The always interesting Alan Abelson makes some less than encouraging comparisons between the  present sentiment levels and those of the late 1990s:

"THE ABOVE REFERENCE TO MANIA, we realize, may smack of journalistic exuberance (not to be confused with irrational exuberance, if only because journalism has never been accused of being rational)…For the year so far, moreover, the S&P is slightly higher and the other two have lost a bit of ground and only the staid Dow Utility Average posted an eye-opening gain of nearly 30%, sparked in large measure by attractive yields and sidelines in energy and real-estate.

So, you may rightly ask. where’s the mania? Seek, we answer, and you shall find.

Most strikingly, the maniacal strain is becoming visible in all the old familiar places. Like IPOs and the Internet stocks, both of which, you doubtless recall, were blown sky high during the late great equity bubble, only to be blown to smithereens when the bubble burst. The premiums on the current batch of new issues that particularly tickle the speculative fancy have not yet hit the clinically insane heights reached by their predecessors when day trading was in full bloom; not yet, anyway.

And, for sure, their numbers remain minuscule compared with what we saw in the roaring ‘Nineties. But the ominous — one could say premonitory — stirrings of animal spirits are evident. Even the worst storms often start with a distant, almost gentle thunder.

Back in August, (ticker: BIDU), a Chinese Internet provider with meager revenues and a bare sliver of earnings, sailed across the wide Pacific and sold an IPO to its new best friend, the American investor. A tad over four million shares were offered at $27 each, and they promptly shot up to $154 (on Friday, last we looked, they were changing hands at a good cut below half that price).

A hot-off-the-presses example of the spores of a full-fledged speculative outbreak was last Thursday’s trading debut of WebMD Health (a detached part of WebMD, the latter soon to rechristen itself by the rough phonetic equivalent, Emdeon). WebMd Health (WBMD) bolted more than 70% higher before the fever subsided a bit and closed at $24.40, up a mere 39%. In case you wondered, the company’s comfortably in the red.

It’s not only that new and exotic Internet IPOs are once more inspiring a heap of heavy breathing among the investing masses that gives us the willies. A mite unnerving, too, is that some of the more promotional pushers of the original, largely ill-fated bunch of Webbies are back doing business at the same old stand.

For example, Morgan Stanley’s Mary Meeker, which this very magazine dubbed "Queen of the Net," but whose jewel-studded crown (they’ve always paid well at Morgan Stanley) became embarrassingly tarnished with the collapse of the sector, has returned from what the cruel would call well-deserved obscurity to some semblance of prominence. Last, we read, she was brandishing her magic wand at Chinese ‘Net stocks (we immediately began to worry about the impact on the already tense relations between China and this country). The story neglected to say, alas, whether Baidu was among her favorites.

By no means, though, is the budding revival of mania manifest merely in IPOs and freshly traded Internet issues. As it happens, some of the old and long neglected Web favorites have attracted a spirited new following. (We presume it’s new because the old following was pretty well wiped out four or five years ago and likely have been driving taxis or picking grapes ever since, both honorable professions but not notoriously financially rewarding.)

One of these back-from-the-brink stocks is Red Hat . . .The reason it evokes a whiff of mania has everything to do with the extravagant value the stock market is placing on the company. The stock, to begin with, is being capitalized at nearly $4 billion, which is something like 17 times sales and 10 times book value. Those are, for the benefit of the statistically challenged, not overly modest multiples.

The shares have already appreciated by 75% or so over the past 12 months, which should give all but the starry-eyed wannabe shareholder a bit of pause. They also are selling at somewhere in the neighborhood of 80 times trailing 12 months’ earnings and 55 times Street estimates for the year ending February ’07.

In a normal and reasonably sane investing climate, even the bravest investor might blanch at the idea of paying more than half a century’s worth of next year’s possible earnings for a stock. But, of course, as Red Hat’s great leap upward last week is but one illustration, the current investing climate is not exactly normal or reasonably sane."

Abelson is always thought provoking, never boring, rarely Bullish. While his point is hardly conclusive, add it to the rest of the risk factors we have been discussing, and its easy to see how the 2006 markets might be a bit of a challenge   . . .

Generous to a Fault
Barron’s, MONDAY, OCTOBER 3, 2005

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  1. nate commented on Oct 1

    mania may not be the right word-

    have you written on survivorship and its impact on data?

  2. Barry Ritholtz commented on Oct 1

    “MANIA” is the word used by Abelson.

    Time will tell whether that is the right word or not . . .

  3. nate commented on Oct 1

    possible room to grow-

    approx. market cap

    MSFT – $275 B
    Google – $88.4 B
    Yahoo – $47 B
    Symantec – $27 B
    Red Hat – $3.75 B
    Novell – $2.85 B

    Disney-$48.5 B

  4. raj commented on Oct 1

    People commonly pore over price and trade data attempt-
    ing to discover investment schemes that have worked in the past. In a reductio ad absurdum of such unfocused fishing for associations, David Leinweber in the mid-90s exhaustively searched the economic data on a United Nations CD-ROM and found that the best predictor of the value of the S&P 500 stock index was—a drum roll here—butter production in Bangladesh. Needless to say, butter production in Bangladesh has probably not remained the best predictor of the S&P 500. Whatever rules and regularities are discovered within a sample must be applied to new data if they’re to be accorded any limited credibility.

  5. Brian commented on Oct 1

    I do wonder what would motivate to someone to buy something like BIDU. A chinese internet stock? It sounds likes a joke. Quick, let’s put our life savings in a chinese internet stock! Like the proverbial bridge or Florida swampland. Hoping for a greater fool I guess.

  6. Alexander Karatis commented on Oct 2

    Has the idea of forced cyclical behaviour in markets ever been pondered? What I mean is that when markets are lazy people are just going nuts to find the next “big thing” and they’ll usually jump at whatever shines just even a little.

    So you have growth sparked by sentiment and an impatience for a renewed up-cycle, while again, fundamentals are being locked in a closet.

    Your ideas?

  7. nate commented on Oct 2

    40 and 50% revenue or profit growth is decent fundamentals. i am not certain that “fundamentals are being locked in a closet.”

    It seems fair to question projections of linux. Past projections of new technology adoption are very difficult. Some are slower than people think (tivo) and some may be faster (move ot DVD from VHS). Who knows. One thing is certain: linux at least has the potential to be a significant market, and to see significant growth. It could also be flat and stale-

  8. Barry Ritholtz commented on Oct 2

    Dont misfocus — the issue here isn’t any single stock (i.e., Red Hat)

    What we are discussing is whether or not people’s appetite for risk and speculation is approaching any kind of extreme . . .

  9. nate commented on Oct 2

    Good input on misfocus- I did not mean to focus people on one stock but rather the concepts that may be driving Red Hat’s prospects. These concepts include choice and competition. The concepts are also open-source and collaboration (similar to blogging). Red Hat is just one company built on these concepts. I do not think people that invest in competition, choice and alternatives are risk-seeking or maniacal – whether it is Red Hat, Mozilla or other.

    On stock mania: i had a fin professor offer one hypothesis (which is not necessarily one he endorsed) which said in aggregate there was no stock market bubble in 2000. It may have been a liquidity crisis. Employment headed downward. People needed short-term cash and could not take long-term perspectives. There are other aspects to a liquidity crunch which I am not as familiar with first hand. This liquidity crunch made the stock markets tank.

    So there may have been no mania before (not sure). There may have been a liquidity crunch.

    Currently, consumer appetite for risk may be somewhat extreme. Investors, on the other hand, may be coming back to rational behavior.

  10. Barry Ritholtz commented on Oct 2

    Hard to imagine a liquidity crisis in 2000 — the Fed, fearing a run on the banks, cranked up money supply.

    You can actually see it on M2 chartsd, starting October 22, 1999.

    The Nasdaq doubled from October to March.

    Hardly evidence of liquidity issues . . .

  11. nate commented on Oct 2

    i am not talking about when the Nasdaq doubled. I am talking about when it popped (decreased).

    Here is a hypothetical question for you:

    supppose in the future (eg, 2025) people look back at an investment in the Nasdaq at its peak, and this investment held straight through to year 2025 performs somewhat typical of equities – higher than bond returns, better than cash, better than commodities. How would you then explain the fact that the Nasdaq could be purchased so cheaply post-Nasdaq crash in the early 2000s? What logically explains it?

    BR: How would I explain something as fact from within a hypothetical construct? I wouldn’t — its hypothetical!

  12. nate commented on Oct 2

    yeah, i am hardly a liquidity expert. I do not follow m1, m2 and m3 as much as I should. any postings you have on this would be cool.

    I was repeating someone else’s idea, and may have gotten it wrong or confused anyways.

    but it is an interesting idea: was there a stock bubble or was it something else? why did the Nasdaq get pummeled so much? do you think it will always be this pummeled, or will it bounce back? when? how much? why?

  13. Logan commented on Oct 2

    While I’m generally bearish on the stock market in the US, wrt Redhat I disagree that its overpriced. Redhat has the potential to be the next Microsoft in terms of the market size its addressing, and the profitability of that market. If you tracked MS over the period ’86 to 2000, you would find extended periods of apparently silly valuations on a trailing basis, or even a forward basis, however the stock also appreciated 60 fold in that period. I develop software and web sites for a living and have a good sense for what platform the software community is targeting for new services and software. Software platforms win for one reason – the development community favors the platform for developing new software that people need, and people buy the platform because it delivers that functionality. Almost all the interesting software is now being developed for Linux first and foremost, and Windows is second if at all. Add to that the religious fervor in favor of open source software in the developer community, the price advantage that Linux has, support by the big integrators like IBM and HP, and the fact that the next generation of developers and IT decision makers in universities use Linux almost exclusively, and you have a formula for breakout success. Linux has pretty much all the same things going for it that DOS/Windows had in ’86.

    So the Linux market will grow spectacularly, it will win the desktop, and with Redhat having a dominant share in servicing linux, they will reap the lion’s share of the rewards. I wouldn’t have believed that three years ago, but using both OS’s side by side every day as I do has made it clear. The primary risk factor I see is that the profitability of the service oriented open source model is becoming clear to alot of people, and companies are popping up all over to service sub-sectors of the linux platform application bundle, this could crimp margins if any of them gain traction, but then Redhat could, and is, buying them up just like MS did.

  14. Fuzzy Wuzzy commented on Oct 3

    Someone said:

    I do wonder what would motivate to someone to buy something like BIDU. A chinese internet stock? It sounds likes a joke. Quick, let’s put our life savings in a chinese internet stock! Like the proverbial bridge or Florida swampland. Hoping for a greater fool I guess.

    I couldn’t believe the run up BIDU had on its IPO day, either.

    I actually got emails from people (economists, too!) a couple of days after the IPO saying the stock would go to the $200 range.

    My site put a $60 price target on the stock a day after the IPO, and I think this week BIDU will actually hit it.

    The bears were ultimately right on this one — the avatar of tech research himself, Anthony Noto, put a $27 target on the stock right after the quiet period ended.

  15. jjr commented on Oct 4

    The current “mania” is not confined to internet or software stocks.

    You’ll find some of the most maniacal strains in the market in energy, particularly alternative energy. Fuel cells, solar, biofuels, etc. etc. There are legitimate companies and technologies within this space. However, there are grossly overvalued longtime dogs who have been taken out to hunt one more time. By no stretch of imagination should some of these stocks be valued at prices they’re fetching.

    Actually, certain marginal microcap oil and gas stocks are also well within the throes of a mania. It seems that traders/investors are willing to throw their money at anything energy related today, regardless of the underlying business. The issues in question are not your big oil producers, but the small money losers at the margins.

    Hard to say how long this mania will soldier on, but it is mostly clearly a mania. It may require a demand abatement in energy, and crude/NG/energy stocks to take a serious breather for the marginal stocks to come back to “fair” value. Could be days, weeks, months or years.

    A couple of examples of the mania, if you examine the underlying fundamentals: DSTI, SPIR, ABLE, CPST

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