Rally's Magic Potion Turns Into Truth Serum
By Bill Fleckenstein
11/07/2002 17:59
Setup for a Pullback: It's difficult to know where to start, in terms of describing all the action, but I'll take a stab at it, because I think the details kind of matter. First of all, I'd like to give an account of what happened last night starting at the close, when the Cisco CSCO news hit the tape, and then in the run-up to this morning. During the first 50 minutes of the conference call, while John Chambers was touting the future, the stock traded up about 75 cents. Meanwhile, our stock index futures didn't really respond. By the time Chambers lowered guidance and the Q&A began, Cisco had dropped a dollar, putting it about 20 cents under the New York close. (Much more about Cisco below.) The futures were down 0.5% to 1% and never recovered.
12-Carat Gold: Also overnight, the worldwide markets did not hunt. One might have thought that Asia and Europe would have deemed yesterday's rate cut of 50 basis points, lucky No. 12, to be the elixir that everybody needed. But they weren't buying it, nor apparently was the dollar, which was lower most of the evening. Gold, on the other hand, passed the time sneaking and creeping higher.
Abracadabra Dud: By the time the world's largest casino opened for business, the stock index futures were down about 1% for the S&P and 2% for the Nasdaq . Naturally, there was an attempt at a bounce, followed by a selloff, then a serious attempt at a bounce, and another selloff. What was most significant about the morning action was that the bank stock index was down a couple percent, that after not having rallied yesterday on the surprise 50 basis points. So, the important thing to note here is that the magic potion appeared not to work.
Unisex Hex: Also not working in the early going were the efforts by the OPM crowd to turn the tech tape, as they had done successfully so many days in a row. Up until today, the difference between technology stocks and other stocks has been dramatic. Technology stocks -- the single most expensive group on the tape, and the one most affected by the glut from the mania -- have continued to be the most sought after, because it's where people think they can get the most performance. But this morning, that gambit didn't work.
Unfinished Symphony in D-ownside: In any case, I am quite surprised the market fell apart as badly as it did, considering that both the Republican sweep and the 50-basis-point cut were deemed to be far more positive than expected. On that note, I'd like to reiterate my comments from a week ago:
"Given where the economy looks to me to be headed, I would think that sometime in the next week, between now and the FOMC meeting, the stock market will have seen its best levels. So, people who are overexposed to stocks might want to use the next four or five sessions, plus or minus, to lighten up. I simply cannot believe the market does not have unfinished business on the downside." Considering the "positive surprises" and the "weak" responses, I would only add that the market could get ugly, fast. That doesn't necessarily mean it will, but it could. People should be alert.
SOX Gets Chicken Pox: Returning to the action, the bank stock index really stunk up the joint today, down about 4%. It was an incredibly poor performance, in light of what I previously described. The SOX also wound up being hit, down about 9%, and its pain was felt in the housing sector, where stocks were down between 8% to 10% apiece. I can't quite explain why the financial and housing stocks were roughed up as badly as they were, but I don't see how that could possibly be viewed as bullish.
Of Balms and Bombs: It's just another amazing development, given how the lower-rate tonic would be expected to precipitate more refinancing and more houses being bought, if all things were equal. One could argue that the market was "overbought" and due for a correction. But considering the extra amount of good news we have seen, the size of the spanking administered is, I think, meaningful.
Away from stocks, the bond market was flying today, with the 10-year up a buck. The dollar was down 0.5% vs. the euro. The metals were quite strong. Gold was up 1% to $320.90, and silver was up 2% to $4.55.
Eat Your S&Ps, Dammit: Turning to the news, I would just like to share a stunning comment by made by former Fed governor Wayne Angell, on Bubblevision. (It was emailed to me by a reader, and I am assuming he took it down correctly.) Mr. Angell said, "The Fed wants to drive interest rates so low that people are forced out of money-market accounts and into the stock market. It is the Fed's job to make people risk-takers." That is just an incredible statement, and one that goes along with the Fed's suggestion of trying to make your money evaporate, as I mentioned yesterday.
I recently had the occasion to "debate" Mr. Angell, and I was absolutely floored at how clueless he was, considering that he had been a Fed member for about six years, including a stint as vice chairman. For him to make a statement like the one I just shared is positively frightening. As I was saying the other day, not everyone benefited by the mania, but everyone is going to pay the price for it. Parenthetically, and speaking of the man we don't talk about anymore, I would just like to recommend a story by Jeff Cooper titled " Fed Sugar Daddy Opens His Wallet ."
Stock Tout & Sons: Turning back to Cisco for a moment, for any of you who would like to know what it's like to listen to a whole lot of corporate arm-waving, I encourage you to listen to the Cisco call. I myself found it very painful. To give Cisco credit, it has wonderful products and has done a great job of fending off its competition. But it is just stunning to see the lengths to which the company appears willing to go to force its stock higher. Cisco is not alone in this, as almost every big tech company, in my opinion, is guilty of managing its stock price rather than (or in addition to) its business.
Index Close Change
Dow 8586.79 -184.22
S&P 500 902.69 -21.07
Nasdaq Composite 1377.18 -41.81
Nasdaq 100 1026.21 -39.65
Russell 2000 383.15 -9.58
Semiconductor Index (SOX) 302.62 -27.22
Bank Index 747.35 -28.77
Amex Gold Bugs Index 122.68 +0.14
Dow Transports 2350.62 -63.09
Dow Utilities 202.28 -7.15
NYSE advance-decline -1,004 -2,110
Nikkei 225 8920.44 -32.85
10-year Treasury Bond 3.88% -0.153
Have Passport, Will Cheerlead: In any case, listeners on the call would have heard one of my favorite vignettes, in which Chambers was talking about how he traveled around the world, and that's how he knew the future would be bright. His optimism was not shared by a friend of mine who offered some illuminating comments that I'd like to share with readers: "In the last month, Chambers according to his statement on the conference call has traveled to eight countries and met with 'thousands' of customers. It takes one day to go country to country. At 2,000 people in 22 days, that's 91 people a day. Using a 14-hour workday and assuming eight minutes' travel time between meetings, he spent exactly 83 seconds with each person, whereby he has concluded, 'As business turns around, spending will return.' I could have saved him a lot of work if he would just have called!"
Of course, the reason for his discussion of that whirlwind tour was to continue a practice which began in the mania but lingers to this day, and that is to cheerlead one's stock. Here I would just like to make the point that all the money lost in the scandals like Enron and WorldCom kind of pales in comparison to what happened in some "real" companies that were hyped to death by corporate chieftains and by the people on Wall Street. Remember, at the peak, Cisco alone was valued at nearly $600 billion, compared with $92 billion today, which is still a big price, relative to $19 billion in revenue. |
