A tip-off to the top?
I'm tempted to say the ongoing blowoff in the Internet stocks is the final top to the mightiest bull market in U.S. history, but there have been so many similar times meriting that call in the past few years. And every time the market sold off, it just roared back to higher highs. But this time might be different indeed. It's not just that P/E's, P/BV's, and yields are far more absurd than ever. This time, as Richard Russell has pointed out, Dow Theory, which is actually an excellent (as well as surprisingly little-monitored) indicator of market direction, is bearish In essence, the theory states that the transports must confirm moves in the industrials. Although the industrials are back to their old highs, the transports are still actually about 20% below theirs. That, arguably, means that everything you see going on now amounts to no more than a sucker rally.
For years the number of mutual funds has been growing at the rate of about four or five per business day, and it seemed to me that this alone was an adequate sign that the market was topping. Funds are basically vehicles for the small, unsophisticated investor-, and by the time the little guy piles into them the party is almost over. It's no accident, therefore, that fund booms correlate with the century's two previous great manias: the late 1920s and the late 1960s. And the explosion in the number and size of funds this time around dwarfs anything in the past. Unlike the two past stock manias, however, the little guy hasn't really been buying stocks through his individual broker until now.
That's recently changed in a big way, and the change is tied up with the Internet. There are at least four reasons I can think of why this mania is not only the biggest and wildest in history, but may (key word) have a way to go before it collapses catastrophically.
First, since the Internet is a brand new business, very few funds as yet own pure Internet stocks because most funds only buy companies with track records of some type. In this sector, however, it's virtually impossible to find companies that have even been around more than a couple years, much less show earnings. Indeed, revenues are hard enough to find. So if individual investors want Internet stocks, they've got to buy them on their own.
Second, the Internet phenomenon is itself driven by individuals. The average guy thinks he actually knows something about it, and he's right to a fair degree because everyone is new to the area. It's actually a fairly level playing field, totally unlike most resource and high-tech markets. That further encourages the retail investor. Internet stock chat rooms give him the courage that comes from being part of a crowd, making him bolder yet.
Third, the rise of the Internet broker has made it really easy for the Internet junkie to place bets on Internet stocks; he never has to get off-line.
Fourth, with the number of people coming online growing at high double digit rates, one can argue that the number of new investors in Internet stocks will grow apace, feeding the frenzy with new cannon fodder for some time to come.
This mania will end badly, like all others before it.
But this one is already the biggest in history and may go on even longer. Calling a top to a market like this, however appealing that might be to one's intellect, is like standing in front of a runaway freight train in hopes it will be derailed before it creams you.
Some pedestrian observations on the future of the Internet
There's no doubt in my mind that the rise of the Internet is on a par with the printing press, the telephone and the computer in terms of importance. And I have no doubt it will continue growing at phenomenal compound rates for years in the future. Its biggest near-term commercial impacts, I suspect, will be felt in publishing and retail.
In the future, publishing will mostly be done online, with printing only on demand for books~ newspapers, magazines, and (gasp!) newsletters will be increasingly available only online, even this one, whose publisher is technologically challenged. The implication is that there will again be many newspapers in every city, not just one or two. Anybody will be able to publish successfully, not just Simon & Schuster or The New York Times. The price of wood pulp for paper is going to crash. (Yes. I know that's the oldest prediction of the electronic age. But it's finally about to come true.)
More and more commerce will be done over the Net, with goods delivered by FedEx or UPS. Just as super-stores are killing the neighborhood shop, the Net will go a long way towards killing the super-store. By basically cutting out the middle man, the Internet obviates the need for retail space, salespeople and a layer of shipping and inventory; ultimately most manufacturers will sell direct. Costs will drop radically, and the variety of goods will explode. Net-savvy companies will become much more profitable, and those that aren't Net-savvy should retain good bankruptcy counsel. The entrance cost to doing business will drop radically. As a result, the percentage of the population that becomes self-employed will grow rapidly, which will contribute to the political changes discussed below.
Those are the rather obvious, and near-term, implications of the Web. But as important as they are, they may be rather trivial compared to its scientific and political implications.
