Hang on to your cellphone. The tech roller-coaster is likely to continue.
Patricia Chisholm,John Nicol,April172000
The Wildest Ride
Hang on to your cellphone. The tech roller-coaster is likely to continue.
The adrenaline-laced, deal-making traders who work on the trading floor at Scotia Discount Brokerage Inc., one of the biggest in the country, usually make quite a din. But around midday on Tuesday last week, the cavernous room in the heart of Toronto’s financial district went dead silent. No one spoke as the country’s richest stock market neared the bottom of its biggest-ever mid-day free fall—718 points, or 7.7 per cent. All anyone seemed able to do was stare at the unbelievable numbers coming up on their computers. “It was astonishing,” recalls Bruce Dickson, senior vice-president and a 25-year trading veteran. “I had forgotten there was space for so much red on a screen.” The eerie calm lasted only moments. Brokers, who a few minutes earlier had virtually no orders, were suddenly deluged with clients clamouring to both buy and sell stocks at greatly reduced prices.
OK, Tuesday was bad. Really bad. But in a remarkable turnaround that some experts say could be a mark of stock markets for the next five to 10 years, the bellwether TSE 300 composite index bounced back strongly the same day, closing down only 232.89 points or 2.48 per cent. Other influential exchanges repeated the pattern. The Nasdaq stock market, the technology-heavy New York exchange that has been at the forefront of the dot-com craze, closed down almost 350 points on Monday, then went into a 634-point free fall on Tuesday before soaring back up again, closing a mere 75 points down. Over the rest of the week, both exchanges kept the rally going, and investors looked set to continue North America’s unprecedented love affair with equities.
There were signs, however, that many will proceed much more cautiously, especially when it comes to buying stocks that are little more than an idea and a funky Web site. “The era of the concept stock is gone,” said Murray Leith, director of research for Vancouver investment dealer Odium Brown Ltd. “But legitimate companies with earnings and tme growth prospects will find their level and continue to do well.”
The rebound does not mean, of course, that investors escaped unscathed. Banks confirmed that Tuesdays slide resulted in hundreds of so-called margin calls: some investors who trade using borrowed money are asked to put more of their own cash into their trading accounts to make up for sagging stock values. And many investors reported that, at least on paper, they were poorer as a result of last weeks meltdown. Philip Alderman, a 74-year-old retired physician who lives in West Vancouver, keeps a daily watch on his seven-figure portfolio using the Internet. With mounting concern, he saw his stock in BCE Inc. drop from about $200 to around $165 in a week. But having acquired his shares in 1996 at only $53, Alderman notes that the drop “did not mean a catastrophe.” To most analysts, it was a correction that had to happen. Market watchers had long warned that many tech-related stocks were absurdly overpriced—yet the public’s appetite for
them only intensified. It took the fall of a seemingly invincible high-tech giant to set off last week’s stunning volatility. A U.S. federal judge found Microsoft Corp. guilty of violating antitrust laws (page 32). For market veterans, Microsoft was simply a trigger for an event that was overdue. “It was the last straw on the camel’s back,” observed John Roth, president and CEO of Brampton, Ont.-based Nortel Networks Corp. “There were a lot of things people were nervous about. This was just an excuse.”
Roth, whose own company’s stock fell 20 per cent in 10 days, remained confident that the high-tech sector would continue to perform well. But for executives of firms in tradi-
tionally strong “old economy” areas like finance, resources and telecommunications, the flight from tech, however temporary, was good news. Dominic D’Alessandro, president and CEO of Manulife Financial, has been following the markets especially closely since his company went public about six months ago. At times, he says, the ups and downs have been nerve-racking. But Manulife stock picked up speed last week, as many investors sought the safe harbour of well-known financial institutions. “There is a general awareness that some valuations bear no relationship to reality,” D’Alessandro said. “You can get a company where, even if it achieves 50-per-cent annual growth over the next 20 years, it still won’t make enough money to support the price being accorded it today.”
Canadian Pacific Ltd. also benefited dramatically from the reverse flow into blue chips: its share price rose by 20 per cent in just over a week. “Before, we felt very undervalued,” said CP chief David O’Brien. “Now, we feel slightly less undervalued.” O’Brien, however, rejects the “old economy” label. “It’s one economy,” he says, noting that companies around the world are reinventing themselves with major investments in e-commerce and new technology.
In fact, most experts who take the long view are remarkably upbeat about the outlook for the next decade. Even though the Nasdaq fell sharply last week, Odium Brown’s Leith notes, it remains about eight per cent higher than it was at the beginning of the year. In 1999, it moved up by a remarkable 86 per cent, and in 1998 it rose by 40 per cent. Set against that backdrop, last week’s dive was really just a dip, he says. And gyrating markets could become far more common, adds Scotia’s Dickson. With investors watching their stocks daily on the Internet, jumping in when they see a strong trend, markets are likely to be far more volatile than in the past.
Others analysts are downright blasé about last week’s heart-stopping plunges. “Big deal,” said Jeff Rubin, chief economist for CIBC World Markets. “The Nasdaq has taken a bit of a hit, but what the Nasdaq is fundamentally about is the notion that the business cycle is dead. It’s about the notion that North America is in a golden age of growth and that we are only in year 10 of a 20-year expansion. Therefore, I don’t buy based on tomorrow’s earnings, I buy based on the next five to 10-year earnings.”
Jack Lawrence holds similar views. The chairman of Lawrence & Company Inc., a Toronto investment management firm for the wealthy, and former deputy chairman of trading giant BMO Nesbitt Burns, says last week’s volatility was “very, very healthy.” The world is going through a technology revolution, he says, and it is going to take time to sort out the winners from the losers. The key to success is to choose stocks carefully—and diversify. “Don’t put all your eggs in one basket,” advises Lawrence. “Stick with a long-term focus and you will be able to participate in the phenomenal growth that is going to take place over the next five to 10 years.” And be ready, inevitably, for more sudden shocks.
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