As the markets take a breather, investors count their losses and analysts watch for more trouble
Toronto investor and self-described gambler Tsai Kian Sung got into the market two years ago for a very simple reason: “I’m 56—nobody would hire me.” Soon, however, unemployment started to look pretty good to the former Hong Kong businessman. By March, 2000, his initial investment of $75,000 had swelled to $2.25 million—all of it through risky day-trading in the technology-heavy Nasdaq stock market. But his high-flying shares fell to earth in only a few weeks, as the Nasdaq went into a steep decline that led to a recordsetting one-day plunge of nearly 10 per cent on April 14. His portfolio is now worth a relatively modest $150,000. Things could be a lot worse, though. “I’m up $75,000, so I’m still happy,” he says. “If money was the most important thing to me, I’d have committed suicide. Gambling, it’s all a part of life.”
A life that, for many investors, has gotten a lot more dangerous. Can such carnage happen again? Quite possibly. In recent weeks, stocks have become a classic crap shoot, diving, soaring, diving and soaring again. After posting record losses of more than $ 1 trillion on April 14, North American markets took off on a two-day rally before seeming to mn out of steam as the Easter weekend approached. The Toronto Stock Exchange 300 composite index was up 5.7 per cent on the week, but was trending
down, while the Nasdaq regained almost all of the ground it lost on April 14, but also fell back slightly at the end. The much less techie Dow Jones industrial average, meanwhile, stayed up—gaining 5.2 per cent over the week.
The gloomiest analysts noted that the Crash of 1929 also happened in fallrise-fall stages. But experts also pointed out that high-technology issues are the leading edge of a revolution that is here to stay. “The dreamers and the ones
CHANGE FROM A YEAR AGO TSE Dow Nasdaq +23% +4% +66%
with way-out-there revenue models are dead meat,” said Gordon Medland, a Vancouver broker and a governor of the Canadian Venture Exchange. “But the technology game is definitely on. Over time, it will dominate.”
In the short term, however, others said that many tech stocks remain dramatically overpriced and that another deep correction is likely. Gary Hufbauer, senior fellow at the influential Institute for International Economics in Washington, cautioned that high-tech investors should remain extremely wary. “If you are buying at this stage, you should be in it for the long term or prepared to deal with another 30-percent drop,” he said. “Otherwise, it could be hard on your sleep.”
In hindsight, many retail investors may be kicking themselves for ignoring the early warning flags that started to appear over some tech stocks in March and early April. But even the professionals were tallying up large losses last week. One Toronto trader, who requested anonymity, lost about $16,000 of his own money in the meltdown. He predicts that markets will flatten out over the next six months, and that the next sustained rally will not get off the ground until the fall. Like many of his colleagues, he has seen his trading commissions fall off sharply as a result of market instability. He is not worried about his own job, but figures some of his peers should be. “I’d say about 20 per cent of young traders are in a professionally precarious position right now,” he says.
Although few investors want to talk openly about their losses, the tech wreckage is clearly widespread. “I know people who’ve bought dot-com companies on their credit cards,” says Halifax investment counsellor Robert Younker, president of J. R. Younker & Associates. “I know someone who is down $100,000 on their margin account. There are people—not my clients —who have been blown out of the water.” Younker says he avoided dotcoms, and took the precaution of moving 20 per cent of his clients’ funds into cash 10 weeks before the April 14 market dive. “We just felt everything had gotten out of hand,” he says. “Now, were telling our clients to buy.”
Buying in the dips has become a common strategy over the past few years, embraced by even relatively unsophisticated investors. But last week’s market
comeback was also fuelled by solid earnings results from a number of flagship American companies. First quarter profits were handsome at Intel Corp., Coca-Cola Co. and Citigroup Inc., among others. Canadian companies did well in the first three months, too, including Canadian Pacific Ltd., up 157 per cent over a year earlier, and electronics manufacturer Celestica Inc., boasting a rise of 175 per cent. Even so, analysts also warn that buying on dips can be deadly if the general trend of the market is down.
Ironically, some of the biggest losers have been companies that were not even publicly traded when investors decided to flee tech stocks. Before the crash, investors were eagerly awaiting the first share issues of a handful of much-heralded high-tech companies, including 360networks Inc. of Vancouver and OnX Inc. of Toronto. Both decided to lower the price of their initial public offerings, fearing they would find few buyers. Sure enough, OnX, an e-commerce software firm, issued its shares at $10.50; by week’s end they were hovering around $9.40. But Vancouver’s 360networks, which is building a worldwide fibre-optic
network, seemed to fare better: issued at $21, its shares closed after one day of trading at about $28.
Clearly, there are no crystal balls when it comes to stock market performance. On the plus side, most forecasters, including Washington’s Hufbauer, believe economic growth in North America will remain healthy this year. On the down side, the U.S. Federal Reserve Board is almost certain to raise interest rates by at least another one-quarter of a percentage point in May, I with further hikes likely later I this year. There have already a been five hikes since last June, I as the Fed struggles to keep inI flation under control. Some I economic indicators are already beginning to slow, per-
haps in anticipation of even higher credit costs: U.S. housing starts dropped by more than 11 per cent in March, compared with the previous month, and factory shipments slipped in Canada during February.
Hufbauer, who wrote in February that there would be a major stock market correction in March or April, believes there are further shakedowns to come. “My bones tell me that one of these times, the snap rally isn’t going to snap,” he says. “I think the trigger for that will be when we get some earnings reports that just aren’t up to the very high expectations that are built into the market.” With the Fed continuing to lean hard against inflation by raising rates, he adds, people are likely to start putting more of their money into value stocks or bonds. And that could well cause markets to start drifting downward. “I’m not talking about a massive dumping of tech stocks,” he says. “It doesn’t take much of a shift to change prices dramatically.” Rolling the market dice, it seems, just got a whole lot riskier.
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