Posts filed under “Markets”


The always interesting Alan Abelson makes some less than encouraging comparisons between the  present sentiment levels and those of the late 1990s:

"THE ABOVE REFERENCE TO MANIA, we realize, may smack of journalistic exuberance (not to be confused with irrational exuberance, if only because journalism has never been accused of being rational)…For the year so far, moreover, the S&P is slightly higher and the other two have lost a bit of ground and only the staid Dow Utility Average posted an eye-opening gain of nearly 30%, sparked in large measure by attractive yields and sidelines in energy and real-estate.

So, you may rightly ask. where’s the mania? Seek, we answer, and you shall find.

Most strikingly, the maniacal strain is becoming visible in all the old familiar places. Like IPOs and the Internet stocks, both of which, you doubtless recall, were blown sky high during the late great equity bubble, only to be blown to smithereens when the bubble burst. The premiums on the current batch of new issues that particularly tickle the speculative fancy have not yet hit the clinically insane heights reached by their predecessors when day trading was in full bloom; not yet, anyway.

And, for sure, their numbers remain minuscule compared with what we saw in the roaring ‘Nineties. But the ominous — one could say premonitory — stirrings of animal spirits are evident. Even the worst storms often start with a distant, almost gentle thunder.

Back in August, (ticker: BIDU), a Chinese Internet provider with meager revenues and a bare sliver of earnings, sailed across the wide Pacific and sold an IPO to its new best friend, the American investor. A tad over four million shares were offered at $27 each, and they promptly shot up to $154 (on Friday, last we looked, they were changing hands at a good cut below half that price).

A hot-off-the-presses example of the spores of a full-fledged speculative outbreak was last Thursday’s trading debut of WebMD Health (a detached part of WebMD, the latter soon to rechristen itself by the rough phonetic equivalent, Emdeon). WebMd Health (WBMD) bolted more than 70% higher before the fever subsided a bit and closed at $24.40, up a mere 39%. In case you wondered, the company’s comfortably in the red.

It’s not only that new and exotic Internet IPOs are once more inspiring a heap of heavy breathing among the investing masses that gives us the willies. A mite unnerving, too, is that some of the more promotional pushers of the original, largely ill-fated bunch of Webbies are back doing business at the same old stand.

For example, Morgan Stanley’s Mary Meeker, which this very magazine dubbed "Queen of the Net," but whose jewel-studded crown (they’ve always paid well at Morgan Stanley) became embarrassingly tarnished with the collapse of the sector, has returned from what the cruel would call well-deserved obscurity to some semblance of prominence. Last, we read, she was brandishing her magic wand at Chinese ‘Net stocks (we immediately began to worry about the impact on the already tense relations between China and this country). The story neglected to say, alas, whether Baidu was among her favorites.

By no means, though, is the budding revival of mania manifest merely in IPOs and freshly traded Internet issues. As it happens, some of the old and long neglected Web favorites have attracted a spirited new following. (We presume it’s new because the old following was pretty well wiped out four or five years ago and likely have been driving taxis or picking grapes ever since, both honorable professions but not notoriously financially rewarding.)

One of these back-from-the-brink stocks is Red Hat . . .The reason it evokes a whiff of mania has everything to do with the extravagant value the stock market is placing on the company. The stock, to begin with, is being capitalized at nearly $4 billion, which is something like 17 times sales and 10 times book value. Those are, for the benefit of the statistically challenged, not overly modest multiples.

The shares have already appreciated by 75% or so over the past 12 months, which should give all but the starry-eyed wannabe shareholder a bit of pause. They also are selling at somewhere in the neighborhood of 80 times trailing 12 months’ earnings and 55 times Street estimates for the year ending February ’07.

In a normal and reasonably sane investing climate, even the bravest investor might blanch at the idea of paying more than half a century’s worth of next year’s possible earnings for a stock. But, of course, as Red Hat’s great leap upward last week is but one illustration, the current investing climate is not exactly normal or reasonably sane."

Abelson is always thought provoking, never boring, rarely Bullish. While his point is hardly conclusive, add it to the rest of the risk factors we have been discussing, and its easy to see how the 2006 markets might be a bit of a challenge   . . .

Generous to a Fault
Barron’s, MONDAY, OCTOBER 3, 2005

Category: Markets, Psychology

Yale Endowment Manager: Index

Among individual investors, David Swensen isn’t a household name. But he is an icon in the world of big institutional money managers such as endowments and pension funds.

Mr. Swensen’s fame comes from his oversight of Yale University’s $15 billion endowment fund, which, since he was hired 20 years ago, has returned an average of 16% a year, far outpacing the market and other funds run for universities. Before arriving, Mr. Swensen had never overseen an institutional portfolio, and he brought to the job an unconventional approach for dividing up the portfolio among different asset classes. He is now Yale’s chief investment officer.

Five years ago, Mr. Swensen set out to write a book that would bring the lessons he learned to individual investors. Instead, he says he found that the option most accessible to individuals — mutual funds — often makes it impossible to beat the market. And even when they do find good managers, individuals end up shooting themselves in the foot, he says.

So while Yale relies on actively managed portfolios, Mr. Swensen says individuals should just stick to index funds, especially those run by not-for-profit companies. He also likes exchange-traded funds, which trade on exchanges like stocks, but says "buyer beware."

Excerpts from an interview with Mr. Swensen follow:

WSJ: You had hoped to give small investors a road map for beating the market based on Yale’s approach to investing. What happened?

Mr. Swensen: I found when I started down that path that individuals just don’t have the same set of investment opportunities available to them that we do here at Yale. In fact, the evidence showed me that the mutual-fund industry has completely failed to provide reasonable active-management returns to individuals.

WSJ: To say that it completely failed — that’s a pretty harsh statement to make.

Mr. Swensen: I think the evidence is there. The crux of the failure is with the for-profit management of funds for individuals. Mutual-fund managers have a fiduciary responsibility to investors. Obviously, if they are operating in a for-profit mode, they have a profit motive. When you put the profit motive up against fiduciary responsibility, that fiduciary responsibility loses and profits win.

continued below . . .

Yale Manager Blasts Industry
THE WALL STREET JOURNAL, September 6, 2005,,SB112597100191832366,00.html


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