by Barry Ritholtz
April 4, 2000
I thought a few additional thougths would again be helpful. Tonites topics:
A) The ever popular: What The Hell Happened Today?
B) Underlying Causes of Recent Market Activity;
C) The Coming Week;
If I leave anything out, or you have any questions, by all means shootem
over.
A) What The Hell Happened Today?
Todays market activity was frenetic. At one point today, the Nasdaq was down
570 pointsan intraday recordwith the Dow down over 500. We closed down today
a mild 74 and 47 respectively.
From the Nasdaq top at over 5150, to todays intraday low of 3750, is a 1400
point, almost 30% swing. Now THATS a correction!
The good news is todays high volume (3 Billion shares) Nasdaq sell points to
a bottom: Todays action was a classic Selling Climax, also known as a
Capitulation. It takes the form of people throwing up their hands in disgust
and saying I just cannot take it anymore -- I dont care what price I get out
at, Im not sleeping and Im throwing up hourly -- JUST SELL EVERYTHING! You
also have had several days of margin selling which has made matters much,
much worse. (see underlying causes, below)
The bad news is we are now 500 points above the bottom, and that distance
can cause a Retest of the recent lows. If the retest were to occur on light
volume, then you have the green light for the next run upwards.
B) Underlying Causes of Recent Market Activity;
I can identify at least 6 factors underlying the market action since my
March 20th e-mail: Abby Joseph Cohen of Goldman Sachs, The Microsoft
verdict, Margin induced selling, The Fed (Interest Rates & Money Supply),
Tiger Management dissolution, and Mark Mobius, et. al.
Here, in order of importance, are the details:
1) Abby Joseph Cohen, Goldman Sachs: Abby was a Bull since the very
beginning of this run. Not only bullish, but consistently and accurately so.
The biggest bull from one of the most influential Investment Banks decided to
cut back her equity exposure by 5% (70% to 65%). She commented We no longer
see the market as undervalued. Look out below!
IMPACT: 500 points
2) Microsoft: Lots of hedge funds and others made very large bets that MSFT
would settle their anti-trust case over the weekend. They were disastrously
wrong. Not only did Mr. Softee lose over 80 Billion dollars in market cap,
but the practically guaranteed an avalanche of private suits from anyone and
everyone. Its a reasonable guess that their strategy is to run out the
clock. For now, MSFT is probably dead money until the remedy phase is done
this summer.
IMPACT: 350 points
p.s. I would be a buyer if the Court breaks up MSFT . . . Look how well S/H
did with both AT&T and Standard Oil anti-truust break-ups.
3) The Fed: Interest Rates and Continued Money supply drain
Of course, when the Fed raised rates Only a quarter point, the market
rallied. Looks pretty foolish in hindsight. Dont Fight the Fed is a cliche
for a reason: Its true. On top of everything else, the Fed continues to
drain M1 (Money Supply), removing the excess supply we discussed lat time.
IMPACT: 250 points and counting.
4) Margin damage: For each dollar you put into a margin account, you can
actually buy 2 dollars of stock. Thats great when stocks are going up, and
its not-so-great when they are coming down. But consider the following: You
bought 2000 shares of Commerce One at $250 with margin -- that means your
1/4 million dollar investment controls 1/2 dollars worth of stock. When it
runs to 300, you are up 100 grand! As it drops to $125, your 1/4 mill is
wiped out. Ouch.
Margin clerks typically have til 3PM to sell those positions out -- that
exasperates the downward moves. Today was interesting because there was no 3
oclock sell off. In fact, its as if the market anticipated the margin selling
all day. When it wasnt as bad as expected, the market rallied.
IMPACT: Only 150 points on the averages, but a huge psychological impact.
5) Tiger Management Hedge Fund: Julian Robertson is a legend on Wall Street:
he ran Goldman Sachs, had one of the biggest and most successful hedge funds
of all times. He was a great stock picker, too. Many lamented his downfall as
more evidence of The Bubble. In his letter closing the fund, he blamed the
wacky valuations and reality disconnect as the cause.
This was pure BS. Tiger lost nearly 2 Billion dollars making a bad bet on
Russia debt. He lost another Billion plus on the Yen . . . why a stock
picker is making currency bets, I dont know. To me, thats like having your
Ferrari mechanic do you open heart surgery, or your cardiologist adjust your
clutch. Oh, and he also bought 15% of USAir, just before oil prices
skyrocketed. Another jumbo loser.
IMPACT: 100 points, with a moderate psychological impact.
6) Mark Mobius, et. al. Mobius is the emerging markets guru for Templeton
funds. Right in the middle of the storm, he opines to CNBC that many New
Economy stocks are so overvalued that they will drop 90%. Most of them wont
be around in 5 years. Why a guy who specializes in things like iron mines in
Kenya thinks he is uniquely qualified to comment on stocks he A) Never
owned; and 2-- Does not understand, is totally beyond me. Some people are
afraid of what they do not understand.
I'm disappointed -- This is a guy I used to respect to. Someone should slap
him upside his head, just to knock some sense into it. But I digress . . .
IMPACT: 50 points, with a modest psychological impact.
There it is: 1400 points.
C) The Coming Week;
Earnings:
Earnings season is upon us! 1st at bat: Yahoo!s earnings are tomorrow, and
they should be good. But look out in case there is a major disappointment.
Friday is the Unemployment Report, which can also move the market.
Thats all for tonite -- lets see what tomorrow brings.
--Barry Ritholtz
Copyright © 2001 Barry L. Ritholtz, All Rights Reserved worldwide. May
not be copied, stored or redistributed without prior, written permission.
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