Clan of the Market Bear

Markets are not rational. Markets are based on mass psychology and, sometimes, mass psychosis.

Last year’s bull market in Internet stocks was a psychotic episode in many ways, and I pointed it out repeatedly. But bear markets can be just as crazy.

Take what happened to Yahoo yesterday.

Yahoo “beat the street” with net income of more than $47 million, more than four times what it earned in the same quarter last year. Revenues for the quarter nearly doubled, to more than $296 million.

Yet analyst comments on these results were funereal. “This is the lowest outperformance at least in the last year and a half if not in the company’s history,” said one. Another expressed concern over its “dot-com exposure.” (Didn’t she know Yahoo is an Internet company?) Shares in the stock, which, for the last month, have been dropping like a space shuttle coming in for a landing, dropped another 11 percent in premarket trading, to $73. The company’s market cap, which once stood at more than $100 billion, is now about $40 billion.

What has changed at Yahoo in the last year? Absolutely nothing has changed. The company has been growing smartly in revenue and earnings. (When it was an Internet “blue chip” a year ago, its positive earnings were rarer than hens’ teeth.) What has changed is the market’s psychology. Fear has replaced greed.

The Internet stock boom was built on what I call “confederate money.” When I coined the term a year ago, the idea was that stock made everyone a partner or confederate in shared success. Now you see the other side of the bill. Pictures of Tim Koogle really have little more to back them up than pictures of Jefferson Davis did. Both depend entirely on confidence for their value.

How far can this go? Consider that in the 1987 crash, the Dow Jones Industrial Average (then the most common measure of the stock market’s value) fell from a high of near 3,700 to about 1,700. It was cut by more than half. The Nasdaq average, which stood at more than 5,000 at one point, is now down around 3,200. It can go down a lot more and can take a lot more fortunes with it.

What happens to our fortunes now depends almost entirely on what happens in the Middle East and to the price of oil. War is not healthy for markets and other living things.

There’s also some good news in all this. The dilettantes and snake-oil salesmen are being wiped out and exposed. Young people are getting a stiff dose of reality. The rest of us should be remembering why we got into this business in the first place, and if it was to make a quick buck, it’s time to get out.

Personally, I was covering this beat in the mid-1980s, when only a few hundred people knew anything about the subject, and no one with any business savvy would go near it. I can live like that again. If you can, too, you’ll make out fine. But we’re a lot closer to the bottom of this market than we are to the top. When I start worrying, maybe it’s time to buy.

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