May 31, 2000
Two steps forward, two steps back
The rest of the world's markets didn't really buy our rally last night. What rallies we did see were pretty subdued for the most part. There were a few Roman candles -- the Hang Seng was up 5 percent and the KOSPI was up a ton as well. Nevertheless, our futures were considerably lower when the market opened. We had a sell-off that lasted half an hour and then a run-up into the economic indicators du jour -- leading indicators, housing starts -- which were a tiny bit weaker. That proved reason enough to rally some more and we quickly had all the indices up on the day. In the last few days the stock market has aptly demonstrated that it isn't really a stock market any more, but really just a giant chain letter.
With the hint of a slowdown, there was an attempt to get the financial perpetual motion machine started today. The truth of the matter is that the slowdown is not good and it's coming not so much because of higher interest rates, but because of the damage the cracking of the bubble has done.
Here in Seattle, I've heard quite a number of stories from good sources about how the real estate market has seized up and housing prices have been marked down, although it hasn't really filtered into the mainstream press. I get a lot of e-mail from the Rap, and I've heard a lot of other stories like that, too. Of course, the nature of economic statistics -- when you focus on the lagging ones, as bubblevision and the Fed do -- is that you wind up looking at data showing strength even after things have turned. The lowest point of unemployment generally comes after the economic cycle has peaked and we have started down into recession.
It's all good?. . . We all know that growth is bullish, and now the only thing more bullish than growth is a slowdown. That's what folks want because they think the Fed is to blame for all their problems (which it is, but NOT for the reasons they think). If we get a slowdown then the Fed won't tighten, and then we can go back to the happy mania days that we had before. That's not going to happen, but that's what folks seem to think. Once again, 10 seconds of reflection will tell you that, from a common sense standpoint, it's not possible for growth, slowdowns, higher rates and lower rates all to be good. Today's bubbleonians want all things to be bullish for stocks, but in the real world it can't be that way.
So there was essentially seesaw action in the indices all day long. If you look at the Dow and the S&P, there wasn't too much movement. The Nasdaq gave up 58 points and the Nasdaq 100 gave up 85. One interesting thing to note was the Sox, which was initially higher on the day -- at one point up about 3 percent -- but managed to close down about 1 percent.
Sox may change ticker symbol to SYBIL. . . Almost all day long there was a certain amount of schizophrenia on the tape. For much of the session we had the computer and cell phone retailers down (the Circuit City, Tandy and Best Buys of the world), along with EMachines, Compaq, IBM, Hewlett-Packard, Gateway and Dell. But while that was all happening, the component suppliers --like Intel and Micron -- were up on the day.
I point this out to show the complete and total inability of the Wall Street cheerleading community to connect the dots. It continues to pin its hopes on some wonderful second-half recovery mirage for PCs. It's not going to happen, but if I continue to make a point of this, folks can see for themselves how the impossible happens -- namely, how people who are paid millions and millions of dollars can miss the most obvious things.
Petal to the metal. . . Part of the bloom also came off the rose when rumor got around that Motorola had been guiding lower at its analyst love-in. Motorola stock finished down about $3 on the day after having been up $5. I don't know if the rumor is true -- although I heard it from pretty good sources -- so we'll have to see. It wouldn't surprise me, given the early signs of a slowdown in cell phones that we have seen and I think we will continue to see. This will come as a big shock to the market, as the build-out for those products is expected to be enormous.
Today's action, with higher volume and the market kind of running in place, made it look like yesterday was what we thought: Just a jam job to paint the tape coupled with some short covering. We have more economic statistics coming later in the week. The bulls hope we'll see some weakness and then we can go back to never-never land. The employment numbers have been ones that the bulls always manage to use to turn any seeming defeat into victory.
Away from stocks, bonds were hoping equities would weaken for real and were cheering the slowdown talk, and the fixed-income market was up strongly across the curve. The 5-year notes were up 3/8 of a buck and the 10-years were up 5/8 of a buck. The rally there was aided and abetted by the fact that oil was down $1.34 on jawboning by the Saudis, who were trying to make it clear that they will release more oil, as per their last agreement, should the price stay firm. The dollar was weaker against the yen and was pretty much unchanged against the euro. The metals markets were quiet, with silver a touch higher and gold a touch lower. The CRB index was down a small amount.
Muse-worthy. . . Before the morning bell there was a decent chunk of Yahoo for sale (about 1.2 million shares), and that stock traded down $5 pre-opening. The reason I bring it up is that it appears the sale could be related to problems with Softbank in Japan, which had been trying to buy Nippon Credit Bank in an effort to guarantee access to capital. However, recent events have gone poorly for Softbank and it's conceivable that it may have had to sell some stock. This is pure conjecture on my part, but it occurred to me the two news items could be related.
More high rollers. . . In the truth-is-stranger-than-fiction department, this year we're expected to construct 76 new roller coasters. This is on the heels of the 107 that were built last year. According to Fortune, roller coasters haven't seen a heyday like this since before the Great Depression. Just an amusing little fact I wanted to pass along.
In a more serious vein, the most recent issue of Grant's follows up on its articles about the overstatement of the GDP, productivity, etc., as a result of the government's "hedonic price adjustment" mess. Jim Grant reports in detail, via James Medoff and Andrew Harless, how these calculations are made and distorted.
This is absolutely a must-read article for anyone who has an interest in what is really going on in the economy and the complete and total distortion that these government statistics have wrought. I suspect that down the road folks will look back and say, "How did we ever get sucked in by that stuff?" The article that you want is "Secrets of the GDP," and you can go to www.grantspub.com and obtain it for a nominal fee. I suggest it would be money well spent.
Remember, all exams are open book. . . David Dreman, a columnist and author of several great books on value investing, wrote a recent column for Forbes entitled "Shredding Consensus" that I'd like to recommend. In it he questions why investors should pay 78 times trailing earnings for Dell and talks about how analysts have missed Dell's stumbling during the last couple of quarters. He also goes on to talk about how Dell is "primarily a box manufacturer with a growth rate that will decline as the personal computer industry decelerates," and how it spends virtually nothing on R&D.
The net of it was his recommendation that if you're brave, you should short Dell. I've been reading his columns for as long as he's been writing them, and the only time I can ever remember him actually saying short something was the bond market in late 1986-1987, which was right on the money. In any case, it buttresses my view of Dell, so if I didn't think he was smart already I'd certainly have to think he was now, right?
For those who have sent me e-mails and asked what are the best books for learning valuing businesses and things like, I would recommend anything by Dreman. He's written several, all on the same theme, and I think his earliest ones are the best.
Please be sure you've read "What is the Market Rap?" before you send me email. As highlighted in this outline, there are certain questions to which I am unable to respond.
William A. Fleckenstein, special to Silicon Investor. |
