The Dot-Com Boom 0 comments

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The Internet boom went at full blast in the pre-millenium years of 1998-99, sending the US stock market into a bubble that ultimately burst and then leaked slowly over the first three years of the millenium, thus bringing an end to the decade-long boom in the US stock market.

The long boom years had drawn many Americans into mutual funds (or unit trusts) as equities became seen as the best investment instrument to make money. Financial news and talkshows had been a staple of many people's TV diet, with some, such as Louis Rukeyser, becoming celebrities. Memories of the last severe bear market (early 1970s) were far away. The scene was set.

In Silicon Valley, a new industry was brewing. In fact, the Internet had been conceptualised and invented 20-30 years ago, but it was only during the late 1990s that it became commomplace and reached a critical mass of installed base, leading to new applications (e-mail, CRM, ERP, online retailing, Web TV etc, search engines) that could each be described as a potential killer application in its own right.

In retrospect, Hyman Minsky's requirements for a mania to form had fully developed: a "displacement" existed in the Internet, which people saw as heralding a New Economy, where real world applications in "bricks-and-mortar" could be mapped effortlessly to the virtual world, and thus where capturing market share was more important that profits. Even Alan Greenspan saw the technology boom as a logical consequence of "productivity growth". Secondly, liquidity was in abundance, provided by small investors and the mutual funds they influenced. Venture capitalists virtually threw money at any Internet startup with a half-decent business idea. Investment rationalities turned to speculative mania, fed by cheap equity and credit.

And so it was that the speculative mania peaked in 1999. Core technology "blue-chips" like Dell, Cisco, Microsoft, Lucent etc sported stratospheric PEs of 30-50 or more, in a hark back to the over-valued Nifty Fifty blue-chip stocks of the 1970s. Internet stocks like Yahoo!, AOL and Amazon fetched 50 times, 100 times earnings multples. Even loss-making Internet stocks (eg Global Crossing) were skyrocketing on the basis of the ".com" link, and burning cash prodigiously. In contrast, "old-economy" stocks like airlines, utilities, even Warren Buffett's Berkshire Hathaway languished. Thus a dichotomy existed.

In Singapore, tech stocks were on fire too. Creative Technology shares rose to a record $60, Pacific Century (with its "Network of the World" and Lee Kar-shing connections) rose to over $30. Chartered IPOed at $16. Contract manufacturers sold at 20-30 times PE. It was a sign of the increasing reach of globalisation and the influence of the US economy and stock market.

The party came to an end in 2000. In March the Nasdaq plunged , and by the end of the year had dropped more than 50% from its peak. Ditto for the S&P 500, qualitatively if not quantitatively. After the event, it was noted that since 1998 the market had lacked support, the advance mainly confined to the technology and Internet stocks in 1999-2000. The massive investments in the last few years had led to over-capacity in the technology and telecommunication sectors. All this while many companies had been "managing earnings", but massive insider selling over 1999-2000 indicated that they knew this was not a sustainable practice.

Once the music stopped, the speculative excesses began to unwind. Small investors suffered heavily, and as with most other manias that turned sour, witchhunts (often justifiable, but undertaken with a vengeance) were launched. A common target throughout the ages was company management, and this was no different, cases in point being executives of Enron, Worldcom and Tyco. Analysts such as Henry Blodget and Mary Meeker were a new target, not surprising given the prominent role they had played in raising investor expectations and handing out ridiculous price targets on Internet stocks even while harbouring private doubts.

References:
(1) Bull! A History of the Boom 1982-1999 (by Maggie Mahar)