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just a game of pass the handgrenade

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    THE SCARIEST SCENARIO IMAGINABLE
    By Steve Sjuggerud

    I never thought we'd see the day... the day when wild
    speculation actually exceeded the excesses of the late
    1990s. And I really didn't think it would just take four
    years to get there. But here we are...

    Investors are actually borrowing money to buy Nasdaq
    stocks. In fact, more people are borrowing more money to
    buy stocks today than at any time in history, including the
    "Great Bubble" of early 2000.

    The result? Just like in the days of the Great Bubble, the
    'garbage' stocks have soared, while sounder stocks have
    struggled. A $10,000 investment a year ago in AskJeeves.com
    (do you know anyone on the planet that actually uses
    AskJeeves.com?) would be worth $220,000 today. Or how about
    NetEase.com? $10,000 invested a year ago would be worth
    even more than AskJeeves...

    NetEase.com is valued in the stock market for over $2
    billion (with a "b") dollars. Yet sales... yes, sales... over
    the last 12 months were only $27 million (with an "m")
    dollars. Who's buying this garbage at these prices? It
    appears to be individual investors at online brokers...

    Trading activity at online brokers in the most recent
    quarter is up 40% from the same quarter last year. And this
    is clearly 'hot' money... speculative money... At online
    broker E-Trade, the level of margin debt in the latest
    quarter (ended June 30, 2003) among E-Trade customers rose
    by 31% over the previous quarter (ended March 31, 2003).

    It's rampant speculation at its finest.

    By contrast, look what corporate insiders - the 'smart
    money' - are up to. Obviously corporate insiders know more
    about their businesses than anyone else. Insiders are
    generally right, but a little early in their selling.
    Recently, they've been selling at a rate not seen since
    1986. They were early back then... but they got out ahead of
    the Crash of 1987, when stocks fell 22.6% in one day.

    Looking at the latest data, corporate insiders set a dollar
    record for the last decade... insiders sold $44.53 dollars
    of stock for every dollar of stock they bought. That is
    unbelievable.

    "Insiders, of course, know much more than the general
    public about their own stocks," Professor Henry Hu of the
    University of Texas said in a news story on the subject.
    "Ordinary investors are terribly naive - all they pick up
    is what they hear from the their friends the financial
    media. And, unfortunately, investors today still have this
    pathological fear of being left behind if the market goes
    up." (Some folks wrongly dismiss this figure, saying that
    "Bill Gates regularly sells a ton of shares." What these
    folks don't know is that these figures actually EXCLUDE
    insider trades over $50 million - so the Bill Gateses of
    the world are NOT included in this figure.)

    It gets even worse when you look at tech stocks alone.
    Kevin Schwenger, the insider data research analyst at
    Thomson Financial, who puts out these numbers, told the
    story in the Wall Street Journal... In August, $644 dollars
    of stock were sold for every dollar of stock bought by
    insiders at semiconductor companies. As a frame of
    reference, $20 sold for every dollar bought is considered
    bearish...

    Yikes...

    While the 'smart money' sells tech stocks in record
    amounts... the 'dumb money' is taking on debt to buy these
    stocks on margin. By my studies, the 'dumb money' is at an
    extreme of optimism not seen since, well, right before the
    1987 crash... In the last few months, individual investors
    have become more bullish than at any time in history (as
    measured by the American Association of Individual
    Investors sentiment poll), except in 1987.

    And the same is true of newsletter writers. The folks who
    write investment advisory letters (like me), as a group,
    are now as bullish as they've been since 1987 (as measured
    by Investor's Intelligence, who has been monitoring these
    things since the 1960s).

    When optimism reaches extremes, as it has right now, quite
    frankly, there is nobody left to buy... Individual
    investors have been buying... newsletter writers and
    analysts have been buying... and the pros have been buying.
    There is no 'greater fool' left to buy and hope for a
    higher price. There is nobody left to buy.

    We're extremely close to the scariest scenario imaginable,
    at least from my perspective.

    There are three major ways to size up the markets to get
    some clues on where it might be headed: fundamental
    analysis, technical analysis, and analyzing the market
    sentiment. All three reveal a gruesome spectacle.

    We've already made the case about market sentiment - the
    dumb money is at a record level of optimism, while the
    smart money is at a record of pessimism. Which crowd do you
    want to be with?

    In the case of fundamentals, stocks are still more
    expensive than they've been at any time in history. We are
    still at 30 times earnings and three times book value in
    the case of the S&P 500 Index of the big, boring stocks.
    And of the tech stocks, oh my... by my calculation, the
    companies of the Nasdaq 100 are trading at a price-to-
    earnings ratio of 49. To explain this in plain English, if
    you were buying a stock with a P/E ratio of 49 as a
    business, it would take you 49 years to break even on your
    investment. Why would anybody in their right mind borrow
    money to invest in that?

    The Nasdaq 100 Index is trading at 8 times sales. If you
    were buying this business, that means if you paid yourself
    every penny of sales for the next eight years, you'd break
    even. Of course, you can't pay yourself every penny of
    sales. Rent needs to be paid, salaries need to be paid, and
    of course it will cost you money to make your product. In
    other words, getting your money back in eight years is a
    total pipe dream. The basic point is, fundamentals in tech
    stocks are horrific.

    All that's left is the technical analysis - the major
    trend. The trend has not broken down yet... but in the face
    of horrific fundamentals in the tech-heavy Nasdaq 100, and
    the truly scary insider selling in the tech stocks, it is
    time for us to place our chips on the table that the Nasdaq
    100 will be lower a year from now than it is today.

    When the market breaks down, you can't say you weren't
    warned...
 
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