Tags: Zweig | Nasdaq | economy | tech

WSJ's Zweig: Remember the Lessons of 2000 to Avoid Getting Creamed Now

By    |   Monday, 27 April 2015 06:00 AM

As the Nasdaq Composite Index advances to a record high for the first time since 2000, it pays to look back at the dot.com bubble, which burst that year.

The lesson: "investors weren't wrong," writes Wall Street Journal columnist Jason Zweig. "They just paid too much to be right."

So, before you lose your lunchbox over the current Nasdaq rally, "make sure you aren't repeating the mistakes of the past," he says.

The problem 15 years ago, of course, was that "investors were so infatuated with how technology would transform the world that they were willing to pay any price to buy stocks connected with the Internet and telecommunications," Zweig explains.

That focus now is on social media and other stocks connected to the "sharing economy."

But, this sharing economy "is no different than the 'new economy' of early 2000," Zweig notes. "It will almost certainly turn out to be a huge boon for businesses and consumers. But it will wipe out investors who think no price is too high to participate.

"Many of the public companies investors are most excited about don't have net profits; they have rapidly growing sales and even faster-growing hopes."

Meanwhile, hedge fund star David Einhorn, president of Greenlight Capital, presents a compelling negative case for stocks in his first-quarter letter to shareholders.

"Even if this quarter's S&P earnings will ultimately be somewhat better than negative 5 percent versus the first quarter of 2014, this level of earnings degradation poses a risk to a market trading at a premium multiple of earnings assisted by record high margins," he writes.

Analysts forecast S&P 500 companies will produce a blended drop in profits of 4.1 percent for the first quarter, according to FactSet.

And when it comes to valuations, the S&P 500 index carried a trailing price-earnings ratio of 20.87 as of April 17, up from 17.90 a year ago, according to Birinyi Associates.

"Some of these challenges are well-known, including lower energy prices and a stronger dollar," Einhorn explains. "Less discussed is the productivity bust and its impact on peak margins."

Bottom line: "we think the market is too high if earnings have, in fact, peaked for the cycle, and we have reduced our net exposure by adding more shorts."

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As the Nasdaq Composite Index advances to a record high for the first time since 2000, it pays to look back at the dot.com bubble, which burst that year.
Zweig, Nasdaq, economy, tech
376
2015-00-27
Monday, 27 April 2015 06:00 AM
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