The Daily Interview: Bollinger Capital Management's John Bollinger

The Nasdaq Composite is not the market.

This may seem an obvious point, but many investors on Wall Street and Main Street have placed such a disproportionate amount of attention on the index that the distinction does appear to be blurred. John Bollinger is here to tell you that the first step to start making money again in this market is to get beyond this fallacy.

John Bollinger Bollinger Capital Management and EquityTrader.com

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In today's Daily Interview, the man who runs Bollinger Capital Management and EquityTrader.com says this is a tale of not two but three markets: the Nasdaq (the worst of times), big nontech stocks (the murkiest of times) and small-cap and mid-cap stocks (the best of times).

In the process of chatting with TSCers Justin Lahart and Steve Schurr about what he likes in today's market, Bollinger also provides a brief history lesson on just how long and painful a correction in once-highflying stocks can be. He also manages to touch upon stocks such as Microsoft(MSFT) and Sun(SUNW), for good measure.

Justin Lahart: What are your thoughts on the market these days?

Bollinger: The market itself is an interesting question. These days we need to ask, what is the market? There seems to be more than one market out there.

If you look at the Nasdaq Composite and the leadership that dominated the market for the past few years into the highs of last spring, that seems to be one segment of the market that's doing really very poorly, and we don't see any relief there for some time to come. If you look at the big listed stocks, the names we all know and love from our day-to-day lives -- your General Electrics (GE) and so on -- that's another segment of the market, and it's pretty much marching sideways, with a few great stories and a few disasters. If we look at the third sector of the market -- the market that I really like, the small-cap area and the mid-cap area -- there we have some indices that are actually recording new highs.

It's really a matter of what is the market, and then, having talked about that a little, it's a matter of what you want to do with each sector. The big problem out there is that everybody and his brother is totally focused still on the Nasdaq. That's become the operating definition of the market, and therefore you have a relatively gloomy tone out there. But that's by far not the only story.

Justin Lahart: Just last week we saw one of these sharp rallies in the Nasdaq. I guess what it told me was that there were still people interested in buying the dip, or having this moment where all of a sudden the Nasdaq was going to rocket up. And once again, anyone who bought the Nasdaq on that rally paid pretty dearly for it.

Bollinger: I think there's still a huge interest in trying to buy the lows, a huge interest in trying to pick the bottom in the old leadership. Especially the quality old leadership, the companies that really had fabulous growth rates and tremendous prospects. Your Ciscos (CSCO) and Suns.

If we go back and examine the history of the markets, the markets teach us a very profound lesson about these types of things. Perhaps the best example would be the Nifty Fifty that dominated in the late '60s and early '70s. One and all, quality companies. Great products, great prospects, good management in place, great sales figures, fabulous growth rates. But when the bear market came to take them, it took 10 years for them to recover.

I always use Xerox (XRX) as an example. It was a prime Nifty Fifty stock, even ending in X, which gave it a certain glamour and sexiness at the time. Its decline following its Nifty Fifty peak lasted many years, and it really wasn't until the birth of the next cycle that Xerox really meaningfully rallied. And that was 1982, almost 10 years later. In fact, things got so bad for Xerox before it was over that it was trading to yield -- a dividend yield -- of better than 13% in 1982 by the time they finally started buying it again. I think that it's ironic now that we find Xerox back down to its 1982 lows, much of casualty of this bear market we've seen.

Steve Schurr: Looking to the tech sector, some of the older leaders, such as Microsoft and others, have posted strong recoveries this year. Does your analysis mean that some of the rallies we're seeing that have been sustained are false rallies?

Bollinger: I think you need to be careful about doing this in too blanket a manner. There will be exceptions; there will be stocks that have good prospects. You have to remember Microsoft was punished awfully severely on the antitrust problems it's had. It's already much later in its cycle than many of these other stocks are, and therefore closer to a period of healing and perhaps leadership again. Many of these stocks are less than a year away from their highs, even though they're 75% or more down from their highs. Really, the decline phase hasn't finished yet, never mind the protracted healing phase.

A couple of weeks ago Sun came out and said it expects to double its business in the next 3 1/2 years. And they may well be able to do that, but doubling of business really implies an exponential growth in the business. And we all know about growth curves -- the early portion of the curve is critical. This is going to be an extraordinarily hard environment for them to maintain the growth rates that will be necessary for them to meet those projections. Many of their customers are on the wounded list and will probably stay there for protracted amounts time. Many of the dot-com companies that went out owned prodigious amounts of equipment. That equipment will be out competing with new equipment sales for some time.

In the announcement, [Sun CEO Scott] McNealy pointed to the idea that the bad times were going to be good for Sun, because corporate customers would be less adventurous and less willing to experiment and try new things and they would go with their tried and true supplier: Sun.

You know, going with the tried-and-true supplier is not something that makes for a doubling of business in the next 3 1/2 years. I don't mean to single Sun out, but I heard that statement and it struck me as iconic of the thinking that's going on. High growth rates are relatively easily sustained by relatively small companies. Large, dominant companies really need a unique combination of very powerful growth in their sector as well as good management driving the process. A small company can even do well in a sector that isn't, because they can incrementally gain market share. But the Suns and the Ciscos, they need the sector to expand. And it's hard for me to imagine that the sector is going to expand this year.

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