This Cramer article ought to make all us piffers feel confident in our approach. He talks of how traditional methods for evaluating stocks and companies seems to be becoming more and more out of date and downright irrelevant. As far as I can tell Supply and Demand haven't lost their luster! Sounds like it's time for Jimbo to find "religion"...
It's a good article.
12/11/99 6:15 PM ET
This piece haunted me all week. It gnawed at me because one of the idols that hasn't yet been shattered is the notion that there is some benchmark that we should value, a benchmark of 500 companies put together by wise folk schooled in assembling the correct pastiche. But like everything else that got trashed by this awesome stretch, the S&P 500 as a gold standard and a reference point has been marginalized and minimized, too. This is that story. I know that at various times I simply went with the magnificent flow and lapsed into the giddiness that this market has bestowed on us, and this piece may represent the apotheosis of that thinking. Readers of this column know, however, that I call 'em as I see 'em and I can't go back to Kansas now.
We all love certainty in the stock market. We like benchmarks. We like relationships. We like the "official" nature of the Standard & Poor's. (Did you ever stop and think, "Hold it, who the heck anointed those companies?" I found myself thinking that McGraw-Hill (MHP:NYSE) had no clothes this week. They are just a bunch of shivering emperors unsure themselves of what belongs in their index. But the camp followers of the emperors know nothing more than to buy when the S&P says buy, and that's what happened this week with Yahoo! (YHOO:Nasdaq)).
We love valuing companies on earnings. (After all, until this year, that did matter. Do you know that I never willingly paid more than 30 times earnings, ever, for Sun Micro (SUNW:Nasdaq) and this year I am paying 90 times forward earnings! Three times and I feel charmed.) We think that price-to-earnings measures never lie.
(I remember when I first walked into Goldman Sachs and someone grilled me about P/Es and I knew what he was talking about. I thought, "Heck, man, I know the secret handshake. I know how to derive multiples. I know what makes them jump and ignite and shrink and revel and sink and fly." Now I think I don't know jack. Maybe I was so much older then.)
We buy and sell stocks on certain matrixes, that make us comfortable. (If you read the myriad research that gets churned out by Wall Street firms, the first six or seven pages invariably has some investo-religious rap about the relative valuations of the S&P and bonds, or some gibberish about the dividend discount model or the ratio of earnings to 30-year Treasuries. That's called talking the talk, and people at these firms can do it for hours. I got bad news: They are reciting ancient shibboleths that simply don't cut it in the world of F5s and Ariba (ARBA:Nasdaq).)
And at the end of the 20th century, we threw it all out the window. (Ohhh myyy, everything that we know gets blow'd up this X-Mas!) We made a mockery of the discipline that served us so well. (It made us so much money for so long that when we realized it had stopped working we didn't care and we persisted with it, if only to justify our indecision or our helplessness.) We rendered all that we knew about relationships among bonds, stocks, prices and earnings hopelessly irrelevant.
(Bonds have had their second-worst year ever and what happens? The growth stocks, the ones most levered to the long-term rates, or so we thought, went to the moon. That's like launching a spaceship with engines filled with water and then watching it power to Mars -- where the sound and pictures work!)
We just don't want to admit it. We would feel naked without our beloved standards. We would be revealed, unbelievably, after all of this rigor that we have built up and blessed, as mountebanks who can't make you a dime. (Let me on Squawk and I will say it once and for all. I will shout it from the rooftops. I am mad as hell at the standards and I will not fake them any more!)
Oh, come on. You know it's true. Nobody can write it. If you write it, you get laughed at by the professionals, your peers, your buddies, your Fellow Travelers. Maybe I am just secure enough -- or just lunatic enough, or just masochistic enough -- to put it down here for all to see. (To go outside the holy grail is to run the risk of being so wrong when it ends that you will never recover. But how about if you don't believe now? Can you be a silent heretic? Or doesn't that just make you into an actor, mouthing lines from an out-of-date play by Graham and Dodd or Gilbert & Sullivan? Oh, how the academics must suffer in these times.) But our methods of valuation, our standard methods of valuation, don't make us any money any more.
(Earlier this week I was listening to some money manager talking about how he wasn't changing his stripes, that he liked the out of favors, the value plays, the lowly P/E stocks. Good for him! He must be a very rich man! Where I am from, there is this process at the end of the year, it's called the "take your money away from the loser and give it to the winner" drill. And it gets practiced everywhere unless your clients are in a coma. Those who stay with these losers for more than a year or two, they get to have the money taken away. I have had money taken away. Last year, when I did the value thing. They thank you. They are glad you didn't take excessive risk. They are thrilled that you stuck to your guns. And here are the wiring instructions where they want the money sent. Invariably it is to the hot-hand manager who didn't play by rules that aren't working any more.)
Sure, periodically, they come into play. We will see S&P futures sell programs come on when rates rise sharply, as money that is run as stock vs. bonds gets juggled about. (These programs, once able to strike terror into the hearts of the Graham and Dodd-ists, now get seen by the Matt Be Free Jacobs' as Pennies from Arbitrage Heaven. They are opportunities, because, of course, Extreme Networks (EXTR:Nasdaq) doesn't care where the 30-year trades, especially when the 30-year may be history someday.)
And there are plenty of managers who won't own the New World stocks; witness the massive underperformance vs. the Nasdaq that most funds are experiencing. (No, it's not laziness. It's density. And it's an unwillingness to admit that Cisco (CSCO:Nasdaq) "stole" Cerent for $7 billion, which is what really started this whole revaluation. Cisco would have to pay $25 billion in this market if it wanted to buy a public Cerent. Isn't that what the market values of Brocade (BRCD:Nasdaq) and Redback (RBAK:Nasdaq) and Juniper (JNPR:Nasdaq) are saying?)
I sure wish it weren't that way. I was able to calculate price-to-earnings ratios and figure out relationships between stocks and bonds and sectors and groups better than just about anybody. Heck, I was one of those kids in school who just had to get As, and I got an A in "authentic Wall Street gibberish." Just ask anybody who knew me before TheStreet.com, when my reputation was for numbers, not popping off.
(I put this stupid line in because I was feeling sorry for myself after the third pasting I got at the hands of Alan Abelson. The simple truth, as my Trading Goddess wife has told me a thousand times, is that Abelson would never have picked on me had I just kept my mouth shut and delivered numbers. He would never even have heard of me. But when you thrust yourself in the limelight to do something different, you take broadsides. You just don't want to sink, but often you limp into dry dock for a refurbishing and a licking of wounds, as I keep having to do after Barron's comes out.)
But it sure is hard to take the so-called righteous stuff now. It's hard to listen to the brokers discuss the relative merits of VF Corp. (VFC:NYSE) and Deere (DE:NYSE) when 10,000 shares of Portal Software (PRSF:Nasdaq) on a good day will make what you make in Deere in a lifetime. It's hard to worry about price-to-sales when Cisco, the smartest company I've ever seen, buys Cerent, which, in the Graham and Dodd world, doesn't even exist.
(It could all come down to everyone being overpaid for everything and everything being worth nothing. But I keep telling people, "Look, you don't believe it? Call your broker and get out of what you own. The market will absorb it. These are not phony prices." Are we headed toward a Japanization of securities a la 1989? Possibly, unless we reign in credit and margin. I favor that. I favor not borrowing at all to own stocks up here.)
It's challenging, to say the least, to think of book value, when a company has an idea that could wipe out much of the current retail infrastructure. Maybe it was all that Marx they made me take at Harvard to get that diploma in the '70s, but analysts seem to have nothing to lose but their price-to-book chains.
(A good friend of mine compared this change to having a giant steel plant like the one Bethlehem Steel (BS:NYSE) had in its hometown -- two solid miles of a No. 1 red hot steel mill -- and discovering that the Japanese can make steel better, cheaper, faster and of higher quality, as was the case in the '70s. What do you do? How do you value that Bethlehem Steel mill? I will tell you how. You value it at less than zero because you have pension obligations and debt associated with it. That's what seems to be happening to much of the non-Net economy now that the dot-coms have all of the resources.)
Oh that doesn't mean it's easy, or a dice roll, or some expensive game of chance. Matt Jacobs, the hardest-working guy in my office (and I thought I would die before I ever wrote that) spends hours upon hours trying to figure out whether Scient ( SCNT :Nasdaq) has a better model than Verisign (VRSN:Nasdaq) (it doesn't), or whether the good folks who run Redback (RBAK:Nasdaq) are better business people than the gents behind the wheel at Tellabs (TLAB:Nasdaq) (they are).
(Wow, how humbling this market is. Scient and Tellabs did a heck of a lot better this week than the ones I compared them with! Instant shake-and-bake wrong!)
Trying to spot which company might have "viral" growth ahead of one that has "organic" growth vs. one that is just plain inert takes a skill set that they can't inject into you at business school. Just as the market itself has become wide open, the skill sets you need to win have become wide open, too. (Don't you love that "viral?" That comes from hanging out for too long with Henry Blodget, the Merrill Lynch Net analyst, who introduced it to me in the green room at last week's show and I've been using it all week. Funny thing about saying viral -- if you use it with a venture capitalist, in their VC-speak sessions, I guarantee you by the end of the session you will hear it back from them.)
One thing is for certain though. All of those talking heads you see and hear today, and all of the analysts and brokers and traditionalists of the antebellum days, they know it, too. Oh maybe they can't articulate their fears other than to their spouses. Oh, they can deny the thoughts of this column till the cows come home. (You try changing your whole life's work. It's like you are measuring in feet and inches and then someone changes everything to the metric system, so you keep getting everything wrong.) But they are shaking inside. They are fighting their own irrelevance. They don't want to change, because it's frightening, and otherworldly, and downright too hard at this point in their lives.
The other day a reader tried to make fun of me. He called me "Chameleon Cramer." I think he meant to hurt me. Get in line! I can tell you, I felt honored. It made me think that I can still change my stripes to stay alive. Only a chameleon would invest in a Be Free (BFRE:Nasdaq).
(OK, I like this business model very much. The go-to guy on this stock is Jamie Kiggen, the unpromotional sage of Donaldson Lufkin & Jenrette, the man who would rather make money for his clients by talking to them than by talking to a camera.)
Only a chameleon could recognize that a coat of S&P 500 worship gets you eaten fast in the New World.
Chameleon Cramer. Maybe I'll make business cards with it. Suits me fine. (Glad to be one!)
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