In the current market psychology, worse is just one step closer to being better.
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Simat Helliesen & Eichner's
Tech spending is plummeting? That's OK. The economy is veering toward a recession? Good. Consumers are suddenly tightfisted? Bring it on. Profit shortfalls replacing upbeat guidance? Now we're really talking. It's not until everything points down that up becomes the indisputable alternative, says Bob Rezaee, a buy-side analyst and co-manager of the
Montgomery Global Long-Short fund. It's not that Rezaee is a sadist; he just likes to earn his recoveries the hard way.
With fundamentals such as the resumption of demand for networking gear and enterprise software still a year or more away, Rezaee thinks the market is close to seeing its worst days. Soon, he says, people will be willing to call certain stocks bargains. But unlike the market upswing of 1999, Rezaee says we're wiser this time around and will stay more attuned to valuation.
TSC: So Bob, last week the market was way down; this week it's started up -- where's the market really headed?
Rezaee: I think we're getting close to a short-term bottom. Prior to the events on Sept. 11, it looked like consumer spending would eventually buckle as more people were laid off over the next few months. But we had a sudden exogenous shock -- sort of a crescendo of bad news -- which caused panic and fear. Monday was just a reflex rally.
TSC: What's next?
Rezaee: I still sense a lot of panic and fear. People who were hoping for a silver lining gave up after the events two weeks ago. But what I like now is that all across the board stocks are looking like tech stocks -- they are all in a free fall. And with more bad news coming in the form of profit warnings and more layoffs, it's likely that we'll see yet another selloff next week.
But all these factors -- fear, bad news, lack of confidence -- all contribute to market bottoms. Pessimism rules the day. This is so typical of the late stages of a market when you give up on everything. Equity becomes taboo. We are getting close to that. And that gives me some level of confidence. By my playbook, we are probably no more than a few weeks away from a major bottom.
TSC: Then what?
I think the resumption of growth will be sluggish, but stocks will begin to recover on the premise that sometime in mid-2002, fundamentals will begin to recover.
TSC: So how will this play out in tech and telecom?
I don't want to be a perpetual bear; we've seen so many of these companies come down so hard and so fast that there is plenty of room to see some of these companies bouncing.
, for example, has been on a steady slide as people priced in the slowdown in PC sales. But they have a new product cycle starting with their XP rollout, and I think people may be encouraged by that.
The thing that concerns me about networking equipment is that the only rally in this group will be sentiment-driven. The stocks have been so oversold that some investors will have the tendency to look further out beyond the short term and do some bargain hunting. But the reality is that phone companies are being rewarded by cutting their capital expenditures. And Wall Street has no appetite to fund any new service providers. So the business is concentrated into a very few companies, and they are squeezing their vendors big time. We'll see a rally among the equipment makers, but it will be based on sentiment, not on improved fundamentals. They will probably mark time until there's a hint of real recovery ahead.
TSC: So what do you make of the stock of JDS Uniphase (JDSU) remaining unfazed, despite the company taking more write-off charges last week and warning this week?
I think that is a good sign -- when there is bad news and yet the stock perseveres. I think it's testimony that the stock has begun to bottom out. Does that mean fundamentals are improving? No, not at all. But there's a set of people stepping in and buying the stock because they think this company has the prospect of re-emerging as a leader sometime.
TSC: What about the phone service side -- anything reached its bottom yet there?
I think we saw after the tragic events how versatile wireless service is. Not only because of the obvious mobility, but the security advantages became clear. And you are seeing a lot of long-distance traffic moving toward wireless. So I would guess that is one area that has seen the worst. I hold
. I don't want to be telling people to go out and buy these companies; they've already seen a flow of buying. I think if the market bottoms out in the next few weeks, the snapback will be strong, and that could mean good things for companies like
TSC: Sounds like 1998 all over again, Bob.
Well, I think this time we learned our lesson, and we won't have total disregard for valuation. That is out, and will be out for a long time. That was the mistake that many of us made, and I think it was a reflection of a lot of inexperience of portfolio managers. They embraced risk like there was no tomorrow.
Personally, I've always had a valuation bent. But it would be a bit of a stretch to say it didn't happen to me, too. We got lulled into complacency. We weren't alone; even the really "smart people"-- venture capitalists, the so-called experts -- dove in. VC funding in 1995 was slightly north of $7 billion. In 2000 it peaked at $104 billion. That's a testimony to how everyone bought into this nonsense. I think we are all much wiser now.