Welcome To Fantasy Island
Tattoo: “Boss, who is this next guest, he looks very upset.â€
Mr. Roarke: “That, my dear friend, is Mr. Market. He’s down over 40% this year to date and wants desperately a rally to ensue before the New Year.â€
Tattoo: “But Boss, with decreased capital spending and a weakened macro-economic picture, what framework
is there for Equities to move higher?
Mr. Roarke: “Everyone, Tattoo, everyone has a fantasy.â€
Reversal day, surprise rate cut,
new bull, no chance of a recession, kinder-gentler fed, year-end rally, bears
back to hibernation…etc., etc., etc. All of these terms barraged my senses
through television media and financial print this weekend as Friday’s strong
broad-based rally in the Nasdaq finally applied a tourniquet to the tech
sector’s bleeding. Friday’s rally gave the bulls a feel-good day and may
ultimately prove to be a constructive rally. However, after today’s somewhat
negative performance, in which Nasdaq bellwethers such as (CSCO),
(SUNW)
and (INTC)
failed to add to their positive action on Friday, Friday’s rally in the Nasdaq
Composite can be viewed as nothing more than an oversold bounce and a rally into
resistance levels.
Let’s consider a few things. Last
week’s new year-2000 low on the Nasdaq Composite saw over 950 stocks make new
52-week lows. Not good. We saw lots of talk and speculation last week about what
the Federal Reserve is going to do. For the past three Fed meetings, all of the
experts that were on television to analyze what the Fed would do on the days of
the FOMC meetings were wrong. Wrong, wrong, wrong. It’s time we stop trying to
put ourselves in the head of Alan Greenspan and assume we know the FOMC’s modus
operandi.
The downgrade of (JDSU)
over concerns of quarter-over-quarter revenue growth was a warning flare. The
entire glamour sector was on the uncompromising premise of unstoppable revenue
growth. These include stocks like JDSU, (JNPR),
(BRCD),
(MUSE),
(VRTS,
(CHKP),
etc.
An earnings warning or any cautionary
comments by any of these rock stars regarding their revenue growth could cause
their valuations to deflate further. Let’s take a look at Juniper Networks, my
favorite proxy stock for the Nasdaq glamour sector.
With 317,560,000 shares outstanding
and a current stock price of around $120, JNPR sports a market cap of almost $40
billion. That is down from its all-time high market capitalization of $80
billion. With analysts and fund managers on television making comments that EMC
is richly valued at 66 times 2001 earnings, one must scratch their head when it
comes to JNPR’s valuation of more than 500 times earnings. If we are indeed in
the middle of price multiple
compression, can we accurately predict JNPR’s fate? I guess what it’s all going
to come down to is perception. If nothing transpires to change the perception
that these glamours will sustain their revenue growth at current rates, they may
resume up-trend. However, any type of scare in the fiber optic or date-storage
sector could make the price-to-fantasy ratios in these glamours deflate much,
much further.
Needless to say, I have assumed a very defensive
posture and am letting the market show me where it wants to go. The bulls
want this bear market to end so badly they are trying to WILL it to end.
Every small rally since April gets labeled ‘the bottom’ but none of them has
held. The market will SHOW us the end of the bear market. When it
ends, it won’t matter if you miss THE bottom.
Random Musings: I’ve been at
the Venetian in Las Vegas for the past two days and will return home Thursday
evening. Someone let Landry know that he has an unsettled bar tab here
from the TradingMarkets 2000 trading convention.