[TOP STORY] Are we heading for a repeat of 2000?

‘When you look at the period June 1999 to May 2000, the Fed hiked interest rates six times’: Schalk Louw of PSG Wealth Old Oak.

SIMON BROWN: I’m chatting now with Schalk Louw from PSG Wealth Old Oak. Schalk, I appreciate the early morning time. A note that you put out that I’ve got to say [sent] a bit of shivers down my spine, because I’m old enough to remember that dotcom crash of 2000. Fortunately, owing to exchange controls, I didn’t have anything offshore invested in it. But the request you raised is: are we seeing a repeat of that collapse where the Nasdaq from its highest to its lows was, what, some 70% down? There are some similarities here.

SCHALK LOUW: Good morning, Simon. Yeah. Hey, hey, it’s Friday. Let’s celebrate that first, because we know Jim Kramer is ringing the opening bell on Monday, so please let’s not jinx it. But yes, let’s start Simon. The note is purely just an assimilation, though. Again, past performances do not guarantee what’s going to happen in the future. All that I did was I looked at that period, let’s call it that period between 1999 and 2000, and I said when you look at that period, we know that the Fed also tightened their monetary policy. They also started in a hiking phase. When you look at the period June 1999 to May 2000, the Fed hiked interest rates six times.

Yes, we also know that, prior to that, the Nasdaq was trading at valuations let’s call it pretty much only seen again 20 years later. Now, I want to just say and make that clear, the type of valuation we see now wasn’t that excessive. But what happened?

When you look at that six-month period after the Nasdaq made its highs, at let’s call it the beginning of 2000, March 2000 to be exact, that six-month period after it made its highs, the Nasdaq traded 39% lower from its highs. Now very similar to that time – you said you remember that time – we didn’t have Twitter and Facebook and those kind of things. We had the good old newspapers. I remember the newspapers, how these newspapers came out and said, well, this is a great opportunity, very similar to that – buy the dips.

Now, if we did buy the dip, that seven-month period later, let’s call it 30%-odd percent lower levels, pretty much one year later your portfolio would’ve been down 52% – a further 52% from those levels. So all I did is I said, what happened? What happened over the past seven months? Seven months ago the Nasdaq also made its highs, new highs. We’ve seen that the Fed started the hiking phase earlier this year, March to be exact. They’ve now ……3:06 had two rate hikes. They’ve said they’re going to do the monetary tightening after years of ……easing, and the Nasdaq slipped seven months later. The Nasdaq has now done over 30% as well – very similar to 2000. I’m getting people starting to say, well, now it’s time; let’s start to buy the dips.

All that I’m saying with this is just be very, very careful. These companies are not trading at very cheap multiples yet. Some of these companies are still I wouldn’t say expensive. They are definitely looking a ‘helluva’ lot more attractive than [they did] in December last year; but they’re not dirt cheap yet. Be careful, we are not in the end of the hiking phase. The world is struggling [economically]. It’s really in a struggle.

SIMON BROWN: It is struggling. I take the point. There is a lot of similarity, and these stocks are not yet cheap. We can almost divide [them] into two parts. If you pull out some numbers, your Netflix, Shopify down 70%, 74%. And Apple, Microsoft are both down a quarter; Facebook off half, 50% down. But what we have got here is companies – I look at the likes of the Facebooks and Apples and Microsoft – that at least are making a profit. Back in 2000 I don’t think anyone in the Nasdaq was making money. Profit is nice, but those valuations ultimately matter. At the end you can ignore valuations for a long time, but eventually they matter.

SCHALK LOUW: For sure. And that’s the one thing you said. Let’s look at the Nasdaq companies of 2000. The Nasdaq companies of 2000 –I would call them garage sales because most of these techies were running these companies out of the garage. They had IPOs and they made millions. It’s not exactly the same, you’re right. The likes of the Metas – they are making money.

But look at that, the Faang darlings. What was similar was a year ago when these companies were trading at these multiples, very similar to 2000, I started to get weird and wonderful ways of valuing these companies. People say, ‘Ah, don’t look at PEs any more. We can’t look at PEs. We need to look at this, we need to look at that’. And that usually is a tell-tale sign to me personally that things are ending a bull market or bull market phase. How quickly we went into a bear market. This went from ‘don’t worry, this is just slight correction’ basically, 10% or more now’. Now over 20%, now even over 30% when you look at the Nasdaq.

You mentioned it – Facebook 53% down. Apple 17%, Amazon’s 34%, Netflix 71% down, Google 24% down and even our blue-eyed boy, Elon Musk, Tesla, down 33% year to date. You know what, I think there will be some opportunities. The opportunities are looking a lot better than they did in the ……6:06. But be very, very selective, and be very patient when buying into this. I don’t foresee this – like I said, there have only been two rate hikes. Europe is in big trouble and I think the world as it currently stands is definitely [inclined] towards a higher volatility market. Be selective, be cautious, and most importantly be patient.

SIMON BROWN: I’ll leave it there. I think Schalk’s a hundred percent [on it]. I think selective caution, patience. That is the theme here. Is it 2000 again? We don’t know, but we will know in time. The point is that there are no sure things there. Some caution, some selection and some patience are needed.

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It would be interesting to look at comparison of:
Total market cap / total operating cashflow
(Total Debt minus cash and equivalents) / total market cap

My gut feeling is that today the market valuation is better supported by real income (ignore headline earnings as that is a journal entry mess). Also, I’d bet that net debt is quite low and for many sectors there is no net debt. Apple can pay all its debt, repay all its contributed equity and retained earnings, have cash spare and still generate 75 billion new cash each year. Its tax bill will look different though…

End of comments.

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