The dot.com boom of the late 1990s is one example. The biotech boom
in the 1980s is another. Still other examples of stock market bubbles
include Japanese stocks in the late-1980s, Nifty 50 stocks in the
early 1970s, and Taiwanese stocks in 1987. A stock market bubble may
set the stage for a later stock market crash, continuing our example,
the Stock Market Crash of 2000.
Since our accurate prediction of the "bursting of the dot.com bubble"
in 2000 we have reviewed the various indications which signal the
formation of the bubble.
Charles MacKay, in 1841 in his classic Extraordinary Popular
Delusions and The Madness of Crowds wrote, "Sober nations have all at
once become desperate gamblers, and risked almost their existence
upon the turn of a piece of paper. Men, it has been well said, think
in herds; it will be seen that they go mad in herds, while they only
recover their senses slowly, and one by one," he wrote.
Many may have never heard of the speculative tulip bulb craze that
gripped seventeenth-century Holland. At the peak of the mania, a
single tulip bulb sold for the equivalent of $150,000 - $1,500,000,
depending on which historical description one reads.
Tulip prices soon plunged to less than the present equivalent of a
dollar each. Imagine having bought a tulip for $76,000, only to
discover six weeks later that it was now worth less than one dollar.
Commerce in Holland suffered a severe shock, and did not recover for
many years.
Substituting "dot.com" for "tulip bulb" their similarity becomes
apparent. The dot.com companies at first attracted individuals drawn
by the prospect of web communities, Internet commerce and the promise
of instant communications to millions at the click of a computer
mouse. Consulting research companies churned out glowing reports and
stock market analysts recommendations for shares of companies who
were going public daily but had no prospects of turning their
activities into a going business. Investment companies were
instructed to drop caution and invest and invest. The competition for
shares or the young companies was insatiable.
The first indication that we are entering into a period that could
lead to a bubble, is related to the large number of initial public
offerings already placed, their quality and the new ones that are in
the pipeline. Prospects are that it will be not only a "bumper" but a
record year for IPOs.
One of the more curious items that caught our attention was the
up-and-coming "pizza IPO". A Luxembourg firm controlled by an Israeli
company, that owns the Domino Pizza franchise in Switzerland,
Lichtenstein and Luxembourg, indicated that it wants to float stock
on London's Alternative Investment Market. While there is nothing
objectionable about a pizza IPO, Israelis well recall Domino Pizza,
that expired and declared bankruptcy after a few years of operation
in Israel. Have the owners of the Domino Pizza franchise learned
something in Israel? It is quite unlikely because the owners are not
expert restaurateurs, but diamond merchants.
"Why London?, a reporter asked. "We considered others stock
exchanges but ultimately chose London, partly because of easier terms
there for foreign companies," the entrepreneurs explained. Should
Domino Pizza trade at a premium or a "pop" as it is known, it will be
a sure sign that values are being forsaken.
Should the "exuberant enthusiasm" for new issues mushroom over the
next year to 18 months we will know that we will be experiencing a
bubble.
A stock market bubble is a type of economic bubble taking place in
stock markets, in which a wave of public enthusiasm,evolving into
herd behavior, causes an exaggerated bull market. When such a bubble
takes place, market prices rise dramatically, making the listed
stocks significantly overvalued. Generally, stock market bubbles are
followed by stock market crashes.