The Inane, The Insane, The Suspicious and Other Bubble-Like Behavior

By James J Puplava CFP, March 13, 2003

There are days in the news business when there is simply no news. There is nothing to report or talk about. When this happens we make up stuff or do stories about things that have very little relevance to anything. When I did television news many years ago there were times when we sat around the news desk in the hopes of a bank robbery, a car chase or anything with blood and guts. The motto in local news is "If it bleeds, it leads."

There was one day that I remember when there was nothing to report about, so we invented a riot. A local fistfight at one of our local high schools called for a patrol car to come to the school and break things up. Listening to the police scan we sent in camera crews. If you watched our evening broadcast that night, what was a local brawl was made to look like a riot. We led our newscast with upfront promotions of late breaking news on a break out of a riot at a local school with police out in force to restore order. Actually it was an altercation between two students that happened to draw a crowd. Two squad cars did show up on the scene. There were a few bloody noses, but nothing more than that happened that day.

Of course watching the newscast that night would have given the viewer the idea that riots had broken out all over the city. Our story gave the impression that blood was shed. Remember, "If it bleeds, it leads" so camera shots of bloody noses and cuts of the two combatants were zoomed in close enough to see nose hairs. We also showed shots of a lot of people running around, creating an action sequence to make people believe they were watching a real news story. We followed up the story later on in the newscast with an editorial on what can be done to stop violence in our schools. What began as a simple altercation or disagreement over a girlfriend ended up as a school riot and violence story that evening. In other words, nothing happened, so we invented a story.

There are many days like this in the financial news business. Stocks went up or they went down for no apparent reason. Lately they have been going up for no reason at all. I doubt last Friday's rumors of the capture of bin Laden�s sons would have prompted intelligent investors to jump into the market to buy stock funds for their kids� college fund. There seems to be a disconnect between the amount of bad news and market rallies, giving the impression that they are triggered by intervention. Today's market rally was set off by a story that the Bush Administration said it might extend its efforts for a UN vote on Iraqi disarmament. Okay, does that mean there will be no war? Are the troops and carrier battle groups headed home? Don't think so. But stocks went up in flagpole fashion; the dollar rallied, gold got trashed, and bonds sunk. There was also a story that the CIA was in talks with Iraqi military leaders about surrendering in the event of an attack. This would suggest a short conflict, so it is time to buy stocks. Remember on Wall Street there is always a reason to buy stocks. War, no war, rain, sunshine, hurricane, and balmy weather--it is always time to buy. I hope that most of these gyrations are caused by caffeine addicted day traders on No Doze. Let's hope that is the case because if it isn't, this country and our financial system is in big trouble. Would you want your fund manager buying stocks on the basis of a rumor of bin Laden�s sons? Or better yet, if we are still sending troops to Iraq and another carrier battle group, do investment managers think there will be no war? And if there is war, what comes afterwards?

In don't believe in my 24 years in the business I've ever seen such nonsense as to why stocks should be bought or why earnings when bad, are better because they beat recently lowered estimates. Analysts play fast and lose with those estimates, constantly lowering the benchmark. We are just a week away from the pre-announcement season for Q1 earnings. Analysts have been busy lowering benchmark earnings so that by the time that earnings are reported, even major losses will look good because they will beat estimates by a few cents. What is widely reported as earnings these days is a joke. Analysts and anchors act like there is no way to discover the real numbers so we just go with what the company gives us. I find it hard to believe that we just can’ttell people the truth anymore. If sales are down, profit margins are shrinking, and business doesn't look good, then why not say so? Wouldn't it be better for the analysts' credibility and the firm he works for to simply state the facts and cut out the spin?

The problem is if the truth is told, most people would be selling their stocks. The markets are transitioning from paper to "things" as leadership changes in the aftermath of the stock market bubble. The only problem for Wall Street is that they aren't in the business of selling �things;� they sell paper. And right now things don't look good for paper. Sure, there is the possibility of a war rally if things go well in the first days of fighting. The US may eventually capture bin Laden; that would be good for a 500-point pop in the Dow. But then what? Are we talking about investing or trading, or pure speculation? If we are talking about investing, why would I want to pay 25-50 times earnings for a company whose earnings are at best only growing at 8-10% per year? Do I buy because every one else is buying? The only reason to be buying stocks today is to speculate and trade. There are very few bargains out there outside of the natural resource sector, which is in a new bull market, so when you hear ads about investing, they really mean speculating. Buying stocks because of a rumor or a political event that may or may not happen is speculation. That is what isn't understood at the moment. Stocks are pricey, the markets are dicey, and investing has turned into gambling driven by short-term news events.

As we get ready for the next earnings season, having experience in reporting the news I would like to make some suggestions for headlines on those slow news or bad news days that are directly ahead. I do this in an effort to clarify, and hopefully help ratings and bring investors back into the markets. They are as follows:

XYZ corp. rose 20% today after a judge reduced the prison sentence of the company's CEO to 5 years instead of 10. The judge�s sentence came in better-than-expected.
Shares of BS rose more than 10% today reversing a 70 percent downtrend after auditors found that company fraud was only $2 billion. This was less than analysts� estimates of $2.1 billion.
Stock markets rallied strongly today after a government report showed inflation to be tame. The CPI rose at an annual rate of 8%, but was only 1% when everything that went up was subtracted from the index.
Oil prices rose to decade levels causing stock prices to jump sharply after a leading oil analyst estimated that people would be doing less driving. Higher oil prices are causing some analysts to turn bullish on the bicycle sector.
The financial markets rose sharply after the government reported the highest trade deficit on record. The dollar plunged causing economists to predict that the plunging US dollar was good for the economy because nobody would be able to afford to buy anything foreign.
The Drug sector bounced back strongly today after is was discovered that terrorists had spread anthrax through aerosol canisters in a shopping mall today. One analyst is bullish on vaccine sales as the virus spreads.
NASDAQ stocks took off like rockets today after the surprising success of today's IPO of Cureall, a new biotech firm that says it plans to find a cure for jock rash. Several analysts have now raised their estimates for the biotech sector.
Markets rallied strongly today after a government report showed that retail sales were unexpectedly better-than-expected. Analysts attribute the stronger-than-expected retail report to sales of survival gear, hydrogenated food, duct tape, and gas masks. Economists attribute the higher sales numbers due to the government raising its threat assessment to �incoming� last month. In a related story, new construction permits rose in a rush to build bomb shelters. It's the �in� thing to do said one analyst. We think it is a positive sign the economy s turning around.
Markets got a lift today after Fed Chairman Alan Greenspan made positive comments about the outlook for the markets. Greenspan said he expects stocks to go up and to go down this year.
Bonds rose sharply and the dollar rallied in overseas markets following statements accompanying today's FOMC meeting in Washington. The Fed changed its interest rate stance from neutral to unsure and confused.

Today's Markets

The markets rallied strongly today on news that the war may be postponed for a week. Investors jumped all over tech stocks in a buying and short covering frenzy. The NASDAQ, has held up strongly this year due to strong buying by mutual fund managers and traders in the hopes of capitalizing on a war rally. One of the big disappointments this quarter in my opinion is just how poorly the tech sector is doing right now. Inventory channels are backing up with unsold goods in just about every tech sector. Margins are dropping as competition forces companies to slash costs as they fight for every dollar of sales. Those companies who are gaining sales are doing so by cannibalizing sales from weaker competitors. It is a brutal business to be in right now. That hasn't stopped fund managers from taking speculative positions in the sector. They are buying these companies in the hopes that even bigger idiots will follow in their path. Unless the stories are spun away, expect some big disappointments coming out of the tech sector this quarter. They are going to need some major distractions to keep people's minds off the bad news this quarter. Perhaps a war will do the job.

Meanwhile, today's feverish spec buying ignored a batch of bad news. Retail sales fell in the US, Baxter International said earnings will drop on lower prices, SAP Chairman steps down, Tyco�s Breen cuts profit forecast, AMR hires Greenhill Miller to advise on bankruptcy, Revlon's losses widen, and Martin Feldstein urges tax cuts to ward off recession and weak economy. This is just the kind of news to generate a stock market rally of 3-4 percent. Is this a casino or what?

Stock markets experienced their biggest rally in five months based on the delay of war plans. Markets haven't rebounded this strongly since October 15^th; a day a major flagpole rally took place as we saw again today. More than two stocks rose for every stock that fell with volume hitting 1.76 billion on the Big Board. More than 1.8 billion shares traded hands on the NASDAQ. It looked like an intervention rally that sparked short covering; part of what I believe has become part of the four-step rally process that begins with intervention. Wall Street analysts said they were looking now beyond the war when they believe the US economy will experience a second half recovery. Where have I heard that before? One fund manager said that the case for investing in stocks is better today than any time in the last decade. According to this fund manager, consumers and businesses will start spending again after the war is over. The fund manager expects 15% gains for stocks this year. Today's worse-than-expected economic reports and earnings warnings didn't deter him from his view that it is a good time to buy stocks.

Tech stocks led the advance along with retailers after a dismal retail report. "Things will get better after the war" is Wall Street's new mantra. Converse Technology shares jumped 19% after the company announced losses this quarter would be better-than-expected. The company said they would lose $0.08 a share instead of analysts' estimates of a $0.11 loss. Tyco shares fell slightly after lowering its 2003 profit estimates and firing the company President. HP shares bucked today's tech trend after the company said it would reduce its first-quarter cash flow from operations by 18% because of an accounting error. The news today supports my thesis that Q1 is going to be disappointing. It now depends on whether Wall Street and the financial media can spin their way out of this to draw in more suckers.

Chart courtesy of www.stockcharts.com

James Puplava

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James J. Puplava CFP
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