33) Internet & High Tech $8 Trillion Bubble 1999 & 2000


At the turn of the millennium, we experienced
the largest bubble that ever had occurred
up to that time. What distinguished the Internet
Bubble from others was its association with
both new technologies and new trade opportunities.
Also exceptional is the fact that this bubble
set new records. It emerged simultaneously
as the greatest creator and the greatest destroyer
of wealth:
During this economic episode, Goldman Sachs
proclaimed that investor sentiment was not
a long-term risk. Unfortunately, this sentiment
proved to be a short-term risk with dire consequences
for many investors and companies. The NASDAQ
Stock Exchange listed the lion’s share of
Internet and related technology stocks. This
is significant because during the boom Internet
Price-to-Earnings ratios climbed to over 100
to 1.
By 2000, investor expectation for the future
reached 25% or higher. However, even though
Cisco surpassed a Price-to-Earnings ratio
of greater than 100:1. The earnings of Cisco
grew at a rate of 15% per year.
Unfortunately, Cisco lost 90% of its value
when the bubble burst. Other companies, such
as Amazon, Lucent Technologies, and Yahoo,
lost between 93% and 99% + of their value
from the high-water mark of 2000 to the low
tide of 2001-02.
Security analysts at Merrill Lynch, Morgan
Stanley, and Salomon Smith Barney provided
much of the hot air for the bubble. They based
their success on their ability to steer lucrative
investment banking business to their firms
by promising ongoing, favorable research coverage
that would support the Initial Public Offerings
(IPOs) in the aftermarket.
Analysts pushed the line that traditional
valuation metrics lose relevance during the
big-bang stage of an industry, which is a
time to be reckless, though rational. Individual
stock prices soared while security analysts
refrained from biting the hands that fed them.
Traditionally, analysts rated ten “buys”
for every one “sell.” However, during
this bubble, the ratio of buys-to-sell neared
100:1. “Investment gurus” marching in
lockstep helped to convince the public that
investing was easy. When the bubble burst,
celebrity analysts or others in their firms
faced lawsuits, investigations, and SEC fines.
By 2001, the United States Secret Service
and the SEC had commenced prosecution of more
than 5,000 cases in respect to the market
structures and conducts that led to the collapse.
Sadly, most of their original files were destroyed
along with their Manhattan offices in Building
7 of the World Trade Center when it collapsed
in the late afternoon of 11 September 2001.
As a result, we never may know the extent
of the fraud and market manipulation that
accompanied fee-based underwriting, cheer-leading
research and analysis, and the infectious
greed that contributed to this very destructive
bubble.

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