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Shahla
Money Managing Guru
Joined: 13 Nov 2004
Posts: 3324
Cash Points ££ 126163.28
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 Posted: Fri Feb 02, 2007 5:27 am Post subject: Bubbles and Crowd Madness - Internet Bubble 2.0 - 2007 |
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During the early 1690s, England experienced a 'Financial Revolution.' It was described by financial historian Edward Chancellor as "a wave of exciting new technology companies coming to market, of rising share prices and record stock turnover, of new fangled financial derivatives, of credit wildly extended, of stock market rumours and sharp practices, and of naïve investors rushing to buy shares."
Sound Familiar? Shortly after in 1695, the English stock market peaked and subsequently crashed. Simultaneously it was recorded that "women's fashionable headdresses which reached a height of 7 feet" during the mania became shorter and more somber. While this may seem a ridiculous coincidence, extravagance in culture and fashion historically coincides with the peak of a mania.
As Edwin Lefevre said in 1923:
" Nowhere does history indulge in repetitions so often or so uniformly as in Wall Street. When you read contemporary accounts of booms or panics, the one thing that strikes you most forcibly is how little either stock speculation or stock speculators today differ from yesterday. The game does not change and neither does human nature."
With this in mind, we have decided to highlight a few instances where the speculative extremes of 2000 are being revisited and even surpassed right now.
Internet Bubble 2.0
Nothing characterized the market peak in 2000 more than the extreme valuations of the dot-com stocks traded at the NASDAQ. As speculative froth returns to the marketplace as 2007 approaches, Youtube.com, MySpace.com, and Facebook.com are at the forefront of investing news. Youtube.com, a video sharing website, was just bought for $1.65 billion by Google. MySpace.com, a social networking site, was bought for $580 million. In a moment that truly harkens back to 2000, Yahoo.com, who participated in the NASDAQ bubble, is considering a bid for Facebook.com for $1 billion dollars. The sums being paid for these websites are outrageous since these companies have little startup cost and are dependent on revenue from fickle teen fads.
Youth
Not only are the dot-coms back, the tech kids are back as well. In 2000, business school students were dropping out to get rich in the Dot-com boom. On March 3rd, 2000, two weeks before the S&P500's all-time high, a BusinessWeek article discussed dilemmas for Dot-com millionaires who were under 30. With newly obtained wealth, they were struggling with their inexperience towards charitable organizations. What troubles! And now the rich nerds are back. Founders "Chad and Steve", both under 30, made between $100-200 million off the Youtube.com deal. On October 30th 2006, Business Week ran a Special Report: Best Entrepreneurs under 25. One article was titled: Young, Fearless, and Smart. One company expects "100 fold growth in 2 years." Youthful naiveté is the perfect symbol for a speculative top.
Mergers
Investment bankers are also now in bubble mode. "As of Monday, the total value of announced acquisitions worldwide reached $3.46 trillion for the year, exceeding the $3.33 trillion level of announced deals reached in 2000, according to Dealogic." A Wharton Business professor Robert Hothausen says that researchers estimate between 50-80% of mergers fail. So why are bankers so willing to put companies together and why now? As happened in 2000, "the intense acquisition activity is driven by the surplus of cash held by private equity firms and public companies alike as well as interest rates that are at historic lows and the willingness of banks to provide financing ." (Emphasis mine.) As one S&P analyst stated "This is merger mania." According to the AP "If current economic conditions persist, the whiplash pace of acquisition activity may go on." Of course this is the current emotional mindset. These mergers, however, happen late in the boom cycle and are an indicator of the coming down wave.
Full article - http://www.marketoracle.co.uk/Article293.html |
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