10 Reasons the NAZ won't recover soon

10 reasons why Nasdaq won't recover soon

By Adam Shell, USA TODAY

NEW YORK - Tales of quick riches, supersized gains and waves of "buy!" orders for tech stocks have been replaced by a new kind of speculation on Wall Street: bets on when, if ever, the once-mighty Nasdaq will ascend to a new peak.
The Nasdaq market marquee in New York's Times Square displays a drop in the market on Feb. 24, 2003.By Rich Kareckas, AP
It's been five years since the Nasdaq composite NASDAQ notched its record close of 5048.62 on March 10, 2000. While most milestones and anniversaries are cause for celebration, the memory of the hissing sound of the deflating stock bubble, rather than the signature pop, pop, pop percussion of exploding champagne corks, is the sound more likely to greet investors.
There are legitimate reasons for investors to embrace a more sober view of the Nasdaq. The most obvious negative is the fact the technology-packed index remains 59% below its high, despite standing at 85% above its bear-market low. In contrast, the blue chip-dominated Dow Jones industrial average is flirting with 11,000 and is just 8% off its peak.
History also waves a big caution flag. The aftermath of past speculative bubbles has been painful for investors. Of the giant boom/busts of the 20th century - the 1929 stock market crash, the gold rush in 1980 and the super spike of Japan's Nikkei stock index in 1989 - only the Dow, which plunged 89% from its 1929 peak, has eclipsed its post-crash high. But it wasn't easy: It took more than 25 years for the Dow to accomplish that Herculean feat, according to Ned Davis Research. The Nikkei is still 69% off its high, and gold is 48% below its peak.
"It's important to remember that bubbles - once popped - do not easily reinflate," says James Stack, president of InvesTech Research.
The Nasdaq composite index over 10 years.
There's a wide range of predictions and theories on when the Nasdaq will post fresh highs, and what it would take. Forecasts range from a super-aggressive four years, to a decade, to a generation, to a lifetime.
The consensus is that it will occur later rather than sooner. Here are 10 reasons why stock market experts do not expect a speedy recovery for the Nasdaq:
1: Flashback to go-go '60s?
Working off excesses takes time. There's a strong chance the Nasdaq will go sideways and "remain flattish" for a very long time, just as the Dow did after a big rally pushed the blue-chip gauge above 1000 for the first time in 1966, says Carl Haacke, author of Frenzy: Bubbles, Busts, and How to Come Out Ahead, and economic policy adviser to President Clinton.
Driven by investors' fascination with the so-called Nifty Fifty stocks, such as Kodak and Xerox, the stock market racked up big gains until being stopped in its tracks by the 1973-74 bear market. In a market punctuated by periods of mini-bull markets and mini-bear markets, it took the Dow 16 years to hurdle 1000 for good. This period feels similar, Haacke says.
2: A "perfect bubble" is unlikely to be repeated soon.
Investors' fascination with tech stocks in the late 1990s was fueled by a powerful one-two punch, notes Jeremy Siegel, finance professor at The Wharton School. The key drivers: the emergence of the Internet and Y2K fears, which sparked a blitz of buying of tech gear in an attempt to avert computer meltdowns when the calendar turned from 1999 to 2000.
"You had the culmination of these very important factors that generated huge amounts of attention," Siegel says. "But both turned out to be one-time events that resulted in the 'perfect bubble.' "
3:People have memories.
The wildly inflated valuations of tech stocks were never justified, adds Siegel, whose latest book about stocks, The Future for Investors: Why the Tried and True Triumph Over the Bold and the New, was published this week. The book advises investors to avoid chasing hot stocks and to buy stocks that pay dividends instead.
"People learn. People have memories," Siegel says. "When they look back, they say, 'That was crazy,' and conclude that maybe the Nasdaq shouldn't reinflate."
4: Caterpillar is not in the Nasdaq.
With growth in China white-hot, big energy companies and Old Economy products such as earth-moving equipment and truck engines made by big industrial companies such as Caterpillar CAT are hotter commodities than computer chips, says Stephen Coleman, chief investment officer at Daedalus Capital.
Dub it the "Caterpillar" rally. The big stock market gains these days, and since the bubble burst, are coming from Old Economy stocks, not tech stocks. Since the Nasdaq peaked, Caterpillar is up more than 170%, and Microsoft is down around 50%.
When asked why the Nasdaq is faring worse than the Dow this year, Coleman responded: "Because Caterpillar isn't in the Nasdaq, and neither is Exxon." These non-tech names, Coleman adds, are also where the earnings growth is. Analysts expect Caterpillar earnings to grow 29% in 2005. Exxon posted 55% growth in 2004 thanks to high oil prices, a trend that shows little sign of abating.
5: Profit growth for tech giants has slowed.
The mega-cap tech stocks, such as Microsoft MSFT and Cisco Systems CSCO, that powered the Nasdaq during the late 1990s, have experienced a sharp slowdown in profit growth. In 1999, Microsoft was the biggest stock on the planet; its earnings grew 40%; Cisco earnings jumped 32%.
But those days are over. Analysts expect Microsoft's earnings to grow just 4% in calendar 2005, and see Cisco's growth rate at 14%, Thomson First Call says.
"Growth rates at the big tech firms have slowed to a crawl," says Gary Kaltbaum, president of money management firm Kaltbaum & Associates. "Companies like Microsoft and Cisco are never going to be what they used to be."
Slower-growing big-cap techs will make it more difficult for the Nasdaq to blast higher, Kaltbaum adds. The index is weighted by the market value of its components, which means the biggest companies have the greatest impact on its returns. Even if smaller tech firms innovate and are rewarded with higher stock prices, it will be tougher for tiny companies to drive the index dramatically higher.
6: The "hot money" has moved on.
The so-called smart money, such as hedge funds, tends to flock to areas of the market that are enjoying the biggest price appreciation. That's another negative for the Nasdaq, which has lagged the overall stock market, oil and real estate this year.
"The hot money wants to get into what is working," Kaltbaum says. "More and more, the hot money sees the Nasdaq is not working, so they are going into other areas."
7: Old leaders tend not to lead new bull markets.
The big winners of one era are rarely the big winners in the next boom, says Marc Klee, manager of John Hancock Technology fund. He notes that energy, the big winner in the '70s, didn't regain its leadership position until last year. Similarly, growth stocks, or companies with accelerating earnings, dominated the 1990s, but value stocks, undervalued names with solid balance sheets, have led since the market topped in March 2000.
"It's tough to hold the leadership mantle on a sustained basis," Klee says. "For tech to become a megamover again, we'll probably have to wait a few market cycles."
8: Even a 100% gain isn't enough.
Another psychological downer is the fact that even if the Nasdaq doubles in value from current levels, it would still fall 18% short of its March 2000 peak. "There's a lot of headroom to get back there," Klee says.
9: Tech stocks are still not cheap.
As the Nasdaq neared its top in February 2000, the index was trading at 246 times earnings, InvesTech Research says. While tech stocks are not selling anywhere near those rich prices today, they still remain overvalued, InvesTech's Stack says.
The P-E ratio of the Nasdaq 100 is currently 30, which, prior to 1996, was considered a "peak" level, Stack says. In October 1990, at the start of the great bull market of the 1990s, the Nasdaq 100 P-E was closer to 15. "Bottom line, one could hardly call the majority of Nasdaq stocks bargains at today's levels," Stack says.
10: History says more pain is to come.
In the grand scheme of bubble aftermaths comes a decidedly pessimistic observation from Pete Kendall, co-editor of Elliott Wave Financial Forecast.
"The historic pattern is for manias to retrace the entirety of their advance," he says. In other words, before this is all over, Kendall says the Nasdaq will plunge back into the "triple digits," the level it was at in the early and mid-1990s. Says Kendall: "The Nasdaq still has a ways to go" - down.
But just because something goes up a lot, then goes down a lot, doesn't mean it can't go up a lot again, other experts say. Just as there are good reasons why the Nasdaq will stay down for the count, there are reasons why the Nasdaq might surprise people and levitate more quickly than some pundits think.
If tech has one thing going for it, it is its ability to come up with the next big thing, says Kevin Landis, chief investment officer of Firsthand funds. "I'm looking out my window in Silicon Valley, and it looks as dynamic as ever," Landis says. "There will be another generation of companies and another wave of technology."
He points out that new technologies and new markets are built on the success of past successes. The PC, he says, paved the way for the Internet, and the Internet paved the way for networking companies. Today, there's whiz-bang TV technology, cell phones that take pictures and satellites that beam radio into cars. Tomorrow will bring fresh innovation. "It's time to question the fear-driven markets and look for opportunities," Landis says.
The next big bull in the Nasdaq will come "when there is such disinterest, and they get so underowned - that is when the big move can be made," Kaltbaum says.
Don't rule out the chance of another bubble. "Bubbles will increase in frequency," Haacke says. "There is huge incentive for the world stock of capital to chase the next bubble. So whatever looks like it is the next hot thing in the global economy, tremendous amounts of money will move there very quickly."
Why not tech?
For more of Pete Kendall's insights, you can read the March issue of The Elliott Wave Financial Forecast. Click here to begin a subscription.