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What the Muses Deign: “The Irrational Market”

by Porruka, Editor, porruka@macedition.com, 19 October 2000

Okay – I’m not a professional stock trader nor an investment advice professional. I know a little about the market, I know more about Apple, and I think I know still more about businesses in general. And now, I (along with most investors) get to throw most of that knowledge out the window.

The internet boom has affected almost every aspect of the economy, that of the US and just about every developed nation. The pace of many aspects of business development have been accelerated by orders of magnitude; where it used to take decades to build a company strong enough to warrant trading in the public markets, only months were taken for some at the height of the most recent dot-com boom, prior to April’s implosion.

Companies took advantage of the boom, both in terms of their business (raking in contracts and money hand over fist from the available capital pool), and in their stock (leaping into the public markets as soon as they were able), generating huge piles of cash along the way. A funny thing happened during all this. The same dot-com boom that was propelling both the market and the economy behind the scenes also gained a public face: online stock trading.

Partially with the advent of discount brokerages, and then more completely with the discount online brokers, the public markets finally became more public. No longer were the masses oppressed by outrageous commission fees just to buy or sell 100 shares of Apple. In fact, your everyday person could now buy or sell 67 shares if they chose, at the same low commission. Democratization of the markets had truly begun. And at the same time, the dot-com stock boom convinced many that there was plenty of easy money in the market (there was, too) and that the shares they were trading represented the money – the currency – not a share of an actual company.

This is where I believe we find ourselves today. The market is no longer representative of fractions of corporations, but rather of shares themselves. The shares are the asset, almost holding a value apart from the company they represent. Of course, there is still a connection if you dig deep enough, but the recent wild swings in the share price of companies that only meet earnings estimates (created by the so-called professional analysts) show that many people shoot first and ask questions later when they have the opportunity to do so. I suspect that as a whole, careful analysis of an earnings report is done after the decision to buy or sell these days. If it sounds good (or lots of people are buying), buy! If it sounds bad, sell! sell! sell! and then ask, “Is it bad?” Add to this the markets’ expectation that earnings, revenue, and general business growth will continue unabated at record levels, and you get one volatile mix.

Such a mix exploded at Apple recently. Couple slowing consumption around the world (no company exists in a vacuum) with what, in foresight and hindsight, seem to be some management blunders, and Apple got slapped for an earnings warning that sent its shares plummeting more than half the value overnight. Something sounds bad? Sell! It’s not like Apple management shouldn’t have expected it. The company is not alone when it comes to receiving that treatment, though Apple’s case was extreme, compared to those others (like Eastman Kodak, IBM, Home Depot, and Xerox).

Now we find that Apple barely made its revised numbers. It certainly is still profitable, but the company will be dramatically affected over the immediate term as it clears the aisles of stores like Sears and CompUSA of older product. And all while trying to convince consumers that there are new, cool products in the pipeline.

The pipeline, as in January and beyond. As in the first half of calendar 2001. As in, “We’re not going to talk, you’re just going to have to take our word for it.” This, less than three months after reassuring the investing public that everything was going gangbusters.

As this article is being written, Apple is below $20 US a share (after-market pricing). The irrational market will have another chance to speak on Apple now that the actual earnings and short-term forecast are available.

For the record, I wouldn’t have it any other way. Individuals are able to make informed decisions (if they choose) without having to deal with a middleman (otherwise known as a broker), but with headlines like Apple Earnings Miss Forecasts (NY Times, registration required), Apple drops on weak 4Q (CNNfn.com), and Apple misses lowered profit estimate (CBS MarketWatch), it will be interesting to see how the “irrational market” responds. And will it take the rest of us Apple investors with it?

[Disclaimer: At the time this was written, the author was long AAPL.]

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