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More Gloom from Mr. Doom Himself
Fund manager Marc Faber on the NASDAQ, Asian markets and the Big Correction
By MAUREEN TKACIK
February 22, 2000
Web posted at 1:40 p.m. Hong Kong time, 12:40 a.m. EST
Click here for current data on world markets from CNNfn
Nervous? You should be. I think. So does Marc Faber, and Alan Greenspan. American traders, though, didn't seem to think so last week--or were they just too busy?--to take the Federal Reserve chairman's hint. Perhaps they interpreted his "imbalances that, unless contained, threaten our existing prosperity" speech to mean they should sell the Dow, again, thereby rendering these imbalances even wider. Again. And so, last Thursday, the NASDAQ soared to a record. Again. And where is the "resistance" level now? Some technical analysts see a crash on the horizon, in the vicinity of March 16. March NASDAQ futures are trading below 4,000. And on Friday the NASDAQ saw the light and shed. Which is why we in Asia today decided to follow suit. No market made gains in Asia today. No one seems particularly nervous. Maybe they should be. I got nervous talking to Marc Faber in Hong Kong.
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Q: O.K. Marc, scare me.
A: The problem is the following in the United States, and it may be similar in other countries: in the U.S., the stock market makes up approximately 150% of GDP. This is the highest ratio it has ever been, and we've gotten to the point where it's very much the stock market that drives the economy, not so much the economy driving the stock market. The market cap of the NASDAQ is now $5.2 trillion, and that's basically larger than all the European markets put together, or all of the Asian markets, including Japan, put together. And that is just the NASDAQ! That is Microsoft, Cisco, Sun, Intel, Oracle, Qualcomm, Yahoo and Amazon. Information technology basically makes up over half of the U.S. stock market cap, and the profitless Internet stocks make up a huge part of that. The companies that have earnings to speak of massage them audaciously. IT makes up about 7% of total output, you know. That's all. We're talking single digits here. Amazon's market cap of $23 billion is still, even after its massive correction, larger than the entire U.S. airline industry altogether. And that is a growth market!
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Q: Speaking of Amazon, the company came up quite often in Hong Kong last week as everyone woke up and realized that we now have a significantly bigger stock in our own backyard: Pacific Century CyberWorks.
A: You know, PCCW has been sold off a bit today, but last week it was within a couple billion dollars of Boeing's $36 billion market cap. That is Hong Kong for you. It always clings to these trends harder than anyone else. Boeing is one of two companies in the world that makes and supplies airplanes. The only other one is Airbus. Boeing is a much more high-tech company than Pacific Century CyberWorks is ever going to be. But that's beside the point. Look at retailing stocks, banks, housing, insurance, auto ... all these sectors have been lavished with nothing but good news. Strong demand, strong consumer spending, strong housing starts. The economy is growing. The U.S. year-on-year GDP growth could have been 6.8% for fourth quarter 1999. The market has been inundated with bright news. But all non-NASDAQ stocks are significantly off their highs. The decline on these stocks is so heavy that under normal conditions it would signal a recession. I mean, whenever someone tells me something is really cheap I go straight to the Dow, or I say, "Cheaper than Philip Morris at six times earnings?" Because that's what it's trading at right now. This is really a bear market. Which is one of the reasons an economy like Japan, which is really not out of the woods at all--it could see a Moody's downgrade, it's seen contracting GDP, more and more debt, et cetera--can see such amazing performance in certain sectors of the stock market, like tech and telecoms. Fundamentals don't matter. In many cases, Japanese stocks like Softbank and Hikari Tsushin and DoCoMo are priced much higher than their U.S. counterparts, and in Hong Kong it's the same way. I mean, say what you will about Amazon, but at least they have a business. Whether they will ever make a profit--and I don't mean a profit garnered by an investment in another Internet company--is another story. Whether that profit will be anything substantial is another story. But they've got a business, and that's more than I can say for Pacific Century CyberWorks.
Q: Scott Blanchard (head of sales trading at ABN Amro) told me the other day, "Sure it will all end in tears, but it's not gonna end in tears tomorrow. Or next year." Scott sees three years of riding out the tech boom in Asia before the Big Correction. What do you see?
A: In terms of the NASDAQ, and that's the only thing that really matters because the NASDAQ will bring everyone down with it, I see it ending by next year. I think before the end of this year we could see the NASDAQ at 2,000 or so, a 50% correction at least. But think about it. The NASDAQ was at 2,000 at the beginning of 1999. If you'd bought the NASDAQ you would still be up from 1996, you'd still have a pretty healthy return. We can't forget that we've seen a lot of growth and a raft of new companies and entrepreneurialism flood the market. It won't disappear overnight. It's just not going to last--90% of the companies leading the pack will fail.
Q: So what do you buy?
A: The euro, which I think is about 40% undervalued against the yen right now. I started buying the euro at the beginning of this year. Gold looks good, so mining stocks are a natural buy--they usually have the least correlation with the equities market. I run an Indian fund, and we have a lot of Infosys, which we collected, I'm proud to say, many years ago. I don't think I would buy it at these levels. At the same time, I saw their chairman on CNBC the other day, and he says, "Look, I don't know anything about stocks. I don't know the equities market. I don't watch our share price. I just run my business." And I thought it was great, because you get the feeling that, particularly in that sector, that's all CEOs do these days. They watch the share price. They massage earnings statements. I think India's IT sector is quite a formidable threat to America in the future, and likewise China's. Chinese stocks, many of which are still 90% off their highs, look good right now. Indonesian politics are still quite uncertain, but I see that market as being good value right now, and the cigarette stocks have done enormously well. Pakistan has been Asia's best performing market in 2000 so far, so you never know where you're going to find value. At the same time, Indonesia's current market cap is around $30 billion--on par with Amazon's. So there's only so much you can invest there, and likewise for most of the markets, I would say you could find a good value these days. And so I don't buy anything. Overweight cash and gold.
Be it overvalued tech stocks, high-profile mergers or corruption scandals, the region's stock markets can go on wild rides. Join the discussion here
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