Friday, October 23, 2009

Selling Off on Good News - Potential Change in Character

As we noted earlier in the day, we're seeing some selling on good news. But it's not just today - a lot of days the past 10 sessions. A lot of stocks have sold off post earnings but the general market has sort of hung in there, and even rallied at various points. Mostly as an anti dollar play.

This goes back to the question we raised in a weekly summary a few weeks ago.... going into the earnings season. Yes we know analysts are inept and part of the "Wall Street game" is to undershoot estimates so we can all scream in glee that companies did "better than expected". Even if the year over year comparisons want to make us avert our eyes. Not that late summer / early fall 2008 was any great shakes (only the potential collapse of the entire Western financial system)... but sheesh year over year should be relatively good using late 2008 as a basis! What should be scary is some companies are doing worse than a year ago, even after jettisoning many redundant costs (redundant costs is my Wall Street way of saying, "humans with jobs")

So we know the great majority of companies will "beat" - they do every quarter... that's part of the game. But what price do you pay for it? (AMZN) had a heck of a quarter last night - bravo. Top of the line company, with a great CEO - premium franchise, game changer. It's up 24% today and we now are approaching 60x earnings. Is it growing a 60% clip? 40%? 30%? Do we pay 1x growth? 2x? 4x? Or in Dutch terms - at what cost tulips? Need we have any association of prices and values anymore? We did not in 1999 when the last great stock 'liquification' happened, and it appears we need not now either. Amazon is actually a bad example because it's a good company; I see countless companies who can't hold a candle to that firm with similar valuations...

We can continue this "better than expected" game for quarter after quarter - there is a reason some 65-75% of stocks beat estimates analysts EVERY quarter - any competent management knows that "managing the Street" is half the game. You need not even have that good of a business; you just have to create lots of "cool surprises" around earnings and get your stock flying, stop at go, collect your stock options and acquire generational wealth. But as we asked 3 weeks ago - when does valuation mean anything?

I have no idea. Do we need to wait until the bowl of unlimited liquidity stops? Ever increasing amount of paper dollars chasing fixed amount of stock certificates?

Valuation will matter again - we thought it did not matter in 1999 as we entered a "new paradigm" - in retrospect that paradigm was nothing more than Alan Greenspan flooding the world with US pesos post Long Term Capital Management and pre-Y2K. And now we have a man in charge who puts Alan to shame. When valuation matters again (or the printing presses slow), I expect a sudden change of heart; and all those who gleefully ignore valuation today will be slammed into a wall at 160 mph. Or off a cliff at 160 mph as lemmings are more apt to do.

Now it's just a question of waiting for that day...

Speaking of "gaps" don't forget S&P 906 / NASDAQ 1800... like a siren she is calling out to us.

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