The NASDAQ's Three Illusions

December 1, 2000

Just how low can the NASDAQ go? The answer, based on the factual, historical record, is 87%. 87% is what the New York stock exchange lost in value between October 1929 and its eventual bottom in 1933. What about Holland's Tulip Mania in the 1600's or the South Sea Bubble in the early 1700's? Once a bubble begins to deflate, the losses range from 60 to 90 percent. This simple fact spells doom for the NASDAQ. Ancient history you protest. No problemo- Japan's Nikkei peaked around 40,000 in 1989 and now trades around 14,000 eleven years later. Do the math and you will find a value loss nearing two thirds.

But surely not the NASDAQ the bulls arrogantly assert. Bulls, along with the female version called a bullete, will then trot out the usual verbal charms, much like a witch doctor shakes his rattles to scare away sickness. The CNBC charms aren't working anymore Abby Cohen, et al. Assuming the NASDAQ recovers this week, it will already have lost nearly 50% from its March 10, 2000 high of 5048. In my book, this already qualifies as a crash. The NASDAQ is currently a market crash looking for a bottom. I see no factual reason for a NASDAQ recovery. The plain truth is the NASDAQ will have to go much, much lower before it finds a true bottom.

I believe a reasonable NASDAQ bottom would be between 500 and 1000,we'll say around 750. In other words, a total loss in value between 80 and 90 percent. The NASDAQ market crash is an ongoing crash at this writing. The NASDAQ has not crashed in the final sense. The NASDAQ is crashing towards 750 with a vengeance. This is the current reality.

Each of the several illusions maintaining NASDAQ market value have failed. The Internet illusion failed first. The dot.com devastation is nearing the 90% loss criteria mentioned earlier. The next illusion is what I call the Internet infrastructure one. The process of devastating telecommunications, fiber optics and bandwidth providers is ongoing and will continue towards the magic 90% level. The third illusion relates to computer hardware and software. Much money has been made on the theory computers are not a commodity; much more money will be lost when the reality hits.

The NASDAQ's explosive growth has been turbo charged by these illusions: money can be made by building and selling computer hardware and software, money can be made by providing information and services; finally, money can be made by building up the bandwidth infrastructure. Glance through the NASDAQ listings and you will find these three ideas heavily represented. The economic reality is different. Outside of pornography sites, nobody makes any money on the Internet. Billions and billions of dollars have been spent upgrading the Internet infrastructure with only a faint whiff of profits in the air. THIS is why the NASDAQ has lost 50% of its value since March. Investors have finally figured this out, although not soon enough to avoid heavy losses. You could make the case for a NASDAQ bottom except for computers.

The two NASDAQ plagues on dot.com's and telecommunications are here. The third plague on computers approaches. The third plague will erode the final thirty to forty percent of NASDAQ value. Like the Ebola virus, it will be rapid and bloody. The NASDAQ is a market where the dot.com's and infrastructure stocks have been devastated, while the computer software and hardware companies have fared better, or at least not as bad. No longer. The PC's hour of tribulation has arrived. Here's why.

Personal computers are a commodity. Software and hardware are subject to the same laws of supply and demand as wheat or corn. Upon this economic heresy, I will stake the following. Micron, Intel, Microsoft and Compaq are producers of a commodity. In December 2000 here is the economic condition of these commodities. Briefly, they have excess inventory. Remember in the old, old economy, the one before the new economy, the goldilocks economy and our current, new, new economy, excess inventory meant a recession. No fear though, Alan the Magician has eliminated all that stuff. We're in the new economy after all! Unfortunately, whatever Alan calls our lunatic economy, Compaq has an eight week supply of computers. E-machines has a fifteen week supply. Micron is faced with a DRAM memory price collapse due to oversupply. Intel faces a slowdown in chip orders. As for MicroSoft, if they can't sell them, they will eventually stop building them. So who will buy Microsoft's software?

In the context of declining consumer confidence and a slowing economy, what does this mean for the NASDAQ? It means excess inventory leads to price cuts or production cuts. Production cuts add fuel to the spreading economic slowdown and reduce consumer demand in a computer saturated economy. Price cuts mean reduced earnings for corporations. Gateway has already announced the fourth quarter will be bad. Stand in line. What do reduced earnings mean? They mean a reduced stock price in a NASDAQ that has already lost 50% of its value.

January 2001 will have a slowing economy and gutted corporate earnings hitting an already weak NASDAQ market. Can anyone say a high tech excess inventory induced recession? The only issue is whether the damage will be limited to the NASDAQ. If not, the global financial system is at risk. I rest my case.

GROWING OLD IS MANDATORY - GROWING WISE IS OPTIONAL
"Both oligarch and tyrant mistrust the people;
therefore deprive them of arms" Aristotle, Politics

In 1792 the U.S. Congress adopted a bimetallic standard (gold and silver) for the new nation's currency - with gold valued at $19.30 per troy ounce

Gold Eagle twitter                Like Gold Eagle on Facebook