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Happy Black Monday!
By the time you read this, you'll know if what the bears call the Big Kahuna struck Wall Street Monday morning. As I type these words over coffee on a dark and windy Sunday, researching the market technicals, it's easy to be superstitious about the stock market. Monday is the 12th anniversary of the 1987 crash known as "Black Monday." One might guess the markets are due for a rebound after the largest single week point decline of the Dow since 1987. That's what most people thought after the correction level declines just before Monday, Oct. 19, 1987. Today's market internals point to further weakness. The yield on the 30-year Treasury bond is up 1.17 % this year. Nothing like a steep incline in interest rates and rising bond yield to shut down a conservative investor's enthusiasm for stocks. Want more? According to the New York Times, "…the level of cash that investors have on hand to put into the stock market is low. For most of the major investor groups, cash reserves are near the low end of their 45-year ranges." Ugh! As we pass through crucial support levels on the Dow, and the S&P 500, one might expect "major investor groups" to take their profits--still strong despite last week's down turn--and sit out the rest of this increasingly volatile year. The same article points out that, "…equity funds had net outflows of $1.1 billion in the seven days ended on Wednesday." The bargain hunters, who have ameliorated every other down draft this autumn, moved to the sidelines last week. Yet, there was no fear in the eyes of traders and no large volume, the usual signs of a bottom. Besides, history shows that corrections never finish on Fridays. Meanwhile, the dollar weakened, inflation indicators crept up, commodity prices rose, gold continued to boom while signs of resurgent economies in Europe and Asia indicate that the US equity "bubble" will need no help from Greenspan's interest rate needle to deflate. All anyone is talking about is Alan Greenspan. A man not known for his recklessness is playing Russian roulette with American equity markets. His dry, dire speech Thursday was timed perfectly to form a double whammy along with the Producer Price Index (PPI) numbers, of which he undoubtedly was aware. The result was a death knell pushing the market below 10,000 at one point. I imagine, as I watch dead leaves blow under a threat of rain this cold Sunday morning, that's exactly where we are headed on Monday. Market Correction Equals Asset Reallocation Apple investors apparently couldn't care less what the broader markets are doing and for good reason. Even as the Dow moved into official correction territory last week, Apple bulldozed ahead, behaving once more like a stock chock full of momentum. Of course, that's yesterday's news! Apple is morphing into a hybrid between a traditional PC vendor, and a Sony-like, user-friendly innovator. With literally no direct competition, Apple has 3 new families, for a total of 7 new products, just now entering the halcyon days of their life cycles. A very clever strategic arrangement as we enter the all important Christmas season. It's the type situation that Warren Buffett looks for, only he doesn't do high tech. Compare this to last Christmas--which wasn't shabby at all--when Apple had only the iMac for sale in the consumer space during the holiday season. This Christmas is going to be a blow out. (See my analysis of Apple's recent earnings announcement for a detailed view of why investors are buying Apple as the broader markets tank.) If 1999 was the "Year of the iMac", and it was, the year 2000 is going to be "The Apple Year". It's easy to imagine AAPL in triple digits as soon as the broader market voodoo is worked out. Even as Apple's new product line guarantees sustained rapid growth through year 2000, AAPL's valuation still modestly hovers at the very low end of the computer hardware sector, or any other tech sector for that matter. Wise Steve Ballmer is correct. Microsoft, AOL, Dell, Cisco and many other tech giants can't really justify their PE ratio of 63, 191, 70, 111, respectively. These are strong companies, but they're not the same great investments they were in 1996. They're now mature behemoths with little opportunity to expand their market share because they own their respective markets already. In fact, they face increasing competition and decelerating growth because they can't maneuver as fast as their more nimble rivals. Much of their growth this year came from acquisitions, not innovations. Increasingly investors are asking what are the great growth values for the next century? It's certainly not going to be yesterday's nifty fifty. Apple with a PE ratio of less than 20 is the perfect value/growth play of the quarter, if not for the next decade. Apple's growth is 100% pure innovation coordinated with an impeccable, even visionary, understanding of the consumer market. Apple hasn't made a single acquisition in years, now that's fading the trend. Of course, if Greenspan's mythic bubble deflates, everyone will feel the pain, but the damage will not be distributed equally. Those most overvalued will have the furthest to fall and least to bounce. When the bubble bursts, or at least corrects hard, all that capital has to go somewhere and it can't all go into bonds or under mattresses. Much of that dislodged capital will wander off in search of next century's opportunities, most of which are currently obscured by the shadows of the giants. Undervalued and overlooked companies with great growth potential in the new economy will ultimately benefit from the reallocation of the huge amount of funds locked up today in overvalued positions. Perhaps, that is what we already can see happening this autumn as the markets trend downward while Apple rises on phenomenal volume. Your comments are welcomed. |