October 9, 2000

Stock Market Analysis: String pulling starting to look more like unraveling

Overnight, world markets were relatively weak and the futures markets were somewhat soft pre-opening, especially by the ramping standards we usually see overnight. The market opened quietly, but under selling pressure. It attempted to stabilize, but was sold in a pretty orderly fashion in the first half-hour. We then had an acceleration, a slide down, followed by a bounce, then more acceleration and a slide.

Down. . . We were greeted this morning by a pre-announcement from Safeco (SAFC), a pretty well-run insurance company. It's not unusual for companies like Safeco to have problems at the back of a business cycle when cost pressures are beginning to build. The types of problems Safeco is having are certainly not bullish. Tomorrow we're going to get earnings reports from Yahoo (YHOO) and Motorola (MOT) and the guidance going forward should be most interesting.

. . .and out. . . Japan's market was closed last night, but it managed to announce its biggest bankruptcy so far: Chiyoda Mutual Life apparently has debts of almost $27 billion. It will be interesting to see how the Japanese deal with that when they get back from the holiday.

After the first couple of hours, the S&Ps were down about a percent and the Nasaq and Nasdaq 100 were down about 3 = percent. At that time, the Dow was doing its best impression of Alfred E. "What, me worry?" Neuman. That must have given folks a reason to try to push the market higher, because the Dow was held up and we had our first attempt at a rally.

As the averages were doing the aforementioned jig, financials and semiconductor stocks were under pressure, along with Internet stocks and many of the former high-flyers. The only things that weren't under a great deal of pressure were Dow Jones Industrial-type names and some selected big retailers.

During the following hour the S&Ps cut their losses almost in half to down about > percent, and the Nasdaq and Nasdaq 100 actually did cut their losses in half. We then had a bit of a setback and another rally such that with about an hour to go, the S&P futures were only down about 2 points and the Nasdaq 100 futures had actually rallied to the plus side to the tune of about 40 points, or just over 1 percent.

There were several occasions today when in day's gone by, with the bulls totally in charge, they would have turned the market plus-side, exploded it and never looked back. But today was just not one of those days, as they obviously ran into sellers who needed to get out and couldn't join in the attempted ramp-job.

Nut results were mixed. . . Not that it was devoid of schizophrenia. A lot of the really crazy stuff -- the B2B names and the optical- and semiconductor-related stocks that trade at 100, 200, 300, 400 even 500 times earnings -- reversed early losses and had decent sized bounces. Just to pick a smattering of names, Brocade (BRCD) was up 12 to 225, Juniper (JNPR) was up 10 to 199, Phone.com (PHCM) was up 10 to 108, Ariba (ARBA) was up 9 to 123 -- you get the picture. Among the plainer vanilla offerings in tech land, virtually everything related to semiconductors, PCs and wireless was under pressure, with the exception of IBM (IBM), Gateway (GTW) and EMC (EMC). Semiconductor equipment stocks also got a bit of a bounce.

No doubt about it, today was very wild. At one point early this morning, a lot of little trap doors sprung open and stocks fell through them. All the king's bulls were able to put Humpty Dumpty together again in some of these cases, most especially in the high-flying names I already described. My hunch is that the gun-slinging bubbleonian fund managers who own that stuff expect the earnings to be just right and think the stocks will go up on those numbers.

Reversals of fortunes. . . I think the companies with no real hurdle to get over will manage to do so, but the stocks will go down anyway. After all, the real technology leaders have been bludgeoned, and now one can look at multiples of companies that a month ago were loved and they are far, far more reasonable than this crazy crop of high-flyers. For instance, Microsoft (MSFT) was down again today and now trades at about 32 times earnings. I don't know where it's going to stop and I'm not suggesting anyone buy it, but when Microsoft trades down to 32 times earnings, and others do too, at some point the relative value game will work in reverse just as it worked so well on the way up.

In the last hour, when it became clear that momentum was not building to the upside, the rally kind of fell apart and the S&P wound up closing down about = percent while the Nasdaq was down fractionally. But the averages don't tell the story -- individual stocks and the day's action really are the story.

Away from stocks, the bond market was closed, currencies barely moved, the metals were up a freckle, and oil was up a buck. I think oil was up for two reasons, the first is the continuing tension in the Middle East. Today, according to a story that passed on Bloomberg, "Saudi Arabia warned Israel Monday against launching any military attacks against Lebanon and Syria, saying it will not let such a move pass without taking action." That only adds to the tension in the Middle East.

SPR-eading the word. . . The second reason has more to do with tight supply and demand. I was sent an excellent story that's an expanded version of what appeared on the third page of The Wall Street Journal about the winning bidders for the SPR. This SPR release was such a political outrage that I hope this scam gets the full coverage it deserves. Suffice to say that 30 percent of the oil went to folks who don't appear to have any real chance of executing the contract as required. I assume that these groups were able to win this because real oil companies didn't have any desire to get caught up in something that wouldn't work.

According to this analysis, when all is said and done, the amount of heating oil that's going to be released from the SPR will satisfy the Northeast for about 12 hours on a cold day. It really is disgusting. In any case, the SPR is not going to help anything in the real world in terms of oil and now things are getting dicey in the Middle East. On the back of this, oil was up about $1.

Has a nice wring to it. . . In the news, there are two interesting articles in The New York Times. One, on the front page of the business section, discussed tightening of loans to young and deeply indebted businesses. The second article, entitled "Signs of Market Saturation in PC World. Does almost everyone who wants a computer already own one?" is closer to the things we've chronicled in the Rap. I agree with the article, but there were some interesting points that always seem to focus people's attention when they read it in the Times.

"We've run out of room for growth," said Martin Reynolds, research fellow at Gartner Dataquest, a market research firm in San Jose, Calif. "Look at the saturation in the market. We're there. We're filled up. . ."

"The corporate market has become a replacement market," said Anne Bui, a senior analyst with the International Data Corporation, or IDC, a research house. "There's no reason to buy anything now. They've bought everything they need."

Amen. That's what the nuclear winter story we've been discussing for the last year is all about. The point of the article will not surprise regular Rap readers, but there is some good information there, as well as a few quotes from folks who continue to think everything is going to be copasetic.

Chatroom material. . . In the How Low Can It Go department, a friend called my attention to theglobe.com. The reason why theglobe.com is so interesting is because in the early days of Internet speculation (thank you, Alan Greenspan), that particular company wanted to go public, but the window shut during the turmoil we saw in fall 1998. As soon as the window "reopened," theglobe.com came public and folks couldn't get enough of it. In a short space of time, it traded from about $15 to $90. It has since split 2-for-1 and trades at about 70 cents.

Bubblevision is fond of saying, "XYZ is down from one price to another and you ought to buy it." One of the themes of the Rap has been you have to look at the market cap and the fundamentals of the business. This is a case in point of how low some of these really can go -- and many of them will.

Off the bubble. . . In the Dead Fish Chronicles, we want to quote a dead fish that has gone from floating belly up to belly down. This particular fellow was talking about the problems in the microprocessor market and a price war that is brewing. He pointed out that, "Brokers continue to report that demand is soft, with Intel's spot prices falling slightly from an 11 to 12 percent discount to list, the largest discount in memory." This is something we've discussed with regard to Advanced Micro (AMD), which plans to cut prices sharply. Given the saturation of the PC market and the increased capacity that AMD and Intel (INTC) are facing, one can expect a price war for sure.

He had another comment that goes to the whole Windows 2000 demand thesis:

Only 10 weeks left until Christmas, and still not much sign of the seasonal pickup we've been waiting for since June. Like farmers in a drought we look to the sky for signs of rain and have none yet. Meanwhile, most microprocessors are growing in availability as lead times for even the higher speed chips have come down from two weeks or more to about a week. We still expect some kind of a tepid pickup in the next couple of weeks.

A tepid pickup in the next couple of weeks is certainly not what people who have been buying PC, processor and memory producer stocks all year have been focused on as the vaunted Windows 2000 was supposed to spur demand. I think it's time to call a spade a spade and focus on the fact that the PC market is saturated, not to mention the big glut in cell phones. Investing in technology stocks in the last group of years has appeared much easier than it really is, and it's going to continue to get tougher before it gets easier.

Buyer beware. . . Lastly, I want to pass along some thoughts from my friend Colin Negrych, about the shallow sort of analysis that keeps people attached to equities:

People figure politics will keep the markets up and push them higher. You know all the arguments. Zero thought about fundamentals, valuation, etc. Clinton will do this, Greenspan will do that, Summers will say this and endless samesuch from hordes of people who figure all the aforementioned are whores who can't afford to have anything bad happen to stocks. Makes trading difficult, but all the equity markets will be 50 percent lower before too long. . .or more in the case of the Nasdaq. Patience is all.

http://www.siliconinvestor.com/insight/contrarian/

-- Carl Jenkins (Somewherepress@aol.com), October 10, 2000