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Bill Freehling is a business writer for The Free Lance-Star and Fredericksburg.com. This blog is on Fredericksburg-area business. Send an e-mail to Bill Freehling.
Housing bubble wasn’t first to burst, won’t be last
IN TIMES like these when an economic bubble has burst and pundits are forecasting doom ahead, it’s reassuring to know the U.S. has been here before–and survived.
That was my thought after recently reading Roger Low-enstein’s "Origins of the Crash"–a book published in 2004 that tells the tale of the late-1990s stock bubble.
Like the recent housing bubble, the mania for stocks in the late 1990s was fueled by years of price increases and a belief that more gains lay ahead. In the midst of both bubbles, people lost sight of economic realities. Only afterward was it obvious that prices got too high.
In each case, it wasn’t until the good times ended that people called for government intervention and reform to prevent another bubble. That seems to works until the next bubble forms, when people again call for government to step aside and let markets take their course.
The story of the stock boom of the late 1990s–which is now remembered more for the downfall of the dot-coms and the disgraced companies such as Enron–is well-known to many readers of the business pages:
- Technology stocks with no real earnings streams or viable business models soared in value, surpassing "old economy" companies that were still highly lucrative but no longer of interest to investors not content with slow and steady returns.
- Corporate executives paid more attention to stock prices than running the business. Their auditors helped them smooth over problems to boost earnings reports, and analysts declined to closely examine the reality.
- Chief executives were vastly overpaid, and they further cashed in with stock options. Government overseers were given no real power to effect reform, as too many people were making money to call for change.
So what are the lessons that can be learned from "Origins of the Crash"? It seems there are several:
- Investors like to see steadily growing earnings, but in reality, business growth can be choppy. In the 1990s, companies took extreme liberties with accounting laws to make earnings consistently grow and match Wall Street expectations. But you can’t hide reality forever.
- Trust management that seems more concerned with building long-term value than those concerned with short-term stock movements. It also helps to see management that has "some skin in the game"–specifically equity ownership.
- Don’t get swept away by "the next big thing." Warren Buffett hasn’t become a multi-billionaire by foreseeing the next trend that transforms the world. Rather, he focuses on companies with long track records of success and honest management.
After the brutal stock crashes of 2000-2002, stocks came roaring back this decade (although the Nasdaq is still less than half of its peaks in 2000).
It’s too early to say how this situation will play out. But it’s nice to know that the economy has recovered before, and likely will again.
Companies continue to spend more money buying back stock than they do on dividends, according to a recent article in Barron’s.
Companies in the Standard & Poor’s 500 bought back a record $589 billion in stock last year, more than double the $246 billion they spent on cash dividends.
The "buyback boom" began in the fourth quarter of 2004, Barron’s says. In the 13 quarters since then, S&P 500 companies have spent $1.44 trillion on repurchases and $721 billion on dividends.
Buybacks can be a good thing if the stock is undervalued. They’re also sometimes preferred by investors in taxable accounts who seek long-term capital gains rather than income.
But for income-seekers, the trend could be problematic. There are still companies out there offering dividend yields of 4 percent to 5 percent, however, for people seeking quarterly cash payments.