[Briefing.com] The Day The Bubble Died

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From: Linda (joelinda1@home.com)
Date: Thu Dec 21 2000 - 10:12:17 PST

[Adam and I have been discussing bear markets. That probably depends
on one's time frame: here's a ten-year Nasdaq composite chart which
suggests that for now, the long term trend is still up.




The Day The Bubble Died
21-Dec-00 00:05 ET

[BRIEFING.COM - Gregory A. Jones] A new low for the year on the Nasdaq.
More key support levels fall. A slew of additional warnings after the
close including AT&T, Real Networks, and Conexant. Surely more declines
are in store for tech stocks. Or are they? Lost in the negativity
yesterday was an important turning point that has been a long time

There have been two factors prompting the tech stock ugliness since
April. The one that is receiving most of the attention
lately is the deterioration in the economy. While very real indeed,
this deterioration would not typically warrant a decline of more
than 50% in the Nasdaq. Note that the Dow's decline has been much
more subdued, and that the Dow really has been flat since April 1999.

The far more important factor behind the Nasdaq's plunge has been the
popping of the tech bubble. Few would now dispute the fact that tech
stocks experienced a bubble in 1999 and early 2000. The question for
investors is when that bubble has been fully deflated. Arguably, that
occurred on Wednesday.

There's nothing like a chart to tell the story. Because the bubble
began in 1999 and ended in 2000, we need to look at the market's
performance over the past two years to gauge where we are in the
life of the tech bubble. We have been watching the percentage change
in the major indexes since the end of 1998 for this purpose
-- that's what we offer in the following chart.


It's not difficult to identify the true beginning of the bubble back
in the fall of 1999. That's when the blue Nasdaq line became detached
from reality and from every other market index. By early 2000, the
Nasdaq increase relative to the end of 1998 rocketed to 126%, while
the comparable increases in the Dow and S&P 500 were 21% and 24%,

Though the indexes can diverge from time-to-time as a result of the
different growth prospects in technology versus old economy
companies, this divergence is usually a few percentage points. That
100 percentage point gap seen earlier this year was truly staggering.

What we must acknowledge now is that the gap has been erased. Tuesday
was the first day since the bubble began that one of the other indexes
eclipsed the Nasdaq in performance since the end of 1998.

This is a powerful point that warrants repetition: if you had invested
on Dec 31, 1998, you would have been better off investing in the Dow
(+12.4%) than the Nasdaq (+6.4%). That's almost two years in the heart
of the technology revolution in which the old economy Dow outperformed
the new economy Nasdaq. How times change.

The good news is that this shake-out was necessary. The Nasdaq
couldn't return to health until the bubble had died. It died this week.

Does that mean that the bottom is at hand? We're not smart enough to
know the answer to that, and indeed no one is. But we can say that the
Nasdaq is now standing on much firmer ground. The economy is slowing
and that's a very important issue, but with Fed rate cuts coming soon,
relief from this problem is not far off.

One sure positive is that yesterday was one of the first big down-days
that wasn't followed by a declaration of capitulation by CNBC. We're
not sure exactly where the bottom is, but wherever it is, there will
be so much pain that no one will think it's the bottom. Wednesday felt
something like that, didn't it?


Jeff Henley, Oracle's chief financial officer, on Microsoft's
earnings warning: "That's too bad. I feel really sorry
for them. And if you believe that, I've got a car to sell you,

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