Retail Fails

April 13, 2001
Goran Yordanoff

As a good friend
once said: “The market is neither right nor wrong; it just is what it is.”
This week, however, the words of another famous man echoed in my head: As Forrest Gump once said,
“Stupid is as stupid does.”

Some very interesting developments transpire this week in terms of corporate earnings and economic numbers. First,
Internet giant
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PowerRating) reported quarterly earnings which raise some serious questions about the validity of
its current business model and revenue stream.Â

Those astute enough to actually read the earnings report can clearly see that the firm is desperately seeking to expand its revenue stream due to a virtual collapse in the growth expectations of its advertising revenue which currently accounts for almost 90% of
its revs. With Yahoo now entering the porn business and its still lofty 10Billion dollar market cap, it is difficult to ascertain the possibility of this firm being acquired by a suitor such as Disney.Â

Oddly, this exact rumor is what has appeared to keep the stock shored up at current price levels in the face of its failing business model. The entry into the porn business virtually eliminates the possibility of
it being acquired by Disney. Moreover, with its gigantic market cap, an acquisition of Yahoo would be too dilutive to the acquirer to warrant the deal. Put this rumor in the same circular file as all the other absurd rumors about acquisitions and surprise
Fed cuts that we’ve been continually exposed to.

Second, we had Motorola come out and miss their first quarter in 15 years. Unlike most of their peers in the tech sector, Motorola actually provided financial guidance for the future as
well…and it was bad. By Motorola stating that the second quarter was going to be even worse than the first
quarter, it is hard to imagine what can possibly take place in Q3 and Q4 to pull this tech giant out of its severe tailspin. Moreover, Lam Research and other semiconductor firms also reported dismal numbers and all but confirmed the fact that orders placed have
ground to a halt.Â

So how does the market react on this news? Enter Jonathan Joseph Cohen. (Do you think he is really Abby with a mustache on, trying to conceal her identity?) Jonathan Joseph’s tremendous track record of being wrong made me excited about his upgrading the semiconductor sector this week. His analysis and justification was based on…get
this…the fact that things have gotten so bad, they can’t get any worse. Is that a fact? I got excited because the semiconductor group is now up around 20% for the year, with the fundamentals continuing to decline. I smell opportunity here and it is all on the short side.Â

This reminds me of something said by Chairman Mao decades ago: “It is always the most dark right before it gets completely black.” Things can’t get worse? Let’s just wait and see what the market holds. Unfortunately, the financial media is trying to make us believe that all the tremendous excesses of the past decade can be quickly unraveled in a short time and then
it’s back to new highs again. With the ever-increasing huge debt levels being carried by both consumers and businesses, consumer confidence continuing to contract, unemployment figures beginning to soar, and retail sales just beginning to contract into negative territory, it certainly doesn’t appear this will be the case.

Which brings me to retail sales. Could it be that reality is setting in? Of course not, silly. With the decrease reported in the March retail sales number, we saw hoards of analysts come to its defense, citing the weakness occurring as a result of bad weather.
Oy vey, this is just as bad as saying, “The dog ate my homework.”Â

Interestingly, with the manufacturing sector falling deeper into an abyss, all we have heard was that the consumer and retail sales would pull this economy out of its tailspin. These same people citing automobile sales as being the ultimate litmus test for the current condition of the retail sector. Interestingly, automobile sales experienced the steepest drop-off in sales in March.Â

Think about this for a second…if you needed a car for whatever reason, would cold/rainy weather prevent you from buying one? You would think that if you didn’t have a car, you were either taking public transportation or using an existing car to get around. First, if you were taking public transportation and the weather
stank, this would be reason enough to propel my butt to the nearest car dealer. Second, if you were already driving a car,
would it be that hard to drive to the dealership…assuming that you hadn’t barricaded yourself in your home to escape the “bad
weather”? Unbelievable proof, ladies and gentlemen, that the market once again is being untruthful
(my editors made me change this from what I really wanted to say) and not presenting the facts in an honest and forthcoming manner.Â

I want to add that I have been a member of Carolyn Boroden’s service for the past three weeks and am amazed at the accuracy she has displayed at determining support/resistance levels in the futures and
(
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PowerRating)‘s. My hat goes off to Carolyn’s expertise and the incredibly positive influence her service has had on my trading results.Â

I apologize for not being able to display charts for this weekend as I had intended. My T-1 line has been down since last night and I am not able to access my charting software as a result. Instead, I will try to explain what I am looking at.Â

Thursday’s high in the Dow is a key level here. Having closing roughly 50 points below that level, Monday holds the key for the index’s near-term direction. At present, I am expecting a downturn to commence within the next two weeks that takes the index down to new lows and possibly down to the 8600-8700 levels. However, the index has the freedom to rally up to its near-term resistance level at 10,294, should it choose to. With the kind of activity we witnessed this week, it doesn’t appear as though the Dow will ever close in the red, ever again. That is usually when things are ready to top out in a serious way.Â

Although I expected a retracement in the entire market to commence on Friday, the early weakness only lasted a few hours before the market rocketed back up to close the day on its highs. The Nasdaq, as well, appears to be approaching a short-term top and a significant retracement appears to be close at hand. Keep in mind that the index has rallied nearly 25% off its lows of a few weeks ago, and may not have more than another 5% upside remaining before it turns back down. I am a little less bearish about the possibilities of the Nasdaq making new lows, however. I feel as though the majority of the damage will be felt in the Dow and the S&P. The current lows that are in place in the Nasdaq may actually hold until later this year.

Have a great weekend.Â

Goran

Gary
Kaltbaum on TradingMarketsWorld! Gary Kaltbaum will be appearing on the
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Retail Fails

BUY THE FEAR, SELL THE GREED

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