The following statement by Stephan-Gï¿½tz Richter of Bloomberg News on April 3, 2000 is a "fact" based on pure hot air which demonstrates the contribution by the media to the 13-fold hyper-inflation of the US stock market:
Microsoft was at one time trading at a P/E ratio of 190, and the fact that the recent $8,563 billion US stock market crash put it down to 26 is indicative of only one thing--it still has a P/E which (and the US stock market capitalization as a percent of GDP) is twice as high as the long term averages. In terms of revenue, there are 23 Asian companies larger than Microsoft, with revenues at Mitsui being 4 times greater, not including private companies which many Japanese companies like Seiko Epson are.
The revenues of these three US companies whose stock constituted 5% of stock market capitalization were only 12% of the $1,497 in revenues of just the following 20 US and Asian companies. Cisco's market capitalization of $612 billion was 32 times it's annual revenues. If Asian companies had been evaluated this way, the following 19 Japanese companies alone would have had market capitalizations of $41 trillion.
In March, 2000, the stock market value of Cisco Systems was $613 billion, 32 times greater than it's annual revenues of $18.9 billion. By what rationale do "investors" decide to buy a stock which has no hope of ever having revenues exceed its stock market value, as is the case for most Japanese companies. Compared to revenues, stock market values of Fujitsu are one fourth, of NEC are one third, and of Sony, Honda, Xerox, and Kodak are one half. If Fujitsu stock was used as an example, Cisco's stock was over-inflated by 128 fold in 2000 and is still over-inflated by 32 times today, as are the stock values of Intel and Microsoft. In order to achieve a level of credibility equivalent to Fujitsu, and to bring the US stock market back to historic trends, Cisco's sock value would have to decrease from $20 to 63 cents per share, Microsoft's from $25.84 to 81 cents, and Intel's from $34.04 to $1.06.
Stock market capitalization in two decades:
Between 1999 and 2001, the Dow Jones Industrial Average representing a stock market capitalization of $12,717 billion decreased 13.1% for a $1,666 billion loss, and the Nasdaq with a stock market capitalization of $5,000 billion decreased 50% for a loss of $2,500 billion. Table 1143 of the 2002 US Statistical Abstract confirms the trend, reporting that corporate equities and mutual fund assets of households decreased $4,413 during this period, the primary reason total financial assets of US households plunged 8.5% to only $32,098 billion. Table 1194 shows that corporate equities and mutual funds held by pension funds also plunged by 15% or $666 billion. The lowest point in both the Dow and Nasdaq occurred in September 2002 by which time the total loss from 1999 was 48.3% or $8,563 billion, representing a 25% loss in financial assets of households. Their total stock market capitalization on that date was $9,155 billion, 7.6 times higher than it had been two decades earlier and 58% higher than the $5.8 trillion it would be if it were at its historic average of 58% of GDP.
These oscillations can be of more than one kind: a price fall in local currency, a depreciation of that currency, a combination of the two. The most striking example is probably that of the Tokyo equity market towards the end of the 1980s, when the Nikkei was at 39000 and the dollar at 120 yen. At the time, the TSE accounted for almost 60% of world stock-market capitalization, whereas Japanï¿½s GDP was only 15% of the world total.
Feb. 8, 1999
The top 10 tech stocks have a valuation of about $1.2 trillion, which is about 50 percent of the valuations of all Japanese equities. The Nasdaq itself trades over 90 times earnings. Our stock market capitalization is $14 trillion, and it's 140 percent or 150 percent of GDP. The peak in Japan was 120 percent. The peak in 1929 was 80 percent.
April 1, 1999
Japan's stock market is worth only 7% of global stock market capitalization, but its economy is responsible for 17% of world output. Before Japan's bubble burst, its stock market was 41% of the world total. The U.S. market is 52%.
Nov. 5, 1999
But while stock market capitalization increased by 68 trillion yen so far to 399 trillion, government debt which stands at about 600 trillion yen grew by well over 100 trillion over the last year.
October 24, 2000
Japan's total stock market capitalization, valued at $3.1 trillion in the spring of 1998, shot up to $4.6 trillion by April 2000. Foreigners owned fully 12% of that flowering market, according to IBJ Securities. But as those foreign investors became disillusioned with the glacial pace of Japan's economic reforms, many withdrew from the market just as precipitously.
The Globalist: In the News
by Stephan-Gï¿½tz Richter
A Decade Is a Big Deal for U.S. Economy by Stephan-Gï¿½tz Richter Bloomberg News April 3, 2000
Every 10 years, the U.S. Census Bureau attempts to count every single person in the country and shows how much the nation has changed. To mark Census Day 2000, we took a look at some of the changes in the economy during the past 10 years.
On April 1, 1990 the last Census Day few people, and not even the mighty Alan Greenspan, knew that America was just 11 months away from embarking on the longest peacetime economic expansion in history. This unprecedented period of continuous growth now in its 109th month is the primary reason the U.S. economy, and the world, looks so different today than it did 10 years ago.
America's big turnaround
Take the worlds 10 largest companies in 1990. Based on their stock market capitalization, the top 10 included six Japanese and just three U.S. companies. Today the list includes no Japanese companies and eight U.S. firms. The three most-highly valued U.S. companies Microsoft Corp., Cisco Systems Inc., and General Electric Co. are together worth about $1.6 trillion. By themselves, these three companies account for a staggering 5% of the value of world stock market capitalization.
Propelling this change was the booming U.S. stock market. In the last five years of 1990s, Japans Nikkei stock index produced annual returns of just 0.4%. By comparison, the S&P 500 index of U.S. stocks hasnt failed to produce at least a 20% gain in any year since 1994. Over the past five years, the average annual return on the Standard & Poor's 500 Index has been 28% 70 times higher than the Nikkei.
IBM vs. Microsoft
In these stock-market-driven-times, commentators like to compare the size of a company to the size of entire countries. Back in 1990, International Business Machines Corp., worth $70 billion, was the biggest U.S. company. The gross domestic product of 36 countries was larger than IBMs market capitalization. Now, in 2000, the stock market value of top-ranked Microsoft at $553 billion dollars is larger than the GDPs of all but 10 of the worlds countries.
The Dow's makeover
During the 1990s, the Dow Jones Industrial Average of 30 blue-chip stocks bid goodbye to eight stodgy old-industry companies. Gone are the venerable names of Westinghouse Electric Corp., Texaco Inc., Bethlehem Steel Corp., Woolworth Corp., Union Carbide Corp., Goodyear Tire & Rubber Co. and U.S. Steel Corp. Meanwhile, the Dow Industrials said hello to Microsoft, Intel Corp., Hewlett-Packard Co., SBC Communications Inc. (the Baby Bell), Wal-Mart Stores Inc., Walt Disney Co. and Home Depot Inc.
Wall Street goes Main Street
With so much money to be made, investors and companies both flocked to the stock market during the 1990s. In 1990, only 32% of U.S. households owned stocks or stock mutual funds. By 1998, 48% of households owned stocks. Now its over 50%.
The 1990s also saw a dramatic increase in the number of mutual funds available to investors. In 1990, there were just over 3,000 mutual funds, in which Americans had a little more than $1 trillion invested (half of that in money market funds). By 1998, the number of funds had more than doubled to 7,300, and Americans had $5.5 trillion invested, 53% of that in equity funds.
The lust for initial public offerings turns out not to have been just a recent phenomenon. The number of companies listed on U.S. exchanges soared throughout the decade. In 1990, there were about 6,800 companies listed on the New York Stock Exchange, the American Stock Exchange and the Nasdaq. Together, these companies were valued at $3.5 trillion.
By the end of the decade, there were almost 2,000 more companies listed. The combined value of all the listed companies at the end of the decade was $18 trillion. In other words, while there was $13,350 of stock market wealth for each and every American in 1990, by the end of the decade, the stock market held $62,800 in value for each American. Are you feeling any richer?
The government sure is. In 1990, the federal government ran a $221 billion deficit. This year, fiscal 2000, the Congressional Budget Office is projecting a $176 billion surplus. That is a swing of almost $400 billion. Not bad for a government that many thought couldn't put its finances in order.
Stock Market Capitalization As A Percentage of GDP
Last week I made the proposal that although the stock market will likely trade in 30 to 50% broad up and down ranges, that in all likelihood the stock market will be at similar prices 12 to 15 years from now as they are now. It has happened regularly in the past , occurring in the period from 1929 to 1954, and from 1966 to 1982. Both of these flat periods occurred after incredible market run ups and subsequent busts.
One way to measure the "madness" is to measure the value of the stock market's overall capitalization to the size of the national Gross Domestic Product. Historically the stock market value has been about 58% of GDP. Lows were in the range of 37% in the early 1950s, and 25% at the bottom of the Great Depression. Highs in this measurement were around 75% and occurred at all the important market turning points in the last 80 years including 1929 and 1966. As recently as 1991, the market was at the historic 58% level of GDP.
Since 1991, all semblance to reality began to be lost in this particular measurement. By the 4th quarter of 1999 stock market capitalization had increased to an atmospheric and unprecedented 185% of total GDP! Even today in spite of a huge bear market, the rate is still a stratospheric 104%!
If the economy were to grow at a healthy and optimistic 4% a year for the next 18 years, it would bring our index back to the 50% range. That is... if the market was at the same level as the current price level at that time! For the future, a strong argument can be made for a prolonged period of broad based market movements moving around the flat line. This is what happened in both the 1930s and 1970s.
All of this should bode well for the market participants who practice timing in a systematic and methodical fashion as is advocated here in the Lussenheide Investment Warrior Report.