because Rukheyser just made me want to puke,i will post in retaliation BF's column of tonight.First though,what Rukheyser said,as he ALWAYS does when the market has couple good days leading into his show(which i rarely watch now,but admittedly once did).What Rukhetser said points out how sell-siders are relentlessly dishonest --he sad-"as usual,when matters are a bit grim the doom and gloomers come out,but the market answered by doing what it always does,continue it's relentless trend upwards." (quote not verbatum,but anyone who has watched Rukheyser knows it is close enough:)
Excuse me,NASD,3/2000,value peak 5048.Today,2085.
Excuse me,SPX,3/2000 peak 1527.Today,1215.
Excuse me,DOW,1/2000 peak,11722,Today,10539.
Now Fleck's Column---<<<THE MARKET RAP
by William A. Fleckenstein 05:15 PM 07|13|2001
What Does 'Down From' Have To Do With Anything?
Last night, it was most interesting that Asia ignored our rally. Singapore was down. Korea was down. Taiwan was down 3%. Japan was down. Hong Kong was down. These are the countries that make the products that we were celebrating yesterday, i.e., technology. They saw no reason to party. In times gone by, when people were really interested in the facts, the action in Asia would have been a clear signal that our rally yesterday was bogus. But of course, we live in a fantasy world perpetuated by Alan Greenspan, Wall Street, and the mutual funds, so overnight our futures were higher.
After the casino opened higher, we had a sell-off, paced on the downside by the Sox, which was down 3% after yesterday's hellacious move to the upside. Then we had a straight-up move of about half a percent that had the early losses erased. In the early going, the S&P was up fractionally and the Nasdaq was more or less unchanged.
After the setback from the early-morning rampathon, we had a mid-morning grind higher that lasted till about midday. From there, we had a setback and a sell-off into the close that was more pronounced in the Nasdaq than in the S&P, though in typical cowboy fashion, we had a nice little post-closing ramp job in the Spoopit that took the S&Ps up about a third of a percent during the runoff. So the S&P futures managed to close on the high of the day. Otherwise, most indices basically closed in the mid to the high end of their ranges. In terms of stock action, there wasn't anything too notable to report, just a small amount of noise after yesterday's fireworks. As you can see from the box scores, the Sox gave back some ground. The bank stock index went a little higher.
Away from stocks, it was mostly quiet, with small changes. Fixed income was up. The metals were up. The euro was up. The yen and oil were down.
Deconstructing Building Materials Following up on yesterday's inventory story, a reader e-mailed me about trouble brewing in the building-supply business as well: "While we're on the subject of bloated tech inventories, I think a similar pattern might be developing in building materials. I own a retail building-materials business and recently got a letter from Georgia-Pacific. They are idling 45% of their drywall plants and stated they don't see a recovery in drywall for 'many, many years.' What is 'many, many,' anyway? Also, both Home Depot and Lowe's are offering six months 'same as cash' on all purchases over $299 and $250, respectively. Not a vote of confidence when you are in the busiest season and are resorting to extended free finance."
'Spewing Paper Like Confetti' The reader continues: "With practically no money down on mortgages, artificially low interest rates, Freddie and Fannie spewing paper like confetti, and six months' free financing by the boxes, is it any wonder why housing remains the last 'strength' in the economy that Bubbleonians always mention? The housing bubble will make Internet stocks look like a mild pullback one day. Keep up your beacon light of financial truth."
Kiss Off My Write-Off Turning to the news, there were two superb articles in today's Wall Street Journal. On the front page is a story by Steve Liesman and Jonathan Weil called "Disappearing Act: Spate of Write-Offs Calls Into Question Lofty 1990s Profits." (Registration required for a two-week trial.) It is mandatory for investors who have any interest in the underlying earnings -- and creation thereof -- for companies they might own. The writers begin by saying, "Was the corporate-profits miracle of the late 1990s partially a mirage?" Of course, the answer to that is yes. This has long been a theme of this column, that not only were PE ratios astronomical, but the E part of the equation was dramatically overstated. It's absolutely essential for people to understand this, because then they can see how completely out of whack stock prices are with the underlying businesses.
That's why, before this is all through, the indexes will have fallen at least 50% from top to bottom, except in the case of the Nasdaq, where maybe the market is going to drop 80%. I cannot pinpoint the magnitude of the drop, but I can assure you that something gigantic is more likely than something minimal. The latter, of course, is what most people expect because they fail to realize the magnitude of the craze that we have just gone through. Earnings have been dramatically overstated for a long time, and analysts have looked the other way.
Your Loss Is Our Nonevent Speaking of analysts, and as a follow-up to our discussion yesterday, the Journal has an excellent article by Rebecca Buckman called "On Wall Street, Microsoft Gets Friendly Calls." The gist of this insightful piece is, How come Microsoft and many, many other companies got to count investment gains when they added to earnings, but now that they subtract from earnings, it's considered a one-time event and therefore a nonevent? When confronted with this question, David Readerman, a dead fish at Thomas Weisel Partners, answered, "It's hard to explain. I don't have an answer for that."
Cock-And-Bull Optimists Play Beach-Blanket Puffball But an answer is set forth by the writers: "Part of it may stem from analysts' desire these days to accentuate the positive about technology companies. . . ." That is exactly the case. If you listen to conference calls, you'll see that analysts routinely toss in puffball questions to management because what they really want to do is find reasons to be bullish no matter what happens, rather than do their job of assessing what these investments are worth based on company fundamentals. Analysts today want to love Microsoft because it looks like the stock is going up. They omit the part about the PC business basically not growing, that Microsoft sells at something on the order of 13 times revenues and 40 times next year's estimates. They fail to point out that even though Microsoft is a monopoly, and therefore very likely to make large amounts of money, there may be some fall-out from that monopoly status down the road.
So Easy, Even An Idiot Can Play So, these are the rules of the analysts' game: If it's good news, it gets counted. If it's bad news, it gets ignored. In other words, good news is galaxy-specific, and bad news is company-specific. Don't worry about the low quality of earnings and their relationship to the business and the stock price. This is a game of Can You Beat the Number?, invented by Wall Street and Bubblevision. Make up a stupid number and if the company can step over it, the stock goes up. But the Rap asks, What does beating the number have to do with it if a $100 stock is supposed to make two cents a quarter and comes in at three? That was the way it was in the craze. Now we have $40 stocks that are supposed to make 13 cents a quarter and coming in at 14 cents, and that's deemed to be great. People never mention that this works out to 80 times earnings. All they hear is Bubblevision saying, "Well, the stock must be a buy because it's 40, down from 120." To borrow from my speech at the Grant's conference, What does "down from" have to do with anything?
What Really Counts In any case, where a stock got to in the midst of a craze or due to drunkenness on the part of others is of no interest to real investors. What is of interest? The earnings potential of the business, the growth potential of the business and, most importantly, the barrier to entry of the business. How do they relate to the stock price, where are we in the economy and where are we in the business cycle? These are the things that matter to real investors, as opposed to what passes for investors these days. I've yet to see Bubblevision discuss these subjects, although I wouldn't know if they did, because I don't watch it anymore.
Except, having said that, this morning I turned it on just to check a futures quote. There was the Queen Bingo Caller making a statement: "[I have been] searching for companies that might beat the number, and came up with one, Lucent." I know she has a high opinion of her opinion, but I don't know why it's the television talking head's job to canvas the analysts and come up with a stock that's going to beat the number. That's a subject for another day.
Micron Revisited Yesterday I said that it was one of the ugliest pieces of paper I've ever seen. Well, last night I got a chance to glance at the document. This is a filing under Reg. 144A, which is supposedly for sophisticated investors. The Micron security will have trading restrictions placed on it as to when people can and cannot sell. But most interesting is the stock price -- the warrants were for $17.20. The exercise price was $58. The stock price for Micron yesterday was about $40, and so it's going to take a $73.20 stock price for people to get even.
That's about as far as the analysis would ever go if it were on Bubblevision, but let's take a look at what it all means. At that stock price, it would give Micron a valuation of about $45 billion. To place that in the context of all the semiconductors sold on the planet, this year the total will probably be less than $160 billion worth. To put that number in perspective, in 1995 about $145 billion were sold, plus or minus. We did have a spike-up last year, but that was due to a situation we'll not likely see again in our lifetime: the entire conversion of everyone's electronics to be ready for Y2K, and the completely specious build-out of Internet companies that of course had no reason to exist. The bubble in terms of demand is not likely to be repeated. Punters are handicapping a $45 billion valuation on Micron. If we were completely generous and said semiconductor sales were $200 billion, Micron would have a valuation of 25% of the world's sales. But Micron is only one of three large DRAM vendors, not to mention the little ones, and then of course there's every other kind of semiconductor maker that exists as well.
Knowledge Strips Bullish Veneer For more perspective on those numbers, back in 1995 when we had those $140 billion worth of semiconductor sales, the Sox was 160, not 640. So, here is my suggestion. We should make all these analysts that are out pounding the table about buying these semiconductor stocks take some of their money and buy them themselves. Let's see how bullish they'd be if they actually had to put up their own dough. This is a little taste of what people ought to look at when considering buying securities, not just look at where the stock used to be and say, Oh, it's down a bunch, therefore it must be a good buy. As a friend of mine once said, "Yeah, it's a good buy, all right. Good-bye house, good-bye car, good-bye wife."
Note to new readers of the Rap: If you would like your Rap e-mailed to you, please click here and check off the appropriate box. Mr. Fleckenstein often peppers his commentary with an inventive vocabulary known as "fleckisms." All is revealed in the "Insider's Guide to Fleckisms." Please be sure you've read "What Is the Market Rap" before sending e-mails to fleckrap@home.com. As highlighted in this outline, there are certain questions to which Mr. Fleckenstein is unable to respond.
Disclaimer: William Fleckenstein periodically publishes columns expressing his personal views regarding particular securities, securities market conditions, and personal and institutional investing in general, as well as related subjects.
Mr. Fleckenstein is the president of Fleckenstein Capital, which manages a hedge fund in Seattle, Washington. This fund regularly buys, sells, or holds securities that are the subject of his columns, or options with respect to those securities, and regularly holds positions in such securities or options as of the date those columns are published. In particular, this fund regularly holds short positions in such securities as of the date those columns are published. The views and opinions expressed in Mr. Fleckenstein's columns are not intended to constitute a description of the securities bought, sold, or held by the fund. The views and opinions expressed in Mr. Fleckenstein's columns are also not an indication of any intention to buy, sell, or hold any security on behalf of the fund, and investment decisions made on behalf of the fund may change at any time and for any reason. Mr. Fleckenstein's columns are not intended to constitute investment advice or a recommendation to buy, sell, or hold any security.
The views and opinions expressed in Mr. Fleckenstein's columns are his alone and not those of Grant's Investor. Grant's Investor disclaims all responsibility for Mr. Fleckenstein's views and opinions. >>>
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