The Stock Market Top, Two Years Later
March 10, 2000. You might not remember that date, but it marks the top of the Nasdaq and the beginning of the bear market. I don’t remember the date specifically, but I do remember the month.
I started my newsletter in January of that year and it consisted mainly of stock picks at the time. Not much commentary. I would run a scan every night and pick out 6-12 stocks to put into the newsletter as breakout picks. The next day they would move and often they would go up 30-50% in one day. It was crazy times.
The breakout mania lasted until March. Then almost every breakout became a false one. Even though the indices were moving higher insiders, the big money boys were selling like mad. Statistics showed one of the biggest jumps in insider selling in the history of the stock market. Even William Shatner sold off most of his Priceline stock that he got in return for being on TV and singing very badly. Remember that commercial? It was just as much an ad for the stock as it was for the company’s services.
I took the sign of breakout failure, the insider selling, deteriorating technicals(such as the advance decline line), and the double top in the market as a warning sign that the bull market was almost over. Then in April I said it was through, said you should get out, and began to short stocks. The market collapsed in chaos. Like so many of the Internut companies at the time, the CEO made a fortune, not by building a real business, but by selling stock.
But at the time people thought the market drop was just a temporary correction. On April 4, 2000 Broadcom trade at $204 a share(it trades now at $40). Infospace traded at $53.77(it’s now at $1.74). Exodus traded at $68.47(it went bankrupt and no longer trades). On that day though Frank Slattery of PBHG told Business Week, “it was the bargain of a lifetime for some of these stocks."
Within days the Nasdaq broke support and began one of its largest weekly point declines in history. But even that didn’t scare people. On April 10th the analysts got on TV again.
Abby Cohen of Goldman Sachs, said “the bull market doesn't end here....We think the economic and profit expansion will continue." Joe Battipagllia of Gruntal, told CNBC viewers, "[strong profits and low inflation] will provide the necessary basis for a recovery to new highs in U.S. financial markets." And finally Jeff Rubin of CIBC World Markets said, “Big deal. The Nasdaq has taken a bit of a hit, but what the Nasdaq is fundamentally about is the notion that the business cycle is dead. It's about the notion that North America is in a golden age of growth."
The market dropped hard and then bounced in the summer of 2000. The talking heads predicted a big economic boom to happen at the end of the year. Once August came the market slowly grinded higher. Maria Bartiromo said that everyone was on vacation and when they came back on labor day the market would take off. All of the “money on the sidelines” would come in.
But the last day of August spelled a market peak and that fall is when the stock market and the economy truly fell apart. A 3rd Quarter GDP showed a total collapse in capital spending. The economic downturn began.
People have been calling bottoms for the market and the economy since then. We all saw Greenspan say that the economy was on the road to recovery last week. He said the exact same thing a year ago. And so did Larry Kudlow.
But in the last few weeks we have seen the first real signs that there is a rebound in the economy and I’m not talking about the questionable employment numbers, but the manufacturer’s reports. However, it is too early to tell if this is the beginning of a real sustainable economic rebound or just a temporary bounce that followed the September terrorist attack and the pullback in consumer spending that immediately followed. And there is no sign of an increase in corporate investment spending that is needed to fuel a real recovery. In fact many companies are still announcing cutbacks in investment spending. Intel, for example.
We can’t really predict the future, as the records of so many have proven to us over and over again. All we can do is trade and invest with the trend of the market. For now that trend is up. But, just like with the economy, it is too early to tell if this is the start of a real sustainable change in the market or if this is just another bear market rally that will top out around the January highs and lead to a horrible crash in the summer.
One thing is clear though. If you want to be an investor you need to have a sound reasoning for making your investment decisions. You need to have a reason to buy stocks. And when it comes to tech stocks there still aren’t any reasons to invest in them. Fundamentally they are still overvalued and the big cap techs, such as Cisco, JDSU, GLW, ORCL, and INTC, are still in oversaturated sectors and are not about to return to the 20-30% growth days of yesteryear. And technically there is no need to buy them. They are still in either stage 4 declines or are in the beginning of a long stage 1 consolidation phase.
When you see people elsewhere tell you that it is time to invest in tech stocks they usually do so by telling you that the economy is going to boom and the market is going to go up. But you need more of a reason than that. You need a method: fundamental and/or technical analysis. The former must factor in valuation and the latter looks for stocks beginning real extended advances and trading above resistance. People investing in techs aren’t looking at either of these.
People looking to invest in mutual funds are better to look elsewhere for safety. Take a look at Russia. It is in the early stages of a bull market and the entire market has a P/E of around 8. They already went through their collapse and have done all of the right things to get out of it. Thanks to strong leadership it now has the fastest growing economy of any industrialized nation and is winning market share in the energy markets.
As for our market. This feels a lot like the summer of 2000. We’ve had a big decline and are now having a nice rally. At the same time EVERYONE is optimistic and thinks the economy is going to boom. Like, I’ve said time and time again though when everyone is thinking and doing the same thing that is not a good sign. Bull markets climb a wall of worry and right now everyone is sitting on top of the wall and looking at castles in the sky. That doesn’t mean this move can’t continue, but when it ends it will end badly. When the herd changes direction the exists aren’t big enough for everyone to go through.
I’ll do the same thing I did that summer. Participate in the rally by buying stocks breaking out of consolidation, while having a skeptical eye towards the future. We’ll see more signs of confirmation if the economy is going to boom. If not, or if the economy is going to get worse thanks to the debt levels and current account deficit we’ll see signs too. Watch the dollar and gold markets. If gold goes up again and the dollar drops watch out. As always we’ll leave the predictions and guesses for the sales people on TV. The market will tell us what is going to happen.
And as for the insiders they are still skeptical. A WSJ report on insider buying and selling shows that insider selling in the technology sector is outpacing insider buying by a 2:1 margin. Software, semiconductors, biotech, and home construction stocks are seeing the most insider selling. Intel and Yahoo are the selling leaders in the Nasdaq 100. If this is the great buying opportunity that everyone on TV says it is then one wonders why the insiders are still selling.
It will be an interesting couple of weeks. A rally to play with that will also give us an opportunity to find stock scams to bust. Like CHST, MEDC, and GENI.
There is new news on the GENI story. Readers from a year ago will recall that we, along with others, helped expose an ongoing stock market scam in this company that involved boiler rooms, arm dealers, and drug smugglers. The SEC suspended trading in the company and launched a formal investigation. The latest news:
HE'S BACK. AND THE FUR IS FLYING ; A US marketing company linked to Adnan Khashoggi is under investigation
Attempts by arms dealer and international playboy Adnan Khashoggi to build a marketing company traded on the Nasdaq exchange have been dealt a serious blow by US regulators. The Securities and Exchange Commission (SEC) has launched a formal investigation into Genesisintermedia and trading in its shares, which are suspended on Nasdaq.
Investigators are also looking at transactions that Mr Khashoggi and others made in the shares of the company. Mr Khashoggi's life reads like a thriller novel. He has been connected with numerous arms scandals, he is well known for having a lavish lifestyle and was once brother-in-law to Mohamed Al Fayed, of Harrods' fame.
A spokesperson for the SEC said it never discusses its investigations. But Robert Bleckman, a vice-president of Genesisintermedia, confirmed that the SEC and Nasdaq are investigating share trading in the company.
Mr Khashoggi's trading in Genesisintermedia's shares has been frequent and unusual, through a Bermuda-based company, Ultimmate Holdings. Of interest is any role his shares played in the collapse of MJK Clearing, a Minneapolis-based share trading company.
The cause of the collapse was a stock-loan transaction between MJK and an American-owned bank called Native Nations. The shares involved are thought to be in Genesisintermedia, which is owned by Mr Khashoggi. But a spokesperson for Native Nations said that the details could not be confirmed.
"Nasdaq has sought information relating to certain transactions, including transactions involving Ultimate Holdings and Native Nations Securities," said Mr Bleckman. "Nasdaq is looking at information that would give them an answer about whether or not Remy El Batrawi [the firm's chief executive] had a possible role in these transactions. The SEC has commenced a formal investigation into certain matters relating to the company and trading in its securities."
Mr El-Batrawi has resigned. Mr Bleckman said he had done so to spend time helping investigators with their enquiries.
The company is involved in direct marketing and advertising. It also has a wide range of products: a video based on the book Men are from Mars, Women are from Venus; home decorating equipment; a piece of fitness equipment called the "Ab Twister"; and "Stimulure", which is a fish-bait that "emits a scent fish can't resist".
Shares were suspended at $5.90 (pounds 4), although they reached a high of $18.77 in June.
Mr Bleckman said the future of the company was not threatened. "We believe our financial position will enable us to continue with our business concerns."
The company has sacked around 60 employees, 15 per cent of its workforce. It has a $100m credit line from financier Carl Icahn's Riverdale, but the money can only be used for acquisitions.
Mr Khashoggi could not be contacted to discuss the investigations, but there is no suggestion that he has acted improperly. |
