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Contrarian Chronicles

Oracle counts on trader gullibility
by Bill Fleckenstein

This edition takes a peek at the dicey nature of today's market environment, in
which rank speculation sometimes triumphs over fear. Recently, Oracle claimed
such a victory when one of its skillfully timed news releases unleashed a wave of speculation among"professionals." No clairvoyance needed to guess that
outcome.

Of course, some people mistakenly attribute oracular powers to the individual
currently installed as chairman of the Federal Reserve. Funny, how this
"visionary" couldn't see an asset bubble growing under his very eyes due to a
fondness for monetary easing that promulgated gambling fever.

When Oracle (ORCL, news, msgs) reported its numbers recently, the action in
the futures market that evening, as well as what transpired the next trading day, offered a perfect microcosm for what's been happening in the stock market. Let's begin by observing that Oracle announced its numbers with about five minutes to go in futures trading (which extends 15 minutes beyond equity trading). After the company proclaimed that software license revenues were better than expected and gave off some feel-good body language in the press release, Nasdaq futures exploded to the tune of about 3%.

The fly in the anointment

People are so rabid to latch onto any piece of news, anoint it as"good" and then try to make the case that the bad news being behind us and therefore the bottom is in, that they will leap on a press release and explode the whole Nasdaq 100 complex to the tune of 3%. They will do this while all the news around them points in the opposite direction. They won't even wait to see what happens on the conference call.

Shortly after the futures closed that evening, semiconductor maker Advanced
Micro Devices (AMD, news, msgs) preannounced a revenue miss of 25%, and
Apple Computer (AAPL, news, msgs) announced it missed its revenue
estimate by 20%. While most people are willing to disregard AMD and Apple
(and I'll grant you, they are not the most important tech stocks on the planet), it's interesting to note that Apple is a few months into its first new product in four years, and there's no interest from consumers. What both Apple and AMD
signify is the fact that demand is horrible. These were massive misses. When
the futures reopened, they were hammered to the tune of 4% from the price they
closed at, which meant that net/net, within two hours after the close, the Nasdaq futures were basically down 1%.

Then, during its call, Oracle guided lower for the next quarter. That brings up the subject of why on earth people would pounce on good news from a company with
such a consistent pattern of cleverness, which in the last nine months has more
than once indicated good things were coming in the quarter, only to preannounce
a miss shortly thereafter. Furthermore, on at least two of those occasions,
Oracle chose to preannounce at 5:30 p.m. Pacific time on a Friday afternoon.
This is one of the least trustworthy managements in all of technology.

Oracle pie a la modus operandi

In any case, on that evening, Oracle's"style" was demonstrated loud and clear
by its familiar two-step: first putting out an everything's-rosy press release and then lowering guidance on the call. The fact that Oracle had a good quarter
means zero because of the fact that it lowered guidance for the next quarter
(after CEO Larry Ellison had said the quarter was sound). Given his track record, how do we know he didn't pull in some orders from next quarter to make the numbers this quarter?

So, across the board, the news that night was horrible, as it indicated that
demand for information technology products just hasn’t materialized. Now, that
shouldn't be a surprise to anyone, but the fact that the initial Oracle news was
seized upon shows why we can't even contemplate a stock market bottom or
even a tradable low. This is not what one sees at those junctures. There should
be abject fear and real concern, not to mention low prices, although a tradable
low would not necessarily require true values.

In any case, as I watched the events unfold, I just could not help being struck by the fact that it was such a beautiful example of all that is wrong. It just goes to show you what rank speculation still exists among the so-called professional community. The public is slowly getting disgusted, and so they are not sending the money to the mutual funds, but the people who have other people's money are still acting like the same drunks that they were during the mania.

I would point out that not everyone is guilty of this. I know there are managers
who take their jobs seriously and don't throw money at everything that moves.
But as one can see from the action described above, there are also an awful lot
of people who check their thinking caps at the door and just react to any sort of price action. They don't care if they lose money, but they are afraid that if the market goes up without them, they'll lose their jobs.

Porous Wessel

Segueing to the corporate netherworld, where lots of players should be shown
the door, I'd like to talk about a recent article in The Wall Street Journal titled"Why the Bad Guys of the Boardroom Emerged en Masse," by David Wessel.
It's pretty worthwhile in the sense that it raises a lot of significant issues, and it also asks many questions. However, I would like to point out the irony of the Journal -- a publication that once capitalized the"n" and the"e" in"new
economy" -- beginning a series called"What's Wrong?" Notably, in an article
last summer, the author referred to Alan Greenspan as King Alan. Wessel totally
misses what's at the root of the problem, which is the bubble created by
Greenspan. (More about that in a minute.)

Wessel does note that during the mania, society was most accepting of all the
reckless corporate behavior and related sleazy things taking place. During that
time, two notorious corporate scoundrels, Al Dunlap from Sunbeam and Walter
Forbes from CUC International (who helped blow up Cendant) had basically
perpetrated fraud and were walking around free men for the longest time, with no
consequences. The Private Securities Litigation Reform Act of 1995 (often
referred to as the"Safe Harbor" law) let corporate chieftains gun their stock
prices and not have to worry about lying, since it eliminated the consequences to this behavior. The public was in an accepting mood, since everything worked to the upside.

Sleaze, on bended knees

To the question that Wessel asks -- why so much corporate skullduggery is
surfacing now -- the answer is that it's a bear market, stocks are going down,
things are being uncovered and people are starting to demand explanations. All
of this corporate skullduggery is just human nature run amok. It's really not
surprising. It happens in all bubbles. Journalists are digging, because that's what is selling. So now we are finding out about all the things that went on that people didn't know about, and didn't want to know about. Many of us speculated that there was a lot of this going on in the mania, but without a subpoena it was impossible to ever know for sure.

To repeat, the socioeconomic mood of the country was to let all things pass, as
long as they ended in higher stock prices. After all, we had a president, whether you liked him or didn't like him, who could say on national TV that it all depends on what the definition of"is" is. Nothing encapsulated the mood of the country better than that. (This isn't a partisan comment.) In any case, people were willing to look the other way as long as they thought they were getting rich in the process. Then, the sins get exposed, and no matter how bad you think things were, you always find out that they were worse than you thought. This always happens in bear markets.

Anatomy of a keg party

Now, for readers who e-mail me to ask why I blame Greenspan, the quick and
dirty is this: Alan Greenspan has conditioned the investing public to believe he’s a miracle worker. In all but name, he’s a price fixer. And the price he fixes is not just any price, but the fulcrum interest rate of the global dollar economy. Sometimes, of course, he sets the right price -- how could he not? But at critical junctures, he has set the wrong price -- again, how could he not? But his failures haven’t been random ones. They’ve been the failures of a man who seems to believe that there was never a bad bull market and never a necessary bear market.

In the early 1990s, he cut the rate to rehabilitate an ailing economy (and, of
course, the sick banks). In 1998, he cut the rate to rehabilitate the financial
markets (Long-Term Capital Management had fallen to pieces). In 1999, he cut
the rate to forestall the crisis of the omputer clocks (which he seemed to have
prevented). People couldn’t help but notice that, as he cut the rate, the market
went up. They loved him for it. And he did not discourage this adulation. Truth to tell, he seemed to like it. By the time the March 2000 peak rolled around, the chairman of the Federal Reserve Board was giving speeches that might have
been written by Mary Meeker, the cheerleading Morgan Stanley Internet analyst.

The reason we are in this mess had absolutely nothing to do with the minuscule
amount of Fed tightening that went on in the year 2000. (Readers can learn more
about the specious arguments surrounding this from a column that I wrote last
December. The link is at left.) The mania simply exhausted itself. Our current
problems are the result of profligate monetary creation and zero attempts to try
to rein in stock speculation.

Greenspan was so drunk with his own abilities that he believed he could make
the market and the economy do anything. He allowed things to go on in a
reckless manner, never once learning anything from his previous bailouts, nor
ever attempting to curtail speculation. In fact, he did the opposite by making
people believe there was a Greenspan"put" -- a rescue if things got too hot.

Monday morning bubble-backs

I am continually struck by the fact that people who never believed there was a
bubble or a mania now say things like"in the mania" or"in the bubble." Then,
while finally acknowledging that we had one, they think everything's going to be
OK shortly. This is not what history suggests about bubbles. Though rare, the
consequence of them is long-lived.
<ul> ~ Quelle</ul>
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