The Song Remains The Same

July 21, 2001
Goran Yordanoff

The measure of success is not whether you
have a tough problem to deal with, but whether it’s the same problem
you had last year. — John Foster Dulles

You try to be greedy when others are
fearful and fearful when others are greedy. — Warren
Buffett

Chance favors the informed mind. — Louis
Pasteur

Once again,
the market has over-promised and under-delivered. Once
again we witnessed the state of euphoria manufactured by the media
following some inconclusive comments made by a technology company.
Once again we are seeing a broadening of the disconnect between the
market and reality. But most of all, we are witnessing the gross
manipulation of stock, futures, and the major averages by the large
institutional conglomerates. Let there be no doubt that we are
currently witnessing the final stages of what will clearly be
reflected on as the largest period of stock distribution ever
performed by Wall Street.

Every week I write to you there appears
to be another argument surfacing as to why the stock market has found
its long-term bottom and why stocks should be bought irrespective of
their historically high valuations — why the economy is soon to turn
back up and re-ignite new sustained periods of hyper corporate
earnings growth. Plain and simple, these are lies. Wall Street’s
chronic abuse of the retail investor made famous early last year by
the analyst community issuing “strong buy” recommendations
for stocks that were grossly overvalued and nearing a crescendo on
their charts while institutions and insiders sold massive quantities
of shares has not subsided in the least bit. The only difference this
year is that many of these same tactics have been employed in the
manipulation of gaming stocks, video gaming stocks, retailers and
specialty apparel stocks, healthcare and managed care stocks, and
stocks in the energy sector. (Credit Suisse First Boston has
reiterated their “buy” recommendation on four different
occasions on
(
THQI |
Quote |
Chart |
News |
PowerRating) in the past two months after the stock is up
nearly 1000% in the past 11 months and insiders are selling…why? In
addition, why have insiders of American Eagle Outfitters
(
AEOS |
Quote |
Chart |
News |
PowerRating)continued
to sell millions of shares of stock as Wall Street continues to pound
the table bullishly on the firm?). But wait, perhaps I am overlooking
a sector that was bullishly pumped by the Wall Street analyst
fraternity that continued to go higher and I’ve merely overlooked it.
Let’s go back in the past and try to remember some of these “MUST
OWN” sectors:

Fiber Optics sector: Who can
forget the great fiber optics conferences in mid-2000 that saw names
like
(
JDSU |
Quote |
Chart |
News |
PowerRating),
(
GLW |
Quote |
Chart |
News |
PowerRating),
(
SDLI |
Quote |
Chart |
News |
PowerRating),
(
AVNX |
Quote |
Chart |
News |
PowerRating),
(
NEWP |
Quote |
Chart |
News |
PowerRating),
etc. all get upgraded and called “must buy” stocks near
their all-time blow-off tops? I’m beginning to see a pattern here–are
these multi-million dollar a year analysts innocently chart illiterate
and devoid of any hint of technical skills, or is there something else
going on? I suppose that is a question for Congress to answer. Last I
checked, many of these names were trading at least 90% below their
highs. Again, no advance warning or words of caution. To give some
credit, at least James Cramer of The Street.Com wrote a column urging
readers to “take some off the table” near the highs in these
stocks. Naturally, he was bombarded with hate mail, which insisted
that he didn’t know what he was talking about. Typical.

Genomics and biotech sector: Remember
these? Anything that was remotely close to this sector exploded to the
upside. The analyst community was awash in bullishness over the growth
potential in this sector. At press time, there is no cure for the
common cold much less lung cancer and many of these names are trading
near their 52 week lows. Again, you guessed it, no warnings from
Spanky, Alfalfa, and Darla.

Networkers: The hype of this
sector came at an opportune time as pure internet plays were getting
destroyed. We learned that we actually shouldn’t have bought the
“pure” internet stocks and instead should be buying into the
“internet plumbing” stocks which we were told were the nuts
and bolts of the internet. Gentlemen, start your engines.
(
JNPR |
Quote |
Chart |
News |
PowerRating),
(
SCMR |
Quote |
Chart |
News |
PowerRating),
(
EXTR |
Quote |
Chart |
News |
PowerRating),
(
CSCO |
Quote |
Chart |
News |
PowerRating), etc.etc. all rocketed north on
the heels of the urgings of “the gang.” If we were indeed in
a new economy as Alan Greenspan had exclaimed several times during his
Congressional testimony, then companies had to buy their routers and
e-commerce-enabling equipment from the likes of these networking
companies. Right? Perhaps the senior economists at these major firms
missed the rapidly approaching cliff that was encountered or perhaps
they merely forgot to tell their analyst counterparts that business
cycles have not been eradicated from reality. Nevertheless, these
stocks continue to decline into the depths of Nasdaq hell.

Storage: As recently as January
of this year, we heard portfolio managers and other supposed
“experts” actually state that the data storage sector was
“bullet-proof.” Well, they musn’t have been aware that the
world economy was packing a Glock with hollow tip rounds. Names like
(
EMC |
Quote |
Chart |
News |
PowerRating),
(
QLGC |
Quote |
Chart |
News |
PowerRating),
(
EMLX |
Quote |
Chart |
News |
PowerRating),
(
BRCD |
Quote |
Chart |
News |
PowerRating), etc. who were once the darlings
of technology bulls everywhere are now wallowing in despair as a
world-wide decline in IT spending of unforeseen proportions has fallen
upon the sector (amongst others). Again, no advance warnings. Rather,
we had continued bullish sentiment and renewed calls to continue
buying these shares all the way down.

We can continue going on and on and
talk about the specialty semiconductor stocks along with the computer
hardware/software sector but the conclusion is always the same: total
devastation in stock prices while Wall Street continues to urge the
retail investor to “load the boat” and buy. Without doubt,
the battle cry of present day bulls is no different from those who
were pounding the drums back in 1929. That battle cry was, of course, “It’s
different this time.”

What happened to all the sectors
described above will eventually happen to all of the sectors that are
hot today and considered “safe” places to put your money.
The specialty apparel, healthcare, video gaming sector, etc. will all
suffer the same fate because of one simple reason: their valuations
are disconnected from reality. Can you tell me why Wall Street
continues to reiterate their bullishness on a company like THQI when
the company made only $3.5 million last quarter (BEFORE charges) yet
has a market cap of over $1.2 billion dollars? Please save the
argument about revenue growth because it is the same hogwash we heard
about stocks like JNPR, BRCD, etc. etc. etc. You cannot determine a
company’s valuation or market cap by extrapolating one quarter of high
growth over every single quarter over the next five years. It doesn’t
work that way and it never has. If you don’t agree with me, please
take a peek at the charts of every single stock I mentioned above in
each individual sector.

Yet, we continue to see the attempts on
the street to call a bottom. For instance, many have boldly stated
that the market has been, for the most part, refusing to go down in
the face of bad news, and this is the earmark of the end of the bear
market. I agree that the ends of previous bear markets have always
been identified by a reluctance of the major averages to decline in
the face of bad news, this is true. But the key element that these
geniuses forget to discuss is the fact that these same bear markets
came to an end when valuations were below their historical mean. In
other words, we ain’t anywhere close to this level. One of the true
masters who continues to shares his wisdom with us after nearly 50
years in the market, Richard Russell, stated the following this week:

“I stay with one basic concept.
Stocks travel from broad areas of undervaluation to broad areas of
overvaluation — and then back to undervaluation. It’s the one
syndrome that never fails — you can count on it” … “How
long each “yield cycle” lasts is unknowable. How high stocks
will rise in the bull market segment in unknowable. But the unknowable
part is not enough for most people or for most analysts. These
analysts want to play “genius” and that means telling us
what will happen every week, every month, even on a day-to-day basis.
Don’t waste your time on this sort of work. It’s work that doesn’t
work. This recent bull market took stocks to unprecedented highs of
overvaluation. The top, the area of distribution is now in progress.
So far, the top has lasted two years. I don’t know exactly how long
this distribution area will last – nobody does. But when it’s over
stocks will embark on a broad, relentless retreat (we’ve already seen
the retreat in one area – tech.” Dow Theory Newsletter, July
18, 2001

Carolyn Lueck did a great commentary on
Friday that displayed multiple charts of indexes we have been tracking
in this office. Please reference her column entitled “Microsoft
Giveth…And Taketh Away” for a look at the charts we are
watching.

Have a peaceful weekend.

Goran

The Song Remains The Same

BUY THE FEAR, SELL THE GREED

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