19 Years-Stalling Out.

For a variety of reasons the markets stalled after it reached its March highs. A casual observer looking at the SPX would have concluded that stocks were going through a digestive phase. This could be seen as a pause similar to other times during the long boom when prices took a rest before continuing higher. With the exception of 1998 and LTCM, stocks had experienced no meaningful downdraft during the 1995-1999 run. It appeared no different this time. The SPX was trading around 1480 six months after its all time high, lower by about 5% from that March 1552 print. But, the real carnage was taking place under the surface in the speculative sections of the market. Now let's first point out that the so called “old economy” companies {which had themselves appreciated quite nicely during the bull market} had not seen anything like the speculative leaps enjoyed by many smaller companies involved in technology and internet communications. The air was let out of many of these stocks as the markets for their services dried up or came to be seen as never as extensive as they had previously hoped.

CMGI, the Waltham, Massachusetts distributor of supply chain management services to other technology companies, is a good example to use. CMGI’s stock had traded below $1.00 in late 1997 and by December, 1999 printed a high of 163.22. General Electric {GE} would have gone from $21 to $3,428 if in the same time it had experienced this same sort of percentage appreciation. CMGI traded as high as 151 in March, 2000. By May it traded in the 40’s. A year later it traded at 4. It currently trades around 2. Many other companies went out of business or had to de-list from the exchanges. If the market itself had its largest declines after the “87 Crash”, then probably the largest flameout since that time hit these speculative companies in the 2nd. quarter of 2000.

The SPX rolled over and started its decline in the fall of 2000. At first this was seen as largely seasonal and due in the main to the uncertainty regarding the upcoming presidential election. The SPX lost about 15% between the late summer and Election Day. But the nation woke up on November 8 to the fact that it had no President and the events of the next several days indicated there would not be one in the foreseeable future. Markets hate, absolutely hate, uncertainty and next to a war this was the one of the murkiest of all outcomes. Stocks had no buyers. Prices fell another 12%. The market lost almost 20% from its March highs to its late December lows. As mentioned above it went worse for other market sectors.

Even with the election resolved the market continued downward as a slowdown in the US economy became more evident. Corporations had spent aggressively to upgrade their systems in the late 90’s and were in no mood to continue the binge in an era where their own bottom lines were being pinched. Economically, the new Bush Administration seemed to be getting off to a slow start. His economic advisors were seen as weaker than those picked by the previous Clinton Administration and his razor thin majority meant he was seen as a weak President in terms of any agenda that he might have.

It was against this backdrop: an already declining economy, a perceived weak Bush Administration and a market that had declined 12 out of the past 17 months, that the September 11, 2001 attacks in New York and Washington must be seen.

The outside world might refer to those of us who invest in the financial markets as working on Wall Street. Insiders mostly refer to our profession as “the business”. It has been my experience that those of us in “the business” place a divider between the world we knew prior to September 11 2001 and that which has evolved since. I believe that the investment world changed irrevocably after 09/01/01. It is going to take me more posts to detail how that is so. But we’ll start to bridge that divide in the next part of this series. To be continued……..

*GE is currently owned by Time Warner (TWX). Mr. English and some of his clients currently hold positions in TWX although said positions are subject to change at any time. No current positions in CMGI although positions are subjedt to change at any time.