Annex Bulletin 2008-20                             October 9, 2008

Recent...

"Beat the Street" Drumbeat Continues (Analysis of HP's 3Q08 business results)

Big Blue Stock Sags on "No News" Days (Analysis of IBM institutional shareholdings)

EDITORIAL COMMENT

Updated 10/09/08, 7:15PM PDT

IBM's surprise third quarter "sneak peak" fizzles amid gloom and doom on Wall Street

Fear Trumps Fact

There is a total disconnect at the moment between stock market and business fundamentals

SCOTTSDALE, Oct 9 – In a market driven by fear, logic and reason can be dangerous to your financial health.   Or as Thomas Gray put it more than two centuries ago, "where ignorance is bliss, 'tis folly to be wise" (Thomas Gray, 1716-1771).  In a battle of fear and fact, fear will trump fact every time.  And that's a fact.  In short, there is a total disconnect at the moment between the stock market and the business fundamentals.

The preceding point was brought home today by the stock market's reaction to IBM's last night's surprise early announcement of its preliminary third-quarter results.  The news was good.  Big Blue had facts on its side (see below).  And for a while this morning, the facts held sway and coaxed the market upward, including the shares of most major IT companies.  But early gains melted away at the end of the trading day, as the Dow slumped another 679 points (see "IBM, Internet losses lead broad tech plunge at close", Dow Jones' MarketWatch, Oct 9). 

Fear won.  Reason lost.  And least for today.

Good companies; profitable companies; companies with excellent cash flows - like IBM, Accenture and HP - were spurned and punished by panicked investors fleeing the equity markets in search of safe havens elsewhere. 

"And where might that be?" you ask.  It would appear the Treasuries.  But wait a minute... hasn't the Fed just lowered the rate by half a point in a futile effort of trying to stem the Wall Street stampede?  So the buyers may be overpaying for the bonds in the hope of a safety net. But wait a minute, what's going to happen when the government starts actually servicing the debt created by its Wall Street payout? Aren't the interest rates likely to go up to help pay the extra cost?  Which means the Treasuries' price will probably decline.  That's some safety net, isn't it.

See what we meant when we said in the opening paragraph that "in a market driven by fear, logic and reason can be dangerous to your financial health?"

So what's to be done?  What to people do when they face a major natural calamity, like a hurricane or a tornado or an avalanche?  They hunker down, batten down the hatches; hide underground until the storm blows over.  Then they emerge to assess the damage and start rebuilding.

Investors could take a cue from survival tactics of the people who live in the hurricane or tornado belts of the country or in the high mountains.  What you don't do is get out and start running.  Which is what all those people are doing who are now selling their stockholdings.  They'll get blown to bits, just like any living creature would facing a  natural disaster out in the open.

That's what happened in early 2000, when the dot-com bubble burst.   And before that in 1987.  And before that...

So if you look carefully at the above Dow Jones long-term historical chart, you will see that today's Wall Street storm is but a tempest in a teapot compared to the Great Depression, for example, in a relative sense.  It's just that the numbers have gotten bigger.  Alas, memories are short.  So the stampeded out of stocks continues...

Oops... I just realized I am making the same mistake... not taking my own advice.  Here I am, again trying to use logic and reason. Sorry.  Excuse me while I climb down into my bolt hole.  See you on the sunny side of the Street.  Remember, post nubila, phoebus! ("after the clouds, the sun").

Also check out...

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MacAttack Falters at Foot of Mount Vista (A story about yet another attempt to break away from Windows)

Minting "Green" into Greenbacks (An update to our five-year forecast for IBM)

Better Late Than Never - Analysis of a rumored HP takeover of EDS

IBM "Places" By a Nose over Google - Analysis of Top 20 IT Cos stock and business performances

Big Blue Takes Chill Off Wall Street's Spring (Analysis of IBM's first quarter business results)

Just Say NO to Greed - Killer of Dreams! (An editorial comment about subprime financial crisis)

The z10 Lifts "Big Green" (Analysis of IBM's new mainframe announcement)

HP Beats the Street Again (Analysis of HP's 1Q08 business results)

Capgemini's Great Valentine's Day Gift (Analysis of Capgemini's 4Q07 and FY07 results)

Profit Drops, Stock Follows (Analysis of EDS's 4Q07 results)

Profit, Revenue Surge, Lifting Stock, Too (Analysis of CSC's 3Q08 results)

Services, Emerging Markets Boost IBM (Analysis of IBM's full 4Q07 results)

Big Blue Shines in 4Q (Analysis of IBM's preliminary 4Q07 results)

Microsoft Still Wall Street Darling (Analysis of institutional holdings of Top 10 IT Cos)