Is Nasdaq Becoming a Bubble?
By Barry Ritholtz - March 29th, 2010, 12:30PM
A few interesting charts today that look at the question Where is the Nasdaq going ?
Up first, this beaut from Ron Griess at The Chart Store. Ron shows a parallel between the post 2000 crash Nasdaq and the post 1989 crash Nikkei Dow:
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click for larger graphs
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Next, we have this look at the Nasdaq/SPX ratio from Mike Panzner. Mike thinks this intriguing relationship is back to prior high levels:
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Last, this trend chart from Lindsay Holt — although there are arguments to be made by both bulls and bears alike from this one:
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March 29th, 2010 at 1:37 pm
That last graph by Holt made me a bit ill
March 29th, 2010 at 1:38 pm
Is that second chart right?
Where it says “… relative to the S&P 500, the high-tech bellwether is now back to levels previously only seen at the height of the bubble”
And then I look at the chart and see the peak of the prior NASDAQ bubble at about 3.75 relative to the S&P whereas now it is not even half that much.
Or is Mr Panzer confusing the financial bubble with the NASDAQ bubble? Surely he does not think that tech stocks were in a bubble in late 2007? If so, I would recommend he take off his blinders and gaze upon a REAL tech bubble, back in 1999.
In any event, there is some degree of peril in mixing up tech and financial stocks and equating the two. Different market segments tend to bubble at different times for different reasons. The financial stocks were the primary beneficiaries of the ocean of liquidity this time around, as we did not see triple-digit PEs as commpnplace NASDAQ events in late 2007, nor did we observe a tsunami of tech IPOs.
March 29th, 2010 at 1:47 pm
If you dont see complete NON-SENSE looking at these 3 charts… you have no “falsification” filter.
Nothing robust there. Just voo-doo. Go see the medicine man. The psychic can now be your financial advisor.
Howabout the fact that the first chart… Nikkei and Nasdaq really dont match up at all. The scales are different. The patterns are nothing alike (except for the first big leg down… which was MATCHED… from there, nothing is similar in the pattern). Nikkei circles 1, 2 were MATCHED. Then circles 3, 4, and 5 were NOT HELPFUL. Then the insuation was circle 6 was helpful… even though that only 50% true…
So thats 1 “hit” out of 4 circles (again, circles 1 and 2 were matched). I call B S.
March 29th, 2010 at 2:27 pm
The last graph must be for only the most hardcore porn-graph aficionados. No explanation whatsoever, no lables, just a bunch of lines. QED! Say no more.
March 29th, 2010 at 2:51 pm
Cognos,
I wanted to apologize for being personally rude to you over the weekend. While I don’t mind disagreeing with your ideas in various creative and sometimes sarcastic ways, I got too personal. I should have reserved that method of disagreement to an abstraction, rather than an individual.
Also, a first: I agree completely with you on these charts. Pure hokum. According to chart 3, the markets will go negative soon. We will see 200% drops in valuation. Can’t wait for that.
March 29th, 2010 at 3:34 pm
It’s just been folly to look at charts and expect anything to equate to current results, during this downturn. Everything is thrown off because there is so much attention given to trying to “guess” the next big move.
It’s like weather forecasting in the deep south: you are right about 50% of the time. Hardly conclusive. Pretty to look at though.
March 29th, 2010 at 4:14 pm
It’s amazing that people actually make investing decisions based on this stuff, looking at pretty pictures in a graph doesn’t get you anywhere. This is akin to reading tea leaves, consulting a horoscope, …
But people making investment decisions like this really helps create “inefficiencies” in the market. Other people willing to do the work to understand company prospects can use these “inefficiencies” to make money. There does seem to be a psychological “cap” on how high NASDAQ should be, that makes mutual funds, hedge funds, other big money managers feel uncomfortable investing in big NASDAQ companies, irrespective of the individual company’s forward P/E ratios and prospects.
So few people understand these tech companies, what they really do, how big a “moat” surrounds an individual tech company’s products. And i’m not even talking about what it takes to design, develop, and reliably produce the tech products. To most people, it’s just “magic smoke” that causes these tech products to work.
Some things people don’t grep:
- Each different type of semiconductor chip will eventually become a commodity. Great margin ( >100%) can be obtained when a new differentiated chip is brought out. When a second or third competitor brings out a competing chip, price that can be obtained for the chip rapidly drop to the cost of fabbing the chip plus a very small margin. For example, Apple designed their “A4″ chip for the iPad, with ARM core, 3G and other linkages support, … About the same features as Qualcomm’s Snapdragon. Look what happened to Qualcomm stock a couple of months ago when their “moat” was realized to be broken. (Info: http://www.tomshardware.com/news/apple-ipad-iphone-ipod,9522.html )
- So many products are “commodities” that prosper when supplies are temporarily tight, only to be crushed when supply catches up to demand. Disk drives, memory chips, … need to be “traded” as a commodity, rather than “invested” in long term.
Some of the big NASDAQ companies are very cheap on a forward P/E or P/E/growth ratio, with reasonably solid estimates on the E over the next couple of years. Examples:
- Apple: Forward P/E = ($230 – $40/sh in cash) / ($13 over next 12 months) => 14. With $60B expected in revenue, on a market cap of about $200B. With good growth still ahead, the forward P/E should be between 20 and 25, not 14.
- Intel: Forward P/E = ($22.30 – $2/sh cash w/no debt!) / ($1.75 over next 12 months) => 11 or 12. With $42B expected in revenue, on a market cap of about $125B. Their only competitor, AMD, is financially hobbled, and constantly a generation or two or three behind in chip fab technology, thus can’t produce chips in quantity at yield with as many transistors on it as Intel can. Granted, Intel’s margins will come down a touch in the future, but x86 chips are in short supply currently, leading to stronger shorter term earnings than published consensus. Their forward P/E should be 15 to 17, not 11 or 12.
-Cisco: Forward P/E = ($26.50 – $4/sh cash w/minimal debt!)/($1.70 over next 12 months) => 13. With $42B expected in revenue, on a market cap of $150B. Wow, what a company! Insanely good products, pushing the state of the art way beyond what others can do. They do have a Chinese copycat/blatant patent infringer limiting some overseas sales, but very solid future. Their forward P/E should be about 18, not 13.
- Others can make similar cases for IBM (an Indian IT company now), Oracle, MSFT, but I’m not as versed in them.
Summary: People looking at reading NASDAQ “comparision” charts, or just saying NASDAQ has moved high enough, are missing some very undervalued companies, by not drilling down and doing some basic supply/demand and forward P/E work on companies that are very solid.
Of course, this is all just imho, i’m guaranteed to be wrong ;-)
(Disclosures: Long AAPL, INTC, CSCO. I’m in AMD’s 401K plan from a long ago startup they circuitously acquired, but don’t own AMD stock. I don’t short stocks, it’s tough enough making money on the long side.)
March 29th, 2010 at 6:51 pm
Wow, I can tell this crowd is not accustomed to reading charts.
Back in the latter part of the 2000-2003 crash some of us were following the 1929-1932 Dow bubble aftermath pattern in trading the Nasdaq. It was incredibly accurate. However, once the 2003 low was in, the question was, “how will this play out going forward?”
I had read a study that looked at 13 major market bubbles from Tulip Mania through the Tech bubble, and the study concluded all but one followed a “bell curve” pattern. The exception? The Nikkei.
We called that pattern “Sushi”, and in 2003 we wondered whether the 1932-1942 Dow pattern would prevail or the Nikkei 1989-2003 pattern (now 1989-2010) would play out.
Why is the Sushi pattern a recent phenomenon? I would submit it has to do with the application of newly formed 20th century Keynesian solutions to address bubble aftermaths. The Sushi pattern suggests the combination of a bursting bubble and Keynesian solutions leads to an outcome that is worse over the long haul than one featuring the traditional, or Austrian school outcome (similar to the 1929-1932 time period).
Also note how the bottoms of the Nikkei/Nasdaq chart seem to line up well while the Nasdaq tops so far seem to shift over as much as 6-12 months in the future.
The Sushi 2013 low lines up with the Dow 1929 aftermath low as well, suggesting either pattern ends in a similar manner in 2013.
The one problem I see with both patterns is the Presidential mid-term Election Cycle, which has worked almost flawlessly going back to the Great Depression. The only real exception is the 1987 crash, which missed the cycle low by a year. 2010 is a mid-term election, although you could say the current macro cycle is a 70-year cycle, which supercedes the 4-year cycle, which would also allow for the misses during the 1930′s.
March 29th, 2010 at 7:38 pm
@xSiliconValleyEE
A 25 P/E by Apple will give it a marketcap of over $365B. Do you really think that’s reasonable? That will make it the largest most valuable company in the US.
In contrast XOM is at $320B, the largest oil company in the world, WMT at 212B, the largest retailer in the world, and MSFT at 260B, the owner of the most lucrative monopoly in the world.
I’m reminded too much of the bubble days when all these so called companies became the largest and what not. Anyone remember CSCO/AOL marketcap?
Besides, Apple’s starting to hit tons of reworked market rivals now from Google to MSFT to HP.
March 29th, 2010 at 10:40 pm
@changja
Yea, i agree, a $365 B market cap for Apple takes your breath away. I can’t wrap my head around it either. But their forward P/E should still be north of 20 given their revenue growth and profitability expected over the next few years.
From an article at the peak of the ridiculous insanity in 2000, Cisco’s market cap was $579B on sales of only $12B, a delusional ratio of 47 to 1. ( http://www.expressindia.com/news/ie/daily/20000326/ibu26043.html ) Apple currently has forward sales of $60B, so a market cap of $360B is a ratio of 6 to 1. A touch high, but given their profitability, definitely not delusional. I agree with that XOM may be undervalued given their profits, P/E ratio, revs, … , but that’s out of my area.
But, back to the subject matter of Barry’s thread, viewing NASDAQ composite level via pretty pictures to divine where it’s going from here, makes as much sense as debating how many angels can sit on the head of a pin. One must base it on the expected profits and revenues of the top NASDAQ companies, the majority of which are very reasonably valued, if not significantly undervalued, on conventional metrics.
And, with the liquidity spigots WIDE open, both the fiscal and monetary ones, all this money is going to go somewhere. This is a recipe for rising P/E ratios.
March 29th, 2010 at 11:10 pm
@xSiliconValleyEE
To a certain point I would agree that Apple’s high margins, etc would justify a fairly high PE.
But I think some analysts are underestimating how difficult Apple’s future growth is going to be. A lot of Apple’s growth in the last few years can be traced to iTunes domination and the iPhone. The market opportunity for those are significantly smaller in the future than in the past. They’re both growing, I don’t question that but the big driver of those were international based imo.
Apple had a huge growth in US, then Europe, then Asia (iPhone only within last year or so was officially brought to China). But the market for any premium based product is by its nature smaller than the whole and I think their early advantage is gone with things like Android and all the other tablet devices coming out.
Anyways, back to BR’s thread, I agree that sometimes reading technical indicators may be a bit wonky but the 2nd chart is a very common way to look at whether something is going out on a different trend than previous. Its the only way to really reliably tell things like bubbles. A similar chart of rent vs buy ratios will show something is not right during the boom times.
March 30th, 2010 at 10:39 am
Market valuations are currently at historic highs. We calculate a secular score index that measures the health of the secular trend in stocks, and it is at bearish levels last seen during the 2000 topping process:
http://www.prometheusmi.com/pages/investing/images/strategy/secular_score_chart.png
Dr. Hussman over at Hussman Funds spends a great deal of time compiling and analyzing the long-term data, and his current research also indicates that stocks are priced to deliver very poor returns based on current valuations. Here are a couple of recent research reports at the Hussman web site:
http://www.hussmanfunds.com/rsi/valuationforwardearnings.htm
http://www.hussmanfunds.com/rsi/yieldsinflation.htm