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During the early 1690s, England experienced a 'Financial Revolution.' It was
described by financial historian Edward Chancellor as "a wave of exciting new
technology companies coming to market, of rising share prices and record stock
turnover, of new fangled financial derivatives, of credit wildly extended,
of stock market rumours and sharp practices, and of naïve investors rushing
to buy shares." Sound Familiar? Shortly after in 1695, the English stock market
peaked and subsequently crashed. Simultaneously it was recorded that "women's
fashionable headdresses which reached a height of 7 feet" during the mania
became shorter and more somber. While this may seem a ridiculous coincidence,
extravagance in culture and fashion historically coincides with the peak of
a mania.
As Edwin Lefevre said in 1923:
"Nowhere does history indulge in repetitions so often or
so uniformly as in Wall Street. When you read contemporary accounts of booms
or panics, the one thing that strikes you most forcibly is how little either
stock speculation or stock speculators today differ from yesterday. The game
does not change and neither does human nature."
With this in mind, we have decided to highlight a few instances where the
speculative extremes of 2000 are being revisited and even surpassed right now.
Internet Bubble 2.0
Nothing characterized the market peak in 2000 more than the extreme valuations
of the dot-com stocks traded at the NASDAQ. As speculative froth returns
to the marketplace as 2007 approaches, Youtube.com, MySpace.com, and Facebook.com
are at the forefront of investing news. Youtube.com, a video sharing website,
was just bought for $1.65 billion by Google. MySpace.com, a social networking
site, was bought for $580 million. In a moment that truly harkens back to
2000, Yahoo.com, who participated in the NASDAQ bubble, is considering a
bid for Facebook.com for $1 billion dollars. The sums being paid for these
websites are outrageous since these companies have little startup cost and
are dependent on revenue from fickle teen fads.
Youth
Not only are the dot-coms back, the tech kids are back as well. In 2000, business
school students were dropping out to get rich in the Dot-com boom. On March
3rd, 2000, two weeks before the S&P500's all-time high, a BusinessWeek
article discussed dilemmas for Dot-com millionaires who were under 30. With
newly obtained wealth, they were struggling with their inexperience towards
charitable organizations. What troubles! And now the rich nerds are back.
Founders "Chad and Steve", both under 30, made between $100-200 million off
the Youtube.com deal. On October 30th 2006, Business Week ran a Special Report:
Best Entrepreneurs under 25. One article was titled: Young, Fearless, and
Smart. One company expects "100 fold growth in 2 years." Youthful naiveté is
the perfect symbol for a speculative top.
Mergers
Investment bankers are also now in bubble mode. "As of Monday, the total value
of announced acquisitions worldwide reached $3.46 trillion for the year, exceeding
the $3.33 trillion level of announced deals reached in 2000, according to Dealogic." A
Wharton Business professor Robert Hothausen says that researchers estimate
between 50-80% of mergers fail. So why are bankers so willing to put companies
together and why now? As happened in 2000, "the intense acquisition activity
is driven by the surplus of cash held by private equity firms and public companies
alike as well as interest rates that are at historic lows and the willingness
of banks to provide financing." (Emphasis mine.) As one S&P analyst
stated "This is merger mania." According to the AP "If current economic conditions
persist, the whiplash pace of acquisition activity may go on." Of course this
is the current emotional mindset. These mergers, however, happen late in the
boom cycle and are an indicator of the coming down wave.
Baseball Salaries
Another interesting reoccurrence is the record breaking contracts awarded to
athletes, especially baseball. For instance in February of 2000, Ken Griffey,
Jr. signed a 9 year deal for $116.5 million. Later that year in early December,
Mike Hampton received an 8 year $121 million contract from the Colorado Rockies.
A few days later, Alexander Rodriguez signed a deal with the Texas Rangers
for a 10 year deal for $252 million in December of 2000. At the time it was
the most lucrative contract in sports history. Less than a week after that
deal, Manny Ramirez signed an 8 year deal for $160 million with the Boston
Red Sox. Shortly afterwards in Feb 2001, Derek Jeter signed a 10 year $189
million dollar contract. These explosive spending sprees aren't random. As
you can see this rush to spend was synchronous to the bull market peak of
2000. Now with sentiment running higher than in 2000, one would expect a
repeat of the same from baseball owners. Sure enough, the purse has been
opened. In April, David Ortiz signed a 4 year deal for $50 million with the
Boston Red Sox. Last week Alfonso Soriano signed an 8 year deal for $136
million dollar deal. Carlos Lee also signed a 6 year deal for $100 million,
the largest deal in Astros history on Nov. 24th. The Boston Red Sox also
recently paid $51 million just for the right to negotiate with Japan's Daisuke
Matsuzaka. To quote Yogi Berra, "it's déjà vu, all over again."
Art
According to The Economist, "Sotheby's and Christie's have chalked up record
volumes this month as well as record prices for individual works of art. On
November 15th a sale of post-war and contemporary art at Christie's in New
York brought in more than $200m, a new high, barely two years after a similar
sale crossed the $100m mark for the first time. Works by Andy Warhol, Willem
de Kooning, Clyfford Still and Richard Diebenkorn all sold for record prices.
In London, the same day 30 records were broken for British artists of the 1930s
and 1940s, and 13 records for Greek painters of the 19th and 20th centuries,
even though many of them, frankly, were sentimental and second-rate." While
art seems to us always overpriced, the fact that even admitted "second-rate" art
is breaking price records should be a sign of speculative overly-optimistic
buyers.
Against the Crowd
With optimistic extremes similar to 2000 appearing now, it is tough to remember
that the good times don't always last. Wise investors should look at the
similarities to 2000 and remember the effect the following years (2001-2003)
had on their portfolio. Much like in 2000, market participants will be hoping
for a "soft landing" in the bubble market. However history shows that "Era's
of Good Feeling", "Gilded Ages" or "Roaring" periods are followed by economic
and speculative downturns. Investors should be calmly exiting their stock,
mutual fund, real estate, and long-term bond positions and acquiring cash.
In our next article we'll display some of our research done on a 20-year crash
cycle that has continued since at least 1761. Hint: It doesn't bode well for
2007.
At Lamont Trading Advisors, Inc. we specialize in the management of risk and
preservation of wealth. Visit our Current
Strategy section for information on our asset allocation recommendations
or Contact Us if
you would like to be notified when our investment analysis reports are published.
***No graph, chart, formula or other device offered can in and
of itself be used to make trading decisions.
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