Skipper: some words from Cramer I think worth reading.
Wrong! Rear Echelon Revelations: Why
the Market Went Down
By James J. Cramer
12/1/98 7:15 AM ET
Must we always have a perfectly scripted reason why the
market goes down? And must editors always insist on such
a fiction? Take yesterday's down-200 shellacking. Three
reasons I heard and read repeatedly for the selloff were 1.
flight to quality, 2. worries about earnings and 3.
overvaluation.
All three are bogus. Let's take them one at a time. CNBC
commentators mentioned several times that they saw a
flight to quality in the markets because bonds went up and
stocks went down. Man, is that stupid. We had a flight to
Treasuries earlier this summer when it looked like all else
was failing. Treasuries are liquid and they will pay the
interest. But we had no such threat yesterday to the rest of
the asset classes that would bring about a flight to quality.
You first have to have massive fear that everything else
could go kerflooey. That was not the case yesterday. In fact,
the only market that seemed imperiled was Hong Kong, and
I have long since given up trying to intuit the way that market
works.
Earnings woes? Give me a break. You get earnings woes
when you have companies preannouncing that they can't
meet posted estimates. But nobody preannounced
yesterday. Judging by the reports of strong retail demand,
the opposite should have been happening. People should
have been raising estimates. The earnings-worries story
smacks of the worst form of canned journalism and should
be banished, so when there are some real
preannouncements you can say "earnings woes" infected
the market and still have some credibility.
Finally, if valuation is the reason the market went down, we
should never have rallied from Oct. 8 to begin with. Stocks
were certainly conventionally overvalued at 7400.
"Conventional" is the key. At various times markets go to
wild overvaluation. Other times, because the alternatives are
so bleak, stocks can power higher effortlessly. We have
been conventionally overvalued since 1982. But if someone
thinks EBay (EBAY:Nasdaq) is overvalued at 200, they
probably thought it was overvalued at 175, 150 and 125.
Heck, EBay shouldn't even be a public company yet by
some people's standards. Surely overvaluation didn't wake
up and startle otherwise calm, rational
dollar's-worth-of-assets-for-50-cents investors yesterday.
The market went down because it was due to go down. It
had made an especially big move in the last few weeks,
some of it on very light volume. The action in the Internet
stocks was totally unsustainable. Margin requirement
changes at brokerage houses for stocks that had been
trading five and six times their shares outstanding EACH
DAY caused there to be a glut of supply at very high prices
with no speculative demand.
The selling will continue if thinly margined speculators keep
liquidating positions. It will stop when they are done. Those
of us who would like the bull market to continue -- and I do
want that to happen -- should be glad that these margin
rules are changing. The action in the .com stocks was so
full of froth as to make any reasonable person believe that
the market had lost its mind.
I wish there were more to it, but there isn't. Nevertheless,
the market is not a "round up the usual suspects" business.
Each time there are different subtleties to why it goes down
and why it stops going down. None of the reasons I read in
the boilerplate stories captured those nuances. Why does it
matter? Because they fail to illuminate the root causes of
the selling. Therefore they will obfuscate, not clarify. They
will cause you to lose, not make, money.
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