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Sharemarkets run headlong into the end of time

Friday 2nd June 2000

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VIRTUAL REALITY: These are what Confucius would call 'interesting times'

NEVILLE BENNETT puts forth his 'A+ idea for the year 2000'

The recent severe correction in tech stocks has caused some jitters, and some casualties, but the markets are broadly holding their own.

Although there is anxiety about interest rates, the markets overseas seem poised for growth. The fact that a crash has been averted is worth some reflection.

My conclusion is rather simple: if a crash is not going to happen, then history becomes rather invalid as a guide. Experience is useless because we have entered a new era, one I call "the end of time."

If there is not to be an extremely severe correction-cum-crash, then our present becomes a unique era, separated by a great discontinuity from the past. Forget cycles; forget price/earnings ratios. Buy equities and see capital growth.

This is an era of boundless easy wealth creation. It is clearly unlike the past where British stocks grew at an average annual return of 4% during the 20th century.

It also pre-empts the future for we are the lucky ones. We will be in the markets and the next generation will not get a look in.

The levitation of share prices has brushed aside the forces that normally function to keep prices low. Normally shares dip sharply when the price/earnings ratio becomes too high and many shareholders voice their insecurity by selling.

Similarly rising interest rates normally check share prices and make fixed interest attractive but markets now quickly rationalise any increased rate change as unimportant or even beneficial. A banker friend tells me share prices rise now despite falling liquidity.

Many sage observers believed the whiplash on Wall St on April 15 was the beginning of a crash. I still believe that is possible (and have decreased my shareholding) and that the subsequent recovery may be a dead cat bounce.

The essence of our times is that for at least five years the equity markets have been in the grip of euphoria. The bull market has prevailed and has been fed by the issue of technology shares which have rapidly increased in price.

While there are obviously good shares in companies offering much-needed product, every reader will have examples of folly, of companies never likely to make a decent return on capital. My example is the 900,000 people who recently stumped up with £500 million to subscribe to Lastminute.com.

There is startling evidence that the euphoria has not been deflated. Even the 35% fall in the Nasdaq is being rationalised. It is commonly said the Nasdaq is still as high as it was last October, so a healthy correction has taken place and this is an excellent time to buy.

As I predicted in my last article (NBR, April 20) prominent brokers were telling their clients about good opportunities as the fundamentals are sound. Banking and finance have never been so good. Abbey Cohen reassured the world stock prices would rise 15 to 20% this year.

Bullish brokers are not urging indiscriminate buying. The euphoria remains but the opportunities lie in different lodes. Even the optimists accept that online retailers are now the detritus of the market, followed also by business-to-business stock.

But the bulls emphasise that big companies are going to gobble the small, so now advice is needed on picking the new whales which will trawl through the krill of dotcoms that are no more than a web page and a prospectus of financial dreams

The internet jackpot has gone to companies building the infrastructure that powers the network. Companies that have patents, trade secrets or software platforms are gorillas that have an edge. Oracle, Sun Microsoft, Intel, Cisco and Hewlett-Packard are close to their peak prices. These companies might thrive but most dotcoms will go the way custom carmakers did when Henry Ford opened a production line.

So will stock markets shrug off a temporary check and soon resume their onward and upward trajectory? It is not easy to speak confidently but I believe reality will eventually exert a growing influence on this irrationally exuberant market. Perhaps the notion that playing the market is as much fun as a trip to Vegas will die.

Reality has decimated the long waiting list for new floats. Adventurous take-overs of old economy companies by payment in dotcom shares now often seem absurd.

These are what Confucius would call "interesting times." Stock markets are not acting rationally. The roller coaster ride may continue.

But will the markets defy time and resume a rising trajectory? Or will reality prevail and deliver a yet more severe correction?

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