This post is part of Om Malik’s bubble-a-thon.
In late October of 1987, a week or so after the Crash, there was this great cartoon I read in the USA Today (I must have been staying at a Marriott!). Two well dressed older gentlemen were walking and one said to the other, “I know it’s only a paper loss, but I miss it anyway.”
That seems to be the prevailing opinion about the NASDAQ 5000 five years ago today. A couple of trillion in losses on paper, and yeah, we kinda miss it. But has anything really changed since then? Not really.
We still blame analysts for saying BUY, even though it was more of a suggestion than an imperative. I was a Wall Street analyst for too long, and believe me, I’m not letting a single one of them off the hook. They are almost all guilty. Former colleagues and friends of mine Mary Meeker, Henry Blodget, and Jack Grubman are the most famous, but there were legions of guilty analysts. But guilty of what?
Bad judgement? Abso-f-ing-lutely. Believing their own bullshit? Almost universal. Self promotion? Yup. Conflict of interest? Often. Banking whores? Pretty much. Causing the bubble? Well,…, not so fast.
Analysts don’t make stocks go up, it’s more buyers than sellers make stocks go up. There is no arm twisting, no gun to anyone’s head, no lollipop if you buy. People buy stocks because they think they are going to go higher. And millions of people thought this, and acted on it both directly and by flooding money into growth funds.
An entire flock of investors became Momos, momentum investors. Perfected by firms like Pilgrim Baxter, they would buy stocks that were going up, because they were going up (they officially call it business momentum, but Momos watch stock prices more than earnings.)
If Mary Meeker didn’t exist, it would have been necessary to invent her.
And there you have it. Index funds were dull. Money flowed into these momentum funds – think Janus, most Fidelity Select Funds, and thing that said tech or growth saw money flow in. After Netscape’s IPO in August of 1995, there were precisely three glitches to the momo show – the December 6, 1996 Greenspan “Irrational Exuberance “ faux pas, and the Asian currency crises, in the fall of ’97 and ’98.
The only thing slowing the growth of Momo funds was the lack of names. You could only put away so much Dell or Cisco until you owned the whole damn company – so Momos turned to Wall Street and begged for new names. Wall Street didn’t have to be asked twice – and took public via IPO anything that wasn’t nailed down – and nothing having to do with the Internet was nailed down, no matter how stupid.
If Mary Meeker didn’t exist, it would have been necessary to invent her. In reality, she was invented – by Morgan Stanley and by Momos – to spit out new names. Her fault? Well, sure, I guess, probably – she does have an MBA, you know, and should have known better. But you and I (I’m guilty, too) were buying stocks, figuring they would go up. We were moving money into these momentum funds, which were buying all these new names, and paying Mary Meeker to hawk them. And hawk she did. (By the way, Mary still complains about me to mutual friends, I wish she would let it go.)
Add to this other issues. Liquidity on Nasdaq trading desks went away after a spread fixing suit cost Wall Street $1 billion in 1998. An order for 5000 shares of Amazon could move the stock 4 points. Almost 80% or more of recently public company shares were locked up for six months after the IPO. Lots of Momo demand, no supply. Stocks go up, Momos get more excited – a circle jerk if I’ve ever seen one.
They say that no one rings a bell at the top or the bottom of the market. Five years ago today, my partner and I were running almost a billion dollar hedge fund. In one week’s time in July of 1999, we had turned down two different offers of $500 million in new capital, each from the Middle East. It was a pretty faint bell, but starting January 1, 2000, I would somewhat randomly pick investors in our fund and either throw them out or make them take half their current capital out. It created this wonderful sell discipline even though we still thought stocks were going up. This saved our asses.
I couldn’t resist and for the first time, went back and looked at the trade blotter for March 10, 2000 (the SEC requires funds keep a list of daily trades). Five years ago today, we sold 10,000 shares of Actuate at $64, it’s now $2. We sold 10,000 shares of Extended Systems at $121, it’s now $4. And 35,000 shares of MMC Networks for $54. That’s over $5 million in cash someone put into the market to buy these names, each was worth almost $2 billion in market cap. Trust me, I ain’t bragging - we had a lot more shares and I wish we had sold them all. My point is that Mary and Jack and Henry had never even heard of these names. And it was only a fuse that was lit. While dotcoms blew up in March, infrastructure stocks got whacked in October of 2000.
Anyway, since 1999, structural problems on Wall Street having nothing to do with analysts have existed, AND NOT A SINGLE ONE OF THEM HAS BEEN FIXED. Sorry for shouting, but making Henry Blodget a poster child for greed misses the point entirely. Spitzer fixed those analysts good, didn’t he? (Not really.) But we still have Momos (Janus is back), we still have liquidity problems and lockups still restrict free supply and demand. Google, Apple, Salesforce.com, Sirius, XM, Activision, Take-Two, Taser, nanotechnology, anything.china. Is there air in these names? Who knows, but buyer beware. And don’t be a momo.