BEING STREET SMART
by Sy Harding
THE WORST YEAR SINCE THE 1970s. Dec. 22, 2000
Barring a miracle recovery next week, history books will forever show that the
1990s produced the most spectacular bull market of the previous century, while
the new century began with one of the worst years for stock market investors
in a generation.
Not in the blue-chip stocks. At their worst levels so far this year, the Dow
and S&P 500 have been down only 14%. That isn't even as serious as their 19%
correction in 1998, is well short of the 20% minimum decline that defines an
official bear market, and nowhere near the 49% average decline of the Dow in
the ten worst bear markets of the last hundred years.
However, modern day investors have not been invested in the blue chips. Their
interest has been almost solely in the excitement of the Nasdaq, what used to
be - and will probably go back to being - considered the home of high-risk
speculative stocks.
And unfortunately the Nasdaq has suffered by far its worst decline in its
history this year, certainly a bear market, down 54% from its March peak. The
Goldman Sachs Internet Index has lost 80% of its value. To put that in
perspective, a sector that loses 54% of its value needs a rally of 117% just
to get back to even. A sector that loses 80% of its value needs a rally of
500% to get back to even.
It wasn't just the little guy, the so-called uninformed investor, enticed into
buying overvalued 'story stocks' on margin, that produced the bubble in the
tech sector. And it isn't just the little guy that has taken a bath in the
bursting of the bubble.
Famed hedge-fund managers, including George Soros, suffered $billion losses.
Many closed down their operations. Even the holdings of Warren Buffet,
arguably the most successful investor ever, were down 50% before beginning to
recover. And of course we're all worried about how Bill Gates will even be
able to buy Christmas gifts this year, given that his stock market holdings
are down $40 billion or so.
But some of the biggest stock market losses have been incurred by the very
corporations that make up the tech sector, whose management teams should have
known far more about their company's value, and that of their competitors,
than any outsider could ever hope to know.
I'm talking of course about those huge stock buybacks of their own stocks that
major corporations made as the market approached its peak. Normally, companies
issue (sell) more stock as the market becomes overvalued, taking advantage of
their stock's high price. They usually engage in stock buy-backs at market
lows, after serious corrections have made their stocks available at bargain
prices. This time around many corporations seem to have forgotten that
strategy, sucked in by the unusual endurance of the rising bull market.
Victims of believing their own hype that the bull market could last forever?
We're just now finding out how badly timed those corporate stock buybacks
were, as many corporations suffer the same kind of severe punishment in the
market decline as individual investors.
For instance, recent data shows that Hewlett-Packard bought back some 128
million of its own shares near their peak in price, and lost - are you sitting
down- $3.7 billion on those shares in the stock's subsequent plunge this year.
H-P had plenty of company. Among other big losers;
AT&T lost $2.4 billion on the shares it bought back near their highs. Cendant
lost $1.7 billion. IBM lost $3.7 billion. Microsoft lost $2.7 billion. The
list is quite extensive. The total losses so far for corporate America, from
its frenzy to buy its own stocks near the market's peak, exceed $200 billion.
That's a significant portion of the $1.2 trillion of stock market value that
has been wiped out.
To make matters worse, corporations showed no more street smarts than the man
in the street they criticize for making stock purchases on margin or other
debt. Many corporations racked up sizable amounts of corporate debt to finance
the purchases, debt that remains owed on the books even though much of the
stock value that the debt purchased disappeared in the tech sector crash.
It's small consolation for investors, who by hindsight realize they bought
into the tech sector craze at its highs of unrealistic valuations, but
corporations who should know a lot more about their company's products and
prospects than any outsider could hope to know, followed the same pattern.
Meanwhile, although the Grinch stole Christmas, and much of the year as far as
investors are concerned, the Nasdaq seems now to be as oversold as it was
overbought last March. So we continue to watch the same technical indicators
that told us to sell the Nasdaq short in February, looking for a potential buy
signal that could produce a significant bear-market rally for the Nasdaq. Just
a normal retracement of 50% of its six month decline would produce a 50% rise.
But for now, it's time to enjoy - Happy Holidays!
Sy Harding is president of Asset Management Research Corp., in Meredith, NH,
publisher of The Street Smart Report Online at www.streetsmartreport.com and
author of Riding The Bear - How To Prosper In the Coming Bear Market. |
