In the late ’90s, my father worked for a rising tech software company started by two MIT graduates in 1989. By the time the tech bubble was in full swing, it was poised to take over the world.

The financial media lavished praise on this firm, calling it “the next Oracle.” Likewise, the CEO who was in his early 30s, was featured in newspapers, financial magazines, and interviews on television.

Dad was crushing it at work. He travelled nearly every week on business, Monday through Friday. He learned new programming languages, worked long hours… but it was all worth it. The company was bringing in loads of new business, reportedly doubling revenue every year for six years straight before going public in 1998.

Dad was asked about his company frequently. Now, being raised on a farm, he wasn’t one to brag. But the truth is, Dad was doing well. Very well. And he wasn’t alone.
The pay was good, there were stock options, bonuses, company cruises… you name it. We were all proud of him.

Remember the story about the janitor at Microsoft who became a millionaire thanks to the soaring stock? It was close to that level of classic American dream-stuff. In fact, some of Dad’s colleagues who had been with the company longer than him were retiring in their 40s and 50s, all thanks to the newly public company.

Life was so good, in fact, that my mother took two years off from being a teacher to raise my younger brother.

“I was a multi-millionaire,” Dad said with a chuckle. “On paper.”

You can probably guess where I’m going with this story.

Then one day, the company announced that it was restating earnings for the previous two fiscal years. If you’ve been around the market for a minute, then you know that’s a big deal.

The issue was the way the company was reporting revenue from major long-term deals it had signed. Not to mention the timing of those deals, which critics accused of being “convenient” enough to be reported last-minute, but in time for the company to meet analyst expectations for the quarter. This triggered an audit review, then the SEC stepped in, and civil litigation ensued.

From CNN Money:

“The little-known Vienna, Va.-based company, which has seen its stock shoot up thousands of percent over the past year, said it will report a 1999 loss instead of a profit, and also will revise 1998 results downward after changing the way it reports software revenue from service contracts.

The move comes three months after the U.S. Securities and Exchange Commission, concerned that some companies — particularly high-tech firms — are artificially boosting revenue in earnings statements, issued new guidelines for how revenue should be reported.”

The Aftermath

Evidence of criminal wrongdoing was never found. Charges were never brought. But the damage was done. Just take a look at this chart to see what I mean…

Just brutal. Absolutely brutal.

I doubt many readers will remember the name of this company today. And I hesitate to even mention it, for several reasons, although you can probably figure it out with a little bit of sleuthing on your own.

The truth is, there were (and are) probably a lot of good people working there. And, to my knowledge, what was happening with the accounting wasn’t all that uncommon during those go-go days of the tech bubble. It certainly wasn’t anything like the malfeasance that happened with Tyco, Enron or WorldCom, which led to the adoption of the Sarbanes-Oxley Act.

The point is, this was just one company among hundreds with stories like it. It’s not particularly special. It just so happens that, for a short time, my old man lived in a little corner of it all. (For his part, Dad made it out OK. Could’ve been one of those early retirees if the ride had lasted a little longer, but then again, it could’ve also ended up a lot worse.)

Ask Yourself: Does This Feel Like A Euphoric Market?

Remember those days? It was euphoric. It was magical. Back then, you couldn’t swing a dead cat in a cocktail party without hitting someone who was making a killing in the market. And they were doing it with Microsoft, Dell, Yahoo!, eBay, AOL — and a hundred other lesser-known companies, like where Dad worked.

They say the next crash never looks like the last one. That’s true. But to those who ask me if I think we’re in some sort of bubble, or whether we’re going to see a market crash or a recession, I usually offer this…

Any bursting bubble is usually preceded by a period of euphoria. And what’s happened with the market these past few years just doesn’t feel like that. Not even close.

This isn’t just my gut talking. Individual investor participation in this bull market has been anemic. The stats bear out what I’m saying here.

My sense is that most individual investors underestimate the sheer size and scope of the liquidity that’s been pumped into the market. It’ll take years to unwind.

Just look at the GDP growth numbers that were released today. Does 4.1% growth sound like the end of a bubble? Granted, that’ll be a hard number to repeat, but it would take a wild swing to go from a quarter like that to two consecutive quarters of negative growth (which would qualify as a recession).

As crazy as it sounds, it’s entirely possible that another two years or more could pass before a combination of rising interest rates and slowing GDP growth start to hurt the market in a big way. Combine this with the dire long-term fiscal picture of the U.S. debt beginning to become more of a strain in the next couple years, and it could get ugly. Just not right now.

— Brad Briggs

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Source: Street Authority