May

30

I'm fascinated by bubbles and crashes. They have a romantic feel, with all the theatrical elements reflected in a simple chart: enthusiasm, greed, madness, drama, fear, despair, and deception. My website has an entire section devoted to this phenomenon; I really believe that the study of these extremes can help us better understand the normal behavior of markets.

But enough theory! Japan small caps together with the GCC markets were the first bubbles to pop in 2006, and they haven't recovered since. The Mothers Index is probably one of the most manic-depressive of all markets I'm aware of. Since 2002 it has managed to climb from 500 to 2500 before falling back to 1500 in 2003, climbing back to 2500 in 2005, to finally loose 70% and counting. If you're looking for low correlations markets don't look further! But wait, I forgot to tell you that the bottom of 2002 was the terminal slot of a 90% freefall off its stratospheric 7500 peak in 1999!

Is this a sign of things to come in our part of the world? In spite of my general bullishness there are warning signs of sporadic irrationalities. How else can you name a struggling ex-dot com such as Artnet (Germany) that has an EBITDA of Euro 1 Mio and is valued at Euro 100 Mio?

But that's precisely the beauty of bubbles; they have this unmistakable flavor that brings out the best and worse of human beings. In the early stage you don't participate because you have decided that they are irrational. Then, after a rise of 50% you are still congratulating yourself, but you do have a little remorse for these opportunity costs. Then, after another +100% rise the elixir makes its way to your most greedy brain corners, and finally you decide to jump in (after finding the rational of course!). One of the most intriguing aspects of bubbles is that you make the highest returns precisely when nearing the peak.

Another fascinating aspect of bubbles is how they managed to fool everyone. Look at a chart of Deutsch Telecom since the late 1990s. What the Germans used to call the "Volksaktie" (the people's stock), looks more like a comedy than a romantic act. Actually, the chart does remind us of an inverted "V."

I wish I had kept all these useless analysts' reports on Deutsche Telekom (among others). They would have made for a great laugh today. But strangely they all disappear under some rug, no more trace in Bloomberg or anywhere. Maybe it's the invisible hand!


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2 Comments so far

  1. Caravaggio on May 31, 2007 11:30 am

    From a couple of reports around the time of the peak:

    February 21, 2000 - JP Morgan

    Valuation
    At the end of 1999, T-Online had 4.2 million subscribers. We forecast that this will increase to 5.35 million at the end of 2000. A 2000 FV/subscriber multiple of $6,000 would imply a market capitalisation for T-Online alone of $32.1 billion. Using these multiples suggests that the acquisition of Club Internet will add at least a further $2 billion to the market capitalisation of T-Online in the forthcoming flotation of the company. We retain our Market Performer recommendation on Deutsche Telekom, with a fair value estimate of EUR 88.

    17 March 2000 - Deutsche Bank (DT price as at 16 March Euro 85.70)

    We are reinitiating coverage of Deutsche Telekom with a Buy
    recommendation. Our sum-of-the-parts valuation produces a 12-month price target of Euro 95 per share.

    Potential Challenges - Valuation of Growth Stocks
    As discussed, we have relied on a sum-of-the-parts valuation for Deutsche Telekom’s various businesses in order to arrive at our estimated valuation of the company. Given that several of these, such as wireless and Internet, are high-growth businesses, the actual or perceived values of these businesses are somewhat subjective and based on investor sentiment. Although both investor enthusiasm and the valuation of these businesses in the capital markets are currently high, there is always the risk that this will change, which could affect our sum-of-the-parts valuation of Deutsche Telekom.

    T-Mobil (Germany) DCF valuation of Euro 73.3 billion; equal to 30.1 times 2001E EBITDA of Euro 2.43 billion and equal to Euro 8,000 per customer (Enterprise valuation = Euro billion 73.3)

  2. Ronald Weber on June 1, 2007 3:05 am

    Thxs Caravaggio,
    It’s absolutely brilliant! I think it would be very interesting to make a collection of the most comic forecasts, I’ll grab into some old files and see what I can find.
    What a waste of resources, all these PHDs, these serious conferences and analysts meetings, these precise forecasts to the last digit…to finally end up being totally wrong!
    Maybe that the prescision of forecasts bring a sense of security and diverts attention from the main issue…
    Definitely to be followed…

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