Market Rap: What Can You Know, and When Can You Know It?
By Bill Fleckenstein
03/06/2002 17:27
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There's No Business Like No-Show Business: Last night, the markets around the globe were basically pretty quiet and shy of news. Today, the lot of newsmaking -- red journalism, as it were -- fell unhappily to data-storage maker McData MCDTA , which preannounced and then saw its stock drop a quick 25% in the early going. That had major ramifications for tech stocks because the company, in essence, said that IT spending stunk. They noted that in the fourth quarter, business was helped by government spending, and people who had budgets and were in the "use it or lose it" mode basically did. But now there's no business. They reported trouble in closing regular deals, and they said that bigger deals are being pushed out. Obviously, that has big implications for other companies. When you combine this with what Oracle ORCL said, it starts to become clear that a wave of preannouncements stands before us. At least that's my opinion. For instance, just to use these two data points and no others, it would appear that IBM IBM is quite vulnerable on top of the other issues swirling around that company.
Floss and Bifurcate Twice a Day: In any case, McData set the tone for the early going, in which the action was as bifurcated and as wild as any I've seen in a while. The market opened slightly negative, tried to rally up, and then sold off. But here, I'm really only describing the Nasdaq , which in the first hour was down about 1.5%, while the Dow was basically flat and the S&P was down only slightly. Then we had a ferocious rally that took the Nasdaq all the way back to unchanged on the day and powered the S&P and the Dow to 1% gains -- hence the bifurcation. While that was going on, the SOX was barely able to rally, though it did make some progress to the upside: After being down a quick 4% out of the blocks, it came around to being down 2%, as apparently a couple of people were trying not to connect the dots. Based on the aforementioned information, nothing would be more vulnerable than the chip sector, particularly given the run it's had.
Mister Market Wears Beige Serge Suit: After the early morning surge, the market flopped and chopped in a rather wide range until the Beige Book was released. That seemed to launch another flurry to the upside, which basically established the prices you see in the box scores. The market did have a little dip at the end, but not enough to really matter. For once, all the big indices more or less tied, up about 1.5%, though the biggest mover top to bottom was the Nasdaq. It was interesting to see that the SOX was never able to turn green today, but I'm not so sure that makes much difference, because I'm sure what we hear from Intel and how the market decides to respond will determine the direction for that wild beast. The American Stock Exchange Biotech Index took its turn as the leader today, up about 5%, followed by the bank stock index, up a little better than 2%. It's also worth noting that retail stocks were under pressure again. Even better-than-expected results from retail darling Kohl's KSS could not inspire that sector today.
Hear Ye!: Tomorrow, we get to hear from Easy Al, the kiddies' pal, when he talks to the Senate. And then tomorrow night, we'll hear from Sun SUNW and Intel INTC . In honor of King Alan's testimony tomorrow, I plan to take a few paragraphs to reprise his performance and the dangers I believe he poses. That's for the benefit of new readers.
Black-and-Blue Greenback: Away from stocks, the metals were slightly lower, fixed income also was slightly lower (as measured by the 10-year note) and the dollar was roughed up, both against the yen and the euro.
O'Neill Marches To Mendelssohn Recessional: I would like to take a moment to talk about the present and the future. Right now, there seems to be quite a good deal of unanimity on Wall Street, in the economics profession and among government leaders that the recession is over and boom times are ahead. Yesterday, in fact, O'Neill was reported as saying that we didn't have a recession last year and things are on solid ground. On the other hand, it seems that corporate chieftains, by the way they're controlling their budgets and slashing payrolls, don't believe that. So, I reiterate the point made last week: Watch what they do, not what they say. It's fine for Wall Street and politicians to do a whole lot of arm waving about how wonderful the future is, but business is not putting its money on the line.
Bears Scale Point Lookout: In any case, if one cannot know the present too clearly, it's even more difficult to know the future. What we as investors have to do is try to make our best guess about where we think we are and where we think we're going. Along that line, what is useful to do is to read opinions and analyses from lots of different sources, and attach more weight to people who've made good decisions over their career rather than to one-decision wonders. There are a lot of people out there who were born on third base and think they hit triples. I tend to not put much credence in what they say. All one has to do is to think back to the Internet insanity that held sway at the height of the mania, and all the prognostications by a lot of those people who were on third base to see that even when one seems certain of where one is, that doesn't often happen to be the case. Many of us never believed in the existence of a "new era" or the Internet Revolution as it was articulated, and we looked stupid while saying so. There is a lesson here, which is that one can be correct about where things are going and still look off-side for a time. I bring all this up because I think we are at a very important juncture, in which most people seem to think everything is going to be wonderful, but other smart people don't believe that to be the case.
Tisch Declares End to Entitlement Search: On that subject, Larry Tisch, one of my heroes, was interviewed on Bloomberg today, and I wanted to share a few of his thoughts. He was profiled in one of the first books I read on investing back in the early 1980s, John Train's The Money Masters , and I believe him to be one of the original "smart men of Wall Street," a man who has made countless great decisions over his career. In any case, the Bloomberg story quoted his opinion as follows: "After September 11, I thought anything you bought was OK. Now, everything you sell is OK." He was quoted in the story as "having doubts about the economy's reported recovery." (Parenthetically, I saw a wonderful interview with Michael Steinhardt not too long ago, and he too was circumspect about where this recovery is supposed to come from.) Then, in discussing the fallen angels of the tech world, he says that he is rather dubious about the prospects for Cisco CSCO as a stock, as it sits today priced at about 52 times earnings. He says that Cisco should be priced more like other cyclicals because it's a cyclical company: "Cyclical stocks historically have sold at low multiples of peak earnings. These so-called tech stocks sell at high multiples of peak earnings. They're just as cyclical as cyclical stocks of the past. Why are they entitled to crazy multiples?" This is a point I've made repeatedly in the past: The business of technology is the business of obsolescence and cyclicality, and as such, one should put a discount on good times, because they're not sustainable. Of course, Larry also underscored his belief that tech-stock earnings were overstated, something that I have droned on about nearly incessantly.
The Bubble Vs. the Bunting: Lastly, I want to share his dim view of the recent Nasdaq rally. He said he wouldn't be surprised to see the Nasdaq break 1000, and his wrap-up was: "I'm not saying it will, but I wouldn't be surprised." That's exactly how I feel about it. I wouldn't be surprised if it goes lower than that. But, of course, that doesn't mean it will. And, of course, all of us who are out here spouting opinions don't know what will happen. We just have our best guess, and what I try to do is to give you the road map I use. But that's why price is the all-important determinant, and that's the point I was trying to make on Monday: Since the future is so uncertain, the price you pay for an investment is a big determinant of what kind of margin of safety you have to protect yourself against these future uncertainties. And that is the problem with the market today, because even if the bulls are right and things do get better, stocks are still priced far too high if they're going to pencil out as businesses, as opposed to conceptual pieces of paper. In fact, if those of us who are dubious about the prospects for the economy coming back are correct, then stocks are really headed for trouble. That's my opinion as to what investing is all about -- trying to get the odds in your favor and securing some margin of safety in your investing, which is very, very difficult to do in today's marketplace.
R.S.V.P., Reciprocity: In addition to weighing opinions and analyses from people who have made multiple great decisions in their career, it's important to also use common sense. For instance, when I try to sort out all the crosscurrents, I say we had (arguably) the biggest mania in the history of the world, and that is supposed to be followed by a recession that is so mild that the Treasury secretary can claim it didn't happen? That to me makes no sense. Perhaps Mr. O'Neill is right. Perhaps what we've seen so far, which has been labeled a recession, is nothing relative to what we're about to see when things fail to unfold as people expect, which is my view. Am I right? We'll just have to see. But when I weigh the evidence, analyses and opinions being offered, I know that the people who I consider to be smart -- and I include Richard Russell in this camp -- are dubious about whether we can have much of a sustainable advance in stock prices or much of a rebound in the economy. One thing's for sure. Down the road, we'll know which view was correct.
Popping the Question One More Time: Turning lastly to the subject of pop-ups, which so many of you have emailed me about, it seems that a lot of people have used a piece of software called "Pop-Up Stopper," which can be had at www.panicware.com Due to the volume of inquiries, I am passing this along. I haven't tried this particular product, but other readers have and they say it's great. Give it a whirl. This will be the last I have to say on this subject. |
