Tuesday, August 2, 2011

More troubling financial news: Is another dot-com bubble about to burst?


QUOTE: "Yet, given the anemic U.S. economy, investors are throwing caution to the wind. "All investors are desperate for growth right now," says Daley. "Companies like Facebook get to set the terms on which they raise money in private transactions. Investors are willing to take on more and more risk to find growth." One measure of the frenzy: Investors are paying astronomical share prices for these Internet stocks relative to their earnings, known as price-earnings ratio, or P-E. For example, LinkedIn's share price is $104.05, while it logged yearly profit of 9 cents a share, yielding a sky-high P-E of 1,196. … That compares with an average P-E of 14.2 for the S&P 500."

Why does your good buddy Chip think this matters?  Simple....  The early 2000s saw a recession because of that era's dot-com burst.  Which means, if something similar happens these days (which seems very possible as dot-coms seem heavily dependent on familys' using discretionary income for their products) that would create a whole different recession issue in addition to the problems the economy faces today.  As I mentioned in my last post here on the blog, can you say "perfect storm"?  Of course, there is a contrary viewpoint that says this is nothing like the 2000 dot-com collapse, but the author's support for their viewpoint seems lacking for some reason.  

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