April 4, 2001

Consider these opinions:

• Earnings drive stock prices and overall, worldwide economic growth drives earnings. (Trying to predict worldwide economic growth is impossible especially with the way politicians and monetary policy makers think.)

• Most of the time when an economic slowdown occurs and then a recovery begins, the best performing group within the technology sector before the slowdown will be the best performing group within the technology sector after the recovery (the same rule does not apply outside of the tech sector, that is, the best performing group prior to a slowdown may be the worst performing group after the recovery). It also holds true that the best companies within the tech sector will also be the best companies within the sector after the recovery, the best companies will also be more likely to get through the slowdown financially.

  Note: When I talk about the "best performing" sector I mean with regard to stock price appreciation. When I talk about the "best companies" I mean the best companies fundamentally: balance sheet and income statement, growth, management, products, etc.

  Note: I think technology will recover and again be a very strong sector, but I don't think the internet part of technology will ever go back to valuations like early 2000, and the internet companies were buying hardware and software and therefore the crash of the internets and disappearance of many internet companies will have some impact, especially in the short-term, on the whole tech sector.

• The volatility is huge on NASDAQ, just look at volume graphs over a long period of time, e.g., 10 years. You will see that volume levels for virtually every stock have gone up exponentially and that includes older, more established companies. All investors, not just day traders, are turning over their portfolios much more than ever before. What this means is that the trend will be stocks falling more when we're in a down market and going up more when we're in an up market: volatility is going up, volatility of the NASDAQ is not the same as the long-term growth of NASDAQ.

• When a company starts to turn sour rather it's due to internal or external reasons, the company's earnings will go sour as well. When the company recovers and starts to earn more money, the earnings growth numbers will look very good (comparison of earnings from one quarter to the next), since Wall Street and investors, in general, likes to see this, they start to buy the stock and the stock price goes up. The interesting point with NASDAQ 2001 is that a lot of companies are going to be reporting sour earnings for the next couple of quarters, not due to internal reasons, but due to external reasons. As far as I'm concerned, external reasons are more predictable (no not predictable within weeks or even months), for the past 50 years we have always pulled out of a recession within a couple of years at most. Many companies turn sour for internal reasons and never recover. (We don't know yet if we are in a recession and by the time we know it won't help us as investors, however, we do know we are in period of global economic slowdown.)

I am going to give you an example of what I mean with the above four opinions: (1) Cisco had earnings growth and the stock price had great growth as well, (2) Cisco was in a hot sector before this current economic slowdown and I believe the sector Cisco is in will be a strong sector when the economy recovers, Cisco was one of the best run companies before and I think it will be after, (3) Cisco went up like a bat out of hell and it fell like a bat out of hell due to the volatility on NASDAQ (Cisco's uptrend was due to good internal and external conditions causing earnings growth, but the rate or acceleration of the rise (of the stock price) was due to volatility, Cisco's downtrend was due to poor external conditions causing earnings growth rates to slow, but the rate or acceleration of the fall (of the stock price) was due to volatility), (4) When the economy recovers, Cisco's earnings will recover and the comparison for the first few quarters of 2002 will look very good when compared to the first few quarters of 2001.

Note: this is what stock investing is all about: fundamentals such as earnings and revenue growth and the technical aspect that I simply call momentum which is driven by volatility, and don't forget the other aspect of fundamental analysis, even if a company has good revenue and earnings growth and good momentum, you still need to look at fundamental valuation, that is, is the stock even with its strong growth and momentum worth what the market is asking for it.