Tech stocks set to bust

By Mark Alexander · Friday, April 7, 2000

If you are among the majority of Americans who now own -- directly or through various funds -- high-tech stocks, there is more trouble on the horizon. While we are not prognosticators of such things, and while it is highly unusual for us to comment on equity markets, we do know that many of our readers hold stocks, and we would be remiss if we did not now comment about recent developments.

The Federalist Editorial Board has access to some of the smartest and most seasoned market analysts in the world -- we're not talking about the corner reps of big brokerage houses. Our sources estimate that there will be additional realignment of the equities market in favor of value stocks -- those with low price/earning (P/E) ratios -- in the next 18-24 months. This means that the trendy high-tech stocks with high P/E ratios -- market values far in excess of their earnings -- may soon fall out of favor.

We are certainly not investment advisors, but we do know that greed has lost many fortunes -- large and small. Thus, holding investments, which have already performed well, in blind anticipation of similar future performance, can be ruinous. The next sell-off of high-tech stocks may be faster than the sell-off earlier this week, and the small investors who are last out will suffer the greatest losses. How sudden can market reversals be? The Dow Jones Industrial Average (DJIA) was at 381 in September 1929. Stock prices had risen from conservative levels of 10 times earnings to speculative levels of 20 times earnings. On October 29, in only a few hours, the DJIA dropped so fast that it wiped out all the previous year's gains, closing that day at 230. The market rebounded for a period and then sank again at a torturous pace. (Note: Many of the high-tech stocks today are trading at 20-50 times earnings.)

Of course, there are more safeguards since that precipitous market drop, which kicked off the Great Depression. Most significantly, margin requirements, which were as low as 10% in 1929, are now 50%.

Those safeguards notwithstanding, in the more recent "Black Monday" crash of October 19, 1987, the DJIA fell from 2246 to 1738 in one day -- losing 22.6% of its total value. In the previous week, the DJIA had fallen about 10%, giving some warning of pending trouble. By the close of trading on October 19, 1987, U.S. equities investors had lost one trillion dollars -- on paper. The complicating factor today is computer day-trading, which introduces a whole new set of risks for most Americans, who are not speculators, but are investing for retirement. Caveat emptor!