SUBJECT: $NDX-Telling times ADD TO FAVORITES: *You must be logged in to use favorites
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AUTHOR: mannfm11
DATE: 6/21/02 5:53:36 PM
STATS: 651 reads 2 replies
Somehow, I get the feeling we are going to get some event again that is going to be blamed for this market going down, but we have been watching the event now for 2 years. For one, we witnessed the wildest 5 years in market history between 7/96 and 1/2002, really 5.5 years if you want to get technical. After a final pullback and finishing rally, we have moved into a new market, one where the trend has clearly reversed.
Maybe here, we get a crash, but I suspect the crashes have already happened. If we do get a crash, the smart short trader will be smart enough to take as much of it as they can and get off, as they almost always spring back. By a crash, I mean a 1000 point down day or maybe a week where we lose 1000 to 1200 points on the Dow with a big down opening one day, which has almost always finished moves like this. Markets are like rubber bands in that when you stretch them this hard, they spring back hard.
We are going to hear about 9/11 in the history books, in the media and from the brokers, but this market was cooked a long time before 9/11 and most of the people that frequent this page knew that. If anything, 9/11 provided a rally point for a market people would have otherwise started to abandon in the fall, but didn't out of being patriotic. Some people think this market is down, but it is a long way from being down, unless you can relate the insanity that finished the bull in the Nasdaq as being up, instead of being the wildest market since tulips in the late 1600's. The Nasdaq at 2000 in 1998 was pure insanity, so how do you measure down when up was nothing more than insanity.
The $NDX is where my attention is at this time. There are some important numbers in this index that are coming into play at this time. For one, the low made in October 98 was 1063.27 and we closed today at 1035.95. That means we took out this low yesterday and closed below it again today. That was an extreme low made during a crash and the close was no where near that low, meaning we have been below the low close for some time, an event that slipped my mind due to the higher level of the composite.
I have felt the most important test that will identify this as a big bear is that the 1998 lows will fall and now, for the $NDX, they have. Interday, 924 is the number for the S&P and 7400, a number we are still far from on the Dow. Interday on the composite was 1357, but I believe with the $NDX taking out its low at that stage merely confirms the composite will follow. The Dow is still almost 2000 points above its mark with the S&P now a mere 6% away from its mark, meaning we have formed a bubble now in the Dow stocks in relation to the other parts of the market. I must add that on the top during July 98, the Dow made an interday high of 9367, the Nasdaq 2028, the $NDX 1485 and the S&P 1190. As one can see, the damage has been primarily in the $NDX and what it has represented in S&P, with the Dow going virtually unscathed at this time. I don't expect this to continue, as the Dow should start to follow the rest of these companies down the drain, taking the S&P through this lower barrier.
Lately, I have been playing shoot MSFT and for good reason. First of all, MSFT made a low just before Christmas 2000 at $40.25. This low has held for some time, about 18 months to this date. During that same week, the $NDX hit 2174.76 or twice what it is at this time. In the fall of 98, it touched down at $43.88, meaning it had already signaled a break of the 98 bottom in the $NDX 18 months ago. For you that don't know, MSFT is the $NDX and most of the other big players in this index have their fortunes tied to MSFT or its industry. The low price I have on this stock in my records that means anything is $4.80 in February 93, with a later low of $4.40 in August 93. This means we have a 1000% return on this stock over the past 9 years in 4 months roughly. People that bought MSFT back then have to be patting themselves on the back as that equates to an annual gain of 29%. Today we closed at $52.28 or roughly 30% above the low it made in December 2000.
Why MSFT? One, it is a component of the Dow and I think that is where the rats have huddled to survive the shipwreck. Second, we have seen a corresponding $52.28/$119.93 to 1031.95/4816.35 decline in MSFT and the $NDX. MSFT's current price is 43.5% of the all time high, while the $NDX is now 21.4% of its all time high. MSFT now carries a weight twice at this time it did at the all time high and it is now nonconfirming the 98 break in the $NDX, while before the $NDX was nonconfirming the break MSFT achieved in late 2000. The point is, both of them have now broken that bottom, but MSFT hasn't followed through.
I know this rational is elementary, but when the key component of an index breaks a bottom, the index is sure to follow and in reverse, once the index breaks, the component that has rebounded is sure to follow. If this was a depressed stock, I would maybe have a different view, but it isn't, but instead as richly priced as ever, with the prospects going forward at an all time low for this juggernaut company.
Here is the data I have on MSFT. As I search the web, I always seem to get conflicting data, so one source is as good as the next in a business where numbers seem to get tossed around like odds before post on a horse race. My source is Yahoo, so if one wants to make a different case from another source, go ahead.
First of all, there are 7 strong buys, 15 buys and 4 holds on this stock, with not a single sell recommendation. Calling for a bust in this stock is clearly going against the trend, but again, if one is going to hold stock, you might as well hold one that might fall from $50 to $20 instead of $50 to $1.50. The Dow, S&P and nasdaq composit indexes depend on this stock holding up and maintaining any kind of idea we aren't in a major bear market. As I have tried to point out at the start, only the $NDX has confirmed a major bear market, though the players in this market, the virgin public have seen only higher prices for most of the time they have been in the market and wouldn't know where a major bear starts if one hit them in the face. Wall Street knows where one starts, as there is a point where the financial cookie starts to crumble and we aren't there yet. My contention is MSFT is the cookie that has to crumble to take out those 98 lows I think are so important and then the fall 97 lows, making the July 96 lows a likely target for a bottom.
In going against the consensus, I have good financial reason. First of all, MSFT was the beneficiary of one of the greatest sustained crazes in history, literally without competition. To richly price this stock in 1995 was a logical conclusion, as everyone was buying their first computer to get on the internet. Prices in 1995 ranged from $7.28 to $13.65, meaning if someone bought at the high and sold at the close today, they would have earned 21.4% on an annual basis. Again, not bad, but what do they have today. This is where my sticking point is in this stock and why I think we are going to see a sustained downtrend in the markets in general.
The main point is the financials. MSFT is currently selling at 11 times sales. Their profit margin is 23%, PE 47.21 and book value $10.03. Listed pay for their officers is $667K for Gates and $671K for Ballmer, the CEO. Here is the sticking point, as we all know these guys are not running this company for this kind of compensation. Stated in the most recent quarterly report,MSFT had repurchased 876 million shares, but had issued 2.15 billion shares under employee stock option and purchase plans. Net, one can see this amounts to an expansion of 33% or in reverse, 25% of the shares outstanding roughly, meaning owners of this stock are facing a moving target. The company doesn't have the assets to repurchase this roughly 1.4 billion shares issued over the past 11 years at current market value and what is shown as cashflow and earnings under this type of operating procedure is really an arbitrary figure. So what is the real PE of this company and if this is really an earnings juggernaut, why is the book value still below the price of the stock 7 years ago? In a time when 10% doubles something, we are still not to what was paid for thst something, despite a massive boom in an industry where the company had a literal monopoly. How can anyone recommend this stock as a buy or strong buy in this kind of market, at this stage of the product cycle for the industry it is involved? There are no dividends, so anyone holding this stock during a bear market is going to have to hope that once the bull resumes, possibly several years from now, the growth in MSFT resumes with it.
Maybe I am missing something, but at the closing price of $52.28, it would take $66.604 billion to buy back this stock issued employees. Chances are good that most of this stock has been sold to the public. The company shows $38.7 billion in cash, so liquidity isn't a problem, but this figure is almost $29 billion short of an amount necessary to restore shareholders to their original ownership percentage 11 years ago, meaning the company cannot buy back what it has paid to operate these 11 years, meaning the long term shareholders really haven't a dime to show for their investment in dividends or company assets. One can say they now have an operating company clearly worth billions to look forward to enjoying in the future, but what is this company really making, not what are they putting on paper they are making?
Here is the catch 22 we all find ourselves when examining MSFT. Is there any company you would rather be holding if everything went to hell? In answering that question, I would have to say there are very few. But, where can this company go in the future that it hasn't been in the past? For one, I don't know they are out of the woods yet in Anti Trust. Second, they are wide open to competition and the structure of the PC market could change. Companies like this are arrogant and slow to change their ways, once they have enjoyed the position at the head of the table for so long as the host of a big party. Consumers are fickled and should a competitors product catch on, what used to be the norm becomes passe and one is pressured to join the in crowd. MSFT has been the in crowd for a long time and their name is going to be worth a huge amount for a long time coming. But, wasn't Levi Strauss the in crowd? Sure they have Dockers, but what about the Levi Strauss label? A stock priced at 10 times book, 11 times revenue and close to 50 times earnings had better have a long future ahead of it and the current price, in the current environment is a real crap shoot. To recommend someone buy this stock or issue a strong buy recommendation is going out on a big limb, when the whole business model is in such flux and the tastes and growth rates in the industry can change so quickly. My feeling is PC's and their related industries are where television was in the late 1960's, where people had only one major innovation in front of them, getting a color TV. They are an appliance now and not an innovation people have to have.
MSFT is important for a number of reasons in the market. As stated above, it is a key component in the Nasdaq composite, the $NDX, the Dow and the S&P. Only INTC holds that distinction. Second, it hasn't had a breakdown that has followed the first breakdown in price in the major market indexes in 2000. That means all these other indexes have sought a lower level, despite a major component holding up in price. Third, and I believe this to be the most important, MSFT is the icon of the new economy and the real bull that took the market higher and fired the imagination of the modern investor. It is prima facia evidence the public hasn't thrown in the cards on the market and the Nasdaq for that matter. The fall 1997 low in MSFT was $30.875 and I believe that to be the test, the puke point of the public in the Nasdaq. We are currently a long way from that point, but with the current valuation, arbitragers are going to start going for this stock. Short interest is about 1% of shares outstanding and for a stock that pays no dividends, has doubtful earning, not in the sense it cannot generate cash flow, but in the sense no one really knows what they are, it is a good target. Mutual funds are going to have to start readjusting their portfolios and many of them may bail on MSFT before it springs a leak. Surely many of them are going to start looking for sound values and MSFT short term isn't one of those.
The current market has an eerie feel of the market in 1930, after the crash. We had the crash, starting in August last year and finishing with the 9/11 event, the rally into the spring that lasted 180 day exactly and what follows could very well look like 1930 to 1932. I have been on this line of reasoning for 2 months now and few have gotten the drift yet. Everyone has been looking for an event to cause a crash, yet the event has already happened. We aren't in an event, but a process, the liquidation of a massive accumulation of stock over the past 20 years by an ignorant get rich quickly public. Financially astute people are selling to those that don't know any better and are afraid they are going to miss the next big rally that isn't coming. Look at the depression chart and you will see a crash, followed by a rally followed by a long downtrend that made the crash look like lost quarter in a coke machine. Look at Japan in the early 1990's and you will see the same thing. The point being, sell rallies until the market looks so cheap you can't do anything but be a bull and start accumulating stock. Cheap is going to be in conventional terms and going to be at a time when the public will have no interest in the market, wish they had gotten out now and don't want to ever get back in. Dividend yields will rival treasuries and I mean long term treasuries, not t-bills. Then and only then, you will have an asset that will pay you to hold it and will be poised at some time in the future to resume a great long term uptrend. Currently, we are a long way from that point, so be patient. There was a huge financial mess created over the last 10 years that few are ever going to understand totally, including myself. Some of us will when the mess is all over and we start to sweep up the pieces. Since the NDX has taken out the fall 98 lows, MSFT should follow as should the S&P and the Dow. We have a big mess brewing and all should be alert. The mechanism of the market is coming apart as liquidity is starting to bind up. |
