Short view By Philip Coggan - Financial Times
Short view
By Philip Coggan
Published: April 25 2006 03:00 | Last updated: April 25 2006 03:00. Copyright by The Financial Times
With the Dow Jones now within hailing distance of its previous peak, it is worth considering whether current market conditions are similar to those of the heady days of 2000.
One apparent similarity is the surge in merger and acquisition activity. But Lehman Brothers points out two important differences. In 1998-2000, nearly 60 per cent of deals were all-paper offers; these days, less than 20 per cent are financed with shares. Cash is now the dominant form of finance.
Bidders' willingness to use ready money may illustrate a more realistic approach. And that is backed up by the level of the average bid premium, only 16 per cent now, against 27 per cent in 1998-2000. Bidders are not taking cost savings on trust.
Another significant difference is that the 2000 boom was dominated by the "new economy", notably technology, media and telecoms stocks, whereas this rally has a distinctly old economy flavour.
Back in March 2000, the global telecoms sector was capitalised at $2,793bn against $149bn assigned to the mining sector. Now the telecoms sector is worth just $801bn (£449bn) and the mining sector is valued at $481bn. In other words, the telecoms sector has gone from being worth almost 15 times as much as mining to being worth just 60 per cent more.
This alters the flavour of the boom in two significant ways. The first is the absence of the positive feedback that characterised the dotcom boom. Back then, investors were receiving e-mails and buying online for the first time; this convinced them there was something substantial behind the promise of internet stocks. There is nothing "new" about oil or gold. Consumers may be well aware of higher commodity prices but for them, the experience is largely negative.
The second change is that dotcom share prices were largely driven higher by greed and euphoria. In the commodities boom, while both emotions may be present, so is fear. Fear of hostilities between the US and Iran, in the case of oil, and of rapid inflation, in the case of gold. If either of those fears were to be realised, mining stocks might keep on rising, but the rest of the stock market surely would not.
By Philip Coggan
Published: April 25 2006 03:00 | Last updated: April 25 2006 03:00. Copyright by The Financial Times
With the Dow Jones now within hailing distance of its previous peak, it is worth considering whether current market conditions are similar to those of the heady days of 2000.
One apparent similarity is the surge in merger and acquisition activity. But Lehman Brothers points out two important differences. In 1998-2000, nearly 60 per cent of deals were all-paper offers; these days, less than 20 per cent are financed with shares. Cash is now the dominant form of finance.
Bidders' willingness to use ready money may illustrate a more realistic approach. And that is backed up by the level of the average bid premium, only 16 per cent now, against 27 per cent in 1998-2000. Bidders are not taking cost savings on trust.
Another significant difference is that the 2000 boom was dominated by the "new economy", notably technology, media and telecoms stocks, whereas this rally has a distinctly old economy flavour.
Back in March 2000, the global telecoms sector was capitalised at $2,793bn against $149bn assigned to the mining sector. Now the telecoms sector is worth just $801bn (£449bn) and the mining sector is valued at $481bn. In other words, the telecoms sector has gone from being worth almost 15 times as much as mining to being worth just 60 per cent more.
This alters the flavour of the boom in two significant ways. The first is the absence of the positive feedback that characterised the dotcom boom. Back then, investors were receiving e-mails and buying online for the first time; this convinced them there was something substantial behind the promise of internet stocks. There is nothing "new" about oil or gold. Consumers may be well aware of higher commodity prices but for them, the experience is largely negative.
The second change is that dotcom share prices were largely driven higher by greed and euphoria. In the commodities boom, while both emotions may be present, so is fear. Fear of hostilities between the US and Iran, in the case of oil, and of rapid inflation, in the case of gold. If either of those fears were to be realised, mining stocks might keep on rising, but the rest of the stock market surely would not.
posted by Carlos T Mock at 9:59 AM
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