Partying Like It's 1999?

As I sat down to start writing this, an hour or so into the trading day, the NASDAQ was down about 2% despite a continuing stream of very encouraging earnings releases from the likes of Boeing and Amazon. A Debt Ceiling Countdown Clock at WSJ Online informed me that we have not quite six days and fifteen hours until something really awful happens, something right up there with Y2K, Carmaggedon, the invasion of Kuwait and the SARS pandemic of 2003. No wait, those weren’t so awful, at least not an in “oops, there goes the present value of the global economy’s future cash flows” sort of way. This “crisis” is probably destined to join those others in the Hall of Shame for Infamously Overhyped Events. It is possible, but not probable in my estimation, that like an avalanche triggered by a single ill-considered snowball, somebody somewhere will feel the need to dump their putatively risk-free assets “before everyone else does”, and the “price signals” thus generated convinces others that there really is a problem and its worse than we think, and then it feeds on itself for a while. Such is the nature of panic. So there is an element of danger in this debt limit impasse, but only if panic takes hold.

This situation is as distasteful as it is because it is so much about short term politics, positioning for next year’s election, at the seeming expense of longer term stakes that are so high. But there is a sense in which we should be grateful for this unseemly display of human nature. Factions within people groups will always disagree, always compete for power and access to resources. We work these differences out through politics. The process is distasteful in the extreme, but considering the alternative, the mobs, assassinations and other sanguinary routines with which most people in most times and places have resolved their differences, it is almost a blessing to have to watch middle-aged men and women go at each other with mere words. This dispute will come to some sort of conclusion in the next few trading days. The Democrats seem to believe that they can make the Republicans look heartless and irresponsible and then get the media to reinforce that message right through the election. As if anyone under the age of about 70 was watching the evening news. The Republicans just want to force the Democrats to have to keep talking about raising taxes, or propose another hike in the debt ceiling, preferably right before the election. Once both sides have decided they have hung something intolerable around the other side’s neck, some compromise will be reached. It will probably constitute and tiny and contingent baby step in the direction of fiscal probity, a long overdue journey that will only get underway in earnest in 2013, but it will be hailed as progress and the Market will move on.

This crisis reminds me of nothing more than a reality show about staging an intervention with some pampered young princess whose credit fueled lifestyle has reached a breaking point. She always seems oblivious to what I, from about age twelve, always thought that any reasonably well educated twelve year old knows, that more money going out than coming in will come to a bad end eventually. There is also that element facing up to how what were once considered luxuries have become necessities or even “rights”. I am optimistic that a plurality at least of voters understand that there will have to be an era of sacrifice, at least a little bit by nearly everyone and a lot by some (i.e., those currently living large on cash flows emanating from that plethora of government programs). They should be able to understand that entitlements conceived a couple of generations ago, when life expectancy was around 58 years and geriatric medicine was mainly palliative, can at some basic level be protected but have to be retooled to the 21st Century. The problem, as always, will be those special interests, whose “sacrifice” (i.e., giving back some of what they have contrived to take from the rest of us) will be acute and possibly life changing. So we will get drama. We will get fear mongering, which we can only hope does not trigger panic (Like the ill-considered “mark-to-market” rules that greased the skids on the way to the brink of catastrophe in 2008, rules that mandate rather than advise with respect to bond ratings are more than a little unsettling at this juncture.)

In the meantime, what’s not to like about this latest batch of earnings releases? Well, some of the action we saw early on, stocks getting crushed for very decent or even outstanding reports, got me thinking about What Time is It? My sense is that in terms of a Bull Market that started in March 2009 and will end at some point to be followed by a 20%+ decline, we are not yet late in the game, but we just might be getting to the late innings. That low water mark is going on 2 1/2 years already. The money at the margin seems to have gotten used to earnings “beats” as a matter of course, and inclined to dump if the “beat” falls short of another construct that seems to have crept back, the “whisper number”. If all this strikes you as faintly familiar, you are not alone. I could not help wondering, especially given the initial reception given some of my Old Tech stocks, if it wasn’t starting to feel like 1999 again. It’s not just the IPO Market back in force, cranking out multi-$B market caps for entities that will probably never turn a profit. No, what the response to the likes of INTC, CYMI and MKSI reminded me of is the way the investing world got starting in April 1998, when New Economy stocks floated as if gravity had been outlawed, and in so doing sucked all the oxygen out of the room for the Old (or, as I liked to put, Real) Economy stocks. This went on for almost two years before reality reasserted itself and valuations of these respective groups reversed course. For a few hours anyway, watching the Market at best yawn at the great results of worthy enterprises while going bananas over yet another dubious social media startup, it was tempting to worry that we were about to go through all that again.

This temptation would prove fleeting. Whatever seemingly orchestrated, trading desk induced “disappointment” at the results of the Old Tech stalwarts was quite short-lived and in some cases (MKSI in particular) no doubt painful for the perpetrators. Investors have not quite taken leave of their senses in the manner we endured through 1999. There is still a realization extant that if Facebook and Linkdin and the rest of their ilk, and even Apple and Google for that matter, are going to realize anything close to their purported potential, they will need Intel continuing to march on what it does so incomparably well. And for that to happen, the likes of ASML and CYMI, athwart that bottleneck in the path denoted by Moore’s Law, are going to have to continue to execute to plan as well. And as they move forward, the likes of MKSI follow right behind. Web 2.0 is most definitely happening, but none of us are truly capable of knowing who the biggest winners will be, and who is going to end up in that vast, teeming herd of also-rans. We can, however, recognize those companies who are key enablers of what the whole world seems to want more of, whose capabilities cannot be replicated and whose valuations are grossly out of synch with any but the most dismal of prospects. Once the data from these earnings releases had time to sink in, the Market at least hinted that it kind of gets this (at least until the Debt Ceiling Countdown got to about seven days), with even dinosaur MSFT shaking off its naysayers.

So what time is it? It’s nowhere near 1999, or even April 1998 for that matter, but it is closer to April 1998 (for Real Economy stocks) than it is to March 2009, i.e., a long ways already from early in the game. There are other factors that make this moment starkly different than what culminated in the Tech Bubble. For starters, the valuations achieved on the way to Y2K were a recognition of how massive and decentralized computing power was going to enable globalization over the next few decades. An Internet based economy has indeed developed, its just not the one the promoters were telling us about 14 or sp years ago. Massive wealth, and not just at the top, was about to be created. That prospect is not exactly gone today, but it is at the very least up against diminution at the margin. Then there is the matter of that national debt and the deficits that caused it. It seems like ancient history today, but in 1998 the Market was loving on federal budget surpluses, with the prospect of more to come (“a shortage of Treasuries, anyone?”). Today’s reality finds a federal deficit unlikely to shrink to even a low-single-digit percentage of GDP unless said GDP starts growing at 5%, and how likely is that?

Finally, in 1998 it had been a very long time since investors had endured a market downturn that wasn’t over and made up for in a matter of months. (Even the Crash of ’87 was over and forgotten, except perhaps for banks and real estate whizzes in the Northeast and the Oil Patch, by mid 1988.) Enough time has passed for the sting that was 2008-09 to fade, but the scars of what probably will be the Bear Market of a lifetime are still very much on our collective psyche. So we can expect the animal spirits to come out and play. And given how long it has now been since the Big Tide turned (that -18% correction last summer notwithstanding), the time has come, in my estimation, to be giving at least as much thought to taking profits and building up for the next rainy day as we give to taking advantage of the momentary buying opportunities that develop when it sure seems like somebody somewhere is trying to trigger a panic.