Throughout the whole of 1999 and into 2000, everything that was good or worth owning in the market b...
Throughout the whole of 1999 and into 2000, everything that was good or worth owning in the market became symbolised by a three letter acronym - TMT.
That is technology, media, and telecommunications, and the three sectors combined formed a single market grouping and enjoyed an unassailable position as the darlings of the investment community over this period.
Then in March this year momentum in the area stalled and in a short space of time TMT became a cliché which investors were almost embarrassed to be associated with. Now in May, two months after their peak, these stocks present something of a dilemma for investors.
Was the TMT phenomenon merely a fad? A bubble waiting to be burst, as many who had not enjoyed the ride up would claim? Or was there a fundamental basis for investors' enthusiasm that, now some sanity has been restored to valuation parameters in the sector, can be bought at levels that give investors a second bite at the cherry?
Throughout 1999, but particularly in the latter stages, TMT stocks enjoyed an electrifying performance. The Nasdaq composite, the index with which the sector is most closely associated, started the year at a level just under 2,200 points, rose to 4,000 by year end, and then on to 5,000 by the middle of March this year.
Stocks like Qualcomm produced returns that were verging on the obscene and necessitated the development of new valuation measures since application of traditional methods produced ridiculous numbers. Investors had to adjust to applying P/E multiples to the revenue line of certain stock groups.
But then in March, against the backdrop of a Federal Reserve that was adopting a more aggressive posture, the group started to run out of steam. After an initial, short-lived correction in the middle of the month, the market rallied back to the old highs, but could not breach them. Then the sell-off began.
The Nasdaq composite is now 30% off its high, the narrower Nasdaq 100 similarly is 30% off its high, while the S&P 500 is less than 10% of the highs reached towards the end of March. The S&P's move illustrates how investors were rotating out of TMT into some of the more traditional 'old economy' stocks and sectors, and in the process some of the Nasdaq's outperformance of last year has been unwound.
Many of the stocks which achieved notoriety last year for their stellar performance have seen even more vertiginous plummets recently. Take Red Hat for example.
This is a stock which was synonymous with the new economy paradigm, and rose from an IPO price of $7 in August 1999 to $150 by December, and whose name was whispered like some sort of code word round the market to illustrate the potential rewards available in the sector. Now Red Hat is trading at $20, a level not previously seen since its first day of trading. Other stocks that enjoyed similar glamour status, such as Freemarkets, have suffered similar fates.
What has happened?
Firstly, there is the progressively more aggressive stance the Fed has been adopting as regards monetary policy. Domestic demand growth has been extraordinary, and was almost feverish in the first quarter, running at 8%. The Fed and virtually every economic commentator views this as unsustainable. It is therefore expected the Fed will need to be tougher on interest rates if it is to stymie demand and keep the lid on inflation, where a couple of indicators have recently suggested pressure is mounting on the upside.
Tightness in the money supply is also becoming increasingly evident and is probably being reflected in the reduction in liquidity in the markets, where volumes have fallen recently from the 1.8 billion share average daily volume on Nasdaq, down to around 1.2 billion more recently. Then came the increasingly interventionist stance the US Government is taking with big business in the US, with the Microsoft break-up ruling being the most obvious case but FTC rulings and demands relating to ongoing mergers providing further evidence. This has weighed heavily on sentiment.
Supply of equity is another factor, as it ran at record levels through the first quarter and inevitably eventually left a TMT-hungry investor sated. Then when the momentum turned, many investors found themselves overweight and shipping water, and were forced to reduce weightings compounding the negative momentum.
Concurrently, the bears who had been underweight were enjoying the moment and had no desire to try and catch the falling valuation knife. This marked a reversal of the pattern that existed on the way up, and combined to produce the performance we've witnessed recently. Ironically, the first quarter results season has produced some evidence to suggest that the optimism regarding the potential of the sector was not misplaced.
Some of the valuations accorded to the players in the sector may have been misguided, but the fundamentals are becoming more tangible and less ethereal. The hard numbers have started to produce some evidence to lend credence to what previously amounted to little more than conjecture.
In addition, the level of emphasis that those companies outside of the actual TMT area are putting on their commitment to and development plans for it suggests the whole new economy revolution is gaining credence and acceptance through all parts of the economy. When this happens then some of the prophecies that were being handed down last year begin to sound a little less evangelical, and the potential of investment in the sector looks less illusory.
For the market overall, the number of companies producing positive earnings surprises this quarter stands at a little over 70% as of today, against 12% reporting negative surprises. If anything, TMT names improved this ratio, and these results are all the more impressive given the number of companies that guided analysts higher through the quarter.
Many of the disappoin
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