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My Feb. 2000 Warning on the Stock Market

Written by Gary North on February 20, 2016

It was the beginning of the end of the 1982-2000 stock market boom. Discounted for price inflation, the S&P 500 has never reached what it was on March 24, 2000.

I thought the boom was close to the end. I sent my Remnant Review subscribers my first warning. I followed with another warning in March.

This is that warning.

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The combined market valuation of the proposed Time Warner/AOL conglomerate is expected to be $350 billion. That is more than the market valuation of Spain’s stock market, according to Bill Bonner’s Daily Reckoning (Jan. 14). The company will sell in the range of 200 times profits.

I use AOL as a back-up e-mail service. I pay $5 a month for the service. There are 40 million users. AOL gets newcomers onto the Internet, but once onto the World Wide Web, AOL has no competitive advantage — and far less tech support — than a local Internet service provider. AOL has to keep people by means of its non-Web services and features — suspiciously like the local bulletin boards of the late 1980’s and early 1990’s. But the power of the web is so great that it overwhelms anything resembling a bulletin board. The sense of community necessary to sustain 40 million customers’ interest is difficult to achieve, precisely because the customer base is so large. Breaking AOL down into sub-communities is the obvious way to go, but AOL has no powerful advantage over Yahoo! or other “Web portals.” It has no advantage at all over specific Web sites — millions of them today — that offer very tightly focused information and chat forums.

Think of Time and Life. Life, Look, and The Saturday Evening Post did not survive the explosion of special-interest magazines of the 1960’s. The fall in the price of color printing destroyed the advantage once available only to large publications. Time is now facing competition from the web. To maintain its subscription base, it must become amorphous, compared to the Web, where WorldNetDaily and other ideologically focused news sources proliferate.

[Below], I reprint a chart from InvesTech. When you see it, you will understand my belief that a market mania now governs investors, including mutual fund professionals. It charts changes in the price/earnings ratio of the NASDAQ stock exchange. This is the preferred exchange for investors who dream of great profits from companies that today have low earnings or none. NASDAQ has been in mania mode since 1997. |image1| The basis of sustained increases in price is profitability. Without earnings, a stock rises only on expectations of future earnings. But when the entire NASDAQ looks like this, then mania has hit. Where will the earnings come from to validate a 206:1 P/E ratio? They won’t. To spend $206 to buy $1 of earnings — which are not dividends — is irrational, except on the assumption of the “greater fool” theory.

There sits a stodgy U.S. government bond, paying well over $6 per $100. New investors don’t consider anything so lackluster. Only in a recession or depression would there be capital gains to bonds through falling interest rates. Who expects a recession or a depression? No one under 50.

(For the rest of my article, click the link.)

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