April 14, 2000
The week the mania died
Index Close Change
Dow 10,307.32 -616.23
S & P 500 1,357.58 -82.93
Nasdaq Composite 3,321.71 -355.07
Nasdaq 100 3,208.49 -345.32
Russell 2000 453.68 -35.54
Morgan Stanley Index 494.41 -24.29
Sox Index 892.16 -117.54
Bank Index 752.20 -57.38
XAU Gold & Silver Index 57 3/4 +3.08
Dow Transports 2,727.04 -176.52
Dow Utilities 303.86 -10.57
30-year Treasury Bond 5.78% +3/32
Yesterday's rout ricocheted around the world and, as has happened virtually every morning since time immemorial, the S&P futures were actually indicating an up opening. Of course, that validates my point that the motto the new-era types have used successfully for so long has been "yesterday never happened."
Well, that strategy ran into a buzz saw when the CPI was reported, because - lo and behold - even the government statistics couldn't hold back inflation this time. That was responsible for busting the S&Ps a couple of percent pre-opening.
Inflation takes off the gloves. . . Now, I submit that it wasn't the actual numbers, it was the fact that the market was ready to go down, because anyone who's not comatose knows that the inflation rate has been running higher than has been reported for some time. So the news was that that statistic was able to take the market down, not that the inflation was there.
In any case, we had a huge break at the opening, then, naturally, they came in and bought the dip and tried to jam the market back up. That lasted about 10 seconds, then the market was sold, made a new low and then another dip ensued, all in the first hour and a half.
I didn't see the exact comments, but I think they trotted Abby out on the tape to try to say things we're okay - at least, that was a headline I saw go by. Recall a week or two ago I mentioned we would be seeing stories about "organized support" somewhere along the way. Those were prevalent in 1929 and we saw those in Tokyo when that market unwound, too.
The long and the short of it. . . We had a series of declines and rallies that lasted all day long. I don't think there's any particular value in describing them, other than to say that every attempt at a rally was met with waves and waves of selling. Very few stocks were even attempting to go up during the course of the day, although there were a handful. My guess is that they probably were stocks that guys might have been short as a hedge against things they were long, and they were being bid up. I can't imagine anyone who was dying to go long buying the likes of Gateway and Apple on a day like today.
One story that's been making the rounds is that a major hedge fund is in trouble. I have heard several stories from credible sources about any number of hedge funds in trouble, but the biggest one is rumored to be Pequot Capital. Very good sources have told me that the fund is, in fact, having to liquidate positions, but I don't necessarily think it's one fund causing all this to happen. I believe it's more likely that, just like the public, a lot of equity-oriented hedge funds were leveraged long in many speculative securities. One only has to think back to the stories we shared in mania chronicles describing the wild behavior as it was occurring.
Mr. Congeniality, he isn't. . . The slide was exacerbated today on a couple of occasions. The first time was when Greenspan gave his fourth speech of the week and suggested that there weren't going to be any wholesale bailouts. This guy's timing is just remarkable. Here he convinces the whole world that he is going to bail out everyone whenever they need it and pursues an irresponsible monetary policy, and then in the middle of a melt he tells them he's not going to bail them out. He's not going to be very popular. Of course, I've said that before.
Calling all margins. . . The second time was when margin debt figures came out and, lo and behold, margin debt was up again sequentially in March. It was 5 percent higher, reaching a record $279 billion. So that ties in with the stories that we have heard about how margin calls were met with money last week and in fact even more buying occurred. As I pointed out yesterday, this only makes the situation potentially worse.
Down days ahead for dollar?. . . Away from stocks, fixed income was under pressure initially and then got a bid as stocks got hammered. And metals got a huge burst off the CPI number and stock market break, and then they were sold off to finish fractionally higher. It's also interesting to note that the dollar got clocked versus the yen and at some point I think the dollar is going to come under pressure as a result of the stock market break. Then we'll have to see how complicated life gets for the Fed.
Holding patterns. . . One other thing that we've talked about for a long time has been that when it was finally game time on the downside, systems would seize up: Folks would not be able to get through to their brokers, lines would clog, the Internet would clog. I still expect that will happen.
A friend of mine told me he tried to talk to someone at Schwab on its 24-hour service. It was at 2 a.m. this morning; he was on hold for 40 minutes and still couldn't get through, with no indication of how long the wait would be. That is something that I think folks need to be prepared for: A lot of these online brokers and discount brokers are going to be so swamped it may be impossible to talk to them.
A drop in the bucket. . . I think it's also interesting that, pre-opening, before the futures got slammed, the queen bingo caller on bubblevision was discussing the fact that $14 billion came into mutual funds as of Wednesday, and how bullish that was. Unfortunately, she read it dead backwards.
The fact that the market got hit this hard after $14 billion came in is wildly negative. None of that cash is on the sidelines; it all got put to work instantly, as it always does. And now we're going to head into the period where inflows are behind us from a seasonal standpoint, where people have margin problems and where there are tremendous lock-ups creating even more other supply. This "flow of funds" argument that has worked so magically for so many years is now going into reverse.
The balance beam may be their strongest event. . . In the corporate news last night, I just want to discuss one item. I think it's a perfect lesson in the kind of nonsense that goes on in corporate America and the complete gullibility/stupidity of the dead-fish community. Last night, Gateway reported its results. The company's revenues were light versus what it promised folks when it pre-announced the fourth quarter. That was not a big surprise. What was a surprise was the gymnastics on the balance sheet.
Keeping it short and sweet, sequentially, Gateway's revenues were down about 4.6 percent and yet SG&A was down a whopping 10.6 percent sequentially while it opened 38 new stores (that's about a 10-percent increase on its store base) and 35 OfficeMax locations. How do you do all that? Well, that's called balance-sheet magic.
But it's important to nail the dismount. . . One look at the non-current assets shows a net bulge of about $130 million, and since 1996 while Gateway's been on its Country Store opening program, my rough take is that this portion of the balance sheet ballooned about $1.4 billion, or about $4 a share. So as long as you capitalize all your assets, you can make sales look more profitable than they are.
Obviously, it's possible that everything is completely hunky-dory, although I find that somewhat hard to believe. Since Gateway doesn't give any data on the Country Stores, even though the company said that it would, it's hard to know for sure. But don't take my word for it. Go to the Gateway Web site, look at the balance sheets and see what's happened. What I want to know is, why does somebody who is a mail-order provider of PCs that gets paid in advance need $650 million of receivables and a bloated balance sheet like this?
This is exactly the kind of fun-and-games that goes on in lots and lots of places and somewhere down the road, if there turns out to be a big restatement, you'll know why. Again, this happens to be something that is timely and it's very easy to see what's going on, even though we had about five dead fish come out and re-recommend the stock and up their price targets.
True to their word. . . I don't mean to pick on Gateway necessarily, other than it's a particularly good example of this kind of stuff. We could do this analysis on lots of companies, although not many that I know of appear to be quite this obvious. Anyway, it's nice to have a balance sheet to help the earnings per share numbers. Management there is on record as having said they'll "pull whatever levers are necessary" to make the numbers and, by God, they did.
Nuclear winter victim. . . In another note, MicroAge today declared Chapter 11. For those who don't know, MicroAge was a Fortune 500 company in the business of distributing and reselling computers and associated hardware and providing "computing solutions." Among the reasons the company cited for Chapter 11 were Y2K/nuclear winter-related problems. Just a reminder that the problem is still there, and that I expect the rout in the stock market will put an even larger damper on PCs prospectively, among other things.
It's important to remember that the U.S. stock market, at a recent high of $18 trillion compared to $30 trillion in world GDP, was not only the U.S. economy but also the world economy. So its unwinding will have severe and rapid economic consequences, in my opinion.
More days of pain ahead. . . This week has been very painful for most investors, no doubt. It was the kind of a week that history has suggested would occur but most folks believed would never happen. My hunch is that as unbelievable as it may seem, it's not over yet. I heard stories of portfolio managers not really selling, hoping prices would go back up, and we had a fair amount of volume today with over-the-counter volume north of 2 billion. I don't think it's been possible to unwind so many years of speculation in just a group of days, as brutal as they have been. I'm hopeful that regular readers are not in the position of many others who are overextended in speculative securities on margin. As I have always tried to say, I was not ever rooting for the pain and suffering that comes from these kinds of meltdowns. But for me, it was a tautology that it would at some point occur due to the irresponsible monetary policies of the Fed and the cheerleading of Wall Street and bubblevision. |
