Faber bullish on Indian realty sector

Investment guru Marc Faber expects money flow into India will continue. He added the appreciation of the rupee has helped foreign investors in India.

Faber would not focus on indices and would look at individual stocks.

According to Faber, real estate companies are on the high side. There is a beginning of major real estate development cycle and it could last 20-30 years. He added the Indian realty prices are still very reasonable in comparison to the rest of the world. He would rather invest in Indian real estate.

He added there has been strong bull market since 2003 in India. The indices are higher than it was during 2006 and majority stocks are down. Funds are no higher than May 2006, he added. Most funds put underweight on Asia.

The second half of 2007 is not likely to be favourable for equities. He expects that US Fed would likely to cut interest rates in H2CY07.

Global liquidity tightness is unlikely originate in the US. Interest rates in the US would climb higher than the market estimates, he added.

Excerpts from CNBC-TV18's exclusive interview with Marc Faber:

Q: How are you feeling about emerging markets now because most of the markets are at new highs? Has the sustainability or the sustained strength come as a bit of surprise?
A: We had a very strong bull market since 2002; here in India we had it since 2003. Then in some markets we made highs last May and had a serious correction here in India. After that we recovered again and had a high during last February; since March 13 we again moved into a correction. The markets have been relatively soft. But the key is to understand that the market consists of many different shares.
If you take as an example of the Indian markets, the indices are higher today than they were in May 2006. But the majority of stocks are actually down from May 2006. The performance for foreigners is of course helped by the appreciation of the Indian rupee versus the US dollar. By and large since I am the Chairman of a variety of funds here in India, most of the funds I look at are actually no higher than they were a year ago in 2006.
Q: What is your call then on the market from here because we have just made a new high a couple of days back? Do you see substantially higher levels in India from hereon?
A: Well anything can happen. In India, I would not focus too much on the indices but would actually focus on individual stocks. The indices have been driven by a few large cap stocks. It is the same in the US markets where some stocks are still moving up. But in case of the brokers and the banks, they are all lower than they were in February or a couple of months ago.
With the exception of Goldman Sachs, that made a new high just three weeks ago, all the other brokers did not exceed the February highs. So, I think we have to focus here very much on individual shares and global liquidity.
I think from the US, you do not get tight money from the Federal Reserve, as it is run by a very dovish person Bernanke. We have some illiquidity in the household sector and now some illiquidity is happening in the capital markets through the sub-prime lending mess; there are already 50 sub-prime lenders that have been forced to the wall. But I do not think that the second half of this year will be favourable for equities.
Q: What do you expect to see for money flows into India in specific because we have got quite a gush up until now both in the primary and secondary market?
A: Well, I still think that by and large the world is underweight on Asian stocks.
We have a lot of liquidities at the hands of the central banks and well-to-do individuals worldwide; their investments in India and other Asian countries are relatively small. So, I expect actually money will continue to flow into India. Of course the question is what the supply is going to be for securities and what is global liquidity going to be? Because, if you have an S&P that goes down in the US at some point or you have a dollar crisis or anything, then obviously these money flows can be interrupted at least temporarily.
Q: I believe you do like the real estate story in India though. What have you made, if you have had a look at today’s new listing - DLF? How do you find the listed real estate stocks at this point?
A: Well, I am not interested in real estate listed companies in India because I think they are on the high side. But I think for the individual investor, there is still plenty of opportunity in realty in India per se because we are at the beginning of a major realty development cycle that could last 20-30 years.
If you compare the realty prices, by and large the prices in India are reasonable compared to the prices in the Western world; I am not talking about Mumbai's prime location.
Q: The big concern for the emerging market investors came in a month back when the US bonds yield crossed 5% and went to 5.3%. Subsequently, it has cool down back to around 5%. Do you think it has topped out for the moment or this is just a pullback and bond yields will harden more out there?
A: We had bulls in the bond market in the US which began in September 1981 and worldwide it ended in June 2003 when the Japanese Government Bonds, or JGBs, were yielding less than half a percent and the 10 years in the US was yielding 3.3%.
I expect over the next 20 years interest rates in the US will go much higher than it is perceived by the market place as I think inflation in the US will accelerate on the upside partly because of the rise in the prices of commodity, energy and food. This is also partly because of the weakness in the dollar that will eventually lift import prices.
Therefore, I would be negative about bonds. But the bonds market will not collapse in one go simply because the economy in the US is in my opinion much weaker than what the statistics show. The statistics show during the first quarter the economy grew in real terms by something like 1%. I think we are already in stagflation because the government in the US probably does not measure inflation properly.
So, if you have to say a growth of 5% in the economy and instead of taking your consumer price increase at 3%, then you got 2% real growth. If you take inflation at 5% or 6% then you actually have nominal GDP growing up by 5%. Then the real GDP is contracting by 1%. I think this is happening in the US and during the second half of the year Bernanke will again cut interest rates.

Q: So far the global markets have been extremely resilient. What do you think could be the trigger for an eventual correction because we have not had any meaningful corrections over the last three-four months?
A: Yes that is correct. And, I would also like to make an additional comment about resilience. If you look at the US markets, say since 2000, first of all in euro terms we are way down over the 2,000 levels. So, we never recovered back to 2,000 high. If you look at the US markets since February, the indices have made a new high in dollar terms. But in euro terms, we are exactly at the same level in February. So, I am not so sure that the US market has been that strong.
If you talk about the stock markets of India, Brazil, Argentina or Russia since 2000, yes we have been very strong. We are up several fold and so forth. And, I think your point about the correction is absolutely correct. We have not had a 10% correction in the US since March 2003; one correction will come at some point and I think that will be more than 10%.
There are two points I would like to make about the Indian stock market. First of all, a couple of days ago the technical picture would have favoured a breakout of the market on the upside. But when you have a technical constellation, that would favour an upside breakout and does not materialise, then the downside could be quite sharp. So, we have to watch in the next few days.
Secondly, Samsel sold his real estate investment trust off in February this year. That was the peak of the REITs in the US and since then they have been going down. Blackstone just went public the other day and the stock on the first day jumped to a premium. But today it is lower than the issue price.
Now in India, you have DLF which is going public today. I think it will be a case where at the beginning the promoters have the vision and the investors have the money; later it would be public have the vision and the promoters have the money. And, usually these great issues are a negative side for the sector and the entire market.
Q: Are you saying that you are not very impressed with the kind of paper India has been churning out these past few weeks?
A: We have two counter-trends in the world. We have private equity and individual selling equities, which we have essentially in the US. The private equity now in other words are the LBOs, or Leveraged Buyouts, as we have had since the 1980s. They are running at the rate of over 5% of market capitalisation in the US.
Equity supply contracts are also the same where we have equity buybacks by corporations. But believe me every private equity firm buys equities and then they repackage and resell them into the market at some point.
I believe some tax changes in the US will make private equity far less attractive. If you want private equity, I would say you should look at some Asian countries. In fact, a large LBO funds should take over the whole island of Taiwan and sell it to the Chinese because the Taiwanese shares are selling at a very low PE and the Chinese shares are selling at something like 40 times of the earnings. So, you could make a great arbitrage.
Q: If you had money to invest in India and had to split it between realty, equity and art, how much would you give to each category?
A: Well, personally I would actually spend all my time on realty in India because I think that is a no-brainer in the long run. It is a problem for people who will have very high borrowings, against their realty because of interest rates. Realty has always been a cyclical industry, where prices move up or down. But by and large if I look at the world, the reason so many families are rich, that came out of realty, is that the money was tied up in realty. They did not do anything more stupid with their money like buying Internet stocks in 2000 and then losing 90% of their money as prices went down.
So, my advice essentially for people, if you are not an expert in financial matters, to own realty - a safer avenue to wealth.

Brazil, Russia, India and China to outdo Europe and the US

Brazil, Russia, India and China to outdo Europe and the US

The main economic analysts of today share their thoughts of tomorrow
What the year 2020 will be like? Although it seems not a long way away, still it is wrapped in mystery. Some 50 years ago sci-fi writers were foretelling the future without any doubts. Experts of today are more careful in their predictions. The world is changing so quickly that the human mind is unable to keep up. Experts from the research department of Deutsche Bank under famous analyst Dr. Norbert Walter decided to take a look at the future. Their research is based on analysis of economic situation in 34 countries.

It turned out that euro zone bankers could not imagine the world without the US dollar as the main currency and means of payment even in 2020. According to their forecasts, the world will stay unidirectional with only one superpower – the USA, GDP of which will reach $17-18 trillion by that time.
Experts from Deutsche Bank certainly expect competition of dollar and Chinese yuan in 2020. Analysts are sure that in 15 years china and India will be some of the leading nations of the world. China, for instance, will become the world assembly shop and the second superpower, followed by India. However, the latter will have to carry out reforms more aggressively, Deutsche Bank. “Further reforms will allow India to keep its growth high at six percent every of next ten to fifteen years. If the reforms are carried out aggressively the growth of GDP may reach seven or eight percent”, Norbert Walter said at the seminar of Indian-German Chamber of Commerce.
At the same time the role of the EU will become less and less important, according to the research. Besides, it is said that the economies of some EU members including France and Germany will lose their positions in the world.

The growth rate of Spain and Ireland will be higher than average European due to the openness of their markets. Another positive factor in their development will be dynamism of investors, favorable demographic perspectives and balanced immigration policy. Experts came to the conclusion that as far as politics is concerned European states have to develop structural political system that can guarantee their further integration. Great changes both in economic infrastructure and social system of European states are needed in order to overcome negative tendencies.
It is worth mentioning that Deutsche Bank research is contrary to that made by another European analytical centre. In March investment group Goldman Sachs published the work of its chief economist Jim O'Neill about the future of world economy. O'Neill is a legendary economist that became famous after his main forecast – dollar's landslide – became a reality.
O'Neill thinks that in terms of living standards Russia will be ahead of Italy and Germany by 2050. When it comes to GDP it will leave France and Great Britain behind.

According to O'Neill, four developing countries Brazil, Russia, India and China (so-called BRIC) will be ahead of six largest industrial countries of the world in terms of cumulative USD GDP. He says that China can leave the US behind as early as by 2040, whereas India will be ahead of Japan by 2035 and Russia can outrun any country in Western Europe by 2030.
The role of the BRIC economies will grow quicker in the sphere of energy: in the next 15 years they will consume more energy than the EU and the US. The growth will be slower in the world motorcar market: BRIC countries will become leaders only in 2025-2030. The share of the four countries in the world capital market will be probably not so big, although it depends on the policy of the countries. Jim O'Neill does not consider the USA motive power in the economic progress. He thinks that at the moment China and other BRIC countries are more important in the accelerating of world economy. They provided for 40-50 percent of the world economic growth. The CIA in its long-term strategic forecast views the fate of Russia differently. According to this prognosis Russia will be able to become a country with the headlong growing economy, but will not become the leading economic power. The report says that Russia together with Brazil, South Africa and Indonesia will belong to a group of countries where economy will grow faster but will leg behind the world leaders China and the US.
The authors of CIA Project 2020 say that Russia will not be able to become one of the economic superpowers because of its failure to solve social problems: unfavorable demographic situation, spreading AIDS as well as slowing down in democratic reforms. A serious threat will remain organized crime and Islamic terrorism.
Nevertheless, these problems will be partly graded by Russia's ability “to change the vector of economic power”. According to the report it will be the result of the Russia's position as the main supplier of energy carriers. Russia will be able to provide for the one third of energetic needs of Europe, with export of energy carriers as the main constituent of Russian foreign policy. The report also predicts large-scale but controllable migration from the Central Asia to Russia: up to a million people can move to Russia bringing down social tension in Asia and making up for lack of labor force

29.08.2005
Source:
URL: http://english.pravda.ru/world/europe/8832-forecasts-0

World Bank data(Latin America and the Caribbean)

REGIONAL FACT SHEET FROM THE WORLD DEVELOPMENT INDICATORS 2007
Latin America and the Caribbean


Many countries in the region have made impressive gains in
social indicators. With 98 percent of the children completing
primary school, the region has effectively reached the MDG
goal of providing universal primary education to its children.
The region has achieved a secondary school enrolment rate
of 86 percent in 2005, an increase of 35 percentage points
since 1991. Except in three countries, over 80 percent of the
population had access to an improved water source in 2004.
With over 90 percent of its children immunized against
measles and DPT, the region has also made impressive
gains in reducing child mortality. The child mortality rates
declined from 54 per 1,000 in 1990 to 31 in 2005, the lowest
child mortality rate among all regions।

Despite impressive achievements in health and education, poverty rates remain high. In 2004 8.6 percent of the people in Latin America and
the Caribbean were living on less than $ 1 day, and between 2002 and 2004, the number of people living on less than $1 a day fell by only
one million people, leaving approximately 47 million people in extreme poverty. Another 74 million were living on less than $2 a day.

Macro conditions improved
Macroeconomic indicators show positive signs. Inflation has been brought down
to single digit levels in most countries where double digit rates were common
in the 1990s. The region as a whole ran a trade surplus for the last three years,
reaching $45 billion in 2005. As a result, many countries were able to reduce their
external financing needs. The public debt profiles of many countries improved:
total debt service was 22.5 percent of exports in 2005, 9 percentage points lower
than 2003 and 16 percentage points lower than 2000. Similarly debt service ratio
to Gross national income has also fallen by 2.6 percent to 8.8 percent in 2005
compared to 2000.


Latin America and the Caribbean: the most urbanized developing Region

Today, half the world’s population lives in urban areas.
Urban populations are expected to grow by 1.8 percent
a year through 2030—almost twice as fast as the total
global population. Most of this increase will occur in
developing regions. No region is more urbanized than
Latin America and Caribbean. In 2005, 77 percent of the
region’s population lived in urban areas—almost as high
as high-income economies’—and the region has four of
the ten largest cities in the world in the region. However,
as cities grow the cost of meeting basic needs increases, as
do the demands on environmental and natural resources.


Between 1990-2005, Latin America had the highest investment in infrastructure projects with private participation
Private participation in infrastructure projects in developing countries plummeted after the 1997 Asian financial crisis and declined for
several years afterward. But in 2004 and 2005 infrastructure investment increased. During 1990-2005 Latin America and the Caribbean
accounted for more than 40 percent of total investment in infrastructure projects with private participation. By 2004-2005, as investment
in other regions increased, Latin America & the Caribbean’s share fell to about 23 percent of global investment in infrastructure projects
with private participation. Three Latin American and Caribbean countries—Argentina, Brazil, and Mexico, are among the top five
countries with total investment in infrastructure projects with private participation, 1990-2005.

World Bank Data ( East Asia and Pacific )

REGIONAL FACT SHEET FROM THE WORLD DEVELOPMENT INDICATORS 2007
East Asia and Pacific
East Asia and the Pacific well on the path to the Millennium Development Goals
East Asia and the Pacific, which comprises 30 percent of the world’s population, has recorded the largest reductions in poverty since
1981. It has exceeded the MDG target of cutting poverty in half by 2015. The region has, on average, also achieved the MDG targets
of universal primary education, with a completion rate of 98 percent, as well as gender equality in access to primary and secondary
education. In health, the fertility rate is at replacement level, almost 90 percent of pregnant women receive antenatal care, and 87 percent
of the births are attended to by skilled health staff. Infant and under-5 mortality are among the lowest of all developing regions.
But problems remain. Preliminary estimates suggest that almost 170 million people live on less than $1/day, over 75 percent of
them in China. For most countries, achieving a two-thirds reduction in child mortality will be difficult. And this is made more difficult
by pervasive inequalities in countries: survey data for seven countries show that, on average, under-5 mortality is 88 per 1,000 among the
poorest fifth of the population, compared with just 31 among the richest fifth. As of 2004, half the population lacked access to improved
sanitation facilities, and prevalence of HIV/AIDS among women increased from 24 percent in 2003 to 27 percent in 2005 .

Growth remained strong
East Asia and the Pacific, which has grown at an average
rate of about 8 percent a year for the past two decades, was once
again the top performer among developing regions in 2004.
China achieved a growth rate of 10.1 percent, while Malaysia,
Philippines, Thailand, Vietnam, and Cambodia exceeded 6
percent growth. Export growth in these countries was particularly
strong, ranging from 10 to 28 percent in 2004।

Cereal yield is approaching that of high income economies
Global demand for food is projected to double in the next 50 years,
as urbanization proceeds and income rises. However, arable land per
capita is shrinking. Growing demand for food has been met by agricultural
intensification. Cereal yields have increased in most developing regions,
with East Asia realizing the highest cereal yield in developing regions.
In the 2003-05 period the region produced 4460 kilograms per hectare,
higher than the average yield in high-income economies in 1990-92, and
more than 4 times that of Sub-Saharan Africa।


Business reform--big improvements in China, Indonesia, and India
The fewer obstacles there are to starting a business, the more businesses will
be created in the formal sector. Firms that go from the informal sector to the
formal sector pay taxes and grow faster. Between 2004 and 2006 both China
and India cut business start-up time to 35 days. And Indonesia shortened
the time to register a business from 151 days to 97 days. During the same
period, China also reduced the cost and minimum capital requirements for
starting a business।


Malaysia leads East Asia and the Pacific in mobile phone
subscribers per capita
The use of mobile phones has been growing rapidly in East Asia & Pacific
countries, and in most of these countries, more people have access to
mobile phones than fixed line phones. In Malaysia, there are almost 800
mobile phone subscribers out of every 1,000 people. Since 2000, access
to mobiles has increased by about 10 times in Thailand and by about 5
times in China and the Philippines।

East Asia and Pacific: led in growth of trade
The nominal value of world merchandise trade in 2005 rose by 13 per
cent to $21.1 trillion or 47 percent of global output. Merchandise trade
by developing countries – especially exports -- has grown significantly
faster than for high-income countries, continuing the trend since 1990.
As a result, developing economies have gained market share. The East
Asia and Pacific region has been the leader and has continued to benefit
from rapidly expanding trade. In 2005, the region’s merchandise trade
rose to 75 percent of GDP, up from 47 percent in 1990.

StockMarket Research

Stock Market Research.
Why is Stock Market Research Important?

Stock Research is important part of the Technical Analysis of the stock or Fundamental Analysis of the Stock depending on what type of market research you are involved in। The Stock Research has to be done to predict the future trends of the stock, to built market timing system or asses the real value condition of the company.

Market Stock Research General:
Before starting your market research company , determine whether the company is publicly held (traded on a stock exchange), privately owned, or a subsidiary of a publicly held organization. You will be much more successful in obtaining information on publicly held companies. Public companies must report certain financial information to the Securities and Exchange Commission (SEC) and their shareholders. Also, serious investors use the Internet to research potential stock purchases or monitor companies in their portfolios. As a result, the Internet provides much more information on public corporations than on private companies.
The first step in "research stock" is to identify the stock exchange ticker symbol for the company of interest. It can be found at
Yahoo Ticker Symbol Lookup
After finding a ticket symbol for the company you should know on what Exchange stock is trading, to what industrial group (ETF) it belongs is an important part of company research. The according Exchange Research and Index Research (ETF) have to be done as well.
When you are doing stock research (company research) you should consider what price and volume movement did your stock experience in the past two months, or three months, or six months, or YTD (year to date) and up to 10 years? Understanding price and volume movement is one of many concepts that will enable you to hold on to your equities (stocks or stock mutual funds), long term।

Some Tips of the Stock Research Company:
There are some some of the facts to look at to properly evaluate your stock to do your Stock Analysis?
Price to Earnings Ratio
Does the company have earnings?
Increasing revenues and profits yearly?
Stock split history?
Is the company paying dividends?
Future plans of the company
Past and Current news on the company?
Company graph of price and volume over time The company ranking in its industry
Five Steps of Market Research
Market Research can be divided in several separate steps.
First of all you have to get the basic knowledge about market, exchanges, stocks, indexes, ETF, shares, options, futures etc.
Second step of market research demands you to define a subject of research, your target. During this period you have to answer on the following questions: what type of trader you are and what you are trading.
On the third step of Market research you have to define relationships. If you are trading on the stock market, you should know to what industrial group ( ETF ) this stock belongs, on what exchange it is traded etc. Other words doing stock research you have to support it with according index and exchange researches too.
The forth step is one where you are collecting information such as historical price and volume, etc. Real time quotes of price and volume, real time charts are always the most important part of any type of market research ether it stock research, stock market option research, research index or trend research.
The last step demands you to analyze all data gathered during your market research and make conclusion either it prediction of trend movement or assessing real value of company ( stock ).

History of U.S Stock Market Crashes

History of U.S. Stock Market Crashes
The Crash of 2000
From 1992-2000, the markets and the economy experienced a period of record expansion. On September 1, 2000, the NASDAQ traded at 4234.33. From September 2000 to January 2, 2001, the NASDAQ dropped 45.9%. In October 2002, the NASDAQ dropped to as low as 1,108.49 - a 78.4% decline from its all-time high of 5,132.52, the level it had established in March 2000.
Causes of the Crash:
Corporate Corruption. Many companies fraudulently inflated their profits and used accounting loopholes to hide debt. Corporate officers enjoyed outrageous stock options that diluted company stock;
Overvalued Stocks. There were numerous examples of companies making significant operating losses with no hope of turning a profit for years to come, yet sporting a market capitalization of over a billion dollars;
Daytraders and Momentum Investors. The advent of the Internet enabled online trading –a new, quick, and inexpensive way to trade the markets. This revolution led to millions of new investors and traders entering the markets with little or no experience;
Conflict of Interest between Research Firm Analysts and Investment Bankers. It was common practice for the research arms of investment banks to issue favorable ratings on stocks for which their client companies sought to raise capital. In some cases, companies received highly favorable ratings, even though they were actually in serious financial trouble.
A total of 8 trillion dollars of wealth was lost in the crash of 2000.
Following the Crash:
New Rules for Daytraders. Under the new rules that were introduced, investors need at least $25,000 in their account to actively trade the markets. In addition, new restrictions were also placed on the marketing methods daytrading firms are allowed to use;
CEO and CFO Accountability. Under the new regulations, CEOs and CFOs are required to sign-off on their statements (balance sheets). In addition, fraud prosecution was stepped up, resulting in significantly higher penalties;
Accounting Reforms. Reforms include better disclosure of corporate balance sheet information. Items such as stock options and offshore investments are to be disclosed so that investors may better judge if a company is actually profitable;4. Separation between Investment Banking and Brokerage Research. A major reform was introduced to avoid conflicts of interest in the financial services industry. A clear split between the research and investment banking arms of brokerage houses was mandated.
The Crash of 1987
The markets hit a new high on August 25, 1987 when the Dow hit a record 2722.44 points. Then, the Dow started to head down. On October 19, 1987, the stock market crashed. The Dow dropped 508 points or 22.6% in a single trading day. This was a drop of 36.7% from its high on August 25, 1987.
Causes of the Crash:
No Liquidity. During the crash, the markets were not able to handle the imbalance of sell orders;
Overvalued Stocks;
Program Trading and the Use of Derivative Securities Software. Large institutional investment companies used computers to execute large stock trades automatically when certain market conditions prevailed. Some analysts claim that the program trading of index futures and derivatives securities was also to blame.
During this crash, 1/2 trillion dollars of wealth were erased.
Following the Crash:
Uniform Margin Requirements. New margin requirements were introduced to reduce the volatility for stocks, index futures, and stock options;
New Computer Systems. Stock exchanges changed to new computer systems that increase data management effectiveness, accuracy, efficiency, and productivity;
Circuit Breakers. The New York Stock Exchange and the Chicago Mercantile Exchange instituted a circuit breaker mechanism, which halts trading on both exchanges for one hour should the Dow fall more than 250 points in a day, and for two hours, should it fall more than 400 points.
The Crash of 1929
On September 4, 1929, the stock market hit an all-time high. Banks were heavily invested in stocks, and individual investors borrowed on margin to invest in stocks. On October 29, 1929, the stock market dropped 11.5%, bringing the Dow 39.6% off its high.
After the crash, the stock market mounted a slow comeback. By the summer of 1930, the market was up 30% from the crash low. But by July 1932, the stock market hit a low that made the 1929 crash. By the summer of 1932, the Dow had lost almost 89% of its value and traded more than 50% below the low it had reached on October 29, 1929.
Causes of the Crash:
Overvalued Stocks. Some analysts also maintain stocks were heavily overbought;
Low Margin Requirements. At the time of the crash, you needed to put down only 10% cash in order to buy stocks. If you wanted to invest $10,000 in stocks, only $1,000 in cash was required;
Interest Rate Hikes. The Fed aggressively raised interest rates on broker loans;
Poor Banking Structures. There were few federal restrictions on start-up capital requirements for new banks. As a result, many banks were highly insolvent. When these banks started to invest heavily in the stock market, the results proved to be devastating, once the market started to crash. By 1932, 40% of all banks in the U.S. had gone out of business.
In total, 14 billion dollars of wealth were lost during the market crash.
Following the Crash:
The Securities and Exchange Commission (SEC) was established;.
The Glass-Stegall Act was passed. It separated commercial and investment banking activities. Over the past decade though, the Fed and banking regulators have softened some of the provisions of the Glass-Stegall Act;
3. In 1933, the Federal Deposit Insurance Corporation (FDIC) was established to insure individual bank accounts for up to $100,000.

The Nasdaq Bubble

The Nasdaq Bubble

After the 1987 stock market crash, the global markets resumed their previous bull market trend। This powerful trend was driven by computer technology. Many of the technology stocks were listed on the Nasdaq exchange, which is an electronic marketplace.

In the early 1990’s, the personal computer was rapidly gaining acceptance for business and personal use. The computer was at last becoming more reasonably priced and more user-friendly. Computers were no longer the fodder of geeky hobbyists. They were veritable business tools, which were vital in gaining a competitive edge. Business applications were invented to aid the user in accounting, calculating taxes and word processing. Computers also began to compete with televisions as a form of entertainment, as PC video games flooded the marketplace. Corporations such as Microsoft prospered enormously as almost every computer system contained their operating system software.
During this time, the US computer industry focused more upon computer software versus hardware. This is because software was an extremely high margin product, due to it not being a physical product, like chips. Software companies produced a markup from selling licensed information, which costs very little to reproduce. Computer hardware became a commodity product, i.e. virtually indistinguishable from the product of any other competitor. Commodity products produce very little profits as each competitor constantly undercuts each other’s prices. Asian companies, with small manufacturing costs, produced virtually all of the hardware components at this point. Software, however, was protected as intellectual property with patents. Therefore, a product such as Microsoft Windows is a one of a kind product. This creates a strong barrier to entry, a benefit which is highly sought after in business.
The stock prices of software companies were marching ahead rapidly. Many small software companies were started by college students in garages, paying their employees with as much pizza and soda they desired. Every startup wanted to become “the Next Microsoft”.
Eventually, several of these start-up companies took the notice of serious venture capitalists, who were looking to finance these operations, take them public and reap massive profits. Soon the fledgling startups began to pay their hopeful employees with company shares. The premise was that when the company went public, the early shareholders would become instantly wealthy. The majority of the software companies were started in Silicon Valley, near San Francisco, which was a technology Mecca. The Nasdaq index of technology stocks was rising extremely fast, creating many millionaires.
Computers became further popularized in the mid 1990’s, as blockbuster PC games were created, such as Sim City and Duke Nukem. This fueled an increase in tech savvy youth, as computers went from “geek to chic”.
The Internet Age
Around 1994, a new frontier called the internet, was first being made available to the general public. In actuality, a primitive form of the internet had been around since 1969. This early internet was called DARPANet and was created by government agencies as an efficient way to exchange scientific and military information to computers in different locations. By the 1990’s the internet had evolved as a way to communicate using email, use chat rooms and view informational websites.
Almost immediately, businesses saw the internet as a profit opportunity. America Online made the internet available for the masses. The Yahoo search engine was started in 1994 as a directory for the universe of websites. Amazon became the first online bookstore in 1994. EBay was started in 1995 as an online auction site. As the internet moved from the hobbyist domain to a commercialized marketplace, online business owners became fantastically wealthy. Many technology companies were now selling stock in IPO’s. Most initial shareholders, including employees, became millionaires overnight. Companies continued to pay their employees in stock options, which profited greatly if the stock went up even slightly. By the late 1990’s, even secretaries had option portfolios valued in the millions! Many companies had BMW sign on bonuses! This is surely an example of irrational exuberance.
Tech Stock Mania
Several economists even postulated that we were in a “New Economy”, where inflation was virtually nonexistent and the stock market crashes were obsolete! Even worse, it was said that earnings were not relevant in picking stocks either! The “Old Economy” referred to industrial stocks, such as those in the Dow Jones Average. Another buzzword was “Paradigm Shift”, which is a synonym of “New Economy”. Investors were enamored by these buzzwords, as they deceptively described something that was sleek, sexy, and exciting.
From 1996 to 2000, the Nasdaq went from 600 to 5,000! Dot-com companies run by people who were barely in their 30's, were going public and raising hundreds of millions of dollars of capital. These companies didn’t even have much of a business plan, and certainly didn’t have any earnings, either! For example, Pets.com had no earnings yet came public and raised billions of dollars. Dot-coms wasted millions of dollars per night on frivolous parties. Hard work was never part of the picture for dot-commers. There are many stories of dot-com employees walking around barefoot in the office and playing foosball all day. At one point, a new millionaire was created every 60 seconds! Many of these instant millionaires thought that they were so brilliant, that all they had to do was play to make money. Never mistake a bull market for brains.
The Bubble Pops
By early 2000, reality started to sink in. Investors soon realized that the dot-com dream was really a bubble. Within months, the Nasdaq crashed from 5,000 to 2,000. Hundreds of stocks such as Pet.com, which were each worth billions, were off the map as quickly as they appeared. Panic selling ensued as investors lost trillions of dollars. The stock market kept crashing down to 800 in 2002. One high flier, Microstrategy, slid from $3500 per share to $4! Numerous accounting scandals came to light, showing how many companies artificially inflated earnings. Shareholders were crippled. In 2001, the economy entered a recession as the Fed repeatedly cut rates, trying to stop the bleeding. Millions of workers were now jobless and had lost their life savings.
Needless to say, the New Economy was a farce, and traditional economic principles still hold. What is sadly interesting is how bubbles will continue to occur in the future. When they do occur, foolish investors will say, “This time is different!”