What the stock markets needed yesterday was an old-fashioned used car salesman.
Yes, these prices are crazy, and a lot of Chicken Littles in this space are wondering if the sky is falling. Well, it’s not. Do you know that the Nasdaq stock index had never passed 3,000 until last November? The Dow is actually up ten percent from a month ago. If this is a bear market, it’s a Winnie the Pooh Bear market.
This was not a crash unless you own an e-tailer that’s out of fashion and out of cash, like CDnow or Egghead. Fashions change, and right now solid assets and real profits are more fashionable than virtual ones.
Right now a lot of people are wondering what happened, so here’s my theory: Taxes happened. (If you didn’t get your taxes in yesterday, you’ve got more important things to do than read the rest of this column.)
A lot of people made a ton of money last year. The Nasdaq index rose from 2,800 to nearly 4,400, and things were even better in our Internet sector. Look at the one-year chart for the Chicago Board Option Exchange’s Internet Index for example.
The index doubled between January and December of last year. That meant that the average Internet shareholder doubled his or her money. (If you had any luck at all you did even better.) It wasn’t real money, but Uncle Sam wanted real cash for it this week. The only way to raise that cash was to sell some of the stock last week. If a lot of people were late with their taxes (and they always are), then a lot of people had to sell. (I have at least one friend in this situation, so I know what I’m talking about.)
Once the selling started, those who bought stock with borrowed money (to increase their leverage) got hammered. (I have a relative in this situation.) When you buy stock on margin, you can borrow the full value of the stock you hold and put that in new stock. When that value falls (when other people have to sell for tax reasons) your loan gets called, and if you don’t put in new cash your stock gets sold for whatever the broker can get.
Once something goes out of fashion, however, it doesn’t come back right away. Don’t expect big profits if you buy an e-tailer today. Instead, look for application service providers (ASPs) to become the next big thing. Most aren’t publicly traded, and short supply means high prices.
So the word for today is don’t panic. When the real crash happens you won’t need me to tell you about it.
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