- The Washington Times - Thursday, January 2, 2003

The arrival of a New Year whets the optimism without which stock market investors would stash their money only in bonds, if not CDs. Optimism is also encouraged by the autumn 2002 recovery in stocks, after two years of travail. With the consensus forecast for 3 percent economic growth in 2003, there is reason to hope that the painful bear-market reaction to the overheated bull market of the 1990s is over, and that a more "normal" stock market lies ahead, one that continues a decades-long upward trend not, of course, without occasional setbacks.
But, even for us optimists, there are new worries the bubble problem and the integrity question. As so many of us discovered, suspecting that a stock market bubble is occurring is one thing and dealing with it constructively is another. Three years ago, after a sizzling market year in 1999, I wrote, "Have we investors been more lucky than smart, riding the leading edge of a bubble?"
We were. The boom in technology and Internet stocks proved to be a classic bubble a vogue for investing in something new the Internet in the 1990s, Florida land in the 1920s, tulips or sailing ships centuries earlier. The Nasdaq market, dominated by technology companies, fell by 76 percent between 2000 and 2002. From a high in excess of 5,000, the Nasdaq index was struggling back towards 1,400 in the closing weeks of 2002. Its low was 1114 on October 9.
Despite whatever awareness I had of the bubble in 2000, I clung to a position in a sci-tech fund and rode it down, down, down. Finally, in October 2002, I sold it to get a tax loss. (I did switch the proceeds to another technology fund, a sector that I still thought I should have in my portfolio.)
One cannot be sure that one is in a bubble until it bursts. While a few investors may make it out the door, for whatever reason acumen, loss of nerve, dumb luck it is impossible for all investors to get out at or near the top. It is always a foolish vanity to think that one will get out at the top (or buy at the bottom).
My "loss" of unrealized capital gains was a painful consequence of being a buy-and-hold investor who dreaded missing out on further gainsand one who couldn't imagine that the Nasdaq might fall so far. Lately, many investors (and I) have been quicker to take profits, which is why in the autumn of 2002 the market's recovery was so fitful.
Another worry for investors is the integrity problem. It has two faces. One is the honesty and completeness of corporate financial disclosure. Does the company hide some of its obligations off the balance sheet, as Enron did? Does it puff up sales with marketing artifices, as some drug companies did?
The second face of the integrity problem has to do with securities analysis. New York's Attorney General, Eliot Spitzer, found that securities research has been compromised by investment banking considerations. Some securities analysts spoke with forked tongues recommending to individual brokerage customers companies whose stocks their houses had underwritten (or hoped to underwrite) even as the analysts were deriding these same companies in-house and to institutional customers.
This is not a new problem. The late New York Times Wall Street reporter Vartanig G.Vartan described it to me nearly 40 years ago. Now, several high-profile Wall Street houses have reached a settlement with Spitzer whereby they undertake to give customers outside, independent analysis and to insulate their own analysts from their investment banking divisions.
The banking houses' lust for underwriting income is blamed by some for the Internet bubble. D. Quinn Mills, a professor at the Harvard business school, makes that connection in his new book, "Buy, Lie and Sell High: How Investors Lost out on Enron and the Internet Bubble." Mills faults the investment banks for bringing to market initial public offerings of companies that had no substantial sales and earnings, just an interesting idea.
That such issues were snapped up was a symptom of the casino mentality. Many of us recognized it and still wished we knew a broker who would cut us in on an IPO at the underwriting price.
We smalltime investors hope we are a little wiser now than we were. That, too, may be a vanity.
The stock market will struggle on for a while, trending irregularly upward we hope as the American economy forges ahead. Eventually, another exciting new technology will come along perhaps a low-cost way to turn sunshine into electricity and store it. Will it become the sunshine bubble?

Edward Cowan, a retired New York Times economics correspondent, is a Washington writer.


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