Stock Market Damage Assessment
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GWEN IFILL: Friday the sky seemed to be falling. Today, a dramatic rebound. To help sort this out, we’re joined by Henry Hu, a professor of banking and finance law at the University of Texas. Bob Walberg, chief equity analyst at Briefing.com, an online research and analysis firm, and John Steele Gordon, a business columnist at American Heritage magazine, and author of the book The Great Game: The Emergence of Wall Street as a World Power. Mr. Walberg, three nights ago we were talking black Friday. Today we are talking big rebound, biggest one-day point gang in NASDAQ history. What’s going on? What happened?
BOB WALBERG, Briefing.com: Well, I think today for the first time in a while, we saw institutional money come back to the technology sector, in that you saw the large-cap names such as Oracle, IBM, and Sun Microsystems, Microsoft, Intel, those were the companies leading the recovery this afternoon. That’s an encouraging sign that possibly we’re coming close to a bottom in technology. We’re going to have to see a few more days of follow-through buying from those institutional buyers, but if they do in fact return to the technology sector, we could be in for a nice, sustainable recovery from here.
GWEN IFILL: So you’re saying we haven’t quite hit bottom yet, that we should prepare for another dip?
BOB WALBERG: You know, I really don’t know whether we’ve hit bottom yet. I think it’s too early to tell. I do think there is a possibility you’ll see the NASDAQ pull back to as low as the 28, 29 hundred area. But even if we’re to go down there, I think it’s a situation now where value has been created again in a lot of the technology names, particularly the large-cap leaders that have suffered over the last several days to the downside. So I think there is some good justification to come back into technology here if your a long-term investor.
GWEN IFILL: Mr. Hu, on this roller coaster, do you have any sense on what we should be reading into it, or if we should be reading anything into it at all?
HENRY HU, University of Texas; I think it’s fascinating what’s happening today. And what happened on Friday. If you believe the official market hypothesis, the market is supposed to process all publicly available information efficiently, that is to look at it rationally and make a judgment in terms of future earnings, future dividends, and come up with a valuation. Well, what has happened between now and between today and Friday? Basically nothing.
There is no new information, yet the market is today many percentage points higher than it was at the close of the trading on Friday. It illustrates basically how the market is very driven by emotions, by human emotions, and that… it just illustrates this fundamental point and in terms of enduring theme, as well as perhaps illustrates the theme as it plays out in terms of today’s markets. Today’s markets seem increasingly distant from fundamental valuations, seem increasingly driven by momentum trading and other kinds of behavior, which are not totally consistent with trading on the basis of intrinsic value.
GWEN IFILL: But emotions that have a real effect, wouldn’t you say?
HENRY HU: Absolutely. Absolutely. You can’t make a living on Wall Street without taking into account both intrinsic value and emotions, and right now, I think the… being able to guess how human emotions are going to move is just as, if not more important, than figuring out intrinsic value.
GWEN IFILL: Mr. Gordon, has this always been so? How does this volatility compare to what happened in 1987 and even 1929?
JOHN STEEL GORDON, American Heritage Magazine: Oh, it’s very similar. I mean, the volatility was very large in 1929. And it played out over a course of several weeks, actually. We think of the crash as one day, but actually it started in September and ended November 13 of 1929. Some were very up days, more bad days than good one, of course.
GWEN IFILL: Was that human emotion driving those ups and downs?
JOHN STEELE GORDON: Oh, sure. You know, there’s an old saying, there’s only two emotions on Wall Street, fear and greed. And on Friday we saw an instance of what happens when fear is in the saddle. Today it seems that greed reemerged.
GWEN IFILL: Mr. Hu, do you agree with that? Is this greed driving this market?
HENRY HU: Absolutely. There’s constant tension between fear and greed. What concerns me is, in fact, I am actually more scared about the market today than I am at the end of the day on Friday. And just… This seems somewhat strange, somewhat counterintuitive. Perhaps I can explain. Today you see the investors piling in, especially toward the end of the day, driving the market up hundreds of points. It seems that people will use this action today as evidence, in effect, that one can always buy on the dips, that somehow the prospect of real risk has been banished from the market. It worries me terribly, because it sends a message that one can be as greedy as one wants and not really worry about a truly significant fall in the markets. I think very few people are aware how bad markets can fall between the 29 high and the 32 low, on the New York Stock Exchange, that is. We’re talking about Blue Chips. The average stock fell something like 86%. I think that people forget these things, and movements like today, in fact, may lull people into a sense of complacency.
GWEN IFILL: How about that, Mr. Walberg, is there a sense of complacency? Are people now thinking to themselves, well, as long as I… I can put all of my retirement income in the market and I’ll never really lose as long as I hold on to them forever? Is Mr. Hu right?
BOB WALBERG: No. I really don’t think I would agree with what he said earlier. I think a lot of people know now there is risk to the market. During the speculative bubble which really took the NASDAQ from 2,600 in October of ’99 to basically doubling by the end of February, early March, certainly there was there was a speculative excess built in the marketplace. A lot of people had disconnected with the risk element on investing in a lot of emerging growth companies. However, I think those people have certainly learned over the last six weeks that there is definitely risk involved in buying companies that are trading at 300, 400 times trailing 12-month sales. However, if we look at today’s environment, we are still looking at an economy which is very strong. Even if Greenspan effectively reigns in economic growth and brings it back to 4%, that’s very strong. Inflation remains very low, despite the blip up that we saw last week on Friday the overall trend in, in inflation is under 2.5%. And interest rates remain relatively low. Those are all very strong building blocks and reasons why investors want to get back in and stay in the stock market right now. Earnings growth again, we’re also seeing this quarter, very strong earnings growth.
GWEN IFILL: But the biggest leaps and biggest plunges have been with tech stocks in the NASDAQ Exchange. Is that something people should start to be cautious about?
BOB WALBERG: Well, certainly those investors buying in biotechnology stocks and a lot of the business-to-business and the business-to-consumer Internet companies, looking and buying and paying 2, 300 times sales, buying companies that don’t have an existing earnings base right now, those investors have learned a valuable lesson about valuations and about buying companies with – you know — basically the connecting the current fundamentals with the company’s business prospects. That doesn’t mean, however, that you can’t be buying in the technology sector. If you’re looking at where this economy… you know, the current U.S. economy is going, technology remains at the forefront. I think you want to be an investor in the wireless industry. I think you want to be an investor in the Internet backbone group. But you want to be buying those leadership quality names, names like Qualcom and Cisco and Oracle and as far as the second and third-tier names go — a lot of those probably don’t bounce back and don’t recover.
GWEN IFILL: What about that, Mr. Gordon, have we got too dot-com crazy? Is it a real issue here, that we need to back up and only certain big dot-com companies will survive and all the others are going to go by the wayside?
JOHN STEELE GORDON: I think that’s very likely. In early days of technology, nobody knows how to run a company exploiting that technology. In the 1830′s, nobody knew how to run a company running a railroad. In 1903 alone, about 40 automobile companies came into existence and about 28 went out of existence. You always see this in a brand-new technology. There’s going to be an awful lot of bodies by wayside before people figure out how to make money online.
GWEN IFILL: Mr. Hu, I hate to bash ours, but how much of this is media hype? People are excessively looking at that ticker, poised on their windows, teetering on window ledges, investing for themselves in a way that they used to let their companies invest for them. This is a very different kind of environment now, isn’t it?
HENRY HU: I suppose that’s right. But when you think about it, on the other hand, as a form of entertainment, it’s perhaps more interesting than game shows. The disadvantage, of course, is that unlike the game show, there sometimes is no lifeline that one can rely on. If you lose your retirement savings, you know, you’re talking about surviving on bugs and leaves and perhaps Social Security. So the concern I have is that people are not really focusing on the downside. Don’t get me wrong. I’m not saying at all that there will be a crash. It’s impossible to tell when one is in a bubble. It’s extremely difficult.
But in terms of some of the kinds of arguments that whether Walberg was sending out, I guess I have two immediate responses. One is the kinds of arguments in terms of the power, the gross, the real economy, absolutely. It’s incredible economy. But there… you can’t pay an infinite price in terms of the shares in that kind of economy. The same kinds of arguments were used in terms of Japan back in the late 1980′s, and between the 1989 high and the low in the NIKKEI several years later the NIKKEI basically collapsed something like 60, 70%. The NIKKEI OTC Average fell substantially more than that, fell close to 85, 90%. And secondly, in terms of the notion that somehow simply because you have a dynamic large cap stock that you’re insulated, although that I realize is an exaggeration of what Mr. Walberg said, is… one must be careful in terms of that kind of thinking. I like to point out, for instance, yesterday I happened to notice in terms of the trading on the Tokyo Stock Exchange, Monday Tokyo time, that Soft Bank did not trade. Soft bank is one of the major high-tech companies in the world.
GWEN IFILL: What does that mean?
HENRY HU: The order and balance was such they did not trade. So it suggests that, you know, the possibility of risk, even in terms of real companies, good companies with real earnings, not only real revenues, but real earnings.
GWEN IFILL: Mr. Gordon, the historian, I’ll give do you last word. Was Friday’s dip taken into… Put in perspective? Was it in the end a pretty good thing, a splash of cold water? And if that’s true, what does that tell us about today’s rebound?
JOHN STEELE GORDON: Well, I think it wasn’t a crash in the classic sense. For one thing, the volume was not nearly high enough. In a real crash you have record volume. The crash of ’29, the volume record was not exceeded for 39 years. Whereas on Friday it went even a record volume. But, yes, I think… You know, today the market was in some ways heartening, but we’re still in a very volatile situation right now, and it could go any way. Again, every human emotion is in the saddle. You can’t predict with any certainty.
GWEN IFILL: And a final thought Mr. Walberg?
BOB WALBERG: Again, I think this is a market that looks very strong. Especially now that we’ve rung out some of the excess, you’re looking at a NASDAQ that remains 32% of be above where it was in the past. Despite all the volatility, the overall trend remains on the upside. Earnings and revenue growth are very strong. I still think you want to be a player in technology.
GWEN IFILL: We’ll end on a positive note. Thank you all very much.