Hi-tech share plunge signals danger on Wall St

The week-long free-fall in US hi-tech shares came to a temporary halt yesterday when the technology-dominated Nasdaq index inched up eight points to 1,175 after six days of steep decline.

Yet a growing number of analysts see the recent dive on Nasdaq - down more than 7 per cent from its peak two weeks ago - as a harbinger of a serious setback on Wall Street.

They were joined yesterday by the giant Swiss investment bank UBS. The analyst Gail Dudack said in a new report that parallels between the market now and November 1983 to July 1984 when Wall Street fell 16 per cent had become "numerous and disturbing".

The Dow Jones index has climbed nearly 11 per cent so far this year. Its only setbacks have followed figures showing faster-than-expected job creation this year, which raised fears the Federal Reserve might start to raise interest rates. However, classic indicators of excessively high share price levels are flashing not just amber but red lights.

One is the ratio of bond-to-equity dividend yields, close to its 1987 pre-crash peak at 3.3. If there are further rises in bond yields triggered by the first Fed increase in interest rates or new inflation fears, share prices could tumble.

The optimistic case is that bond yields could fall if the economy turns out weaker than the markets currently expect, which would reduce the yield ratio from present danger levels.

So far, the optimistic view has prevailed. The latest Merrill Lynch survey of US fund managers showed a sharp fall since March in the proportion of investors who expected the economy to pick up, and consequently a sharp rise in the proportion planning to invest in bonds. Yet a range of other indicators suggest that US shares are near their peak, according to the new UBS report.

New issues have been running at record levels this year. According to Securities Data, which tracks "initial public offerings", they raised $15.8bn in the second quarter of this year, or about twice the annual rate set in the previous record year of 1993.

Many of this year's flotations are hi-tech stocks, making the parallel with 1983 striking. That was a boom year for bio-tech issues - of which only a handful, including Chiron and Amgen, remain as listed companies. Small technology stocks bore the brunt of the 1983/84 correction.

A further similarity is that both 1983 and 1996 have seen huge surges of investment in the stock market through mutual funds. Their net investment in US equities has amounted to $290bn at an annual rate so far this year.

That means American investors are running down their cash holdings, relative to total savings, to a record low of 31 per cent, according to Ms Dudack.

There are signs that the mutual fund inflow may be slowing, however. The May figure was $18bn, down from last December's $25.4bn.

The other key warning signal, she argues, is the growth in margin debt - or borrowing against the security of other assets to buy shares. It has reached an all-time high, and could prove a problem once share prices do start falling. If other shares have been used as securities, investors will be asked to put up more money.

Comment, page 17

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