Technology Investor Column:
technologyinvestor.com
8:30 AM Thursday, August 8, 2002. Fred Hickey's August "High-Tech Strategist" newsletter remains positively gloomy, replete with numbers to justify his gloom:
+ The total stock market valuation as a percentage of GDP still hovers around 100%, versus the all-time high of 87% set in late August 1929 just before the Crash. Major market tops (1929, 1936, 1968, 1973 and 1987) all were forewarned when this indicator climbed to the 70% level or higher. Major market bottoms are normally seen in 20% to 40% range (27% in 1932, 20% in 1942, 37% in 1974 and 34% in 1982).
Therefore, to attain the bottom valuation of the 1990 minor bear market (just slightly below the historical long-term average) stocks would have to be cut in half again from here. .. A Dow at 4,000 and the Nasdaq at 600 would not surprise me."
+ A halving of the market averages would also bring price/earnings ratios and dividend yield measures closer to levels seen at market bottoms.
+ If the Philadelphia Semiconductor Index (SOX) lost half its value (from 301 to 150) it would put the SOX back at levels seen in 1995, when industry sales ($150 billion) were higher than they are today (estimated at $130 million to $140 million).
+ Without historical grounding, all the noise emanating from Wall Street and media outlets like BubbleVision (CNBC) can be quite confusing. For example, Abby Joseph Cohen, Goldman Sachs' chief investment strategist came out in mid-June with a report telling investors that the market was undervalued and would rise more than 20% during the next year. As we know, the market promptly collapsed in July.
In September, 2000 she predicted that the Standard & Poors 500 stock index would end the year at 1575. It closed that year at 1320.
In March of 2001, she forecast the S&P 500 would finish the year at 1650. It closed at 1148 and today the S&P 500 index sits at (last night) 876.
In March 2001, when Nasdaq was at 2118, she told the Wall Street Journal, "I do not think the market is at equilibrium today. It is undervalued...Sectors whose valuations were of concern to us a year ago no longer are and here I mean technology and telecom."
Vanguard lost $100 million in outflows from its stock funds in June. July outflows totaled $3.5 billion. Charles Schwab also estimated investors pulled a net $3.5 billion from its stock funds in July.
According to Hickey, Individual investors are finally giving up hope. A monthly poll conducted by UBS Warburg found that investor optimism plunged from 72% in June to 46% in July. This is a good sign, says Hickey, as a market bottom will not be reached until almost all investors have given up. Unfortunately, the institutional money managers are still exceedingly bullish, probably because they're playing with other people's money.
Hickey on individual stocks,
+ Microsoft. "I believe that Microsoft sales may fall off a cliff after 7/31...However, due to Microsoft's revenue deferrals, it's more likely to be a significant problem for the Microsoft resellers.
+ CDW. CDW's software growth will fall off, starting in August. HP plans to take more of its business direct to compete with Dell. HP may also lower its vendor channel rebates (pure profit for CDW).
+ Hickey looked at tech stocks he might buy:. AMD, Lawson Software, JD Edwards, NetIQ, Rational Software, Legato Systems, Compuware, Comverse Technology, Amdocs, Red Hat, Sybase, Adaptec, American Power Conversion, Netscout, Network Associates, Iona, Interwoven, Borland, BMC Software, BEA Systems, Concord Communications, Verity and Novell. According to Hickey, "Unlike the large capitalization Nasdaq stocks, these stocks are all relatively cheap, have little or no debt, have large cash balances, generally low price/sales ratios and high gross margins (except for AMD). these stocks also all have warts (which is why they're so cheap).....But after much consideration, I came to the conclusion that while most of these tech stocks were cheap, they were likely to get even cheaper before we hit bottom."
Hickey has basically moved to the sidelines for now, warning his readers that playing shorts is a dangerous game, especially given this market's volatility.
The Stadium Naming Game (see yesterday's column) has gotten a lot of reader attention. A reader writes, Add to your list CMGI stadium, home of the New England Patriots, which was just changed to Gillette stadium as of Monday this week. Another writes, You can add to the list of companies that have paid to have their names emblazoned on sports stadiums the Lincoln National Corporation, parent of Lincoln Life Insurance Co. The company moved away from their old headquarters in Fort Wayne, IN, where they were founded some 80 years ago, to new digs in Philadelphia and recently ponied up something like $135 million for the rights to advertising on a stadium in that city. As a former shareholder in the company, I have watched with interest as the value of the stock falls. In retrospect, I should have purchased a few put options on Lincoln earlier this year.
Another reader writes, "The real reason for the sports stadium thing is that it's a sign of how a company's executives allocate capital. Capital allocation is crucial to running a good public company and investing shareholder's capital in a sports stadium is a pretty telling signal about the prospects of one's supposedly "core" businesses."
As to what Harry Newton is doing? What with the nice upticks in the last few days, I've started to look at shorting selectively again. These stocks look interesting once again, Adobe, Black Box, CDW, Expedia, Hotels.com, IBM, International Rectifier, Maxim Integrated Circuits, Novellus, SAP, Texas Instruments, Verizon and Xilinx. But I'm not in yet. It looks as though futures are strong again today.
Some wonderful rumor floating: Warren Buffett made $300 million the day his purchase of bonds in Level 3 was announced publicy. Apparently he had already bought oodles of Level 3's bonds. When his "public" purchase of $100 million was announced, the value of his existing bonds immediately rose $300 million... I guess this is legal.
Your thoughts? Are Hickey and I justified in being gloomy?
I'm playing tennis today. We also saw "The Boys from Syracuse," a musical on Broadway. It was great |
