In Today's Market Cap:o The Day Ahead: A very decisive day, trendwise
o Industry Focus: Kick this dog when it is down
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The Day Ahead: A very decisive day, trendwise
Two weeks ago tonight, we called for the beginning of what turned out
to be a spectacular rally on the route to Dow 10,000 and a few days
later we went out on a limb calling for one of the greatest stock
market moves of our lifetime. Yesterday morning at 10 to 10 am Eastern
Time, in its habitual Squawk Box appearance at previous milleniums, the
Dow Jones hit its greatest Milestone ever: 10,000 in a fleeting moment
of Euphoria that seemed to evaporate in less than a New York minute ofcheers.
Since then, following a whirlwind of publicity Worldwide, the markets
have managed to elicit great doubt in the minds of most, as to the
markets continuation beyond this achievement, in fact , if any-thing,
it brought out a horde of bears calling for a top and the end of the
World as we know it. So far the Dow has obliged by closing lower two
days in a row, but there has been a refusal by certain less well known
market indices to confirm this 'bearish activity'. This is a very
interesting development.
Last week on our way to 10,000, when the Dow faltered the
Transportation and Banking indices and also the Pharmaceutical index
that stood up and later stood tall. Yesterday, it was the Internet
Index closing at a new record high and today, inspite of near all
markets being off to some degree, in one of the most surprising
displays of strength, the Russel 2000 and Mid-Cap indices closed higher
and as expressed in last night's commentary re a further upmove in
Crude, the Oil index also managed to close sharply higher at almost the
highest level in 6 months.
This is potentially either the most bullish of new developments or a
gigantic trap if the expected move higher and breakout I see coming
fails to eventuate. The market appears to be broadening out in the face
of near unanimous commentary to the contrary that this rally is narrow
and has no real future.
The emerging world markets are rallying strongly and this is an
effective broadening of the World Stockmarket rally that appears to be
gathering momentum. If you look at the US market as the Dow or Blue
Chips and the rest of the World, from the Industrialized nations down
to the emerging as a kind of proxy for the various tiers of indices of
the US market from the Blue Chips right down to the Over-the-Counter
and Wilshire 5000, it could be argued that the World markets emulate
the structure of the US markets across the entire spectrum.
So, if the very broadest world markets are interpreted as some of the
newest emerging markets on the Globe and markets that have been bereft
of interest for months are suddenly exploding higher in massive
percentage leaps, I would argue as I have suggested in recent months
might occur, that the whole World is getting richer and the long
awaited Global economic recovery is already underway and gaining steam.
This is in turn potentially very bullish for the broadest sector of the
US market as US exports pick up, it will no doubt lift the bottom line
of the underperforming underbelly of the U S market that is represented
by the Mid-Cap and Russel 2000 (futures) indices. The fact that the
good ol' Russel June Futures managed a close over 400, at 401.5 on a
down day like today has to be at least given some credence that a
change in behavior is ongoing. With markets like Greece, Turkey,
Brazil, Mexico, China and Japan and finally most of the rest of Asia
not just rallying, but going through the proverbial roof, this has to
auger well for US Stocks in the near to medium term.
The mighty S&P 500 itself displayed a distinct reluctance to go down
too much today and the futures snapped back on the close, cutting
losses in half. If Europe comes in stronger tomorrow, it might be just
enough to get these markets heading north again. My gut feel tells me
that another run at 10,000 will not be a whimper, but a solid
broadbased rally with monumental implications that I will expound upon
in depth tomorrow, if the day does unfold in a bullish posture as
appears possible if say the banks can set a positive tone and perhaps
the Transports don't swoon too much.
The Nasdaq Futures act strong and if they break out to the upside, that
upside appears to have no limits on how high it could go. It just needs
some kind of push to get it going and the rest should feed on its own
momentum. It's going to be really interesting to see whether we can
pull this off.
Came up with an interesting idea for the future that could help to
propel all the World's markets dramatically higher in the coming years.
It's called E Commerce and it's going to be usher in the biggest change
in business paradigms the World has ever known. Right now with 68,000
new participants logging on each day, it is almost plainly obvious that
there is too much potential E Commerce and not enough capacity,
(companies to handle it all). Therein lies a huge opportunity
in itself for the company that can deliver the most cost effective,
efficient, secure and easy solutions to businesses who want to be
Ecommerce enabled and up and running within 24 - 48 hours.
I am trying to get a list of companies that are likely to benefit most
from this area and some that come to mind are of course the Auction
companies such as EBAY, UBID, ONSL, EPAY and NGWY.
In a curious way the great growth wave has been driven by the power of
Moore's law which dictates that computing power will double about every
eighteen months. Interesting ECommerce topped 100 Billion in 1998 and
is slated to reach 1.3 Trillion by the year 2003, with the potential to
eclipse most existing commerce soon thereafter. Curiously, this
anticipated growth rate resembles Moore's Law.
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Industry Focus: Kick this dog when it is downBackground
"Tech" reduces to computers, ultimately. Computers in business,
computers at home, computers embedded in machines. Everything in
techland relates in one way or another to computers - to building them,
to networking them, to programming them, to storing data they will use.
Pretty simple.
The drive-makers are a group that has been decimated over the past few
years, and frankly, I believe they deserve it. 1999 has been u-g-l-y
for this group. I will refer to the AMEX Disk Drives Index (DDX) as a
proxy for the group. The DDX has dropped like a rock since mid-January,
from over 260 to about 155 right now. And 155 isn't even a very
significant bottom! The DDX was up in the 300 range in the second half
of 1997 and fell all the way below 100 within a year. By mid-January,
the group had rallied back to about 260 from that second-half '98
bottom, but now it is back down again.
I am not gonna beat around the bush here - the future is grim for many
firms in this industry. Not everyone, but many. And the DDX stocks,
especially, have miserable prospects ahead.Fundamentals
Who Cares? - who does? I mean, why should I care if my PC has a Western
Digital (WDC) or Quantum (QNTM) hard drive? Why should I care who makes
my PC's magnetic recording head or head stack assembly? Am I supposed
to be expected to pay up for a brand on a part of the PC I never even
see? This group doesn't exactly have any shot at an "Intel Inside" type
branding, which means pricing is awful tough to pull off. If a PC was a
football team, the drives inside wouldn't even be punters for all the
glory they will see (or deserve).
Centralized Storage in Companies - talk about a better way!
Centralizing storage makes things so much more efficient for a company.
For one, precious data is that much easier to administrate and back up.
Centralizing storage also offers a means of tracking employees, which
may not appeal to the employee, but frankly, why should the company
care? Another possible value-added from centralized storage is the
myriad of possibilities that data can offer to a creative manager.
Having everything in one place allows upper management to snoop around
and maybe squeeze some value out of what would otherwise be virtualclutter.
Centralized Storage for Consumers - talk about a better way!!
Centralizing storage for home users offers many benefits. For one, a
device like a WebTV box that lacks a lot of PC guts is cheaper than a
computer, which benefits the consumer. People do not want to buy PC's,
and slowing growth of revenues in the PC complex is proof. The next
device to penetrate every American home is going to be a variation on
the WebTV thin client type that offers the internet, email, and some
rudimentary computing at 1/4 of the cost of even the cheapest
name-brand PC's. Part of the service will be having your files and
settings stored remotely. Not dealing with floppies or disk-crashes.
And if you don't think Big Brother will want to engineer exactly this,
you are mistaken. Big Brother will be watching, and the opportunity to
opt out of being part of massive, centralized databases that track
usage patterns will not be widely promoted by ISP's or providors ofcontent.
Bad Economics - the business just doesn't offer much opportunity for
most firms. Drives are such a commodity good, so the only way to
maintain any margins is to be the cheapest competitor. Another option
is to provide more than just hardware, but at that point a firm goes
from being a drive-maker to being a "storage services" firm and
probably falls out of the group. The race to lower costs in order to
make a profit against falling top lines is a brutal one, and one that
offers equity investors very little to be attracted to.Technicals
The DDX is in a multiyear bear market. The recent rally from '98
bottoms failed to take out 300, a level that had been reached in '97.
At 155 or so, the DDX probably offers at least another 50% of downside
before a meaningful bottom gets put in before another run up can occur.
I am talking about a monthly scale here, of course.
On a weekly scale, the DDX is in the sweet-spot of downside momentum.
Based on a weekly stochastic (%k = 18 %d = 10) oscillator, it looks
like the DDX is about to accelerate downward from this area, perhaps
after a brief rally with the NASDAQ if that should occur right away. If
the PC complex recovers at all from its recent rout, this group will
participate, but I think it will be a short-lived recovery and a
selling opportunity.
Daily DDX is oversold. A rally on this basis could be coming. But it
will just be a retracement within bigger scale decline trends. The DDX
group is likely to take out the '98 lows within 12 months, and it is
probable on technical grounds that another 50% from here is looming.Wrap-Up
This group is pretty grim. It is not a very attractive industry.
Especially the DDX stocks, which are abyssmal. If you own them, think
about selling on rallies, and if you don't, now is not the time to buy
on value. This group offers very little value, as the future of
computing probably does not center on the PC model. Without strong PC
sales, this group cannot go anywhere. And a shift away from the PC as a
means of delivering internet/email/rudimentary computing hurts these
stocks long term.
This industry may well be making modern buggy-whips. Don't be surprised
to see the DDX as a defunct entity within a decade. Other firms are
doing stuff that the DDX stocks show no signs of being able to do.
Consider EMC Corp (EMC). This firm carries the model storage investors
should be following. They do enterprise level storage on a services or
consulting basis. No manufacturing/sales model, they add value to the
firm via a cohesive storage plan. Look at EMC's chart, then say Seagate
(SEG) and tell me how the market is voting as far as the future ofstorage. |
