stocksite.com
What is the Market Rap?
September 25, 1998
Market Rap with Bill Fleckenstein
Internet, PCs rally as Nasdaq goes wild
Japan hammered... Asia was hit hard last night, with most of the major markets down a couple of percent. Japan was hit the worst as it lost 3 percent. The country's on-again, off-again banking rescue program is falling apart. As I have said, I think the size of the problem is much graver than the Japanese have admitted to. Not only do they not know how to fix it; it is too big to be fixed.
Europe down, gold up... Europe was down between 2-3 percent initially, spurred by the losses inside the banking system. Gold was up six dollars over the $300-an-ounce level.
Internet stocks lead rally... Our markets indicated that we would have an opening to the down side of about 1 1/2 percent. In fact we did open down, but after about a half-hour we staged a monster rally led by the Internet stocks and Dell (DELL), along with the PC names that run with them.
Nasdaq goes berserk... By the end of the day, things had changed direction several times. The S&P futures, which at one point were up about 1 percent, finished down a quarter of a percent. But that didn't stop those sterling studs of value, the Nasdaq 100, from going berserk today. It was up close to 3 percent, led - as you might imagine - by the Internet stocks and those ridiculously priced tech stocks. The Sox index decided it didn't want to be left behind and was up 3 percent because, well, you fill in the blanks. I guess we are going to have another new economic cycle and everything is going to be wonderful.
Pre-Christmas sale?... Interestingly, people seemed to be selling the retailers. It's as though there is going to be a problem with Christmas, but that doesn't have any impact on the PC sector. I guess it isn't a retail item anymore.
Mark-up turns market... Why did the market turn after the opening? To the best of my guessing ability, we have the quarter-end mark-up (as the quarter ends on Wednesday). Remember, money managers have to make it look like they did a halfway decent job for the preceding 90 days, and they always mark up stocks a few days before the quarter ends. And let's not forget that Easy Al will lower rates on Tuesday.
Gold closes down... Gold couldn't stand prosperity and gave up all of its gains to finish down 20 cents on the day, although silver managed to finish about a penny and a half better. All in all, it was a spectacular example of the new era meltdown trade. Sell financial stocks, because the world might come to an end, and buy tech because the end of the world is bullish for tech. Insanity prevails and those people who will lose all their money in tech stocks deserve to do so.
As I see it. Today was the Dell analyst love-in down in Texas. Michael Dell said all the predictable, wonderful things. Naturally its stock caught fire, leading the charge as the market screamed higher.
Let's put some numbers in perspective. Dell's market cap is $80 billion, yet we sell only $150 billion worth of PCs in the world annually. If you assumed that Dell achieved 100 percent of the worldwide market for PCs at $2,000 per box, and a 5 percent net margin, Dell would net $9 billion a year. With 1.3 billion shares outstanding, this would translate into $7 in EPS.
At today's prices you would be paying nine times earnings for a company that has 100 percent market penetration, assuming no pressure on ASPs or anything like that. To look at this differently, people are assuming Dell's growth rate won't slow. In which case, it would have 100 percent of the PCs in the world in about five years.
Some people might be saying the PC market is expanding, but the truth is, the growth is being seen not in dollar terms but in unit terms (and even that is slowing). It is hard to imagine that growth will occur in the world at all because of the way it is presently contracting. In any case, the stock is patently ridiculous.
This doesn't mean it won't go higher or down immediately. I don't know what IBM (IBM), Gateway (GTW), Compaq (CPQ), Micron Electronics (MU), Apple (AAPL) and the Japanese are going to do if Dell takes the entire market share. Somebody should clue in these other players.
The PC stocks may be the biggest joke that I have seen in my investment career. Sure, the Internet stocks are silly, but the PC stocks actually have fundamentals, which have been deteriorating, yet people still are giving them astronomical valuations.
Here are a few more comments from Paul Volcker's speech yesterday, which I think are very worth highlighting. Volcker blamed "the plunge in emerging markets on greed overcoming prudence," and said, "the result is systemic risk in those markets. The countries in trouble are the very ones that in the eyes of the market were deemed to have exceptionally good prospects and policy. Maybe this applies to Long-Term Capital. It is a story about volatility that is as old as the markets themselves."
He went on to say that "a small fraction of money in some of the big U.S. mutual funds can overwhelm the banking system in some of these small countries, turning the country into a row boat on the ocean."
The plunge in financial assets argues against allowing Social Security to be placed into the hands of private investors, he continued. "I am a little leery of privatizing Social Security, and what is going on in the markets is part of the reason."
Finally, when Fed chairman Alan Greenspan used the phrase "irrational exuberance" months ago, many claimed that it wasn't the Fed's job to worry about the stock market. Volcker said, "I observe that when the market goes down the philosophy is somewhat different." AIN'T THAT THE TRUTH!!!!
|
