A Hedgehog Commentary

Fear And Loathing On Wall Street

10/19/97 - (Apologies to Hunter S. Thompsen) - In the past week the NASDAQ has fallen about 4.5%. Tech stocks have led the drop. Intel is down a good 10%; Novellus also dropped 10% even after reporting a significant earnings surprise, and Hedgehog favorite CFM Technology has dropped 25% on virtually no news. Lately, when earnings reports start coming out, tech stocks start charging up, even on so-so performance. Does this week's activity signal a fundamental change in the Street?

No, the Street is responding pretty much the way it always has, like a pendulum lurching erratically between dizzying heights of euphoria and gut wrenching lows of fear and terror. The pendulum is now entering the fear and terror zone, and as with many things where the Street is concerned, we're there for no good reason. In this case, three no good reasons, and one mildly relevant event.

The first no good reason is that Alan Greenspan once again felt an overwhelming compulsion to comment on the stock market. Greenspan is kind of like a stock market werewolf; who, obeying some strange lunar cycle, starts telling anyone who will listen and has a microphone how overvalued the market is. Fortunately, Greenspan quickly turns back into the bureaucratic drudge he really is, and the market quickly goes back to doing its own thing. I could comment endlessly on how overrated Greenspan's power is and maybe I will in a later commentary. For now, just remember that anything Greenspan can say or do has absolutely no affect on the performance of any company.

The second is the fear of a trade war with Japan. Friday, it was announce that this had narrowly been averted. Oh, baloney, there never was going to be a trade war, just a lot of political talk. In the end, neither the Japanese nor the Americans want a trade war. One way or another, wiser heads will prevail here.

And of course the big no good reason is the anniversary of Black Monday when the market dropped more than 20% in one day. Commentators have been asking all week whether this could happen again. In anticipation of this possibility, the 'heroic' traders have been cashing in their shares, suddenly, a self fulfilling prophecy.

The mildly relevant reason for the market's drop was the slightly low earnings for Intel. Intel's quarterly earnings were $0.88 a share, 3% less than the predicted $0.91 a share. As I've said repeatedly (see my review of Intel), this isn't really relevant to Intel's long term performance. The shortfall does indicate though that maybe the high earnings growth that people have come to expect from high tech companies is beginning to slow. Well, yeah, they all couldn't rise forever, but this should really only affect the companies who've gotten ridiculously ahead of their actual earnings and instead are trading on hype. AOL, Yahoo, and @Home are just a few to come to mind. Instead, the fearful have punished stocks without regard.

At first, the Hedgehog was more than a little po'd about this, but then as an aggressive investor, he recognized this for what it is: opportunity. A number of tech stocks are now trading at what The Hedgehog considers attractive prices. In fact, The Hedgehog is rushing ahead to rapidly assemble a Hedgehog Portfolio for this website to take advantage of this (so the Hedgehog can brag to you about the brilliance of his advice).

Now, none of this is to say that the market can't drop more, the fear and loathing could last longer than a few days. Nor, is it to say that the broader markets can't go into a correction. Many stocks really are overvalued. If anything positive comes out of Intel's earnings report, it may be that people start evaluating high tech stocks with a little less of an eye toward long term potential, and more of one toward current value. If you do, you may find some pretty good deals out there right now.