Musings from one of the azw's -s-
>>Wrong!
Feb 11, 1999
What Is a 'Healthy Correction'?
By James J. Cramer
When I first got in the business, I remember hearing Leon Cooperman, one really smart guy and then head of the research department at Goldman Sachs, talking about a "healthy correction."
I remember thinking to myself, who is this double-talking joker? Healthy correction? How about "terrific form of cancer"? How about "cheerful plague"? Why not "needed California earthquake"?
The Dow was locked at about 1400 at the time. It had just put on 400 points in a straight line and Lee thought it was due for a pullback. It happened. We shook out the margined players and the quick-change artists and we socked in some stocks at good prices. The correction ran its course and the market came back stronger than ever.
This morning I got out of bed, feeling older, and I said, "Hmmm, looks like we are having a healthy correction." I am sure when you read this many of you have the identical reaction to the seemingly oxymoronic phrase that I did when I knew everything as a fully fro'd 28-year-old at Goldman Sachs.
Man, I didn't know jack.
In the midst of a correction I always imagine it feels like some hopelessly retreating Army somewhere. I am sure that some of you feel like you are Lee's troops at Gettysburg, and you have gone as far north as you will ever go. Others perhaps view it as the Battle of the Bulge, where overextended green U.S. troops went a bit too far and almost got crushed by an army that should have been finished a year before. The chaos of it is frightening. The rally that started "too early" Tuesday gaffed a ton of people and the selloff engulfed the rest. It reinforced the difficulty of retreat.
And yet, it is a healthy correction. We have come so far so fast from our October lows that we have to take some pain here. If the pain is too great, we sell. If we can handle the pain, we hold. If we have cash, we wait until the prices get so ludicrous that we can profit from them. (The war analogy works here, because we all know that the Battle of the Bulge allowed the U.S. forces to crush the Nazis much faster in the end as they got hopelessly extended without fuel or supplies.)
How far have we gone? Let's take the new whipping boy, Cisco ( (Nasdaq:CSCO - news) ). Here's a stock that had a triple disappointment in the super bulls' eyes. It did not announce a split. It did not talk up numbers. And it did not come to Goldman Sachs' tech conference. Well, excuse me, John Chambers!
But that's not why it is going down. It is going down because it was priced to perfection. It was priced for everything to go right and then some. It was priced as a Netizen, not a tech company. The longs had simply decided the price-to-earnings multiple, long the staple of the game, didn't matter any more. If it did, what the heck was Cisco trading at 70 times earnings for?
Now we are in the unwinding phase. I want to hold on to my Cisco. My discipline says a stock, down 20% from its high, with good fundamentals, should be bought aggressively. But my gut says: Hold it. What if that benchmark that I am using, the 117 level where it traded, was hopelessly inflated? What does a 20% decline from ridiculous levels mean?
Is this U.S. Surgical at 95, down from 130, to use a benchmark some of us remember as a killer place to average down? I don't know. (Oops, talk about three words you aren't allowed to use in this business. They are going to take my guru card away for sure!!)
But when I don't know I do things small. That's why I use the word "nibble." And if Cisco trades up a tad, maybe I let some go that I bought lower, so I have room to buy it back again. That's my "trading around a core position" concept that I do constantly. It keeps me from getting too long at one level so I eventually have to blow it out because I am out of capital or out of position. In a correction it is vital to keep some dry powder around for when things have gone too far.
So, when does the correction run its course? Guru-rejection time again: Who knows? I prefer to see a crescendo, where everybody pukes everything, a la Oct. 8. We don't have that yet. (Again, if you want to see what that looks like, read my four-parter about how the market bottomed amid a much worse gloom-and-doom cycle than we have now.) Remember, that was the time when the whole world was bearish, except Ron Insana, who came on and boldly presented guests who anticipated the turn.
How do we know that this time it is not different? That this time it's all over? That it's unhealthy? For that, we have to rely on the fundamentals. There is little to no inflation. Growth is good. Business is strong. About the only thing that got out of kilter were the valuations.
And that's exactly what is correcting. Healthily.
Random musings: Over the weekend I sneak into my wife's personal computer, and, sure enough, it defaults to eBay ( (Nasdaq:EBAY - news) ). Now I am thinking, hmmm, I am in trouble. Shopping E-Goddess???
Last night, after a more than tough day at work, I ask my wife about it. I kid you not, she says: "Oh, you can barely see the stuff. It is like a bad Home Shopping Network." << |
