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New hyper bull market by small investors { June 22 2003 } Original Source Link: (May no longer be active)
http://www.nytimes.com/2003/06/22/business/22STOX.htmlhttp://www.nytimes.com/2003/06/22/business/22STOX.html
http://news.yahoo.com/news?tmpl=story2&u=/nyt/20030621/ts_nyt/smallinvestorsonceburnedleadnewbull
June 22, 2003
Small Investors, Once Burned, Lead New Bull
By GRETCHEN MORGENSON
Internet stocks are racing, even those with more promise than profits. Unsolicited pitches for obscure penny stocks inch out of fax machines, and stockbrokers are prospecting for customers. Mutual fund managers who have been in the doghouse for years are basking once again in the favorable publicity that shines on hot performers.
There is no denying it: the bull is back. The Standard & Poor's 500-stock index has risen 13 percent this year, while the Nasdaq composite is up 23 percent. Individual investors are leading the charge back into the stock market, according to some brokerage firm executives who look closely at trading behavior.
"What we're seeing is the retail investor has been getting back into the market since the last couple weeks of March in a pretty broad manner," said R. Jarrett Lilien, the president and chief operating officer of the E*Trade Group, an online financial services business, who added that he was surprised by the shift. "There was a big question: When will broad-based retail come back to this market? All of us thought it would take years of healing time."
Instead, investors appear to be returning to equities with their wounds barely healed. Three years of stock market torment seem not to have shaken the long-held view that stocks are best for the long haul.
Lyle E. Greenman, 55, a lawyer in Boston, has recently taken a much more active position in the stock market for the first time since the collapse of 2000. "I was one of those people who got caught up in the bubble — I lost my shirt, boxers and briefs, all of it," he said in a telephone interview last week. "I've tried to use these last few years to figure out what I did wrong."
Mr. Greenman said he thought that individual investors — and he includes himself in this group — had learned a great deal since the stock bubble burst and were alert for hype and for advisers with conflicts of interest. "I think the public is a lot wiser about what the investment banks were up to in the 90's," he said. "The public is much more Internet savvy than they were a few years ago. They know people go on CNBC because they need people to sell their winners to. People are sensitive to what they should look for or not."
But to some Wall Street veterans, the market's recent action has a familiar and troubling feel, one that harks back to heady days of 1999. In their zeal to recover some of the losses in their portfolios, have investors become too willing to forgive and forget the lessons of the torturous bear market?
"The rally makes me nervous," said Jonathan H. Cohen, a portfolio manager at JHC Capital in Greenwich, Conn., and former head of Internet strategy at Merrill Lynch. "The Nasdaq is now up almost 25 percent, which is way ahead of the fundamentals. Sure, the market looks into the future and tries to discern the state of the world next year, but I'm not sure we've seen any meaningful indication that technology companies are doing better than they were six months ago. It's just that they're not doing worse."
Portfolio managers point to several pockets in the market where stocks are behaving a lot as they did in 1999. For example, the most speculative securities — like biotechnology stocks, Chinese Internet shares and low-priced stocks — are among the hottest today. Sohu.com Inc., the operator of an Internet portal in China, has risen more than 300 percent in 2003 and has jumped to $27.83 a share from $1.15 in the last 12 months. The Sina Corporation, an Internet company that operates Chinese-language Web sites, is up 160 percent in 2003 and has risen 900 percent in the last 12 months.
Biotechnology stocks, by their nature another high-risk group, are also up smartly. The American Stock Exchange's biotechnology index has gained 33 percent so far this year. And in the technology sector, semiconductor stocks are soaring, in spite of little change in consumer demand for computers. According to a recent analysis by Fred Hickey, the editor of The High-Tech Strategist, an investment newsletter based in Nashua, N.H., only one of the 17 stocks in the Philadelphia Stock Exchange Semiconductor index had a price-to-earnings ratio below 40.
"I can almost understand why people were dopey about this stuff in the mania," said William Fleckenstein, the president of Fleckenstein Capital in Seattle. "Nothing had gone wrong. Everything was coming up roses. But now we know things can go wrong; we have seen Enron and WorldCom; we know most states and local municipalities are bust; and there are lots of problems. To act the same way you did then?"
The stock market is famous, of course, for spotting economic rebounds before the data confirm it and for shaking off bad news when it is in the mood to rally. But in the last three years, the market has made several leaps that some professional investors saw as evidence of a new bull run. All turned out to have been false starts or so-called suckers' rallies.
To some professional investors, the return of the individual to the stock market is a warning sign all its own. Traditional market lore states that individual investors are not shrewd enough to know when to buy and that when they swarm into stocks professional investors often sell.
But amateurs are not the only ones who are bullish. The most recent Investors Intelligence survey shows that 60.2 percent of investment newsletter writers are bullish, while 16.1 percent are negative. That is the lowest bearish reading since before the crash of Oct. 19, 1987.
The fact that the S.& P. 500 is trading at about 19 times the earnings that analysts expect from its companies in 2003 represents a decidedly optimistic view by many investors. As stock market veterans have often pointed out, bull markets do not typically begin when the index is trading at such a hopeful level.
In the most recent week, investors put $3.3 billion, net of the money they withdrew, into domestic stock mutual funds, according to data from Banc of America Securities. That was the 14th consecutive week that more money flowed into than out of stock funds, the investment bank said.
With so much bullishness about, companies are finding it easier to raise money in the stock market. On June 11, FormFactor Inc., a semiconductor maker, raised $84 million in an initial public offering of its stock, the first by a technology company this year. It had originally hoped to raise about $60 million. Interest in the deal was strong, and the company increased both its price and the number of shares offered. The stock rose 50 percent during its first day of trading, but settled back for a gain of almost 26 percent from its offering price.
Of course, for a hot new stock to close 26 percent higher on its first day out is nowhere near the delirium during the stock market mania of 1999. Then, according to research done by Sanford C. Bernstein & Company, new stocks rose on average 60 percent the day they started trading. Roughly a third of the Internet companies issuing shares in 1999 paid more in investment banking fees than they booked in revenue during the previous 12 months.
But FormFactor's first-day move was not shabby, especially when compared with typical first-day moves before the mania. From 1986 through 1994, Bernstein calculated, the average first-day move in an initial offering was about 10 percent.
While speculative fervor has returned to some areas of the market, certain firms say that the increased interest they are seeing from individual investors is tempered. "From an equity standpoint, we are seeing clients dip their toes into the water. They are not jumping in, not diving in," said Jamie Wanless, the director of retail operations at Strong Investments, a mutual fund company in Milwaukee with $45 billion under management.
Mr. Wanless said that investor interest had picked up at his firm in the last three to four weeks. One measure is a rebound in client calls; in January, client calls were down 30 percent from January 2002. Now, the calls are down only 5 percent to 10 percent from a year ago. "As we talk to our clients, there are those who know they should have been doing something about their investments but were paralyzed with fear. And they are taking action now."
Even as investors begin to embrace more risk in their portfolios, almost no one expects a return to the anything-goes mentality that ruled during the bubble. For one thing, securities regulators have put some constraints on Wall Street firms, leading to fewer outlandish analyst recommendations. Another change: as of last Friday no brokerage firm had published a report recommending that investors buy FormFactor. During the mania, such reports would have been ubiquitous by now.
Analysts are much less enthusiastic now over all than they were three years ago. According to Zacks Investment Research, 71 percent of analysts' recommendations were buys or strong buys in 2000; today only 43 percent are. And three years ago, fewer than 1 percent of recommendations were sells or strong sells; now almost 11 percent fall into those categories. The remainder were neutral.
Warily, and a good bit wiser to the way Wall Street works, individual investors seem to be coming back to stocks. Mr. Greenman, the investor, said he has seen more people going into the brokerage office where he trades, and they seem to be asking questions about setting up accounts.
"I don't think you need to caution the people like me who just got creamed," he said. "But a few people missed the whole bubble and now they think they're getting in on the next one."
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