“Be fearful when others are greedy and be greedy when others are fearful.” Warren Buffett
Were we too sad?
Last week, America celebrated the first anniversary of an astounding, and mostly unexpected, stock market rally. During a brutal 17 months beginning in October 2007, the S&P 500 had fallen to 676 by March 9, 2009, its lowest level since September 1996, 12 ½ years earlier. However, over the next 12 months, the S&P climbed back to 1150, a gain of 70%. As might be expected, financial stocks -- the catalyst for the debacle -- also recovered the most, gaining 115% during the year. In my view, the most impressive indicator was that 490 of the 500 listed stocks rose in value and, of the 10 that declined, 7 fell less than 10% and only one (MetroPCS, a telecommunications company) fell more than 20%. On the other hand, over 20 stocks rose over 350% and 9 gained over 500%.
Is it time to bake a cake, invite the neighbors, have a party and sing songs? I submit that would be premature. Let’s recall that prior to its partial rebound, the S&P 500 dropped 57%. Moreover, during that tumultuous period, several giants of the financial world met their demise. Exactly two years ago this week, Bear Stearns was absorbed into JP Morgan, and exactly 18 months ago this week, Lehman Brothers went bankrupt and Merrill Lynch was swallowed up by Bank of America. Please note that even after its impressive year, the S&P 500 is still nearly 30% below its peak. Moreover, while most investors rode the roller-coaster on the way down, many of them jumped off before it began its ascent.
This is basic human nature. Stock market rides are scary, especially if you’re blind-folded, have no idea how long the track is or where it ends. By definition, we only know what day the market hit a bottom after it has long since passed. A year ago, the world looked bleak. No one knew how the combined bailouts, stimulus packages and other remedial measures would affect global capital markets. There were far more pessimists than optimists. According to Buffett, that’s the best time to buy. And he did.
Were we too happy?
On the other hand, we recognized another milestone last week the tenth anniversary of the technology bubble. A decade ago, on March 10, 2000, the Nasdaq rose above 5,000 points. At the time, no one knew that the market had reached an all-time high. In fact, many investors kept pouring money into tech stocks as they started falling, thinking they could now buy more “cheaply” what had eluded them a few months earlier. There were many more optimists than pessimists, resulting in multiple “suckers’ rallies” during the ensuing months. The bubble was created by millions who were greedy just as Buffett would be fearful. However, by the time the Nasdaq reached a bottom in October 2002, dropping nearly 80%, many investors -- and plenty of companies had already disappeared. And they took their time coming back.
While investors sat on the sidelines, waiting for the “perfect” re-entry point, both the Nasdaq and the S&P 500 more than doubled over the next five years (though the Nasdaq was still at only approximately half its peak). Gradually, this sustained performance encouraged many retail investors to return and infused them with an appetite for all sorts of other risks. People felt wealthy and were borrowing heavily, often using their homes and stock portfolios as collateral. Banks were happy to lend and Wall Street was eager to repackage these loans into a wide variety of structured products. These derivatives were indeed “financial weapons of mass destruction” and the carnage created an incredible mess.
Seducing consumers and inventing passports
Now Congress is trying to pass a Financial Reform Act. While the proposed legislation has received negligible media attention compared to health care, the lack of cooperation among the parties with respect to both putative statutes is just as profound. That’s a shame and, for the Republican Party, probably a glaring misperception of current American public opinion. Regarding health care, most people are apprehensive about the government suddenly taking control of over one-sixth of the nation’s economy. Regarding banking regulation, the taxpayers feel they bailed out an entire sector because it was allowed to drink from the punch bowl long after the bar should have been closed.
Perhaps more outrageously, for 30 years banks have been aggressively distributing credit, in the form of subprime mortgages, “pay-day” loans, auto financing and credit cards to nearly all comers. Worse still, these latter arrangements are governed by contracts that are, by design, impossible to understand. For example, in 1980, Bank of America’s standard credit card agreement was two pages long and had 780 words, fewer than this article. Today it runs over 30 pages. It has been festooned with new clauses, sub-clauses and complex terms and conditions at a rate that rivals the speed with which the Dubai Police Force is able to “discover” new fake passports. Congress would be wise to rein in these abuses and Republicans would be wise to pick another battle.
A $5 billion 20th anniversary gift
Speaking of birthdays, this month also marks the 20th anniversary of Teva Pharmaceutical’s initial public offering in March 1990. What's more, Teva gave itself a $5 billion anniversary present, when it announced the acquisition of German generic drug company Ratiopharm this morning. Navigating steadily through turbulent markets over two decades, the company stands as Israel’s first and only true multi-national. At $54 billion, Teva’s market capitalization is slightly above 25% of Israel’s entire GDP. Expressed in American terms, that would be the equivalent of a US-based company with a market cap of nearly $4 trillion. Is there such a company? No. The largest is Exxon Mobil, valued at just over $300 billion. Let’s add on the rest of top ten, including Microsoft, Wal-Mart, Proctor & Gamble, Apple, Johnson & Johnson, Google, General Electric, IBM and JP Morgan. Are we there yet? No. We’re still below $2 trillion. In fact, if we add the next ten, including AT&T, Berkshire Hathaway, Pfizer, Wells Fargo, Chevron, Cisco, Bank of America, Coca-Cola, Oracle and Hewlett-Packard -- the top 20 US-based companies the collective market cap is less than $3.3 trillion, representing about 23% of America’s GDP. Most importantly, like Teva, these companies are multi-nationals, not dependent exclusively on their domestic market. Instead, they all generate meaningful revenues abroad and employ significant numbers of employees in various countries around the world.
As noted, we can’t know we were in a trough till we’ve climbed out. Similarly, we’ll never know we had reached a peak until we’re quite a ways back down the hill. However, we should applaud fidelity to excellence when it’s applied diligently over decades. Many thanks to Teva for a March birthday worth celebrating!
Lyon (Lenny) Roth is a senior executive at an international wealth management firm and a member of Ben Gurion University's Board of Governors.
Published by Globes [online], Israel business news - www.globes-online.com - on March 18, 2010
© Copyright of Globes Publisher Itonut (1983) Ltd. 2010