Pop! Goes the Bubble
May 30th, 1999
HAS E-phoria ended? Highflying Internet stocks look mighty weak. Even on Friday, when other Nasdaq stocks were strong, many Internet shares couldn't muster their typical big moves up. As the week ended, shares of Internet concerns were well off their mid-April peaks. The Interactive Week index of 50 stocks is down 17 percent from its highs, while Thestreet.com index of 20 Net companies has fallen 26 percent since April 12.
Battered E-investors are wondering whether the recent action is simply a pause in an upward trend or the beginning of the end of a glorious ride in these stocks.
While no one is certain, there is a host of reasons why the downturn may continue. Broadly speaking, investing in Internet shares has changed. And investors who don't realize that are vulnerable.
The factors working against these stocks are both macro and micro.
One of the big-picture problems is rising interest rates -- bad for almost all equities, but especially damaging to stocks of Internet companies, which rely heavily on debt to finance their money-losing operations. As interest rates rise, these companies' debt costs do, too.
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Also adding to supply is the fact that as newly public Internet concerns age, more stock hits the market from executives and insiders. These individuals are generally prohibited from selling any shares until several months after the I.P.O.'s.
Even as extra Internet shares flood the market, demand is drying up. One measure: The money going into Internet-related mutual funds has dropped from $470 million in the week ended April 14 to $34 million last week.
Complicating matters is a small-picture issue: a dearth of natural buyers -- the short-sellers -- waiting to step in even if these stocks keep falling. Investors willing to risk their money selling stocks short must buy them back later to close their positions. As a result, short-sellers represent future buyers. But since so many who bought this way lost their shirts betting against Internet stocks, few remain standing or solvent.
At the height of the craze, Internet buyers were many while the sellers were few. Now the tables have turned. Ah, well. It was fun while it lasted.
Sounds familiar, no? As prescient as this article seems, its prognosis turned out to be entirely premature. It is talking about a relatively small dip from April to May that quickly recovered. The NASDAQ would go on to double and reach delirious new heights in March of 2000 before collapsing amidst further interest rate hikes.
The lesson is that even bubbles can tolerate significant corrections before rocketing upwards. It is very, very hard to time the collapse.
Submitted March 06, 2021 at 07:06PM by wokeness_be_my_god https://ift.tt/3qnqmMD
