Greg,
Hi. I'm looking to buy MIK and PETM. MO looks like it has run out of gas and I might short it. I just got this email from tradermike...what he says about the nifty-fifty is very true...I lived though it.
Hello The last time I sent
you an email was way back at the beginning of February. I told you that I had
shorted stocks in January and was expecting a huge market correction. I also
said that I would send you an email when I thought we hit a bottom. Well I
haven't sent you an email, because we haven't hit a bottom yet! Yeah we got a
temporary rally at the end of February and we got a little rally today, but this
ain't no bottom.
Hopefully you heeded my advice and got out of big cap techs because they have
been losers this year. In fact they are the worst segment of the entire market.
Gold and silver mining stocks are the best. That's why back in February I
bought a basket of gold stocks and am making a killing on them. They include
symbols GG, KGC, BGO, DROOY, and CBJ among others. You may want to check out
their charts. Some of them are up 30-50% from where I got in already and I
believe they are going to be THE SECTOR of the year although they are due to
pullback and consolidate right now. At the same I've been shorting Nasdaq tech
stocks of course.....So far my position has given me a personal gain of over 15%
this year and we've only had one quarter! Do you know anyone on CNBC who has
beaten that?
Over the past three weeks I have spent time with about a dozen people and gone
through their portfolios with them. The wealth of their portfolios has varied
from $50,000 to the millions. In all, but one case their portfolios have been
turned into disasters by the bear market. Almost all of them are dominated by
stocks from the Nasdaq 100 and in many cases that is all that is in their
portfolio.
I look at them and I know that the sad truth is that they are likely to continue
to decline the rest of the year and the stocks in them won’t start another
sustainable uptrend for years – if ever.
I have been telling most of these people to sell and get out of tech for the
past two years. None of them did it. And most still don’t want too. Even
though their stocks have been dropping – often by more than 70-90% from their
highs – in a steady downtrend, every time the market puts on a rally that lasts
more than a week they find reason to hold on.
They have no strategy for selling or holding. They know nothing about the
fundamentals of the companies they own and they certainly don’t know anything
about the charts. If they did they would run for their lives.
Instead they find rationalizations to continue holding. It may be something
that they heard on TV – such as the semiconductors have bottomed, consumer
spending was up last week, or you have to be in the market or you’ll miss out
when it booms at the end of the year. The most popular thing that they say is
that they are holding strong companies and therefore they are great investments
for the long run.
However, when they say this they have no notion of valuations or earnings. For
example take one popular stock – Corning . Corning had earnings of around $400
million a year ago and lost $5.5 billion dollars this year. Yet the company has
a market cap of over $7 billion. For every dollar people invest Corning it
loses over $1. Using common sense anyone should realize that is not the type of
company you want to invest in. And as for the argument that it will turn around
so you need to get in now – how long does it take to turn around a $7 billion
dollar company? I’m sure the answer is a lot longer than 6 months.
And what else is ironic is that more often than not the insiders and corporate
CEO’s of these company’s have been selling shares like crazy through the decline
while these people have been holding or buying more. Since the September market
low 93% of the insider transactions at the 50 largest tech companies have been
sales. 3.2 million shares were bought while 45.2 million shares were sold. It
is insanity for people to ignore a figure like this.
But people see what they want to see. And what they want is signs of hope. And
that hope comes from the wonder market rallies like what you are seeing right
now and from the parade of analyst liars and fund managers on TV who say that
everything will go up. You don’t make money from hope.
What is really happening is that the world and the financial markets are going
through fundamental changes that are going on right under these people eyes.
They are still looking back to the 1990’s for guidance and encouragement when
they need to look ahead. Only then can they seize the opportunities for profit
that are here right now.
On September 11th the nation underwent a change of consciousness when it came to
its relationship to the world. A movement of international terrorism all of a
sudden became central to everyone’s lives – at least for a few days, but at
least forever for those who live in New York and Washington .
A similar change of consciousness is going to happen when it comes to the stock
market. Bear markets come to an end when people get disgusted enough with the
stock market that they either sell out or promise that they’ll never buy another
stock again. We’re not at that point yet, but we are in the process of getting
there. It doesn’t mean the market has to crash or fall into oblivion – it can
just go sideways long enough for people to simply lose interest.
What it means for us though is that we need to recognize these changes before
the crowd does. That I want to tell you what the new investment paradigm is and
how you can profit from it. But first I need to tell you that the old one is
dead and over.
And I’m talking about tech stocks and the Nasdaq. Forget about it. The only
people who still believe are the people – like my friends with the tech
portfolios – who are acting as bagholders for the insiders. People who don’t
own stocks know that the economy is not booming and that tech stocks are
garbage.
I am friends with all sorts of people. From multi-millionaires to people who
build mobile homes and work in factories. The ironic thing is that the regular
man in the street has become more savvy about the market than the wealthy people
with the big tech portfolios. They can see from afar that the system is a mess.
But the guy who has been successful all of his life has trouble realizing that
he has gotten himself into a bad spot when it comes to his investments. He
remains too close to his investments to think clearly.
The truth is most of these investment positions need to be liquidated so that
the money can be used to take advantage of the new paradigm. The old one is
done. This is nothing new. Investment paradigms come and go in the market.
The paradigm most similar to the tech boom is the nifty-fifty of the late 1960’s
and 1970’s. The early 1970’s marked the end a 10 year bull market for stocks.
At the peak of the boom the market became dominated by 50 big cap stocks.
During the last years of the bull market most stocks declined, but the rest of
the market went up because these 50 stocks continued to go up. Between 1998 and
2000 the same thing happened again. Although the averages went up – fueled by
big cap tech stocks, most stocks actually dropped.
In the 1970’s the nifty-fifty were conglomerates. These companies were supposed
to take over the world. They were hot because they sported huge earnings
growth. Small companies can often post huge earnings growth rates just because
they are small or are in new and growing market niches. Conglomerates can post
large growth rates too, but they don’t do it the same way. They do it buy
acquiring other companies and buying earnings, and ironically the more
overvalued their stock the easier they can do this.
The 1960-1970’s bull market was led by a group of conglomerates. Once the bull
market ended the stock prices for the conglomerates crashed and many of them
simply disappeared. You never hear of Ling Electronics anymore, even though it
went from 2.25 in 1955 to over 1000 split unadjusted in 1967. In 1969 Fortune
Magazine called it the 14th largest industrial company in the United States .
It no longer exists.
Neither does Rapid-American or Riklis. Gulf and Western still does, but its
stock doesn’t trade anymore. It started out as a car parts store until it
borrowed $84 million dollars from Chase Manhattan bank and bought the New Jersey
Zinc Company, Desilu productions, and Consolidated Cigar. It went up a like a
rocket until the SEC investigated it for accounting fraud.
But all of these were once hot stocks that were growth stock favorites of
analysts and fund mangers. And they posted growth numbers. The Ling
conglomerate announced a 75% rise in EPS in 1967 alone. Cisco didn’t even have
to do that in 1999 to be called a “new economy” stock.
How did the conglomerates of the 1960’s do it? They bought earnings.
John Brooks, who wrote a history of the era called The Go-Go Years tell us in
his book:
“The simple mathematical fact is that any time a company with a high multiple
buys one with a lower multiple, a kind of magic comes into play. Earnings per
share of the new, merged company in the first year of its life comes out higher
than those of the acquiring company in the previous year, even though neither
company does any more business than before. There is an apparent growth in
earnings that is entirely an optical illusion. Moreover, under accounting
procedures of the late nineteen sixties, a merger could generally be recorded in
either of two ways – as a purchase of one company by another, or as a simple
pooling of the combined resources. In many cases, the current earnings of the
combined company came out quite differently under the two methods, and it was
understandable that the company’s accountants were inclined to choose
arbitrarily the method that gave the more cheerful result. Indeed, the
accountant, through his choice and others at his disposal, was often able to
write for the surviving company practically any current earnings figure he
choose…All of which is to say that, without breaking the law or the rules of his
profession, the accountant could mislead the naïve investor practically at
will.”
Let’s look at the nifty-fifty conglomerates and see what happened to them. A
few of them later went on to become stock market leaders in the 1980’s and
1990’s. These include Philip Morris, Coca Cola, and GE. Most of them though
turned into basket cases. The latter include IBM, Sears, Xerox, Kodak, Avon ,
and Kmart. Although IBM recovered 20 years later, Simplicity Pattern, Digital
Equipment, and Burroughs disappeared.
Since the top of the 1970’s bull market 64% of the nifty-fifty, that continued
to exist, have under performed the broader market since then.
The nifty-fifty was the investment paradigm of the great bull market that
proceeded the last one. Once that bull market ended the nifty-fifty paradigm
ended too. Yesterday’s investment winners are seldom tomorrow’s. People who
think Cisco, Oracle, and the wrest of the tech wrecks are still good investments
worth holding on to or doubling down on are burying their heads in the past and
are ignorant of the changes that are taking place around them. The poor schmuck
who bought Gulf & Western back in the 1970’s is still wondering where his money
went.
There is more to investing than buying and holding. You make money by taking
advantage of large trends in the market. Tech was the big trend of the 1990’s.
Gold, commodities, and pockets of strength in small caps will be the next big
thing. And don’t forget about the rest of the world. Look at Russia and
countries linked to natural resources such as Australia . But at the center of
all of the new trends that will emerge over the next few years is one word:
safety. Only the most foolish will continue to blindly through their money at
stocks on the old mantras of hope. The wise will learn from the bubble and
rotate their money into sectors that are strong and safe. The people who double
down on what was once hot will be eliminated. That's the harsh reality of the
market and the ferocity of the bear. It eats investors alive. |
