The Next Stock Mkt. Crash-When ?

[gene]

I am anxiuosly watching my portfolio, and I (and many others) are no doubt wondering when the current Bull Market will end. As we all know, it is best to sell out before the horde wants out, and I am trying to decide what signals the end of a market run-up.
We had the example of 1929-when it is said, that Joe Kennedy knew the market was ready to crash, when he received a stock tip from a shoeshine boy!
I also read some years ago, about a remarkable theory, which ties the ends of market booms to the market for luxuries (e.g. fine art, expensive houses, clothing, etc.) In essence, the theory is this:
very rich people "make" market booms. When they decide to invest in stocks, everyone "makes" money. The big gains allow people to borrow more, so the market for luxury goods then takes off. Eventually the VERY rich start to speculate in things with NO intrinsic value (like rare paintings). Anyway, one signal of a market top is when rich fools outbid eachother for crap art.
Well, I hear now that really mediocre artists (like Andy Warhol) are going for huge prices-AND, I saw that a collector paid $4,000.00 for a cereal box form the 1960's!!
Is it time to get out of the stock market??

[Pooch]

I'm in as well. I read a lot about the coming internet stock crash, but I don't see. I do believe many internet companies are over valued, but there has already been a healthy adjustment.

The IPO's are crazy and many investors are going to see there own personal crash sooner than the rest.

I believe the internet and the business behind it is nothing short of a grand revolution, and the we are still crawling. I don't know about the bull market maintaining the same momentum, but I see 20 years of serious growth ahead.

[pluto]

Soon, very soon!

I recently read "Only Yesterday" by Frederick Lewis Allen (I hope that's right!). This was written in the early 1930s about the 1920s, with a lot of coverage of the great crash. I was absolutely amazed at the parallels between the time he wrote about and the present day. Two things stand out with regard to the stock market: 1) an unparallelled bull market, with no end in sight and tremendous popular belief in its strength; and 2) everybody was getting into the act, not just the well-to-do or the traditional investors. The statements made by the pundits about why the market had to keep going up, or if there were a "correction" how it would only be minor, would be funny if the same things weren't being spread as gospel today.

I don't really think the end is coming tomorrow but it was a little too scary to see how easy it was to fool ourselves back then. I doubt we've gotten a whole lot wiser since. So -- be careful!


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"non sunt multiplicanda entia praeter necessitatem"

[tracer]

gene wrote:

I am trying to decide what signals the end of a market run-up.

So's every market analyst in the U.S..

Everybody has his own theory as to what makes Stock prices rise and fall, and each of those theories is about as accurate as reading tea-leaves or throwing an I-Ching. If I predict a stock (or a market segment) is going to rise, I'll be right about 50% of the time; all I need to do is tell you about the times I was right (and neglect to mention the times I was wrong) and I'll look like a genius stock-prophet.

Buy a stock because you believe the company and its products have promise, not because you believe that traders will inflate the stock's value. Trying to predict the behavior of the stock market is like trying to predict the behavior of a roulette wheel.

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I'm not flying fast, just orbiting low.

[Keeves]

12/31/99

[Mr.Zambezi]

My grandfather who lived through the depression told me that the major danger sign was when EVERYBODY started buying stocks and borrowing to do it. It makes sense. Schmucks like me buy stocks because we assume they will go up, not becasue of any intrinsic value.

My guess though is that it is going to crash as soon as all those boomers start pulling money out of their 401k's. about 2011.

[MrKnowItAll]

October. This October. The market tends to drop off some in this month, and the Y2K panic will only make the situation worse. What's more, it won't let up until after New Year's, when everyone will see that there was nothing to worry about.

[LongHrn99]

I agree with you on that one, MrKnowItAll, maybe until November, though, if the media will leave it alone for a while. I've heard something about the Fed raising interest rates, maybe this is to help lower the amount of flop when the new year comes in, any ideas on that?

[C K Dexter Haven]

On the other hand, if MrKnowitall is correct, and the downturn is only for a few months, that would be the time to buy! BUY!! BUY!!! like crazy.

A few months downturn is only shattering to short-term investors. Long-term investors (like 401(k) plans) ride it out.

The problem with the 1929 crash was not just the crash itself -- in those days, there were no protections on bank accounts, for instance -- but the duration of the depression.

[handy]

couldn't come sooner....

[gene]

Another factoid for you market-watchers:
Beanie Babies are off 50% their highs. I saw an ad in a local paper advertising them at a discount.
Can this be the beginning of the end??

[handy]

Sales of things, real estate for example, usually pick up as summer comes and then decline late summer when the kids go back to school.

[Shirley Ujest]

I agree with CK Dexter Haven on this one.

When the Market hiccuped in October 86 ( or 87?) I was dating a guy who's best friends dad was the first non-jewish successful broker on Wall Street ( or so I was told.) The night the market crashed we were all in their kitchen and everyone ( the adults, us teens were in over our heads on this subject) was talking about "this is the beginnning of the second depression..blah blah blah." All the teens except me left to another room and I listened very quietly to these adults. When the room finally cleared I asked Mr.X if I should pack up my bags and move to the Ozarks and live like a Mountain Person. He laughed then said to me, " If I were you, I would start investing right now. The stocks have never been lower and they will climb right up."

The sound you hear is me kicking myself for not listening to this advice.

[The Ryan]

Don't listen to CKDextHavn or Shirley Ujest! When the market goes down, sell, sell, sell! The more you sell, the lower the prices will be when I buy.

But seriously, while the stock market has been rising more than the actual economy has been, indicating that stocks are overvalued, i don't think that anything as bad as 1929 will happen. Attitudes towards the market are different. Back then, people were basically money appear out of nowhere. First they'd borrow money, then use it to buy stocks, which would then rise, and so they'd get richer. But it wasn't really their money that they had used to buy the stocks, and the value of the stocks wasn't actually real money; it was only hypothetical money. Now, people are using their own money to buy stocks.




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-Ryan
" 'Ideas on Earth were badges of friendship or enmity. Their content did not matter.' " -Kurt Vonnegut, Breakfast of Champions

[gene]

Here's another question about the stock market:
economists tell us that over the past 90 years or so, the return on stock investments has been around 9% per year. At the same time, the US economy has only grown (as measured by GNP) at an avergae of around 3-4% per year.
How can the value of stocks outpace the increase of GNP (and by such a huge margin)?

[StrTrkr777]

The best method is to ride it out. If you are in it for the long term and have not speculated then your stocks will rise. The market will not totally crash.

I agree with CK and Shirley.

As for Gene's question, it is fairly complex. One, you have to account for companies that build and sell goods overseas. These companies grow in value, yet the US economy does not have to change.

Another factor is the way that money is used. Money can be borrowed to purchase things and to purchase stock. Also, since the stock market sort of operates on the supply and demand principle, if people demand a stock, it can and will go higher than the actual value of the company.

Another factor is products that do not count in the GNP, but do add to the economy and to a company's value.

Also, the stock market is not completely tied to the GNP and so does not directly mimic it.

Jeffery

[RickG]

An aside:

Thus spake Shirley (added emphasis mine):

I was dating a guy who's best friends dad was the first non-jewish successful broker on Wall Street

Pardon me, but of what possible relevance is this characterization? Maybe I'm being over sensitive, but this kind of statement feeds into some loathsome stereotypes about Jews. I recently had to explain to a very nice coworker who said that he picked his brokerage by the number of Jewish names on the staff list that the flip side of the outwardly complementary statement "Jews are good with money" is "Jews are greedy, money grubbing usurers who control the world through their riches." Neither statement is true (if either were, where the *hell* is *my* share?!). I'm also mighty skeptical of any contention that there was ever a period during the last century where the *only* successful stock brokers in New York were Jewish.

I'm not trying to be the PC police here, but I just couldn't let this one pass without comment.

Rick

[manhattan]

Dammit, Dammit, Dammit! I was going to stay out of this thread, I really was. And I apologize in advance for the long post and extra-long sig. But here goes:

From the OP:
As we all know, it is best to sell out before the horde wants outNo, it’s not.
Is it time to get out of the stock market??No, it’s not.

I’m not being flip. There are at least two problems with selling before "the horde wants out." First, you (and I) don’t know when the horde will want out, and we will sell too soon or too late. The two terms for people who sell right at the top are "lucky" and "liar." Second, the horde often wants out for stupid reasons, driving prices down only temporarily but leaving you too scared to buy, lest the horde get more stupid before it gets smart.

It is not time to get out of the stock market, even if prices seem too high (which, OK, they seem). This is because you presumably are in the market for the long term. The luckies and liars who sold the market in August of ’87, avoiding the 30+ percent drop later that year, often didn’t get back into the market for years, missing out on some spectacular gains. I read a study once that a person who was in the market for all but the 20 worst days made only a few basis points per year more than someone who stayed invested the entire time, but that someone who was in the market for all but the 20 best days gave up dozens of basis points per year. I think it was a proprietary study, but if I can find a public source, I’ll post it.

The "gee, that makes some sense" indicators play well in the press, and sometimes seem to work well looking backward, but generally are as useful for looking forward as the skirt-length rule or the AFC/NFC thing. Don’t trust ‘em. Tracer’s advice was best:Buy a stock because you believe the company and its products have promise, not because you believe that traders will inflate the stock's value.

From Pooch:
I believe the internet and the business behind it is nothing short of a grand revolution, … I see 20 years of serious growth ahead.
Me, too. But maybe not. More importantly, I have stock certificates from railroads that have gone bust, electric utilities that have gone bust, phone companies, etc. Being first to market is often a competitive advantage in a growing industry, but it is not a guarantee that a company will prosper. As they say on Hill Street, "Let’s be careful out there."

From Zambezi:
My grandfather who lived through the depression told me that the major danger sign was when EVERYBODY started buying stocks and borrowing to do it. It makes sense.
Indeed. Wise man, your grandfather. But it’s of (slightly) less concern today, because the Fed regulates how much leverage normal people may employ when buying stock. The max is 50% today, vs. 90% being not uncommon at the time of the ’29 crash. That said, big shots like Long Term Capital Management can borrow more, and some day-trading firms have devised a scheme where the day’s winners loan money on an unsecured basis to the day’s losers, thus increasing the net leverage of customers of the firm. You won’t be surprised that the SEC and the Fed have taken a keen interest in these phenomena, so stay tuned.

From gene:
How can the value of stocks outpace the increase of GNP (and by such a huge margin)?
As StrTrkr777 said, its a combination of things: 1) Stocks are at or near their historical highs as a multiple of what they earn (and by several other measurements), so valuation inflation is part of it. 1a) most people who count the market start from after some event which led to low historical valuations, such as the ’29 crash, or one of the panics of the late 1800’s, or "the postwar period." 2) Profits as a percentage of GDP are also at or near their historical highs, so corporations keeping their revenues for reinvestment or distribution to shareholders (as opposed to paying labor, for example) is another factor. 3) Companies with relatively easy access to capital, which mostly means public ones, have a competitive advantage over capital-constrained ones (think of all the smaller stores your favorite "big-box" retailer has put out of business. 3a) Successful companies are more likely to go public and stay that way. 4) "The Market" as defined by the people who do such things generally means either "an index" or "stocks over a certain size" or "companies on the NYSE" or some such thing, thus often disincluding tiny companies and loser stocks that never make or get kicked out of the evaluation group. There are other reasons, but you get the idea.

And last, but not least, let me try to douse the looming flame war between Shirley and RickG. In addition to being potentially offensive (although probably not meant that way), Ms. Ujests’ assertion is incorrect on its face. In fact, Wall St. was WASPy right from the first revolutionary war-bond trade under the Buttonwood Tree, and Jews were systematically excluded just as they were from many areas of life in less happy times. Jewish merchants responded by creating their own trading firms, which in time came to be as large and powerful as the WASP ones. So now very few firms (and essentially no large ones) are exclusionary either way. There are WASPs (and Catholics) at the top of some of the old Jewish houses and Jews at the top of some of the old WASPy places. Same thing for Wall St. law firms.


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IMPORTANT DISCLAIMER
This is for general information only and is not an offer to sell, or a solicitation of an offer to buy, the securities or instruments mentioned. The information has been obtained or derived from sources believed by me to be reliable, but I do not represent that it is accurate or complete. Any opinions or estimates contained in this information constitute my judgment as of this date and are subject to change without notice. The author of this post, or affiliates of the author may provide advice or may from time to time acquire, hold or sell a position in the securities mentioned herein. It is the intent of this poster to remain anonymous, and readers of the post should exercise the due care appropriate when evaluating information from a source not personally known to them.

[AuntiePam]

I wouldn't mind a little slump in the economy for a few months.

I work for a manufacturer and our sales are going through the roof. Our product shouldn't be considered "disposable" but we're selling so cheaply, it's turned into a throwaway -- cheapter to buy a new one than repair the old one.

We're having big problems keeping up with the demand -- vendors can't make parts fast enough, we can't hire enough people, and our best and brightest are being lured away by other manufacturers going through the same cycle and paying bigger bucks.

A bit of a slowdown would be welcome. I need a break.

[Sam Stone]

Regarding Internet Stocks:

I don't really understand the business model of many of these companies. They are losing money hand over fist trying to build brand recognition. But is this valuable? Is buy.com gaining anything of value by selling products below cost? They may build a huge market share doing so, but the minute they raise their prices they'll lose their market to someone else. It's just too easy to search for the lowest price.

In brick-and-mortar companies it's very different, because people have to invest a lot of time and effort to buy the product. So if my brand recognition can get them to my store first, they likely won't go elsewhere. Not so on the internet.

Also, being first to market in other industries has value because having an infrastructure of stores, distribution networks, trained people, etc., gives you a competitive advantage over new startups. None of this is true of internet companies.

What am I missing?

[manhattan]

dhanson asks: "What am I missing"

Maybe nothing, maybe everything. I’m not going to endorse or attack any particular company’s business model here, but maybe I can explain what they seem to be shooting for.

Think free TV. Networks spend hundreds of millions of dollars on programming, distribution, etc., all to attract eyeballs, not one of whom pays the network for any of the programming viewed. So if not for advertising, the network would lose every cent spent.

But they do have advertisers. And in a new development, networks sometimes sell ancillary product to viewers to supplement the bucks from advertisers. And having collected all those eyeballs, a network becomes an attractive asset for a diversified media company that needs access to viewers.

Now think of an internet company. Your favorite dotcom says, "By selling products at or near cost (or even at a loss), I can deliver people at a lower per-eyeball cost than networks. What’s more, my advertisers can track exactly how effective advertising with me really is, something they have to guess at with TV. So I need fewer eyeballs, I can deliver a lower per-eyeball price to advertisers, and if I’m good I become a must-buy for advertisers.

Then comes ancillary revenue sources. They can extract better terms from suppliers (by charging them for prominent mention, for example). This can allow them to maintain their price advantage, ala WalMart. They can move an occasional high-profit item. By diversifying the product mix and adding services, they can even become a "portal." And if they don’t become unbuyable (too expensive), they, too become an attractive asset for a larger company’s portfolio.

And first to market and name recognition do (or can) make a difference. While I imagine that it’s less popular among sophisticated SDMBers than among the general public, an early entrant to the net-search business that has a catchy name and has successfully built a product portfolio is among the few internet companies to turn a profit.

Finally, the process is not different at all from brick-and-mortar companies, just faster. Remember the huge chains that have disappeared from the earth for the same reasons that you believe some internet companies might fail. They all fell to companies that were at one point startups. In real space or cyberspace, execution is everything.

All that said, think free TV again. With cable and the internet, many observers believe that the basic business model will have to change for them to stay viable. Could the same thing happen to some or all of the internet companies now sporting billion-dollar valuations? Stay tuned.


--
IMPORTANT DISCLAIMER
This is for general information only and is not an offer to sell, or a solicitation of an offer to buy, the securities or instruments mentioned. The information has been obtained or derived from sources believed by me to be reliable, but I do not represent that it is accurate or complete. Any opinions or estimates contained in this information constitute my judgment as of this date and are subject to change without notice. The author of this post, or affiliates of the author may provide advice or may from time to time acquire, hold or sell a position in the securities mentioned herein. It is the intent of this poster to remain anonymous, and readers of the post should exercise the due care appropriate when evaluating information from a source not personally known to them.

[Sam Stone]

TV is a good example of my point. NBC can be killing everyone in the ratings, but their viewership is very fickle. They can have all the viewers one season, but if another network puts out a good show they lose all their viewers overnight. After all, how many people turn on the TV and say, "I think I'll watch NBC tonight?" None. They go where the programming is. It's too easy for them to change for NBC to hope to grab anyone with just name recognition.

Your other arguments would apply if these companies were going after an advertising revenue model, but they aren't. Buy.com wants to make money selling product. They don't have commercial advertising. So they sell below cost to build a market share, hoping that this initial period will end and they'll be able to go back to charging enough that will allow them to make a profit. I just don't see this as being very realistic.

And these companies (Amazon, buy.com, etc) are the BEST of the internet stocks. Some of the other ones are operating with business models that have never been shown to be successful, but more importantly they really don't have anything for a product that anyone else couldn't create in a few week's time. I'm thinking of a recent IPO of a company started by a couple of young guys (19 and 21 or something like that) for a 'portal' site that's supposed to attract all kinds of advertising revenue. I believe these guys raised over 100 million dollars on an IPO, despite having no assets, no established market, no proprietary technology, and having never made a nickel with their idea.

The cynic in me says that there are a lot of net companies with an 'internal' business model that goes something like this: "Build up a cool sounding company and make it viable enough to get us to an IPO, so we can all make millions and bail"

[manhattan]

Again, without endorsing or attacking any company’s strategy:

Every single thing you say about TV networks is true. And yet the big, old networks are profitable most years and they carry valuations in the billions (ask Viacom). They survived lots of things that many people predicted would bring them down. VCRs, the remote control, rising programming costs, declining daytime audience size, even (so far and to some extent) cable. The same might (or might not) eventually be true of net companies that want advertising.

I can’t say anything about Buy.com, as it is a private company and has not filed any documents with the SEC regarding their intentions. But it reminded me of another thing important to net companies. Float. When you go to the store, you purchase a product that the vendor has already bought and paid for. Or at least is going to pay for very soon. Financing that working capital is one of the biggest profit-killers for standing stores. On the net, a good company will hit your credit card for its money before or immediately after ordering your product from the maker.

An example: At the end of the last quarter, Amazon.com owed its suppliers $166 MM, or 53% of the revenue it generated that quarter and almost 3 times the company’s inventory. Home Depot owed $2.4B, or only 23% of its revenue for the quarter and 48% of inventories. And Home Depot is among the very best at inventory management. As you know, Amazon currently spends all that extra cash on growing its business, but as a company grows, receiving cash before it pays it to suppliers can be an enormously profitable undertaking.

Your example of the new "portal" site is a good one. Will it actually become a profitable portal? Who knows? But many internet investors (institutional ones, anyway) take a "shotgun" approach to the sector rather than a "rifle" approach. That is, they invest in lots of companies, knowing that most will fail but believing that the successes will overwhelm the failures, giving them a larger-than-normal return on the portfolio. If these guys raise the money it’s because at least some investors believed that they have at least some chance of doing well, and if they fail, another portal company in the portfolio will succeed.

The internet is not the first place where this has happened. Biotech, in the 80’s, was similar. Most "rifle" investors lost out, a few "rifle" investors got rich beyond anyone’s wildest dreams, and I don’t remember how most of the "shotgun" guys did.

And the cynic in you is right. A lot of net companies are probably doing exactly that. But not all. Most actually are trying to build a successful business. Will they succeed? Some will, some won’t. But don’t write off the entire sector just because there’s no profit today.


--
IMPORTANT DISCLAIMER
This is for general information only and is not an offer to sell, or a solicitation of an offer to buy, the securities or instruments mentioned. The information has been obtained or derived from sources believed by me to be reliable, but I do not represent that it is accurate or complete. Any opinions or estimates contained in this information constitute my judgment as of this date and are subject to change without notice. The author of this post, or affiliates of the author may provide advice or may from time to time acquire, hold or sell a position in the securities mentioned herein. It is the intent of this poster to remain anonymous, and readers of the post should exercise the due care appropriate when evaluating information from a source not personally known to them.

[Sam Stone]

I don't write them off... Some net companies are likely to become huge. I just think the internet market in general has all the signs of a wildly speculative market running amok.

Another example: EToys has a market cap of over 2 billion dollars after their IPO, when their annual sales were only $30 million, and they had a net loss last year.

I believe eToys is now worth almost as much as Toys 'R Us, even though TRU has a nationwide distribution system, thousands of stores, serious brand recognition, and all kinds of other advantages. And, Toys R Us has moved into the web business and is a direct competitor. This just doesn't make a lot of sense to me.

[The Ryan]

dhanson posted 09-07-1999 06:18 AM

TV is a good example of my point. NBC can be killing everyone in the ratings, but their viewership is very fickle. They can have all the viewers one season, but if another network puts out a good show they lose all their viewers overnight.


I disagree. Just how are viewers supposed to know that the other network has put out a better show? Maybe advertising will tell them, maybe word of mouth will, but this can take several weeks. Add in a few more weeks as viewers try to decide whether they like the show (after all, it's hard to tell whether a series is good or not until you've seen several episodes), and we're talking about a month or more.


After all, how many people turn on the TV and say, "I think I'll watch NBC tonight?" None. They go where the programming is. It's too easy for them to change for NBC to hope to grab anyone with just name recognition.


Really? You don't think that there's anyone that just says "I feel like relaxing. I think I'll sit down, turn on the TV, and veg out, regardless of what's on"? And what network do you think those people will choose? The opne they're most familiar with of course. Why was the space between Seinfeld and ER so valuable? Because people don't want to deal with evaluating what the best show in each time slot is. They want to have as simplest an answer as possible to the question "what should I watch tonight". When I'm looking through the TV guide to see if anything good is on, I tend to check the listings for networds such as NBC and Fox first, and look at networks like the WB later on. PAX I ignore completely. Do you really think that name recognition is useless?

[smilingjaws]

About 20 years ago when I started working I was told that about 6 months before every recession the paper industry would go south. Their markets would pick up about 6 months after. The paper industry has been doing poorly for a while--they really have been hit by both overcapacity and by the Asian market meltdown. Today I read that Mexico is basically becoming a lawless country because of police and governmental corruption--the example was of the trucking industry. Now trucks have to have armed escorts because of basically pirates. I'm getting nervous--but not much. I'm in money markets for the long term and I think over 20 years there will be ups and downs. But, I just cannot comprehend a market that doesn't have some sort of recession--business cycles still exist.

[Sam Stone]

The Ryan: Have a look at the network ratings from season to season: They have nothing to do with the 'network' itself, but with the shows. CBS, ABC, and NBC, all take turns being number one, and all wind up on the bottom from time to time. They move about somewhat randomly, because their popularity comes from the shows they are airing at a given time, and not from any intrinsic value of being NBC vs CBS etc.

Now, that block of three has built some credibility which gives them a competitive advantage over networks like Fox, WB, etc.

And all of them are still in a much more traditional industry as compared to the Internet. Networks gain considerable value from having more affiliates, which gives them more local advertising clout, etc. A new network has to compete without that infrastructure, which is one reason why it has taken FOX so long to come close.

On the internet, none of that applies.

[Boris B]

The next stock market crash will happen on September the 9th of this year (9/9/99). Be prepared.

[# 00: The Fool]

The stock market will crash very, very soon. As a knowledgeable trader, I know that the faith that people have misplaced in the bull market is a terrible folly, and that they will lose all their invested assets if they don't pull it all out as soon as possible. Which is why, in my compassion for the people ( fuck the corporations! ), I am going on every message board my browser can take me to and telling everyone to sell, sell, sell! You must do it NOW before the stock values fall to the center of the earth! Don't hesitate, take it ALL out now! You don't want to suffer the consequences, BELIEVE ME!!!

Giggling in anarchistic joy,
Andrew Thomas Gallien

[tracer]

Yes, sell sell sell! The market is going to crash! And I'm certainly not just saying that because I just did a lot of short-selling or bought a bunch of Put options and am trying to make the coming stock market crash into a self-fulfilling prophecy!

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