Salient excerpts from a recent OTC Journal Newsletter:
. . .2000, the worst year in NASDAQ history. . .ended the year down 39%. . .the worst performance in the 29 year history of the NASDAQ system.
. . .the 39% decline doesn't begin to tell the story. . .hundreds of NASDAQ stocks are trading at 5% to 10% of their March highs. Many of these stocks will bounce, but the excessive valuations. . .will never return. Investors in individual stocks have had their portfolios decimated. The destruction is so wide spread that we really have to start over. The bar has been lowered to the point where we have to throw all pre-2001 speculative ideas out the window and start fresh. Some of the microcap companies. . .will come back and have a good year.
We have been in a bull market since the first stock trade on the London Stock Exchange in 1830. Stocks have spent a lot more time in the last 170 years going up than going down. Common sense tells us to expect a better year in 2001 than 2000. It can't be the worst year in history a second year in a row. Stocks have already been priced for a full blown recession in the technology sector. The perception that we aren't going to have a recession should help us turn back up. . .It is estimated there is nearly $3 Trillion sitting on the sidelines waiting to get back into stocks.
Stock performance is the life blood of Wall Street. Major Investment Banking firms don't make money off the small trades from individual investors. Goldman Sachs, Soloman Smith-Barney, Merrill Lynch, and all the other major names make their real money off their Investment
banking business. With IPOs at a stand still, and merger and acquisition activity curtailed, the major firms are not making money. The powers at be on Wall Street will not allow this environment to continue much longer. There is too much money at stake.
The Investment Banking industry is intimately tied to the general health of the stock market. The patient has been very sick for the last nine months, but the healing process will begin soon, and Investment Banking firms will once again make their billions off IPOs and the stock options they get for structuring deals.
We have lived thorough a brutal shake out. All the weak hands have been blown out. Market Makers own our stocks at ridiculously low prices, and they intend to sell them at much higher prices. While the market has reset its own bar on stock pricing, companies are also resetting the bar on their financial performance. Every day there are more earnings warnings coming out of growth stocks.
Public companies care about their stock price for three main reasons:
1. A good valuation makes it easier to raise capital for expansion.
2. Employees are easier to recruit and keep when the Employee Stock Option program is healthy.
3. Insiders prefer higher valuations when liquidating positions.
The environment for stock valuations has been abysmal for the last four months. Most companies understand the cycles and take the opportunity to lower their own performance bar. They know there is no hope for their stock to trade well, so they ramp down the markets expectations for their performance over the next quarter so they can easily beat expectations in ensuing months when the market will reward them. They also take as many accounting write downs as possible to enhance financial performance in future quarters.
Therefore, looking down the road, companies will begin outperforming the newly lowered expectations in the coming quarters, which should bring back a healthy environment for stocks.
The Problem With Analysts
Most Wall Street Analysts are considered a joke by serious traders. Analysts are reactive to events and don't take stock pricing into account. They lower ratings when a company's business appears to get worse, and raise ratings when it gets better. They fail to take the stock's price, which is already way ahead of them, into account. Analysts were falling all over themselves to find reasons that Internet stocks could keep going up in March. Today there are downgrades coming out regularly from these same Wall Street analysts. They don't take into account that a worst case scenario has already been priced into stocks. They fail to understand that the market was six months ahead of them. In this environment when stocks are cheap analysts should be looking for reasons to raise ratings. As far a we are concerned the multiple analyst downgrades coming from Wall Street every day are good indicator that the bottom is in site. The analyst always throw in the towel
just when things turn back up. They have totally capitulated, and that is a good sign for the markets.
The table is set for the bull to return. . .Investors will return and markets will improve. The market will eventually give you back the money you lost in 2000.
Rich |
