Fish or Cut Bait: Doom and gloom returns

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on 19 August 2001, 22:00
by staff

Maybe April 4 wasn't the bottom after all.

That's a truly scary thought for most investors (although, if you've been shorting the Nasdaq-100 QQQ tracking stock, then you're probably as happy as a prepubescent girl at a Britney Spears concert). Slowly but surely, it seems that the Nasdaq Composite is heading back toward the April 4 low point of 1,638.80. Until August 17, when the index stood at 1,867.01, the Nasdaq had not closed below 1,900 since April 11.

The monstrous rally that took place between April 4 and May 22, a period in which the Nasdaq surged 41.2 percent, is now a distant memory. Since May 22, the index has plunged 16.6 percent. It has now fallen 22 percent for the year, which means that there will need to be another humongous surge in technology stocks in order to avoid a second consecutive yearly decline. That would truly be an amazing occurrence. Let's put this in perspective. The Nasdaq has not had two back-to-back losing years since it dropped 31 percent in 1973 and another 35 percent in 1974 to close at the itsy-bitsy level of 59.82.

DON'T BET ON ANOTHER RALLY So what are the chances of the Nasdaq avoiding this dubious fate in 2001? Sadly, I think they are pretty slim. The index would have to soar 28 percent between now and the end of the year in order to break even. Impossible? Of course not. Likely? I don't think so.

When the Nasdaq hit its nadir for the year back in April, companies were about to report woeful first-quarter earnings. The hope was that technology fundamentals were about as bad as they would get. Once companies started to warn about second-quarter results starting in late May, that line of reasoning was exposed as sheer folly. And unfortunately, earnings warnings are not abating, even as the second-quarter earnings season draws to a close. Dell Computer (Nasdaq: DELL) and Ciena (Nasdaq: CIEN) recently issued grim forecasts for the remainder of this year and next.

What's more, it's still incredibly difficult to make the argument that the technology sector at large, or the general market for that matter, is cheap. The S&P 500 is trading at 21 times 2002 earnings estimates, even though the long-term estimated earnings growth rate is just 8 percent. According to Thomson Financial/Baseline, the 1,677 technology and telecommunications companies it tracks trade at an average of 42.3 times 2002 earnings estimates. True, this isn't exactly a bubble-like valuation, but since earnings estimates for the sector continue to come down, it's tough to justify such a high multiple. Analysts have cut their 2002 earnings projections for the stocks in this group by an average of 4.9 percent over the last month.

Sorry to sound so depressing -- I think I've been watching way too much of HBO's funeral-home saga Six Feet Under -- but there really don't appear to be any catalysts in the short term that will get tech stocks moving once again. I do think there are some select tech companies that are attractive now, and from time to time, I've pointed them out in my columns. Just don't expect a broad technology rally this year.

FOCB INDEX WINNERS AND LOSERS Surprise, surprise, surprise. Last week was another wretched one for the WorldCom (Nasdaq: WCOM). The stock rose 4.9 percent. Among the many losers, Ciena was the week's biggest dog, dropping 36.5 percent following its earnings warning.

Finally, as much as I'd like to make a prediction about the upcoming Federal Open Market Committee meeting on August 21, I'll leave the Greenspan-watching to my colleague J.P. Vicente in his Market Currents column. The last time I tried to figure out what the Fed would do, I boldly called for a 50 basis-point rate cut and the Fed responded with a 25 basis-point reduction instead. I've learned my lesson.

Topics: Bait, Returns, Doom, Gloom

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Comments

by Ames Tiedeman on 22 September 2007, 14:11

This is the doom and gloom I see...or it is an opportunity if I am correct. In any event, I am deeply worried. Gold will go way up, maybe to $1,500 an ounce or higher because the dollar will fall for years. The dollar will keep falling and here is why: The U.S. cannot sustain 800 bilion a year trade deficits. We cannot export our way out of this mess. The only answer is a sharply lower dollar to drive manufactruing home and to lower the trade deficit. The dollar has much farther to fall. What you are seeing is a long term effort (it will take 20 years) to get the trade deficit back under 1% of GDP. We are currently running a trade imbalance of nearly 6% of GDP. No nation can do this. The IMF would be stepping in to help any nation if its trade imbalance went to 6% of GDP becuase its currency would collapse! The U.S. is different, but still, we cannot sustain a trade deficit of this magnitude. People must understand that when we buy an item from say China, we pay in dollars. The Chinese company we just bought from them goes to an Exchange Bank in China and converts those dollars to Yuan. The Chinese banking system (Chinese Government) is now sitting on those dollars. They can either 1, buy oil, 2, buy Treasuries, 3. buy U.S goods, 4. buy U.S. Corporations, 5. other. Over time if we (the U.S. ) continue to run a trade deficit we could simply be completely bought and controlled by foreigners. Warren Buffet has explained the situation as being like a rich Texas farmer who loses a small piece of his land year after year and never notices for a while. When he then notices, tragedy sets in because he no longer controls his land. So in sum, we need to get the trade deficit way down. This is why the Fed has abandoned the dollar. It wil be going down for the next 20 years. That is how long it is going to take to correct this imbalance mess. Bottom line: A lower dollar will equal higher inflation and higher GOLD prices.

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by Ames Tiedeman on 30 December 2007, 14:46

Who here thinks Oil goes to $110? Thanks, Ames

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