Back in the day, when the alpha male Clinton roamed the White House, the high tech stock bubble grew, and grew, and grew. That bubble began to burst in March 2000, nine months before “W” took office, and caused the S&P; 500 to head almost straight down for another 30 months. You don’t hear much these days about the tech-wreck, only about the great economy under Bill Clinton, which wasn’t so great, just a bubble waiting to burst.
If the Barney Frank – Chris Dodd hide-the-ball on Fannie Mae crowd sowed the seeds of the current housing bubble (which led to the current financial crisis), then the seed-sowers of the high tech bubble were the “analysts” who developed new paradigms for investing such as “eye-ball” clicks. None of these analysts was more famous or more infamous than Henry Blodget.
The problem was, people like Blodget were telling the public to “strong buy” stocks that they called “POS” in their internal e-mails. The kept saying “strong buy” as the high tech stocks tumbled, leading millions of investors to buy crap stocks and to hold onto the crap stocks they already had bought.
The regulators charged that, among other things, Blodget, of New York City, issued fraudulent research under Merrill Lynch’s name, as well as research in which he expressed views that were inconsistent with privately expressed negative views. Blodget’s conduct constituted violations of the federal securities laws and NASD and NYSE rules, which require that, among other things, published research reports have a reasonable basis, present a fair picture of the investment risks and benefits, and not make exaggerated or unwarranted claims.
Here’s a part of a chart showing some of Blodget’s more egregious lies:
Which is why I got a good laugh when I heard the other day that Blodget was warning that the stock market has further to go before it bottoms out. It seems that bubble-boy Blodget has spent the last several years reinventing himself as an “honest” commenter on the market since he already had been caught being a “not honest” analyst. Whom better to trust than someone you already know will lie?
On days like today, it helps to look at the silver lining. Here it is: The farther stocks fall, the cheaper they get — and the higher the expected long-term return becomes. Unfortunately, that doesn’t mean we don’t have a long way to go on the downside.
There were four massive stock bubbles in the 20th Century: 1901, 1929, 1966, and 2000. During each of these bubble peaks, the S&P; 500 neared or exceeded 25X on professor Robert Shiller’s cyclically adjusted P/E ratio. After the first three of these peaks, the S&P; 500 PE did not bottom until it hit 5X-8X. We’re still in the middle of the last one.
So the loss of over 50% of market value has a silver lining? Isn’t this what Obama said the other day?
“On the other hand, what you’re now seeing is profit and earning ratios are starting to get to the point where buying stocks is a potentially good deal if you’ve got a long term perspective on it.”
Another 30% off the S&P; 500, and this market will be a screaming buy. Silver lining indeed.