Sunday, December 26, 2010

Time to Party Like It's 1999?


I saw in the Financial Times the other day that the market value of companies like Facebook and Twitter have soared in the last few months.

Based on transactions in the private market (since the company is not publicly traded), the value of Facebook has jumped by almost +50% since the summer. Facebook is now apparently valued at $41 billion, even though its total revenue for the past year was around $2 billion.

Now, I am a huge fan (and believer) in the future potential of social media, but reading stories like this give me a gnawing feeling that I've seen this movie before. Remember 1999, when technology stocks were all the rage? Cisco was even supposed to become the first company worth $1 trillion (today the company is worth about 2/3 less than it was valued 10 years ago).

I hope we're not going down this path again, but there seems to be an awful lot of optimism about stocks among the Wall Street community (even though Main Street does not share these same sentiments). Valuations are much more reasonable than 1999, of course, so perhaps the market will be OK, but with the S&P up +20% since early September (thank you Ben Bernanke and QE2) we could be setting ourselves up for a more rocky year in 2011 than many are anticipating.

There was an article in this morning's New York Times talking about this growing optimism; here's an excerpt from Paul Lim's column:

INDEED, some market strategists worry that investor optimism itself may be a headwind to another strong year for the market. Consider how stocks performed in other recent periods of optimism. In October 2007, a survey by the American Association of Individual Investors found that 55 percent of investors were bullish; in the 12 months that followed, the S.& P. 500 fell 37 percent. Similarly, in March 2000, investor bullishness reached 66 percent. And a year after the fact, stocks were down 25 percent.

It just goes to show that by the time the market thoroughly convinces investors to be optimistic, most of the good news is already behind us.


Stock Market Optimism May Be a Red Flag for 2011 - NYTimes.com