Fleck...10/19/01
The Market Rap
William A. Fleckenstein
04:45 PM 10|19|2001
'Patriotism: The way I see it, if you lose your life fighting for the USA, that's patriotism. But if you lose your money in a bear market, that's just being a damn fool.' -- Richard Russell, 10/18/01
Last night, we had a host of earnings reports. Anybody with a gas mask was one step ahead of the game, since for the most part they all stank. The ones that were deemed to be better, a la Microsoft, were in my opinion not as good as they should have been. Microsoft has recently been running a rather strong-arm tactic on piracy crackdowns. Though I am sympathetic in principle, I still have to ask if the company is not taking advantage of its monopolistic muscle to be slightly more strong-armed than if it had real competition. A lot of people think that this is the case, between what Microsoft has done about piracy and the way it's changed its licensing plan going forward. That happens to be my view.
Licentious Behavior Along that line, for those of you who have not been following the proceedings, in today's Wall Street Journal there was a very good article by Rebecca Buckman called "Microsoft-Backed Piracy Crackdown Strikes Some As Heavy-Handed." (Registration required for a two-week trial.) In any case, the fact that this situation has been going on has increased software revenues for certain vendors. That was the point we were making yesterday regarding CDW Computer, and it also holds true for Tech Data, which reported better-than-expected earnings about a month ago.
Encountering Saturation, Not Pirates, On The High Seas To return to Microsoft, these circumstances should have made the revenues even better than they did, I think. That the CFO, John Connors, was rather downbeat about the company's entire fiscal year leaves me to believe that even Microsoft can see it's living on borrowed time. When saturation renders the underlying hardware business as bad as it is, even Microsoft becomes susceptible. This also relates to the point I was making about CDW Computer yesterday.
Shortening Can Be Fattening So, with Microsoft unable to rally the troops, just as most earnings have failed in this department, the market was under pressure in the early going. After the first couple of hours, the S&P and the Nasdaq were down about 1%, and the Dow was down about 0.5%. There were also problems in credit land, most especially for credit card issuer Providian. On the back of another earnings disappointment and the news that its CEO would be leaving, PVN was sawed in half, basically split two-for-one the hard way. Not so long ago, it was at $60, so its flight path now resembles an Internet stock collapse. Providian, by the way, was a favored stock of the shorts for all the reasons it's now come unwound. It took forever to unravel, but it has collapsed in no time, which is of course the way stocks go down. What's the lesson here? That often the stocks that turn the heads of the shorts are ones that people who only go long would be wise to stay away from, even if it does take a long time for the story to finally matter.
But Micron, What Big Jaws Of Defeat You Have After the initial sell-off, an attempt was made at a rally. That fell apart and we traded back down to the lows. But from there, the market managed to find its footing. Over the balance of the day, we basically had a straight-up grind that translated to the small gains you see in the box scores. The move from the lows was anything but tiny. The Nasdaq rose almost 50 points from the low tick to the high tick, or about 3%, and the requisite proportional gains took place in the other indices. The Sox, too, managed a pretty decent turnaround, traveling nearly 5% from its lows to its highs. Lead sled dog Micron refused to buckle under pressure, to close up 5% and hold onto its title "canary in the coalmine" in one fell swoop. All in all, the bulls managed to snatch victory from the jaws of defeat. We'll have to wait until next week to see if the market wants to have a bounce, or if today's action was purely a function of option expiration.
Away from stocks, it was rather quiet and everything had small ranges. The metals were fractionally higher. Fixed income was lower. The dollar was up against the yen and the euro, which dropped about 0.5%.
Topographical Virgins To reprise some thoughts on earnings, it's important to point out that the game of "let's look over the valley to the better numbers" -- which is what the dead fish try to play while the companies play "beat the number" -- is much harder to win when stocks are as expensive as they are today and psychology has changed. During the mania, when everyone believed in Santa Claus, it was possible to pretend that a company making $0.04 cents a year could have its stock trade at $100. But now, with people realizing that the world has become a dangerous place, it is far more difficult. This is true not just geo-politically but also from an employment and investment standpoint. About a year ago, people were talking about looking over the bad news as though it were a little ditch. My comment was that this little "ditch" was about to become the Grand Canyon, and then I amended that to a black hole.
Joanie Of Luminescent Arc I still feel that way. If you are going to own stocks in the face of uncertainty and turmoil, be sure that you are buying stocks that are in fact cheap relative to what the business is worth, not relative to where the stock traded in the mania. But I believe it's far too soon for this, which is why I continue to avoid trying to find stocks to buy. If there is one frustration I have in e-mails I get from time to time, it is that people keep asking me how come I won't jump in and buy them. I think it should be clear to any reader why I don't want to do that. I have no intention of following this path until I think that the risk/reward equation is skewed in the favor of the buyer, which in my opinion it certainly is not. Along these lines, in her morning piece Joanie penned a rather eloquent description of the place in which we find ourselves now. We have talked about a lot of these things in the past, but I think it's worth sharing her summation. From time to time, it's a good idea to review the bidding, so to speak. So, without further ado, here it is:
'First Stage Of The Dirty Work' "As a nation, we are laboring under tremendous stress, both psychologically and financially. Compounding this distress, we are simultaneously still trying to address the aftermath of a busted stock bubble (hereafter called 'Bubble 1'), which has now made overcapacity a household name. Courtesy of the most recent jobless and employment reports, we are now understanding that 'overcapacity' is not limited to things such as DRAMs and men's white Oxford-cloth business shirts. Nah. We are now about the business of correcting the 'overcapacity' of human beings in the workforce. (Read: We are now addressing the first stage of the dirty work that has to be done.) And this 'correction,' if you will, is emerging, while we are also getting evidence of a trend toward deflation."
Nobody Knows The Bubbles I've Seen "When you combine this deadly mixture of rising unemployment and declining asset values, you then have to address 'Bubble 2,' which is the credit kind. And honey, if you think that a busted stock market bubble was gut wrenching, you ain't seen nothin' yet. Indeed, we can marvel at those who easily dismiss lousy Q3 earnings as 'fully discounted,' or my favorite -- 'the trough.' Do they take the time to extrapolate earnings deterioration to the impact it has on, say, corporate debt? I don't think so. Because if they did, they would shudder at some of these results and hopefully would then have the presence of mind to look at the other side of the balance sheet once in a while."
Greenspan-Fried Minions Joanie continues: "Where were we, for example, when the telecoms were raising ungodly sums in the international debt markets at almost-punitive rates? Right. But this all has to be addressed. That Greenspan and his minions are still out there touting lower rates as a panacea is even more laughable if you sit down and think this whole mess through. And now here comes the job losses, piling up. While some celebrate job cuts as favorable in light of their impact to lower costs, how about we look at it another way? How about we consider that eventually, corporations are laying off each other's customers? Right. And then what? That starts us down a slippery slope. Bubble 2 is a clear and present danger. I don't like the macro signals we're getting, do you?"
'This Ball Game Hasn't Been Played Since The 1930s' "And what really gets my goat is when we get the comparisons. Like how thus and so transpired after the last six recessions, implying that we can expect the same this time around. Or how the stock markets were X percent higher after the nth Fed ease, historically. Historically? I'll give you historically. Anybody who compares today's complete syndrome to any events in recent history and makes calculations based on those comparisons has got rocks in his head. Simply put, this ball game hasn't been played since the 1930s. And just as a tease, how about we let the Newbies in on a little bit of that history? How about we tell 'em that it wasn't so much the actual crash itself of 1929 that hammered the Street? How about we let 'em know that it was the trading in the aftermath of the implosion that really did so much irreversible damage? It was so bad, as a matter of fact, that the 1929 peak wasn't seen again until 1954, if my memory serves me correctly. So we would be wise to do some research."
Cutting The Crap "That said, I guess we can shove the old 'six-to-nine-month lag rule of thumb vis-à-vis Fed rate cuts while we're at it, too, eh? Stocks are undervalued? If that is the case, then where is the M&A frenzy? See what I mean? Put your money where your mouth is, if you think that stocks are 'cheap.' Wanna own stocks? Fine. This is the first month of the quarter, so you can probably trade 'em okay, but do you have the conviction necessary to take a long-term stand right now? I always wonder why they called it an earnings 'trough.' Is it because of who eats there? See ya 'round. P.S.: I'm in a lousy mood today, as you can see. Today is the anniversary of you-know-what. Ugh." As always, Joanie, well said! |
