MacroProfit: This Time it is Different

He whispered: Of course

imagesWhether it’s oil, gold, the Nifty Fifty, dot com, housing or the current Nasdaq, at the peak of the mania, the bubble or the parabolic move, the proclamation is always the same this time it is different.

Let’s look at the rationale why the Nasdaq will not repeat its meteoric decline of fifty years ago. Or will it?

On March 10th 2000, the Nasdaq hit its all time closing high above 5000. This week it came within a whisker of duplicating that lofty mark.

Some might say here we go again but the vast majority believe that this time it is different. Why?

First of all, there are fewer Nasdaq companies than in 2000 with much larger capitalization. Also much less technology companies and far from the lofty valuations of before.

He whispered: Investor’s intelligence bullish percentage of 80.8% hasn’t been seen since February 1987.

In 2000, the Nasdaq was loaded with such worthy characters as Bernie Ebbers, CEO of Worldcom and Jeff Skilling from Enron who found their days spent in minimum security for massive accounting scandals.

Today, of course, such fresh faces as Mark Zuckerberg, CEO of Facebook, Sergey Brin of Google and Tim Cook of Apple could be considered the poster boys for fair and honest play leaving the sins of the dot com in the past.

He whispered: January 1, 2000, Wall Street Journal front page titled “AMAZING FUTURE” dazzling potential for new technologies and the “BRILLIANT MEN” who will take us there.

The Nasdaq is still a tech heavy index, however, it is significantly less pure tech plays. Information tech was 57% in 2000 and now down to 43%, complete reversal where other tech companies were at 43% now 57%.

Comfort can be taken that the words “growth heavy” are now being used to replace “tech heavy” as a description of the Nasdaq. Companies like Apple and Amazon were far from maturity and Google and Facebook were simply a glint in someone’s eye. Based upon the description one could say that the Nasdaq’s overall valuation is “comfortable” in comparison to the dot com mania. The price/earnings ratio for the index in 1999 was a lofty 152. Most recently the ratio stood at 31 which gives comfort to the this time it is different crowd.

He whispered: The Nasdaq’s price/earnings ratio is almost twice that of the Dow Industrials. The wonders of technology can make all things right.

Going bust may be a reason for no longer being included in the Nasdaq. Companies such as CMGI, a high tech venture capital firm and Broadvision, Inc., an internet commerce company are examples of companies hitting peak in 2000 and declining 99% since.

However, Mergers & Acquisitions can also be credited with the decline from 4715 companies to 2568 currently being traded.

Included also in the reasons was Sarbanes-Oxly Act of 2002 which makes it much more costly to be a publicly traded company.

All of this put together, according to the this time it is different crowd, has restored much needed “trust” to an index that so sorely needed it.

He whispered: The Nasdaq of 2000 was a dream – The Nasdaq of 2015 is a reality – Grilled Cheese Truck (GRLD)

Finally there is the “who’s got your back” belief. Of course during the dot com crash the Federal Reserve was simply a bystander. Now, of course, with such things as Quantitative Easing, Mark to Model and an undisclosed balance sheet the Central Bank is an integral player reiterating that a sound stable economy is only measured by the record level of the S&P with the Nasdaq tagging along for the ride.

He whispered: GDP has failed to surpass 3% for nine straight years, the first time since the 1870’s.

He whispered: This time, of course, it is different.

“For over 1,000 years Roman Conquerors returning from the wars enjoyed the honor of a triumphant tumultuous parade. In the procession came trumpeters and musicians, strange animals from the conquered territories together with carts laden with treasure and captured armaments. The conqueror rode in a triumphant chariot. The dazed prisoners walking in chains before him. Sometimes his children, robed in white, stood with him in the chariot or rode the trace horses. A slave stood behind the conqueror holding a golden crown and whispered in his ear a warning: that all glory is fleeting.” George S. Patton

He whispered with a smile: this time it is different.

Of course.

Written by
With his passion for economics Bill Tatro has been entertaining audiences on the radio and in seminars for decades. Bill is an economist that provides weekly paid content to subscribers, and offers a free daily "lite" version as well.