...[A] mania is a mania is a mania . . . and when it will end is anyone’s guess. In the 1980 oil stock mania, oil was allegedly on its way to $100 per barrel according to the gurus of the day. Similarly, the Japanese market (Nikkei) was “cheap” at 39000, according to many market mavens in 1989, right before it lost 50% of its value.
Manias tend to work both ways. On the one hand they create a demand for the product, but on the other hand they tend to reduce the length of the product cycle. Consider this; a century ago it might have taken years for a new entree to enter a market where attractive profit opportunities exist due to poor communications. Today, with instant communications, the situation is different. The flood of new Internet IPOs is a testament to this. Also remember that the longer a mania lasts, the lower the quality of the new issues become.
The fundamental differences between past high-tech manias and now is that previously the U.S. stock market was relatively inexpensive. Currently, that is not the case. The DJIA has roughly quintupled since the low in 1990, while the NASDAQ is up nearly 10 fold. Additionally, technology, and particularly the Internet, has outperformed the market by a wide margin, as it became the “only game in town.”
In the past, such widespread popularity of a group in an extended market has seldom paid off. Is it really different this time? We are skeptical. Consistent with this, we advise participants to protect their profits in many of the Internet issues. With these thoughts in mind, we wish you a momentous new millennium.
The call for this week: This morning, we reprise our comments of nearly six years ago because just as we were cautious back then, we are currently short to intermediately bullish. Longer term, we remain cautious as we honor the Dow Theory “sell signal” of November 21, 2007. In the near term, however, the sentiment is about as negative as it was bullishly-skewed six years ago!
Moreover, as the brilliant GaveKal organization notes, “The four great momentum trades at the moment are: 1) long U.S. Treasuries; 2) long commodities (including gold); 3) short credit [financials]; and 4) short the U.S. dollar/long the Euro. All of these trades are getting rather crowded, and, in our view, the fundamentals argue that they are due for a turnaround.” Plainly, we agree!