The bottom? Wait until most techs are under $3
When market cheerleaders proclaim the virtues of a $60 stock selling for half that, it’s hardly a bottom. When no one sees the value in much of anything, that’s a bottom.
By Bill Fleckenstein
moneycentral.msn.com
Post-Enron (ENRNQ, news, msgs) reform may be in the air, but the crosscurrents of chicanery remain strong. In this week's Contrarian Chronicles, I review an example dearly beloved of corporate America (the miracle of pension accounting), and a dearly beloved government employee who has not earned his high regard (Alan Greenspan). Next, it's on to the bull markets in bottom-calling, with a look at the gold and Japanese markets. Finally, it's back to our domestic techs, where I will urge you to be cautious about the poor fundamentals gussied up by marked-down shares.
Recently, Floyd Norris at The New York Times penned a wonderful article titled “Pension Folly: How Losses Become Profit,” which catalogs some of the shenanigans available to corporate America via the miracle of pension accounting. Here is my favorite quote, which will give you some idea of the magnitude of the problem: "A study by Milliman USA, a benefits consulting firm, found that in 2001, the reported results of 50 large companies included $54.4 billion of profits from pension fund investment. In fact, the pensions lost $35.8 billion from investments last year." So, on top of pro forma earnings, in which companies pretend to make money when they actually lose a ton, here's another case of loss masquerading as income in broad daylight.
Time to tear down the altar of Greenspan
Turning to cluelessness that masquerades in the form of a Fed chairman, I'd like to talk about a silly editorial in a recent edition of The Wall Street Journal. “Faltering Recovery or Surging Productivity,” by the Journal's editor and vice president, Robert Bartley, which praises Alan Greenspan for having done a great job, though adding that he needs some help in the form of supply-side stimulus. I have no objection to tax cuts, because the more money Washington doesn't have, the less it can misuse, but to say that Greenspan has performed brilliantly is absurd. If that were the case, why are we in this pickle? Of course, Bartley says, “Hey, if we didn't have much of a recession, we must have a strong economy. Look, after all, what we've endured.” That comment lands him firmly in the camp of one who falls off a tall building and halfway down thinks he can fly, so it's not so bad after all.
Speaking of miracles, he goes on to sing the praises of productivity in a statement that leaves out the distortions caused by the government's use of hedonic price adjustments (which overstate productivity by incorrectly assuming a falling price for “more efficient” computers), but does include fresh-produce images: "The surge in productivity even in recession means that the ‘new economy’ remains with us, that the fruits of technology investments have not been fully harvested. Of course the recession represented the end of, or at least a pause in, the big boom in IT investment. Yet despite the dot-com collapse, the surge in productivity shows that the investment did pay off in the macroeconomic sense."
There has been no “payoff,” except in the damage that the Fed and Alan Greenspan have wrought, and which we face going forward as a result of their actions. In any case, notwithstanding what may be contained within the pages of a major business newspaper, it's time for people to stop believing in the sanctity and “clairvoyance” of the Fed and Alan Greenspan, because focusing on the wrong issues will not solve our problems and will in fact exacerbate them.
Reflection in a bottomless pool
Notwithstanding the problems we face, an ingrained optimism (and a desire for a higher stock price) has led people in and out of corporate America to try to jumpstart the recovery by incessantly proclaiming a bottom. But since many fail to recognize what we need to see at a true bottom, I thought it would be worthwhile to share some thoughts on the subject. Ladies and gentlemen, what we see at a bottom is not enthusiasm and immediate recognition, but rather apathy, hatred and fear. A bottom, like a top, is an extremely low-probability event -- a point that I cannot emphasize enough.
A bottom can only happen once, and that is why it is an exercise in folly for anybody to spend an inordinate amount of time attempting to identify something that by definition is almost impossible to spot. For this reason, it's so critically important to try to lower one's risk via a fair price, based on the business. Investing is about managing risk and reward, not chasing pictures and concepts.
For a picture of what a market looks like when it actually may be bottoming (remembering, of course, that one can only know for sure with a good deal of hindsight), let's begin with gold and then move on to Japan. Just consider gold's lowly estate when it bottomed out at $250/$260. How many people were talking about it? Only now, with gold surpassing the $300 level, are people starting to consider that maybe the bear market is over and a bull market has begun. That's the way it really works. No startling epiphany or instant gratification when it's really time to step up to bat for a major bull move.
Panning for a pounce
That said, a review of the recent Commitment of Traders report released by the Commodity Futures Trading Commission shows that we could experience a setback in gold at any time now. If the buying that we have seen was sloppy enough, the setback will be uglier, although it should be noted that the last setback in gold, when it slipped briefly under $300, didn't last very long. Meantime, if a decent setback occurs, and if an obvious opportunity presents itself, I'll try to point it out (as I mentioned in my first column) for readers who might like to seize the chance to gain some exposure to gold or gold shares. In any case, what's important is to understand the mindset for when opportunities present themselves, as opposed to all the pseudo-opportunities that are constantly being proclaimed on Bubblevision. (Not that I know firsthand, because I never watch it, but I continually get e-mails from people who do.)
Turning to Japan, another area that brings thoughts of a bottom to mind, let me just say that I have been watching the Nikkei index with some interest for the last few months. I had considered perhaps buying Japanese stocks, but I decided against this after witnessing a couple of the "fiddles" that occurred near the end of its fiscal year on March 31. That said, the horrible psychology that we see in Japan is akin to the loathing that we see at market bottoms. Of course, this does not guarantee a bottom -- a distinction that is completely lost on the clueless cheerleaders on Bubblevision -- but nevertheless, the psychology in Japan is worth studying, if only as a standard against gauging what goes on here.
If Japan hasn't bottomed after witnessing the type of negativity that they have seen, how can we possibly have a bottom here, given the optimism that people still maintain? That is exactly the point. The psychology there was about as black as it could be. Of course, that doesn't mean it can't get blacker, and prices can't get cheaper. One fear I have about Japan is what happens over there when things really get nasty over here, as I suspect they will. Nevertheless, I would again say that the psychological contrast appears to be a useful bellwether.
Whisk the risk
Finally, I would also point out that in addition to the bleak psychology surrounding real buying opportunities, cheap prices also abound, thereby limiting risk. In the end, I believe that buying at attractive prices is a key determinant to a successful investment.
That said, people should not consider the price of a company's shares, notably tech shares, attractive just because they have been marked down. Take the case of Sun Microsystems (SUNW, news, msgs), for example. I think a lot of people figure they've done their homework just by asking "Where is the stock down from?" Recently, it was as follows: "Well, Sun's at $10 and it's down from $60, so it must be cheap." And now, of course, Sun is under $7. This is a point that has certainly escaped most of the talking heads I see: Where a stock has been has nothing to do with what it's worth.
Even at this particular price, Sun trades at roughly two times revenues, and it still can't find its legs. This is not to pick on Sun. I quite like the honesty of its management, and the company indeed has a winning product, but it does make you ask, how on Earth can some of the semiconductor stocks trade at between eight and 15 times revenues, when Sun trades at two times revenues?
Sometime before this year is out, I think all of technology is going to be taken to the woodshed, and at some point it will probably happen en masse, instead of just a couple of stocks at a time. To quantify the damage, I believe that before this bear market is through, we'll probably have a whole lot of stocks trading under $3, because what a stock is worth is a function of the underlying fundamentals -- not what its price has been at some crazy moment in time.
William Fleckenstein is the president of Fleckenstein Capital, which manages a hedge fund based in Seattle. He also writes a daily Market Rap column for TheStreet.com's RealMoney. At time of publication, Fleckenstein Capital had no positions in the stocks mentioned in this column, although positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy, sell or hold any security. The views and opinions expressed in Bill Fleckenstein's columns are his own and not necessarily those of CNBC on MSN Money. While Bill Fleckenstein cannot provide personalized investment advice or recommendations, he invites you to send comments on his column to fleckrap@hotmail.com. |
