Why Bother Analyzing Companies? October 30, 2009 http://jasonkelly.com/index.html For more than a year now, fundamental analysis of companies has been a waste of time. Stocks have traded as a block, first plummeting in tandem a year ago to March as banks froze up the financial system, then soaring in tandem as the Federal Reserve expanded the monetary supply and made cash worthless as an asset with near zero interest. The latter sent liquidity flooding into stocks, lifting all of them together. We've seen evidence of this recently. Last week, Apple delivered a superb earnings report that announced its most profitable quarter ever. It sold 10.2 million iPods, 7.4 million iPhones, and 3.1 million Macintosh computers in the quarter. Reports just don't get any better. Since the March low, Apple's stock has risen nearly 150% and the easy explanation is its phenomenal business execution. Was it that bad before, though? No. Here's how Apple CEO Peter Oppenheimer began the earnings report conference call a year ago, on Oct. 21, 2008: "We are very pleased to report our September quarter results, which were record-breaking on a number of fronts. First, we sold more Macs than we have in any other quarter in Apple's history. Second, we sold more iPhones in the September quarter than in all previous quarters combined. Third, we sold more iPods than in any prior non-holiday quarter and finally, we generated more revenue and earnings than in any previous September quarter in Apple's history." Remember, that was a year ago. During that record-breaking quarter, Apple's stock declined 40%. All Apple's recent stock price rise has done is return the stock to where it was in December 2007 before it dropped 59% to its low last March. It was a solid company with strong fundamentals all through the drop, and it's been a solid company with strong fundamentals in this year's rise. Those fundamentals didn't matter a wit. What mattered was the macro backdrop. Also, since the March low, stocks of other companies -- both healthy and sick alike -- have risen remarkably, too. Citigroup is up 350% and Crocs is up 500%. Judging by correspondence I've received from book readers and subscribers to my newsletter, the latest shenanigans from government, banks, and big business may have had a lasting impact on the character of the market. I sense that many individuals have finally had it. The ruse is over, the curtain is drawn back, and what's revealed is that Wall Street is no longer about companies using public markets to raise capital in an efficient way that allocates it to those with the best prospects. Nope, it's a fraud in which you can spend all of your free time (or work time, as the case may be) analyzing product plans, marketing plans, management history, and so on just to be laid low by a bank that levers up too far or a single pen stroke from the Federal Reserve chairman. It finally became plain as day that individual investors are up against the Goldmans of the world, and the Goldmans own the casino via their connections to government and government's connections to the Fed. When the investment banks control the Treasury and the Federal Reserve, observing their actions alone is all that matters to the performance of a stock portfolio. Enough individual investors have seen that and realized that they stand little chance against such collusion that a crowd of former market participants would rather take their chances against inflation than the casino owners. Sadly, those are the alternatives. Deciding to walk away from the stock market is barely an option for Americans because the money supply has been constantly inflating since the Fed's creation in 1913. Americans face two crummy choices: risk another cliff dive in stocks when the powers that be speculate the whole sham into another crisis, or try outpacing inflation in non-stock investments that are less vulnerable to Washington's whimsy. Lovely. Individuals used to take solace in looking at fundamental factors, thinking they could find an edge with personal shopping experience as Peter Lynch taught, inside their own circle of competence as Philip Fisher taught, or culling the attributes of quality companies as Warren Buffett demonstrated. Now that even that impression has been rendered cock and bull, what's left? About the best anybody can do is stick with broad index ETFs and try to sense the waves of pressure on the stock block. Good luck with that. Nobody can do it consistently, as has been widely demonstrated in the literature. Given the increasingly dice-like nature of stocks as the number of factors that individuals can analyze to make a difference dwindles, no wonder so many look to be placing their money elsewhere. Trading is still alive and well. However, most stock market participants weren't in it for the slot machine aspect of speculating on stocks. They were in it for the steady average 10% per year growth they were told by the industry to expect, which is obviously not part of the bargain. It was made clear that past performance was no guarantee of future results. At last, it looks like people are paying attention to that. Instead of accepting the risk as they used to do, however, they're now concluding that they would like a few more guarantees in their financial future, and are more trusting of just about anything other than stocks.
That's one of the facts about trading that I learned the hard way. Cost me plenty to finally realize that regardless of how good an entry I had, if the broader mkts went opposite my position, my stock was going that way too.
There's a time to sell. There's a time to buy. There's a time to stand aside. Trade what you recognize, not what you hope to see.
The explanation is rather simple. The Fed followed the lead of the UK. The UK realized that it could not bail out the banks. The UK realized that the banks had lost too much money in MBS/CDO and that there wasn't enough money around to create "bad" banks. After this realization, the UK decided to prop up the "capital" of the banks - they bought preferred shared, etc. This made it look like the banks were adequately capitalized. (The Fed followed this game plan as well.) The banks (now flush with taxpayer cash and REALLY cheap loans from the FED/BOE) were then instructed to make money in the markets. They have followed this "plan" to the letter. The banks are trading amongst themselves to make it look like they are "earning" money from their trading desks. In reality what is occurring is yet another bubble in the equities markets. When this bubble collapses...capitalism is finished! -gastropod
Scary shit. I think you're right gastro. But I hope you're wrong. Amazing that the politicos are just looking on smugly! They haven't got one testicle between the lot of them.
Hello cap'ncod, I wish I were wrong too...but, I am right. It was planned to be this way from long ago. The only question is: Will we be smart enough to get out of the disaster area in time? Pardon the language, but...What fucking piece of shit "information" came out today to drive the Dow up over 200 points??? Nothing!!! We must then understand that the market is being manipulated up - plain and simple! The bullshit answer by the excrement talkers on the "news" channels is that the market went up, because the dollar was devaluing?!? Really????? The 200 point gain in the Cow oh, my bad Dow, should then have been the result of a $30 increase in the price of gold...hmmm...didn't happen. Silver will "spike" soon - this should be the warning to all...go to your bunker/hideout...this is about ready to collapse! -gastropod
I think we're in the final innings of this shell game. even greenspan is saying stocks skying have saved the day. every one and there mother is counting on rising stocks saving the day. the obsession with the mkt rising is its coming downfall. i recall hong long buying into there mkt huge in the 90's only to get stuck with a ton of stock.vol in this whole 7 month rally has been 40% under normal. tons of people are near break even now and will all rush to sell when this rolls over.
Yeah, but they aren't really even, are they? Not after factoring in inflation. Our dollar is going into the toilet, so the markets rally because to own part of a company is a hedge against inflation. BTW, since you guys are saying its over, thats a sure sign that it isn't. Only when you change your mind and start buying...then its over. SM
Thanks for the vote of confidence that we will be the suckers who buy at the peaks...just to lose all the way down! My prognostication for you...you will have missed the most important commodities rally so far!!!!! While many on this board have their gold and silver. I will bet that you greatly lack what others of us out here have in the "other" precious metals...blued steel and lead Did I mention that I live in one of the last bastions of freedom...Texas -gastropod
Stocks have always gone up and down with the market, this is nothing new. People want the one hot stocktip, that's why they watch bubble vision. They don't want to think "what's the trend of the overall market and what are the strongest/weakest stocks?" they want to think "what stock is hot and can go up 1000%" regardless of market direction. Where does it say that fundamental analysis is a guaranteed road to riches in a bear market? Where do people pick up such non-sense? The problem is with people, not with markets.