More Un-Bubblish Behavior From the Market
This is a strange time in the stock market. On the one hand, prevailing
wisdom among the chattering classes has it that current stock prices,
especially on the Nasdaq, represent a bubble, and that the best we can hope for
is for that bubble to lose slow air slowly, rather than in one giant burst. I
started collecting examples of journalists saying things like "this overvalued
market" and "Does anyone remember Japan in the 1980s?," but I stopped because,
well, I got bored. At the same time, though, no one seems to be actually
selling their stock, perhaps because everyone's succumbed to the siren song of
long-term investing or perhaps because everyone always thinks they'll be the
ones who can get out just before the crash.
Or it may be that people are staying invested because for a supposed bubble
in which prices are driven ever higher by indiscriminate investors, this market
is actually quite discriminating, and its standards for corporate performance
remain quite high. In an earlier
column, I wrote about the segmentation of Internet stocks into winners and
losers, and in recent weeks we've seen a mediocre Christmas further segment the
Net sector by taking a real toll on Internet retailers. When Lucent recently
announced that its quarterly numbers would fall well short of expectations, the
stock dropped 40 percent. And today, Qualcomm saw its stock price drop 10
percent in a few minutes of after-hours trading despite the fact that the
company announced that it had grown profits by 213 percent in the latest
quarter.
Now, one way of looking at these sharp turns in market sentiment is to
dismiss them by citing them as evidence of that much-dreaded "volatility." But
a more accurate way of looking at them is to see that investors are thinking
hard about what news means for a company's future earning prospects and are not
interested in rewarding companies that fail to live up to expectations. (For
further evidence of this, look at the market's reaction to all the recent
merger announcements.) It's also the case that those expectations are very
high, as the case of Qualcomm suggests.
Of course, the market's expectations should be very high, what with the
prices investors are paying. Qualcomm's profits grew by 213 percent, but its
stock is up more than 1,400 percent in the past year, so it may have a ways to
go (down, that is) before it's fairly valued. And Lucent's quarterly numbers
were more worthy of a slow-growing consumer-products company than of a
high-priced tech giant, so the market's reaction was hardly surprising. But
what's interesting is that it isn't just stocks trading at stratospheric levels
that are punished, nor is it just stocks that fall well short of
expectations.
Take, for instance, SBC Communications, the largest Baby Bell, which
announced earnings today right in line with analysts' estimates. SBC's profit
and revenue growth weren't staggering, but they weren't disappointing, either.
The company showed strong growth in its wireless business, which remains one of
the hottest sectors around, and it issued a bullish forecast for the coming
year. But Project Pronto, SBC's $6 billion effort to roll out DSL Internet
access to its local customers, fell well short of expectations. Since
high-speed Internet access will soon be a crucial, perhaps the crucial,
business for local phone companies to dominate, this was not good news. On a
day when the market rebounded sharply in the afternoon, SBC finished the day
down 10 percent. And this was not after a big run-up. On the contrary, the
stock had already been down 28 percent over the last 12 months.
The market's judgment was, I think, the right one. (Actually, SBC's stock
deserves to drop just on the basis of naming the DSL initiative "Project
Pronto," but that's neither here nor there.) But the important point is that
the judgment was made. In a pure speculative market, like the South Sea Bubble,
it was enough to exist to coin money. And even in the months leading up to the
Crash of 1929, or during the rapid rise of the Nikkei in the 1980s, corporate
performance seemed to matter less and less. Say what you will about this
market. There are no byes for the teams that are playing in it.
