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Nasdaq Bubble Essay

846 words - 4 pages


The Nasdaq index was first compiled in 1971; before then, there was no formal measure of growth stocks, although some economists used the Wiesenberger growth funds as a proxy index. Yet while there were some excesses in growth stocks, their rise and fall had not been much different from the S&P 500 index, as shown in the figure 17.12 until the 1999-2000 period, when the Nasdaq index rose so much that many growth stock valuations really did take on tulip bulb characteristics.

The foundation for the high-tech bubble was laid in late 1995, when Netscape went public, raising approximately $ 2 billion in its IPO and making Jim Clark the first internet ...view middle of the document...

Yet investors continued to ask for more.

At least in retrospect, some investors said they knew the market was ready for a downturn on March 3, 2001, when Palm Pilot, a spinoff 3Com, rose to a record high of $ 95 per share on the opening day of its IPO. 3Com had said it would spinoff 1.5 PALM pilot shares for each share of 3Com, so even if the rest of the company was entirely worthless, the price of palm should not have been higher than two-thirds of the closing price of 3Com that day, which was $ 81.81. But obviously palm was worth a lot less than $ 54.54 unless you really believed the rest of the company was worthless at that point, Short sellers could have purchased the rest of 3Com at a price of - $ 63 per share that day, yet the negative value was not erased for more than two months. Eventually, of course, the price of palm shares dropped substantially, in early 2002 they were selling for about $ 1 per share. The point is that even arbitrageurs, who could have made a killing by acting on the absurd difference in the share price of these two companies, failed to move. It was at this point that a few traders began to realize that a major selloff seemed almost inevitable - although they did not say so for several more months.

In terms of its magnitude, the Nasdaq bubble is comparable to the great bull market of the late 1920s and the...

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