Post of the Day
March 11, 1998
From our AOL
Subject: Bad Market, No Donut!!!
The longer I'm in this market, the more I come to realize the depth of my own ignorance. I can understand CPQ's price performance in light of the earnings warning. I can even bring myself to accept that is the way the market functions when half a billion dollars slides out of the predictions -- it doesn't offend my sense of the fundamentals of this particular Company. In fact, CPQ's recent woes gives me a warm, fuzzy feeling because that's the way markets probably should price stocks, at least the myopic view of one (like myself) who want's everything to make economic sense.
However, it does trouble me when I see companies, in roughly a similar business, get their stocks scuffed up for reasons that seem best characterized as completely psycho. If you have watched what's happened to SUNW, another pretty good computer maker over the past two days, it makes you wonder in the grimlins aren't at the controls of the NYSE and NASDAQ. Poor old SUNW was down more than four points yesterday on a couple of downgrades, and then up nearly five points on a couple of upgrades. Want to talk about a case of the bends?!?!
Strikes me that this tech stock market marches to an entirely different drummer, than the real and rational world. There's a post today on this board wanting to know how come Amazon.com was an $87 stock when no earnings are expected until the two cents in 1999. Want something from the internet business that blows the mind entirely go have a look at Yahoo! or XCIT. Why? Lordy, lordy, hows come that is?
Seems like a lot of posters want to compare DELL's performance to CPQs. I can't rationally explain any of that based on a balance sheet, sales forecasts, margins, or even forecasts of earnings and average brokerage recommendations. If you look at the fundamentals, CPQ's aggressive pursuit of market share and broadening of its operations into allied markets seems very rational and a growth path that makes intuitive sense for a Company that is destined to be the dominate computer producer. DELL's situation seems more of a risky business, build to order, JIT, and a narrower focus than CPQ's seems to incorporate some limiting characteristics that, while effective now, does not bode as well for future performance. But look at the P/E ratios and the most recent couple of quarters' price performance.
Only a few hundred years ago these observations would have resulted in someone being burned at the stake. Black magic, consorting with the devil, or witchcraft would certainly have been the accepted cause of these things, end of discussion, get out the barbecue sauce. Psychology is a tough line of causation to follow. People react to perceptions of reality and sometimes their perceptions are wrong, or subjective (both negative and positive), or just plain biased. I suffer from all three, we all do. It is also very obvious that the market is made up of buyer and sellers, that are no better with their perceptions than most of us are. Sometimes they have more facts to confuse them a little more, or perhaps, if they're lucky, help dispel some of their pyschological constraints.
The bottom line, is that the psychology plays a role, one that takes us away from our nice, neat little economic models which reduce everything to nice smooth, continuously differentible functions that always produce, data supported answers that confirm the underlying fundamentals. Psychology is bad for the economic understanding of the results of this market, particularly the tech sector (and therein is the reason FA needs a little TA to help spice the dish that's finally served up). Simply put, in an economic sense, the tech sector is not well behaved most of the time.
The fundamentals of CPQ are still dyn-o-mite in the long run, and the pyschology has not been particularly good to CPQ over the past few months. Bad market, no donut!!!! Notice, however, with this fall from the graces of the mid-thirties, to the last two days where we have hung up above 25, seems to suggest there could be a difference in the psychology. So long the psychology has been a negative influence, probably in anticipation that things couldn't be that rosey. With the seeming realization of the anticipated negative expectation, could we have fallen through Alice's rabbit hole? There is a certain relief to be found in bad news, with negative consequences behind us, in terms of our perceptions, the old downs may become ups, and the old views of west could become east, Alice's Wonderland, may have been little more than a psychological twist on the stock market. It's alot easier to be positive with the short-comings known, than when they're not (if this is as bad as it gets, then perhaps things are going to be okay afterall). Perhaps we really are going to be okay, except this time the psychology is going to help, rather than harm price performance going forward, if so, it would be a welcome change. In fact, I think that may just happen, FWIW.