Johnny had a dime store piggybank that contained
four quarters. Johnny wanted more. Johnny wanted to make a name for
himself. Johnny had a way with words. Johnny sounded oh so
convincing. It wasnt long before Johnny had people lining up to pay
$1000 for his dime store piggybank.
Timmy had a dime store piggybank that contained
four quarters. Timmy wanted more. Timmy wanted to make a name for himself.
Timmy had a way with words. Timmy sounded oh so convincing. Timmy
said, "If people are willing to pay $1000 for Johnnys dime
store piggybank, then my piggybank must be worth $1000". It wasnt
long before Timmy too had people lining up to pay $1000 for his dime store
and thus began the careers of two publicity
hungry Internet analysts.
Just when we were getting used to the valuation
methods of the New Era of Reason, the rules of the game abruptly changed,
yet again. We knew that traditional valuation models were long dead,
replaced by dreams of what might be in 10 years, but now it seems the new
methods are also yesterdays news. Next decades earnings and tomorrows
revenue growth no longer matter; instead, it is the market capitalization
of a rival that shall be used as the yardstick from this day forth.
The details of this new price determiner are
still being ironed out, and so at this point it is still undetermined
whether the market cap valuation model also works in reverse: i.e., Peapod
is a money losing e-commerce company, Amazon.com is a money losing
e-commerce company, therefore Amazon.coms market cap should equal that
of its rivalon this question, the jury is still out.
The sudden emergence of this new means of
enlightened thought, if widely adopted, is likely to make a moot point of
the question that has resounded throughout the street this week: Capitulation
or Prelude to a Decapitation.
While Tuesdays mid-day recovery from near
death caused more than a few to utter the multi-syllable phrase
"capitulation bottom", and the markets hard fought upward
shift on Wednesday and Thursday caused several more to proclaim a bottom
was firmly in place, the two-part question remains: "a. Who
capitulated?, and b. If the right people did not capitulate, can a bottom
truly be in place?".
From a purely technical standpoint, a strong case
can be made that Tuesday marked a capitulation bottom, and that NASDAQs
follow-through rallies on Wednesday and Thursday signaled brighter days
ahead. Stepping outside the technical vacuum and looking at the broader
landscape, the case is not as strong, and the evidence points in the other
Sure we saw a bit of panic early in the week, but
the only ones we saw throwing in the towel, i.e. capitulating, were those
"investors" who were forced to make a hasty exit: those on the
receiving end of a margin call, or those who knew they soon would be. In
order for us to say "capitulation bottom" with a smile of relief
on our faces, we would need to see the average retail investor, the
"in it for the long term", "buy and hold" investor,
fleeing for the nearest exitwe did not see this. In fact, what we saw
was quite the opposite.
The retail investor did not hit the panic button,
instead, just as they have throughout other precipitous declines of the
past few years, they observed the scene with concern, but not fear, all
the time waiting for the right time to get back in and do some
"bargain shopping". In the midst of the tech sectors early
week mauling, investors were assembling a "buy on the dip"
shopping list, a list top heavy with newly created "values"
named Cisco, Sun, Applied Materials, and HPperceived bargains in an age
when the term "value stock" has come to mean a stock that is
trading at a lower price than it did two weeks ago.
The continued faith of the buy-on-the-dippers
helped steady the market this week, and a favorable employment report
later today could give the market a boost, with the Dow and NASDAQ moving
quickly towards resistance at 11400 and 4600, respectively, but these
resistance points are likely to mark the end of the bounce, with a retest
of this weeks lows the next stop. Short term bottom, yesstart of a
sustainable new leg up to record highs, no.
Finally, many of you already read the following
item in our Stocks to Watch section this morning, but for those who did
not, well repeat it: