Tech Naysayers Can't Contend with Strong Business
By James J. Cramer
12/2/98 8:08 AM ET
It's hard to preannounce bad earnings when your business is
smoking. That's the reason why the drives popped and took
a lot of technology with them yesterday.
First, let's set the stage for this rally. On Monday, Piper
Jaffray analyst Ashok Kumar, a man bent on making his
name in this cycle, made an extremely negative call on
Gateway (GTW:NYSE). The substance of the call was that,
after all of the hoopla about how computer sales may have
been very strong across the board in the industry, business
didn't get done. Gateway, at this pace, would miss its
quarterly estimates.
The timing of the call was exquisite. Gateway had just
ramped 15 points, in part because the overall PC business
had been strong and in part because Prudential, the last
firm to have a good look at Gateway's business, said that
things were strong there. Kumar's call took people's breath
away. The call said that not only were we operating on a
false set of pretenses, but that things had just gotten very
bad.
Remember, tech stocks trade like atomic dominoes. When
they go, they go very hard and fast. Immediately, Gateway
sunk Dell (DELL:Nasdaq), Compaq (CPQ:NYSE), Intel
(INTC:Nasdaq) and Microsoft (MSFT:Nasdaq) and then
Micron (MUEI:Nasdaq), the PC innards like the drive stocks
and, ultimately, the market itself.
Of course, there were extenuating circumstances, but
Kumar's call had the look and feel of a "right from the horse's
mouth" report. Coming right when "preannouncement
season" officially begins -- meaning when companies begin
to fess up that their quarters did not meet expectations --
this was the home-run call.
There was only one problem: Credit Suisse First Boston
had gathered under one roof everybody in tech who
mattered. On Tuesday, they spoke, and they spoke in
unison. Business, they said, is smokin'.
As many people remain incredibly skeptical of this move off
the Oct. 8 bottom, they had already placed some serious
money bets against such a rosy scenario. I saw shorting in
put-buying in the disk-drive stocks, for example, all day
Monday.
But when Western Digital (WDC:NYSE), which has been
as downbeat as a Russian tax collector, announced that
business had gotten better, you could sense the noose
tightening on the extrapolators of Kumar's Gateway call.
Worse, those who had made the field bet, either through
NDX puts or through Morgan Stanley High Tech puts, had
no place to turn other than to sell the puts or risk neutroning
their firms. So what started as a "Western says business
isn't as bad as it has been," turned into a rout to the upside
that took Intel and Microsoft past where they were at the
start of Monday's session.
I know many of you do not believe me or can't put much
credence into the notion that a short-seller or a group of
short-sellers could really move whole industry groups. To
you I say, not only can it happen, but I have done it myself.
A few years back, in a fit of insanity, I chose to sell NDX
calls, as the premium on them was out of control. I probably
sold close to 1,000 of them against about 500 calls that I
was long. The calls were out of the money. But, as the
market kept ramping in one of those tapes like we have had
Since Oct. 8, I realized that, before the calls I had sold at 10
turned into 20, I better bring them in. My buy of 500 NDX
calls caused the Nasdaq to go up at least 25 points as my
broker bought them back with all the finesse of a pile driver.
So, with tech firms, one after another, proclaiming so far so
good, the bears' best hope, that Kumar had an early great
call, seemed much less likely. And those who bet the farm
Monday that there would be no tech under the tree for the
holidays on Tuesday bought the farm.
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