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business news2008 Vs. 2011: Tech Analysts Miss the Macro Picture Twice
By
Ram Seshadri
Aug 19, 2011 2:35 pm
Just as in '08, analysts are narrowly focused on their small niches; their individual companies are beating numbers and raising estimates. So what could go wrong?
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Less than a month ago, when the S&P 500 touched 1350, tech analysts were frothing at the mouth to get into the tech sector. Don't look now, but a month later and we have people putting Google (GOOG) back to where it was before its stellar earnings! And all that changed was a piddly debate about the US debt ceiling.
Time and again, I see that my fellow buy-side compatriots in the hedge fund and mutual fund communities have been taken by the sell-side wizards; these wizards took every earnings and revenue growth number from the just-reported quarter and used a one-click tap on Excel to produce a massive extrapolation to infinity. Voila! By that magic metric, they proclaimed to the buy-side that their beloved tech stocks were the cheapest in a generation and a massive Buy, Buy, Buy! I am referring, of course, to that infamous Bloomberg headline a month ago, where they touted how looking forward well into the future, big cap tech was never cheaper (oh, maybe in the last 20 years, but allow me to extrapolate).
Well, for those that looked forward from that headline, Hewlett-Packard (HPQ) has declined another 30% and has never been cheaper. Guess why everyone is dumping HPQ today instead of buying it? Fear. Those same hedges who tout their returns when the market goes up and claim it's all their stock-picking prowess, guess what they do when their portfolios decline in value? They blame the markets, of course! It's not their fault that the markets plunged. Heck, no one could see it coming. This was a once-in-a-generation decline, not some garden-variety decline that they're well-positioned for. If you don't believe me, I have one interesting story to tell you.
When I was discussing what I saw coming in early 2008 with one of my fellow hedgies, he asked me what my "net" was. I replied that I was net short. He looked at me with a look bordering on pity, but masking contempt. He then asked me what I was long. I explained to him that I was long just two stocks: Checkpoint Systems (CKP) and Oracle (ORCL), and that I was short everything else in tech. He then went on a rant about how everything was so cheap in tech and wondered how I still had a job. Needless to say, when the market crashed in late '08, his portfolio was decimated. The fund he was working as a tech analyst was down a whopping 50%. But he kept his job and continued to thrive as money poured in after the market came back in '09 and '10. I was stunned by the sudden rush to risk by pension funds and fund of funds into his hedge fund since they had just seen a near wipe-out of their money.
But guess what? He and thousands of tech analysts like him never learned a lesson from their debacle in '08; they thought that what they did was great. In fact, many of them don't even know why their stocks declined or what they missed. They think that the whole debacle was due to Lehman's collapse, and if it hadn't happened, their stocks would have been A-OK. And, then money poured in after Ben Bernanke bailed out the speculators; they felt that Uncle Ben would never let "their" market fail again. After all, if they go down, they'll take the economy down with it. So they need to be saved. They will be saved.
That's why when I saw the markets standing firm in July, I was reminded about '08 all over again. In '08, as now, markets and analysts are narrowly focused on their small niches. Their individual companies are beating numbers and raising estimates. So what can go wrong? However, all around them, countries are close to collapse and unemployment lines keep stretching. They fail to understand that theirs is a small village surrounded by a forest that is on fire. The glow of the fire may be distant, but each day that it blazes on, the bigger and closer it gets to their village. One day, the flame gets too close and they have to relinquish the village to the fire. That's what's happening now. Due to their myopia, many tech analysts missed the macro picture: Europe is in dire straits, the dollar is on its death bed, and inflation fueled by runaway money printing is burning consumers' pocketbooks. During such a bad prognosis is to keep your books lean and your outlook clean. Instead, many of my peers ran headlong into the oncoming fire, by chasing grotesquely valued stocks with unproven business models such as LinkedIn (LNKD) and Pandora (P). The result was predictable.
I always used to say: Macro trumps micro any day. If you don't keep an eye on the big picture but rather blabber all day about eyeballs and social media, you will get slammed when the proverbial you-know-what hits the fan.
Or as Santayana said more beautifully: "Those who don't learn from history are destined to repeat it."
In this case, thanks to Bernanke and Alan Greenspan, an entire generation of stock market analysts have never been allowed to learn from history, let alone attend the class. They are busy getting drunk at the bar -- the Easy Money Saloon.
No positions in stocks mentioned.
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