April 12, 2000
What can a small investor observe about the stock market in April?
The first observation. NASDAQ has corrected by over 25% and many stocks have lost over 30% of their values. Have you observed companies standing up for themselves? Meaning, it's one thing for the market to trash stocks that have PEs over 100 and have earnings and revenue growth rates of less than 20%, but quite another to trash a stock that has a PE of 35 and has earnings and revenue growth rates of greater than 40. The NASDAQ has trashed stocks no matter what. I would think that if I was a company with the PE of 35 and growth rates greater than 40% I would be asking institutions like Fidelity, "what don't you like about my stock?" "You own some stocks that have ridiculous PEs for their growth rates, but don't own stocks like mine that not only have high growth rates, but low valuation as well, why?"
My point is that companies do not care about the short-term swings in their stock prices. A company is controlled by a small number of executives and they know exactly what's going on with the company. They know if the recent decline in their stocks are caused by NASDAQ corrections or for internal reasons, or a combination of both, unlike small investors, since we don't know about the internals we can only assume it's NASDAQ's doing. The small investors are nervous as hell when NASDAQ acts like it is, but corporate executive are only wondering how to play the tee shot on the 14th hole.
The fact that companies don't care about short-term swings in their stock prices in itself doesn't bother me. What bothers me is the financial news and even a lot of small investors in chat rooms think they do and are constantly supporting executives when they shouldn't be.
When I was in business school, ten years ago, the number one priority of upper management was suppose to be stock price appreciation. In the real world this just isn't true. Why doesn't the financial news, corporate executives, and business schools, just admit that the number one goal for upper management is their compensation? If corporate executives are making plenty with their salaries and bonuses they really don't care about their stock options. And as far as options go, if the stock does fall, they can always have the compensation board drop the strike price. I have known several companies where CEOs made multi-million dollar compensations with the stock at a certain level, say $50. And the stock falls to $25, the compensation board resets the CEO's strike price to $25, the next year the stock is back to $50, investors made nothing, but the CEO made their multi-million dollar compensation and also their stock options doubled.
A second observation. Looking at mutual funds. You would see equal damage to any mutual fund that owned NASDAQ related stocks such as tech stocks. So, that makes sense. It sure does, but that also holds true when NASDAQ turns around, that is, mutual funds and mutual fund managers are trackers and that's it. They track markets rather it be the S&P 500, the NASDAQ, the NASDAQ 100, a specific overseas market, or a specific sector. It doesn't take a hold hell of a lot of investment acumen to track a market, just a computer.
Don't give credit to a mutual fund or a fund manager who doesn't deserve it. Also, realize that if you are in mutual funds there is no way for you, over the long-term, to beat the market. Most likely, you will only match the market, so you had better hope the market continues to go up until you decide to pull your money out. Mutual funds and mutual fund managers have no obligations to investors at all when it comes to return, they don't guarantee nothing.
A third observation. In regards to the Internet Blow Ups." Remember back just a couple of weeks, a couple of months, remember all those analysts who were saying buy, buy, and all those fund managers who were buying, buying, those ridiculously high priced, no earnings, internet stocks? Well they got burned. It wasn't just small investors who got burned like the financial news media likes to mainly report, but it was also those so-called experts and gurus who don't know their butts from a hole in the ground, but are the same ones who CNBC keeps asking back on their show...so you can profit from it.
A forth observation. Greenspan can talk about irrational exuberance, asset inflation, and the wealth effect, increase interest rates until he gets a reaction from the stock market, but tell the politicians and the financial news the rate increases are because of inflation...some time down the road, and of course, the politicians and the financial news media believes him, even though there are no signs of inflation. Let me remind you the first time Greenspan raised interest rates because he saw inflation down the road was in March of 1997. Here it is April, 2000, where's the inflation Mr. Greenspan?
A fifth observation. The financial news media continues to mislead investors. The financial news media concentrates on the fact that the internets and high-flyers are getting hit suggesting to viewers and readers that good solid growth stocks rather they are old or new economy stocks are not doing that bad. The fact is the vast majority of new economy stocks are doing poorly regardless of their valuations based on growth rates, that is, even reasonably priced new economy growth stocks are getting hit. The reason? Wall Street institutions are sheep; they sell when everyone is selling and they buy when everybody is buying, they don't look at the fundamentals like they claim.
A sixth observation. The large cap stocks which the institutions claim have liquidity can drop pretty far themselves. I'm not saying as much as the small cap stocks, but still in the 30-40% range. Maybe the institutions need to go back to basic fundamental analysis no matter if the stocks they are buying are large or small cap stocks.
A seventh observation. The financial news media has a vested interest in keeping the "bull market" phrase going, and going, and going. A bear market occurs when a market falls 20% from all time highs, a corrections is less than 20%. CNBC reporters Mack on April 4 and Costello on April 12 stated we are in a NASDAQ bear market. However, as soon as the NASDAQ recovers they all will be right back saying this bull market has gone on for over ten years. I don't have a clue as to why they all want to retain the status of bull market?
To summarize observations you can make in regards to the recent correction in NASDAQ:
ADDENDUM (April 14, 2000)
To elaborate on the third observation. Ron Insana of CNBC today made a comment about Greenspan not bailing out the day traders getting margin calls. To me what Insana is implying is that the meltdown on Wall Street is being caused by day traders getting margin calls. I don't believe it. Day traders don't control that much money relative to the large institutions which is where the problem really lies. If the institutions had not been buying large cap growth stocks that had PEs of over 100 with growth rates less than 30% or boughten internet stocks that had no earnings at all, overall market indexes would not have gotten as high and therefore the plus 30% losses in NASDAQ would never of had to happen. The institutions continued their buying of overpriced stocks vice being fundamental investors, and the bubble finally burst. Losing the institutions, holding the Microsoft and Cisco type stocks (stocks that have PEs that can't be justified by their earnings and revenue growth rates), billions of dollars, much more than the day traders have lost. It's a simply fact: institutional investors such as Fidelity have lost their investors tons more money in real dollar amounts than day traders have lost. Ron, a fund manager buying overpriced stocks is no less stupid than day traders losing money, why don't you just admit it. I know, I know, you don't have no where near as many day traders as you do fund managers on CNBC.
Bartiromo reiterated we are in a bear market today (in regards to the seventh observation). Let's see how long it takes a CNBC reporter to talk about the ten year old bull market?
ADDENDUM (May 10, 2000)
Today on CNBC's Squawk Box it was again reiterated by a guest that we are in a bear market for the NASDAQ as well as the S&P 500 since many of the S&P 500 stocks are down more that 20% in the past 52 weeks. However, Bob Pisani of CNBC said less than a few hours later that we're not sure if this is really a bear market or not, he talked to some people and three said we were, but one said no. Also, he stated that the current bull market, if it's still a bull market, has been going on for 18 years, meaning, some don't believe that the stock market crash of 1987 was the end to the bull market started in 1982.
My main point with all this about being in a bull or a bear market is simply the fact that these so-called experts can't even make up their minds what to call certain markets, so why worry about it. It also shows you how much the so-called experts don't care about facts, but more so what's in their best interests. If they think it helps them to say we've be in a bull market for 18 years that's exactly what they will say.