The Grim Redemption Reaper
By James J. Cramer
3/12/01 6:34 PM ET
The problem is the funds. They are in redemption mode. Particularly the ones with too much tech. They have to sell and they are selling the Ciscos (CSCO:Nasdaq - news - boards) and the Qualcomms (QCOM:Nasdaq - news - boards) and the JDS Uniphases (JDSU:Nasdaq - news - boards) because they no longer have any earnings momentum. And they have no visibility.
That cycle of redemption decline makes it so that tech has to get ultra-cheap before it can bottom. This market reminds me very much of the post-1987 crash market, where people kept trying to bottom-fish and kept getting hammered. That said, it turned out to be a great buying opportunity for companies with big cash flow that could buy back stock and had pristine balance sheets. Those companies got thrown out with everything else.
Unfortunately, tech does not fit that pattern. And because of the redemptions, the stocks of these companies will continue to get whacked by the funds that own them. Let's just go over what happens in a redemption phase. Let's say you are at the Remarc Twenty fund. You are seeing big net outflows. You can't not sell. You have to return the capital. You have no choice. You can't tell people, "You are so wrong for selling." They don't believe you anymore. If a company has a stock owned by the Remarc Twenty fund, that stock is going to come back last if there is a rally. The redemptions aren't going to stop.
It is because of that vicious vortex that tech has to be avoided, not because tech is not the future. In other words, I continue to believe that technology can be a very important part of the future, but we are battling the Remarc Twenty problem right now.
Merck (MRK:NYSE - news - boards) and 3M (MMM:NYSE - news - boards) and Target (TGT:NYSE - news - boards) don't have that problem. They are not in bad hands (or in Firsthands, for that matter -- LOL). They stand to benefit when the Fed cuts (Merck less than the others). They are not immune to a market meltdown, but they can come back and come back faster than a stock in the redemption cycle.
How powerful is that cycle? Let's consider the best-acting stock in the Dow for two years running: Philip Morris (MO:NYSE - news - boards). This stock was owned by every value manager. As the withdrawals piled up on these folks, they kept selling and selling. It wasn't until the whole market swung toward defensive stocks a year ago this month that things finally lifted. At $17 -- where the stock yielded 10%.
Understand the pain. Understand how low things can go. And remember, we aren't there yet. Again, I refer you to my SOX series (tomorrow featuring Intel). We simply aren't anywhere near where we have had a bottom before in those stocks. Sell some of those stocks. Take the proceeds and redeploy it in other more defensive sectors.We aren't done going down yet. We are just getting there. And this decline has pushed any tech recovery further out in time. Which is something that you don't want to have happen if you are hoping for a tech turnaround.
Random musings: The brokers are doing terribly too, here. Why hold them? Why buy more? Because they are cheap and have giant cash flow and have the flexibility to rein in costs in time to save their second-half earnings. And they benefit immensely from the Fed's cuts. They are wrong to sell.
I will be on CNBC's "Business Center" tonight at 7:30 p.m. talking about this same stuff. |
