New-Era Chimera Goes Timber
The Market Rap
William A. Fleckenstein
06:15 PM 08|16|2001
The overnight markets played catch-up to our spanking yesterday. The Nikkei was down a couple of percent, and Hong Kong got roughed up as well. It's interesting to note that Japan has now surrendered almost all its gains from the night the BOJ changed its interest rate policy. Last night, our futures were also unable to do much of anything. They were under a bit of pressure as the casino opened this morning. Immediately, we had an attempt at a rally, followed by a sell-off, another rally, etc. In the early going, the net effect of this series was lower prices, with the S&P and the Nasdaq down about half a percent. A couple of hours later, the S&P was down about three quarters of a percent, and the Nasdaq was down about a percent and a half.
Once again, the Dow was the "port in the storm," down about half a percent, though in the early going, there was a good deal of motion as the bulls were trying to make a stand to turn the tape. Their efforts were somewhat hampered by more bad news. Ciena (CIEN) and Brocade (BRCD) lowered guidance, and their stocks were down over 40% and 20%, respectively. Thanks to their problems, the kinkies were under pressure. There was also news from the economic statistics du jour, but it is completely irrelevant, as is the case on most days, and not even worth discussing.
Fear Optional, Spin Compulsory The lows were seen at midday, with the Nasdaq down about 2% and the S&P down about 1%. From there we had a steady grind higher into the close, with the market finishing on its best levels of the day. All the major indices closed on the plus side. It looked to me as if there was a fair amount of short covering in the last couple of hours. Of course, tomorrow's options expiration may have had something to do with the afternoon's action. By and large, it was a rather uneventful day. There did seem to be a little fear building up this morning, before the market rescued itself this afternoon. Tonight we get results from Dell and a couple of chip companies. As always, the important thing will be spin, and the reaction to same. And of course, people will probably start breaking out the pom-poms in anticipation of next week's FOMC meeting.
Away from stocks, the dollar experienced a small bounce against most currencies. Basically, nothing happened in the metals, though silver was up a percent. Fixed income managed about a three-eighths of a point gain, as measured by the 10-year.
'The Late '90s Never Happened' In the mandatory reading department, today there was one of the best articles to come out of The Wall Street Journal's C section in quite some time: "Nasdaq Companies' Losses Erase Five Years of Profit," by Steve Liesman. (Registration required for a two-week trial.) Citing numbers from the investment-research company Multex, the writer says, "The companies currently listed on the market that symbolized the new economy haven't made a collective dime since the fall of 1995." He quotes Robert Barbera, chief economist at Hoenig & Co., who puts it another way: "What it means is that with the benefit of hindsight, the late '90s never happened." This is something that long-time Rap readers understand, and it's important that the Journal is finally catching on to the fact that there never was a new era, but rather a fantasy by the same name.
Intel Sired One-Time-Charge Bastards Now, to be intellectually honest, this is not a perfect comparison, because many of the losses that we're seeing are not operating profits. Of course, on the other hand, to continue to be intellectually honest, we have to remember that many of these very same companies were trying to include non-operating gains in their earnings during the mania. The lead sled dog on that score was none other than Intel. Also, many of these companies have persisted in writing off their costs and calling them one-time charges. As we have been saying, bastardization of the accounting rules has become a common practice.
'Pride Cometh Before A Fall' The article goes on to say, "The data show that the very companies whose technology products were supposed to boost productivity and help smooth out the business cycle by providing better information had been among the hardest hit in the economic slowdown. 'Management got caught up with how smart they were and completely forgot about the business cycle and competition,' says [Deutsche Bank Alex. Brown's Ed] Yardeni." Of course, that's because they all believed in the new era. Maybe this means that from now on, the words "new economy," "new era," etc. will be forever banished from the lexicon. The Journal itself was guilty of liberal usage of these terms.
If It Walks Like A Duck I'll repeat something I've said many times. There can never be a new era because human nature never changes. Every time people refer to one, you know for sure what's coming next -- mountains of trouble. I think we can expect more articles about the utter nonsense that passed for knowledge, as people run post-mortems on the post-bubble period. Then, maybe at some point, we can go back to reporting profits in the true sense of the word. By the way, will anybody who knows Easy Al or Mr. O'Neill please send the article along so that this intellectually challenged duo can be clued into what we're dealing with. I'll spring for the postage.
People Who Live In Glass Bubbles Shouldn't Borrow Against Them Meanwhile, in today's New York Times, there was a completely clueless story entitled "Housing May Rescue Economy from Wilting Wealth Effect," by Jonathan Fuerbringer. (Registration required.) It implies that people can avoid the bear market fallout via the housing market. The author doesn't understand that housing is just lagging the stock market, and that this sector, too, will take a beating. The article includes a couple of priceless observations from Al.com. In essence, he says that borrowing against rising housing prices is "not a worrisome long-term trend." The most mind-numbing observation, though, is this statement from the Fed chairman: "If unrealized capital gains were declining, which is of course what happens when you extract equity from homes, yes, it would be a problem." (The italics are mine.) Memo to Al: When housing prices sink, as they will, the same thing happens. It's the Peter Principle to the nth power.
In Your Dreams Finally, switching from clueless to clued-in, I'd like to share Joanie's succinct, humorous comments on the pro forma earnings so beloved by corporate America: "Pro forma results are kind of like when a chick walks into a dress shop and the clerk asks, 'What size, Madam?', and she says, 'A 3 fits (pro forma), but an 18 feels good (operating)."
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