Several Great Wonders of an Inscrutable Market
By Ben Stein
Special to TheStreet.com
10/10/2001 07:01 AM EDT
I first became interested in the stock market when I was about 10 years old. I read a big book that Merrill Lynch had sent to my mother about the market, and I was fascinated.
I then studied finance at Columbia and much more intensely at Yale. In my poor little way, I have tried to keep up on the market, and I follow it closely. In fact, I actually sometimes read 10-Ks, 10-Qs and annual reports. I think, study and even make charts. I have written about it, and I speak about it a lot.
But as I have followed it in the past few years, it has become even more bewildering than I could have imagined. There must be people out there who understand it, or maybe it simply isn't any more understandable than the human heart.
Probing Questions
In a spirit of inquiry, however, I hereby offer a few basic questions about the market as it is in the second week of October 2001, as the bombing of Afghanistan begins.
First, can someone please tell me what is holding up the tech portions of the Nasdaq, or any part of the tech sector? The Nasdaq now stands at roughly 1600 from a high of about 5100 in March 2000. The QQQ (QQQ:Amex - news - commentary - research), or Nasdaq 100 Unit Trust, is at about 32, from a high of about 120 in March 2000.
But the companies that make up the Nasdaq and the QQQ still have almost no earnings to speak of. Their prospects for the foreseeable future are extremely grave, to put it mildly. The collapse of the high-tech sector seems to be gathering steam rather than improving. Many of the tech-sector gods still trade at almost unbelievable multiples, such as Cisco (CSCO:Nasdaq - news - commentary - research) at 95 times earnings. Other big powers have no earnings: Veritas (VRTS:Nasdaq - news - commentary - research), which rose by more than one-third last week, has none at all. Siebel (SEBL:Nasdaq - news - commentary - research), Sun (SUNW:Nasdaq - news - commentary - research) and Qualcomm (QCOM:Nasdaq - news - commentary - research) all are trading at a significant multiple to earnings.
Why do these companies and the tech sector generally command higher multiples than, say, General Motors (GM:NYSE - news - commentary - research) or General Electric (GE:NYSE - news - commentary - research)? The answer used to be that they were high-growth companies. But we now know that they're low-growth companies -- at least for the foreseeable future. They may become high-growth again, but they're cyclical at best, like Alcoa (AA:NYSE - news - commentary - research). Why do they command a much higher multiple than other cyclicals?
When I take a peek at the Nasdaq and its multiples, I'm reminded of a conversation I recently had with a man at Fidelity. We were smoking over bond funds. At one point, he said that if I were really interested in yield, I should think about a junk-bond, or "high-yield," bond fund, as he called it. I asked him what the current yield was. He said it was about 10%. I was impressed, but then I asked a key follow-up. "What has its total return for the year been?" He cheerily answered, "About 12% negative."
"Then," I asked, "why is it called a 'high-yield' fund?"
Taking Responsibility
Anyway, on to question No. 2: As I write this, I'm staring at a copy of Access, a quarterly publication of Pimco Funds. For my sins, I once had a fair amount of a hellish thing called Pimco Innovation Fund. In the year and a half since I've had it, my investment value has fallen by about 80%. Yes, I put about $44,000 into it, and I now have roughly $8,000 in it. This is a staggering loss, even worse than that of the unmanaged QQQs. Yet, in Access, which is dated June 30, 2001, the smiling Dennis McKechnie, portfolio manager of Innovation, said that he's seen some problems in tech (a "rout," he allows) due to "lack of visibility of earnings," a silly way to say there are no earnings.
However, he said as of June, "...specific industries in technology have begun to show signs of recovery." If McKechnie is reading this, could he let me know which ones those were?
McKechnie goes on to add that while weakness may "...persist for the next couple of months, we are confident that the economy will improve by year-end, and that portions of corporate spending on technology will accelerate in advance of economic recovery."
Now, anyone can make a mistake. We're all human. His stock choices have been catastrophic. (Stockholders paid him to find such hidden gems as PeopleSoft (PSFT:Nasdaq - news - commentary - research), Applied Materials (AMAT:Nasdaq - news - commentary - research), Sun, AOL Time Warner (AOL:NYSE - news - commentary - research), Dell (DELL:Nasdaq - news - commentary - research) and Qualcomm.) His forecasts have been humiliatingly wrong. Again, this is the human condition. But how could he have been "confident" about anything after his dismal record? Or is this just a fine sense of irony at our expense?
How can McKechnie and his hundreds, nay, thousands of colleagues who led us investors to lose our savings in such massive amounts fail to resign? I wonder how many tech fund managers have done so? (And why is McKechnie actually smiling in his photo in Access?)
Pimco is a company. It has directors. Why haven't they dismissed McKechnie? True, anyone can make a mistake -- indeed, a lot of mistakes. But don't people have to answer for them? Why doesn't he resign or get dismissed, along with his peers who not only led us off a cliff but also didn't even do as well as a fully invested index with no ability to hold cash or bonds?
However, in McKechnie's defense, in the big, wide world that reads this, can someone tell me about a tech fund manager anywhere who managed to avoid the bloodbath in tech? Even one in that sector who switched to cash or bonds in time to avoid carnage? Not one in a broad sector fund, but one in tech who said, "You know, tech has had it. Time to go to bonds or cash." Please let me know.
Finally, will someone out there please send me an embroidered sign that I can put on my wall that says, in big bold letters, "Remember the Innovation Fund"? That way, if I'm ever tempted to put my faith in mutual fund managers again, I can lock myself in the closet until the urge goes away. |
