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Technology Stocks : Applied Materials No-Politics Thread (AMAT) -- Ignore unavailable to you. Want to Upgrade?

To: Gottfried who wrote (6985)	8/28/2003 9:29:58 AM
From: Proud_Infidel	Read Replies (2) \| Respond to of 25522

A clown posits his theory of why this sector has been performing well.....note there is absolutely no talk whatsoever of improving fundamentals for the sector, shortages of chips we are seeing which will eventually lead to allocation etc., the likes of which we read in the headlines here each day. Anyone who claims this group is "rallying on nothing" does not have a clue. RealCommentary from TheStreet.com Semi Equipment Becomes Hedge Funds' Waterloo Wednesday August 27, 9:33 am ET By James J. Cramer, The unthinkable keeps happening in semiconductor equipment land. For a year now, these stocks have rallied on nothing. They have been upgraded on nothing. They have nothing really good to say. They barely grow at all. And yet, every day someone upgrades or praises them and they keep levitating. These stocks are the shorts' worst nightmares. These stocks are made of Teflon; the bad slides off, the good just keeps getting flagged as great. And they keep working. Take Cymer (NasdaqNM:CYMI - News ). I remember a month ago when Cymer was blowing up left and right but the stock wouldn't go down. I knew people who were short it and they couldn't believe it. Today, J.P. Morgan raised estimates from a loss of 28 cents, where numbers were taken to when it had a shortfall, to a loss of 25 cents. And what has happened to Cymer during this whole period of its earnings cratering? It has gone higher. And what will happen now that numbers are being "bumped"? It will go higher. You could say the same thing about KLA-Tencor (NasdaqNM:KLAC - News) or Novellus (NasdaqNM:NVLS - News). How do you explain this phenomenon where stocks of companies that are doing badly go higher endlessly? Is it because we are about to see a big cycle turn in semi spending? Let me posit a different theory. There are 6,000 hedge funds with somewhat identical business models. They short stocks of companies that are having their numbers cut. They go long stocks of companies that are having their numbers raised. The biggest estimate cuts have been in this group. So this group attracted the biggest short positions. The stocks themselves couldn't "handle" the short positions. There weren't enough sellers on bad news to accommodate all of the hedge funds that needed to cover them. The result? These stocks went higher on bad news. They will keep going higher on bad news because numbers still are not coming back fast enough. The conclusion that hedge funds should reach is rather counterintuitive but worth taking away: The model that predicts that stocks will decline on bad earnings news simply isn't working or isn't worth banking on these days. Too many people know the same data. Too many people are playing the same game. Whenever the same game is played by too many, even if it's an intelligent game, it can't produce winning results. I will take it a step further. This market bottomed in part because there were so many hedge funds that had been short and made good money in 2001 and 2002 using this model that the model itself led to the counterintuitive upside. On each Cymer number cut, you literally had to buy the number cut, not sell it. Much of tech has been like that in 2003. Things are bad, but not so bad that they create the selling needed to fulfill the hedge funds' demands for supply. The companies themselves were using their cash to sop up shares. The insiders didn't accommodate and didn't need to issue secondaries. The result? Totally counterintuitive action. The people who knew these companies best got their heads handed to them. The people who had no rigor and just said "You know what, I like this industry because it is a growth industry" made money. The people who did the least homework made the most money. I know that defies logic. I know that doesn't seem right. But it is exactly what happened and it is causing a huge cohort of hedge fund managers to be so far behind the market that they are going to face redemptions. That, of course, will just exacerbate the problems because the only way to raise the capital to meet those redemptions is to sell the remaining winners or cover the shorts. What a nightmare.