Bill Fleckenstein: Special to TheStreet.com
04/09/2002 05:40 PM EDT
SOX Sunrise: Overnight, the world equity markets basically shrugged at yesterday's ramp job here, and our futures were pretty quiet as well. When the casino opened for business this morning, a little flurry to the upside took the Nasdaq up about 0.5%, the perennially leading SOX up a couple percent, the bank index up 0.5%, and the Dow up fractionally. But after about half an hour, that rally completely fizzled.
Rerouted on the Red-Eye: In the early going today, which was kind of a modest follow-through to yesterday, the Nasdaq was under pressure as bad news from Nortel (NT:NYSE - news - commentary - research - analysis) and rumor of a Cisco (CSCO:Nasdaq - news - commentary - research - analysis) preannouncement trumped last night's "good news" from Compaq (CPQ:NYSE - news - commentary - research - analysis). (More about that below.)
It wouldn't surprise me if Cisco were forced to preannounce that business is lousy, though I think it's still a little early for that. This is what I have been hearing, and its customers are in terrible shape, as demonstrated by Nortel's preannouncement (which is why I have been short the stock). In any case, Cisco was never able to turn green in the early going today, and was quickly down about 4%.
Survival of the Specious: As to the glad tidings from Compaq, I find it somewhat disingenuous that the company would come out and say, hey, we're going to make or better the one-penny estimate we previously set. What's the point of issuing the announcement? There's no material difference there, except in the intensity of the cheerleading. And, even if the revenue number is no good, the company can often make the earnings number, because it is not unacquainted with the business of financial engineering.
Call of the Dodo: Of course, Compaq has on many, many occasions stuffed the channel, which makes its modest amount of good news totally useless in terms of assessing what's really going on. And naturally, it's got an especially vested interest in chirping brightly, given its desire to conclude the merger with Hewlett (HWP:NYSE - news - commentary - research - analysis) . What a sad sack that combination is going to be. It just sickens me to see a wonderful company like Hewlett dragged down by Carly and this merger, but that's a discussion for another day.
Bank Stocks Vault: Once again, as can be seen from the box scores, the action was rather bifurcated. We'll describe the Nasdaq, since it did far worse than the S&P and the Dow. In essence, we had one bounce after the first selloff, one failed attempt at a bounce about midday, and just steady selling all day long. The market basically closed on the low tick, with the Nasdaq down about 2.5%. The same sort of pattern occurred in the Dow and the S&P, only selling appeared to be nowhere near as aggressive. The SOX was the loser, down over 3%. The bank stock index was the winner, up about 0.5%, though retail stocks did pretty well, as did the homebuilding stocks. Basically, it was tech's turn in the barrel.
Beached Wails: In many ways, today looked like the day we should have had yesterday in tech land. Now I am even more convinced that what we saw yesterday was an attempt to muscle certain tech names higher to try to mute the damage done by IBM. Obviously, the tide turned out to be too strong, and today exposed yesterday for the one-day wonder that it was. So, as we head into earnings season, it looks like tech stocks are definitely on the skids. And it will be interesting to see how nontech stocks do as their earnings are reported.
Away from stocks, the metals were lower. Gold cracked the $300 level, closing down $1.80 to $299.50, while silver was down fractionally. Fixed income was up slightly, with the 10-year Treasury up one-eighth. The dollar was down against both the yen and the euro.
Sheriff Spitzer Ropes Merrill Bull: Turning to the news, today's New York Times (and TheStreet.com last night) had a very important story titled "Merrill Lynch Under Attack As Giving Out Tainted Advice." Apparently, as I have long expected and discussed in these pages, we are finally seeing an escalation in the recriminations that await the brokerage houses.
Citing a whole host of reasons, New York State Attorney General Eliot Spitzer called Merrill Lynch's (MER:NYSE - news - commentary - research - analysis) investment advice "tainted," and basically accused its analysts of being shills. On the subject of some damning email, he said, "This correspondence shows that the people writing stock reports at times functioned essentially as sales representatives for the firm's investment bankers."
Hot on the Appellation Trail: Ladies and gentlemen, that is why I named analysts "dead fish" and not "cheerleaders," because the latter fails to capture how utterly useless they are. Other dead-fish houses are also now being hit over the head with a crowbar, in the shape of a subpoena, to do the right thing as well. I find it disgusting, although not surprising, that firms have no real interest in change, but I believe that a big change is nevertheless under way.
Bull in Balkans State: By my reading of the facts, Merrill Lynch inadvertently granted Mr. Spitzer the point about these "analysts" being charlatans when it balked at the separation of research and investment banking operations. According to the Times story, "People inside the firm [Merrill Lynch] said that a settlement could not be reached because Mr. Spitzer had insisted that the firm agree to spin off its research division as a separate company." This is a key thing. "That would be impossible, these people said, because research does not pay for itself. Firms provide research to institutions in exchange for their trading business and to help attract corporate clients who need to raise money through the sale of stocks and bonds."
Out-of-Commission Admission: So, there you go. Basically, we can't make money doing research, and so what we have to do is get our pompoms out and cheerlead, and then we can make money in the IPO business. Now, I submit to you that the reason they can't make money from research is because they do such a pathetic job of it. I believe research can be profitable if you do high-caliber work. If you are able to consistently make people money, you can charge a fair rate for that.
Mediocrity Is Unprofitable: After all, people already pay for research services. You are paying to read RealMoney.com. My friends Jim Grant and Fred Hickey both sell research products that are spectacular, just to name a few close to my heart. They can all make money. So, it strikes me as disingenuous when people say that research is unprofitable. Maybe you can't make disgustingly large piles of money like you can from cheerleading and hyping worthless pieces of paper, but going forward, that game isn't really going to work anyway. In fact, as I have said for some time, I think these brokerage firms are just lawsuits waiting to happen.
Financials on a Short Leash: That said, I'd like to be very clear about this: I am not advocating ambulance-chasing. In fact, some of the class-action lawyers are more disgusting than the charlatans they are chasing. I just bring this up because I think that people who own brokerage stocks should be aware of the risks. For a very long time, it has been clear to me that this sort of activity would follow in the wake of the irresponsible behavior we saw in the mania. After people sobered up, they would want to blame someone else, and this is all part of the process. I have no ax to grind with these stocks. I am not short them, though down the road that could change.
Nouvelle Home Cooking: As the bear market rolls on and people become more disillusioned with equities, I believe that the brokerage business is going to get far, far worse. That said, I continue to feel that the analysts would do a better job of research if they were forced to put their money where their mouth is on the recommendations, except that they have to act after the public. That would solve the problem real fast. |
