It’s Friday April 4, 2014. I am getting ready to run out the door to a meeting and I hear someone compare the the Nasdaq mini-meltdown of recent days (down 2.6% on Friday) to the beginning of the “tech bubble” bursting in March of 2000. Unfortunately, I was not recording at the time and there is no video clip that I can produce to prove it or give it context. Having said this, “Nasdaq Meltdown: Shades of Y2K,” is the perfect gambit for the media to begin to pound on. In case you didn’t remember, the Nasdaq composite peaked in March of 2000 at 5048.52 and then begin its inexorable descent to 1268.64 at the bottom March 9, 2009…a slick 75% retracement. From its recovery high, a month ago (4357.97), we are down only 5.3%. Nonetheless, when you look at the carnage in the momentum leaders (Tesla, Linkedin, Facebook and the biotech sector…some 15 to 20 percent downside moves), it looks pretty gruesome. I guess what I am saying is that, if this continues, you will likely read and hear more about the “Y2K” comparison and my inclination would be to ignore it.
This is not your father’s Nasdaq Composite
According to Matt Egan at Fox Business News (Meet the Nasdaq Composite 2.0), back at the peak of the ‘dot.com boom’, the average Price/Earnings ratio (PE) on the index hit 150. At the beginning of 2014 it stood at 31. Thirty-one times earnings is not chicken feed, but it is not stratospheric like March of 2000. On top of this the index has morphed from a broad haven for startup oriented names to a list of much larger, financially stable companies.
My point is that a small group of momentum stocks supercharged the index to run to within 15% of its all-time high in March 2014. Based on current fundamentals (Nasdaq Composite 2.0) there does not seem to be a compelling reason to expect a calamitous decline like the one commencing in Y2K.
Correction Talk
Having said all that, this could be the beginning of that whopping-big correction we have been waiting for over the past year and half. Intelligent talk about the potential for correction is always welcomed. Ron Insana, former CNBC anchor, turned financial consultant/ CNBC contributor, provides that in the attached clip (Ron Insana: 10 to 20% correction ahead).
Follow-up: Warren Buffett’s advice to heirs
In Session 95 (Keep it Simple Stupid) I talked about Warren Buffett’s advice to his heirs on what to do with the money. Essentially Buffett said it is hard to beat the market on a consistent basis, especially when you are investing a large amount of money. So, be the market…buy an S & P 500 index fund and forget about trying to one-up the market. Jeff Sommer in todays New York Times, posted an article critical of Mr. Buffett’s recent performance, with which I’m certain the Oracle of Omaha would concur.
Post Mortem: High Frequency Trading
It is hard to believe, even as last week ended, the talking heads were still obsessing about High Frequency Trading (HFT) and charges of the market being rigged (a bit of hyperbole). Yes, it’s disgraceful these loopholes exist. Front running of any kind should not be permissible. But, it is really immaterial when it comes to long-term investing and should not deter anyone from participating in the market directly, or indirectly through ETFs or Mutual funds. As a final point, HFT has greatly reduced spreads and the actual costs to do trades…don’t ban it, just reform it.
Media, get over it!
What do you think?
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Besides that the ratings increase with fear and the short sellers want the market to go down, why do you think all of these talking heads want the markets to tank? What’s the point? Aren’t they all invested too? Just makes zero sense in the short or long run.
Yeah like the markets are rigged against the little investor. It might cost each individual .50 to a dollar. But they have saved tons on transaction costs. It’s just dumb and bad business IMO.