I Death of the New Economy At the peak of the 1990-2000 bull market, the so-called new economy was touted as both invincible and eternal. Stocks that represented the old economy were uninviting, unexciting, and rarely recommended. While traders and investors were being advised to buy worthless stocks like Broadvision (BVSN) at $90 a share, they were advised to forget about old economy stocks that had no sex appeal, such as H. J. Heinz (HNZ) that was trading in the $43 per share range and actually paid a dividend. In addition, stocks like Philip Morris Companies (MO) (trading at $32 a share) also offered little promise for the future. The chart in Figure 1.1 shows how BVSN enjoyed a spectacular ride up and how it has crashed since the stock market top in 2000. Yet several years later, BVSN traded below $1 a share and MO had risen to $56 and HNZ maintained its price in the $41 a share range. Investors sadly accepted the fact that the new economy was moribund while the old economy was alive and "kicking." What to do? I Solutions and Salvation Marketing and repackaging are the lifeblood of capitalist economies. We have become experts at reinventing the same products repeatedly and selling them as new. We have become proficient at planned obsolescence. For many years the securities industry provided a vital service to investors by serving as the intermediary between buyers and sellers of securities; and commissions were paid to brokers as part of the agreement. As the brokerage industry became more competitive and the cost of clearing trades decreased as a result of electronic order executions, commissions declined, forcing brokers to seek new avenues of income aside from the monies earned on "float" income (i.e., income derived on short-term interest from free reserves in customer accounts). The futures industry suffered a similar malaise in the late 1990s and early 2000s. Specifically, commissions were more competitive and interest rates were low, thereby lowering float income. Electronic trading lowered costs but also lowered commissions. Clearly, what was needed in both the futures and the securities industries was a new vehicle, a new instrument, a new game that traders and investors could play. The time was optimal for the introduction of SSFs. I How Futures Survived While Stocks Crashed Another positive aspect of the new SSF market was the relative stability of the futures markets, even though stocks declined sharply from their year 2000 highs. Stocks such as BVSN lost more than 90 percent of their value from their 2000 highs; futures markets, on the other hand, didn't suffer similar declines. In fact, the declines in futures on a price percentage basis were tame compared with the declines in many stocks. The old argument that futures were riskier than stocks no longer held water. Several years of extreme volatility devastated many stocks, but the futures markets, although lower as well in many cases, maintained their strength without the same severe declines that afflicted speculative stocks. Perhaps the main reason for the comparative strength in futures prices was the fact that these markets actually represented something. In other words, corn futures are a tangible item. Stocks, on the other hand, are pieces of paper that can easily become worthless. Corn, soybeans, and other commodities cannot declare bankruptcy as corporations can. There is a logical, and often reasonable, limit to commodity prices' downside risk, particularly in the agricultural, metal, and tropical futures markets. Furthermore, some commodity markets—gold, for example— moved higher as stocks moved lower. While stocks declined in 2001 and 2002, gold prices rallied from about $255 in early 2001 to a high of about $329 in mid-2002. Gold rallied as stocks dropped, fulfilling its traditional role as a hedge against economic uncertainty. stock symbol ~ money maker |