David Tice market commentary: Note he is bearish on everything EXCEPT GOLD.
Market Commentary - April 20, 1998
If one watches the price changes for the Dow Jones Industrial Average as a reflection of the stock market, one would assume that today and the past week have been unusually quiet, uneventful
trading as the Dow has gained a mere 14 points the past five sessions. Of course, the general market has been stronger with the S&P500 and Russell 2000 each posting gains of close to one
percent. This has the "look and feel", however, of the quiet before a big storm. Beneath the markets composed surface, individual stock trading has deteriorated to almost complete chaos as stock
prices swing unpredictably and wildly. This type of extraordinary action is a classic symptom of acutely unhealthy market underpinnings driven by massive speculation and aggressive trading.
Indeed, actual deteriorating fundamentals are, for now, being ignored as this most incredible stock market mania now runs out of control.
Nowhere are stock prices diverging more radically from company fundamentals than in the technology sector. Tuesday, IBM gained more than $6 as earnings per share of $1.06 beat estimates by
one cent. Never mind that earnings estimates had been sharply reduced after beginning the year at around $1.30. Looking at the earnings report, one must question why there was all the euphoria.
Net income for the quarter actually declined 13% from last year as sales grew a paltry 1.8%. Hardware sales, where IBM has its highest margins and traditionally earns most of its profits, declined a
noteworthy 8%. Gross profit margin declined to 36.6% from 38.1%, although net income benefited as the tax rate declined to 32% from 35.5%. Boosting earnings per share was a reduction in
shares outstanding as IBM spent an additional $1.8 billion buying back its common. Interestingly, during the past year as earnings have suffered double-digit declines the stock has gained over
65%.
An important, although largely ignored, comment came from Chairman Louis Gerstner, "...our PC business suffered from a severe price war that was greater than anticipated." Nonetheless,
euphoric investors ignore collapsing prices and profits in the personal computer business choosing instead to buy these stocks with reckless abandon. So far this week, in three wild trading
sessions, Dell has gained 14%, Gateway 2000 16%, and Compaq 12%. Dell, gaining almost 90% year-to-date, now has a ludicrous market capitalization of $49 billion and a Price-to-earnings
ration of 54. The stock is now up four-fold in the past year. This is investor irrational exuberance in its clearest form.
Similarly, Intel, after recently reporting first quarter earnings 27% below last year, gained 5 points today supposedly on hopes that the second half of the year will show improvement. The stock
now trades 20% higher than it did last year at this time when its earnings were much higher and prospects appeared bright. Today's unusual move appears to be much related to a massive short
squeeze throughout the tech sector. During the past week the NASDAQ 100/NDX, Semiconductor/SOX, and Morgan Stanley High Tech index have all gained an "eye popping" 5% . This has all
the sign of a "textbook" speculative blow-off and investors should be on guard for an inevitable sharp reversal in stock prices. These types of melt-up invariably lead to sudden and very sharp
declines and we would expect this any day.
While many of the heavily shorted PC and semiconductor stocks such as Micron Technology, Linear Technologies and Novellus Systems were exceedingly strong today, cracks are forming in
groups that have been the recent focus of most manic speculation. Today the internet stocks were hard hit as Yahoo dropped 5, Excite 7, Amazon 6, Infoseek 4 , and Go2net 2 3/4. Investors should
take note of how quickly these stocks can fall. Also showing signs of the end of a brief but sharp speculative run are the stock market data companies such as Data Broadcasting, Market Guide, PC
Quote, Omega Research and Track Data. These stocks, like the internet stocks, had wild speculative surges earlier this week as many of these stocks gained between 30 to 100% in one or two
trading sessions. Once again, this type of market action is indicative of trading seen in a final speculative period prior to market trouble. In our current stock market's case, the end of a long and
historic mania. We can not overstate our utmost concern for today's market. While it is impossible to predict daily moves, there is one thing that we are 100% - unequivocally certain of - today's
stock market is the most unhealthy and potentially disastrous bubble of our lifetime. This is a terrible accident just waiting to happen and extreme caution is warranted if you're invested at all on
the "long" side.
Interestingly, the gold stocks, while not getting much attention from the media so fixated on internet and technology companies, continue to shine. The XAU/Philadelphia Gold and Silver index
has gained 9.5% this past week bringing its year-to-date gain to 25%. As the US financial asset bubble runs hopelessly out of control, the interest in gold, with its long history as a traditional
store of value, is easily justified.
IS THE CURRENT STOCK MARKET "A BUBBLE"?
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"Bubble" - a light hollow ball, Webster's II. The stock market is a "bubble" looking for a pin. The purchase of a securities at one price may be an investment, at a higher price - speculation, at an
even higher price - irrational exuberance, and today, 1500 points above "irrational exuberance", the greater fool theory.
Everyone is investing in the market. People buy at high prices and expect to sell at ever-higher prices. The overall stock market is selling at the highest valuation in more than seventy years.
People have forgotten that in order to "buy low, and sell high", you have to sell.
It is extremely rare for a Federal Reserve Chairman to warn investors about the stock market. This has happened only twice before in this century (1929, 1965), and in both cases, a severe bear
market followed that required more than twenty years to breakeven after inflation. Alan Greenspan chooses his words very carefully. Yet Greenspan referred to the stock market as "a bubble" in a
prepared speech when the Dow was about 6000.
Only in a bubble can a stock like At Home Corporation be worth $2 billion on its first day of trading when it posted revenue of only $2 million and lost $23 million for its previous six months.
Slow-growing companies like Procter & Gamble and Coca-Cola are posting sales growth of 4% and 2%, respectively, yet are selling at 31 and 41 times earnings. Normally, the P/E's of stocks
sell closer to their growth rates. These companies have been posting earnings growth slightly faster than sales, but not by much, and this never lasts forever. In the 1960's, people justified
paying-up for great companies that would continue to grow, but look at their market returns from 1973-74 - (Coca-Cola -70%, Walt Disney Co -85%, PepsiCo -67%).
So why can't I wait until the end gets closer? "Times are too good now for the bubble to burst yet", you say. I only wish it was this easy. People always ignore history. They fail to realize that
markets always get the most overvalued when times appear to be wonderful. The view is always clearest at the top. But it "feels so good" when the economy is strong, and everyone is making
money "hand over fist" that people ignore the perils of a ridiculously overvalued market. Stock market moves nearly always precede economic events, and therefore people rarely predict the event
which might cause a market decline. But in a bubble, they always think they can. When times are the best, all you have left is risk.
Stock markets never go up forever. It's not as easy as Wall Street would like you to believe. It isn't typical for money to be given away on Wall Street, but with the Dow Jones average increasing
at a 19% rate since 1982, it seems like it. Consider the recent warnings of Greenspan, Buffett and Templeton. Think more about preservation of capital and less about greed. Expressing caution
today is like being against motherhood and apple pie. History does repeat itself, so to protect yourself and your family's future, don't invest in a "bubble". |
