Thursday, July 23, 2009

The burst of the mini Nasdaq bubble

Looks like the mini tech bubble is about to burst. Let's take a quick look at Nasdaq.

A rally like this in an economy that is still in shock is just not sustainable. According to Bloomberg, Nasdaq trailing PE ratio is 32, and the estimated PE is 24. Yes, these are growth companies, but you are buying them at 24 times earnings! It's true, some corporations are overdue to upgrade their hardware and systems, and there seems to be an insatiable appetite for iPhones. But with unemployment approaching new highs, the type of growth that is built into the market is unrealistic.

This evening we saw the first signs of the bubble bursting with Microsoft's earnings results. From the NY Times:
On Thursday, the world’s largest software company reported its worst fiscal year since it initially sold stock to the public in 1986. Year-over-year revenue and full-year sales of Microsoft’s flagship Windows software dropped for the first time.
MSFT after the close

Amazon released earnings that are worse than expected as well. From LA Times: Inc. reported a decline in second-quarter profit and sales that missed estimates after discounts failed to spur as much growth as predicted. The stock dropped in late trading.
Tomorrow the market should get back to reality.

Disclosure: the author does not hold any positions in MSFT or AMZN

Also we would like to thank the reader from Deerfield, Illinois for their support.

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