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$3 trillion and Ancient History



This article in the NYT yesterday - on the resurgence of Internet analysts - is important for a number of subtle reasons.

"...happy days are here again" proclaims the article in a tone that is seemingly half enthusiastic half cautious. The piece goes on to discuss the re-emergence of the Internet analyst as a notable and important influence again within their own brokerage firms and within large buy-side shops who own the shares of internet companies. The reporter goes on to detail some of the changes - regulatory and compliance - that have changed the working environment for analysts generally but the most important part of the article is not what it says but what it means.

Speaking of Goldman's Internet analyst, Anthony Noto, the Times article says: "Mr. Noto has cultivated ties with perhaps the most influential investor in Internet and media stocks, Gordon Crawford of Capital Research and Management, who calls him "the most effective large-cap Internet analyst on Wall Street." Asked about Mr. Noto's past support for companies like eToys and Webvan, Mr. Crawford said, "That's ancient history."

Let's review for perspective's sake: the Nasdaq's rise in 2000 capped the single most extreme financial asset bubble that recorded economic history has ever known. Ever. You would not be remiss to assume that the resulting 83.5% decline in the NDX in the ensuing 2 years (and certainly much more in Internet-specific indices) would have produced the type of fear that would, well, linger. After all, the destruction of $3 trillion in equity wealth really is non-trivial.

The great depression created an entire generation of Americans that were loath to even use savings banks as a store for their wealth. But the technology bubble of 2000 and the ensuing crash? Merely two years hence it has produced an embrace of the same type of speculation that gave rise to the bubble in the first place. Only this time, apparently, it is a more narrow list of beneficiaries: a few Internet analysts and a few "safe" companies like Google (GOOG:NASD), eBay (EBAY:NASD), Yahoo! (YHOO:NASD), and Amazon (AMZN:NASD). Call it an 'echo' bubble.

The most important aspect of the article is the phoenix-like rise that speculation and risk have undertaken and the apparent dismissal of history's lessons: "That's ancient history" according to one of the largest and most influential mutual fund portfolio managers in the business. Remarkable. No; incredible.

That the sell-side has embraced this group once more is interesting but perhaps not seminal; brokerage firms need commissions to stay in business and they need information flow on stocks that are going up to get them. That the most well-trained, experienced buy-side portfolio managers have embraced it is seminal. Yes they need performance (alpha) to keep and attract assets, and the Internet stocks have been going up aggressively from the October 2002 lows. But they (or perhaps more specifically, their clients) suffered an unspeakable decline in wealth only recently pursuing the same type of risky strategy. Again, seminal.

And that the New York Times has found this story important enough to publish in its technology section speaks to the fullness of the entire trend itself. It's always popular media outlets that embrace the trend last. And as a result, this NYT article might be much more important for what it means than for what it says.

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