That's all I've got to say. Wow.
The stock market has been as jumpy as a squirrel on a caffeine binge over the last month, rushing higher, running down, and then up, and then both directions at once, and then neither.
A look through of some of our most popular message boards will tell the story: There are a bunch of individual investors who have been badly burned. "Paper profits," or the converse, "paper losses," don't mean a whole heck of a lot when large portions of the market go "poof"!
Parts of the market, at least. The "Old Economy" stocks, those that as recently as last week we had been writing off as lacking relevance, have come bounding back, retracing much of their losses from the beginning of the year, and crossing both the 10,000 and 11,000 levels on the Dow in the course of a single week.
After some pretty shaky days, and a severe drop on Friday in the Nasdaq, the dike burst open on Monday in part as a result of the collapse of mediation between the Justice Department and Microsoft (NYSE: MSFT) in regard to the antitrust case against the company. "In part" signifies that there are some other things going on here, far and beyond people getting spooked by Microsoft having to face some chin-music from Judge Jackson of the District of Columbia Circuit Court.
Although these issues more likely affect the Rule Breaker portfolio more than this one, it is also germane to discuss them in the context of what the MakerPort is trying to achieve as well. Yes, right now Microsoft is a wounded dog. Yes, Yahoo! (Nasdaq: YHOO) has taken a 30% haircut this year. And yes, Cisco (Nasdaq: CSCO), which at times seems to be made of Teflon, rising when the market is down, rising when the market is up, rising when nothing else does anything else, has taken a shot as well. Even Cisco has ceded more than 10% of its value from its high, equating to a loss of $66 billion in market valuation. As a manner of translation, Cisco lost the equivalent of the combined market caps of Charles Schwab (NYSE: SCH) and Amazon.com (Nasdaq: AMZN).
And no, the end is not near, as least as far as I can see. On the other hand, I cannot see into the future at all. But, in Foolish style, I think I have a much better idea of what it will look like five years from now than I do tomorrow in the equity markets.
What's going on is that people, finally, are beginning to put some credence in the importance of revenue quality with companies. At least that's what Fools should hope is going on. I, like every other pundit who claims to speak for the market, have no real way of polling the polity of investors. Because, even with all of the volatility going on right now, most people have done nothing with their portfolios, and therefore, cannot be effectively queried.
We're going to blame the recent weakness in the most speculative stocks on the "Hmmmmm Factor." The beginning of the recent drop started on March 10, with President Clinton and Prime Minister Blair putting a good slice of public doubt into the defensibility of the position of several biotech companies, primarily Celera (NYSE: CRA). Hmmmmm. Without going into the details of this event, my take is that it served as a wake up call for people holding speculative companies. The realization is that a company's product or service had best be really defensible. Current sales growth can only lead to future profitability if a company protects its lead.
Soon following the biotech hiccup, MicroStrategy (Nasdaq: MSTR) announced that it had to restate its revenues from 1998 and 1999 because it was recognizing revenues for long-term contracts immediately. In other words, the company was counting its chickens before they hatched. Investors wondered what other companies had poor quality revenues. Hmmmmm. We know where investors have been achieving spectacular growth, but where do they go to find a company that they trust? Hmmmmm.
In fact, companies from all parts of the "e-revolution" are having their revenue recognition policies questioned. In normal markets this would not matter so much, but in one with so many unprofitable companies being valued on multiples of sales, then a little creativeness to expand the top line can have a huge impact in the marketplace. But the media and the SEC are now focusing upon the more dubious ways that Internet companies increase their sales. This has had the effect of adding just a bit of doubt, where previously there was none. Hmmmmm. In a frothy market, doubt can be fatal.
Barron's added gasoline to the fire with its story on March 20 about Net companies that it projected to run out of cash. Barron's may be the grumpy old man that has never met an underpriced stock, but its timing in this case was uncanny. Within two weeks of the article, 3 of the 12 companies listed in the article -- Drkoop.com (Nasdaq: KOOP), PeaPod (Nasdaq: PPOD), and CDNow (Nasdaq: CDNW) -- have received letters from their auditors stating doubts on their ability to remain going concerns. These types of letters are not formalities. In fact, the last thing an auditor would want to do would be to savage a client company by sending such a letter. But beyond what it means for these companies, there is the greater message that the dot-com appellation does not somehow release a company from the basic laws of finance, the central one being: "In order to stay in business, you must make money."
The final leg is the Microsoft ruling. Of the three catalysts, this one is by far the most unreasonable. Microsoft's legal problems are specific to Microsoft. If anything, several companies would have been set to benefit from the ruling, most notably Sun Microsystems (Nasdaq: SUNW). And yet, what we have is a referendum on high-tech stock valuation.
As a result, investors seem to be running back to the blue chip stocks as fast as they can. This makes perfect sense for those who have been nibbling farther and farther in the outer edges of speculation, but what does it really have to do with our telecommunications Rule Maker, Nokia (NYSE: NOK), a blue chip in its own right?
As I've opined many times before, market fluctuations have little to do with company operations. What we have going against the overall marketplace right now is systematic risk, the risk that public company shares have just for being public. Stocks tend to move in a herd, either within the market as a whole or as a part of a sector. But the overall result should be that we will see a move into the top dogs of business.
So, you want a strategy in this rocky time? Well, here it is: Look at your portfolio. Is each company the top dog in an important business? Does it have potential for sales growth? Is it run by intelligent, creative, and honest management (and remember, if management isn't honest, then the other two components are not going to help you)? If the answer for any of your holdings, for any question, is "no", then you've got to have a gameplan.
Because systematic risk affects all companies, all the time, up as well as down (though, I doubt too many people call a rise in the market the actualization of a "risk"), the question we should be asking ourselves is whether or not the companies we hold have something beyond the overall market drop going on to justify an even more severe loss.
In the end, as has always happened before, the best companies will rebound and rise for the long term. It always happens, but the key is to have the best companies, not the also rans.
Bill Mann, TMFOtter on the Fool Message boards
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