This reporter was reading this thread. -g- Another good article, worthy of pirating. -g-
October 30, 1997
Don't Blame Plunge on Asia,
It Was All About Wall Street
Forget that Asian domino. It started the three-day plunge on Wall Street,
but causing it is another matter. U.S. stocks fell and fell sharply because
they had risen too high. Multiples were soaring, and Wall Street had gotten
in the comfortable habit of closing its eyes to anything unpleasant.
Hong Kong merely reminded Americans
that markets go two ways. But if you're
tempted to blame the hemorrhaging here on
the Hang Seng there, recall that Japan
crashed in 1991 and has been in a bear market for the past seven years. It
didn't slow Wall Street one iota, and Japan is a bit -- quite a bit -- more
crucial to American exporters than Hong Kong and maybe even Thailand.
Sure, a slowdown in Asia will hurt some U.S. companies, but in economic
terms, that's only a headache. The reason Wall Street turned it into a
migraine, even a short-lived one, is that stocks were priced to discount
every imaginable favorable event. Wall Street needed good news at every
corner -- in Bangkok and also Berlin, Mexico City and even South Philly.
I can't explain why computer shares had been moving up while computer
prices (and profit margins) were moving down, only that such trends do
not indefinitely persist. And when armies are massed, there is always an
archduke somewhere willing to take a slug and start a war. This time it
was called Asia.
But real blame
--
responsibility
may be a
better word --
lies with Wall
Street analysts
and pliable
corporate
accountants,
who have
become the
foils of
momentum investors. People who were glued on Monday to events
around the world (truth to tell, even a certain newspaper columnist
inexplicably switched off the football game to catch the trading in Hong
Kong) probably should have been paying more attention to Norwalk,
Conn., which is home base for Oxford Health Plans. Oxford, a
managed-care company, said Monday that a screw-up tied to a new
computer system had led it to overestimate revenue and membership totals
and, guess what, underestimate its costs. The stock fell 62%. The shame is
that analysts had been uniformly bullish, even while investors who had
done their homework had suspected for months that the company's
numbers were unreliable.
All it took these investors was a few phone calls to learn that Oxford didn't
know who its customers were -- that it hadn't, in fact, been billing some
customers or paying various doctors and hospitals. Were the analysts that
lazy, that blind or, maybe, that co-opted?
While not every company is an Oxford, any business that estimates
accruals and expenses can make its numbers look as good as it wants in
the short term. Wall Street's job is to keep them honest.
"So why so gloomy," I hear you saying, "didn't markets recover?" "Buy on
the dips" is on everyone's lips, but that misreading of recent affairs implies
buying at any price. At some level, price eclipses value. It was noted here
in June ("Cheap, fair, going, gone") that the earnings yield on the Standard
& Poor's 500 was well below the yield on the risk-free bond, meaning that
the underlying payoff on stocks wasn't in current earnings but only in the
earnings that were expected -- nay, counted on -- in a Panglossian future.
Since then, bonds have done better than stocks, narrowing but not
eliminating the gap and the relative overpricing in equities that it suggests.
Of course, that overpricing is only on average. It shouldn't deter you from
buying individual stocks, if you parse the numbers and if on so doing the
value is there. But Wall Street, in its usual crowd-following mode, has
been buying 'em wholesale. It has no commitment; it rents an ownership
position in the morning and bails out in the afternoon, and with all the
parsing and concentrated judgment of a dog when it hears the dinner bell.
Fund managers make no secret of the fact that they're loath to hold cash.
By investing (regardless of price) every penny that comes in, they're
following the small investors they were hired to lead.
If you want proof, look at Intel, a great company that, as judged by its
operating results, has lately been in a rough patch. On Tuesday, Intel
plummeted to 69 1/4 and soared to 86 3/4 -- meaning that in the space of
a few hours, Wall Street added $28 billion to the company's value. Not
even Intel sells chips that fast. Of course, Wall Street wasn't really
"valuing" Intel; it was reasoning with its glands.
The wackiness of back-to-back record moves in opposite directions
merely underscores that stocks can only be dissected and understood, and
should only be purchased (or sold), one at a time. My insurer may be
cooking the books -- yours may be on the up-and-up. Gotta do the work
to know.
And the lesson from this week is that it pays not to mechanically buy on a
dip but to think about price and value all the time, because sooner or later,
mispriced securities correct. Hong Kong reminded people, even if only for
a day. And somewhere out there, another archduke lurks. |
