Partying Like Its 1999

 “Let’s take a break from today’s gloom, and do some charting. Why? Because all of the sudden, some of the stocks that are held up as the worst examples of dot-com era excess… the optical components and testing plays like JDS Uniphase, Agilent, Oclaro, Oplink, Opnext… are taking their cue from the artist formerly known as Prince, and partying like it’s 1999… a party I don’t think an imploding North Africa can really stop.” Jim Cramer, Mad Money, Feb 22, 2011

 We think Jim Cramer was right.  These stocks were partying “like it was 1999″ –  a few weeks ago.  But it looks like they quickly are now being destroyed like it was late 2000. We don’t want to pick on Jim Cramer.  After all, a guy who picks almost every high short interest, momentum name is bound to get a few wrong.  But we would like to highlight these optical stocks as an example of what is wrong with today’s market. 

Lots of momentum chasing coupled with quants who run the same strategies and topped off with some HFT “market making” gets you inflated charts that are in a “feedback” loops.  Then it doesn’t take much to pop these bubbles. A small miss on guidance is enough to punish a high flyer like FNSR for more than 35%. 

The question should not be why this stock has been pummelled but why was the stock up that much in the first place?  Are investors doing their homework? Or are they just chasing momentum to keep up their performance?  Where are the so-called analysts?  Going into today, there were 6 buys, 1 hold and only 1 sell on Finisar.  FNSR was up 33% YTD before last night’s miss on guidance yet it had this to say according to the AP:

 “Finisar executives said on a conference call with analysts that the slowdown is part of an “industrywide phenomenon.” They said they’ve seen the dramatic reduction in orders in China for a couple of months and weren’t sure when it would ease. They emphasised that the weakness was with multiple customers in China, and that Finisar isn’t losing market share”

 A couple of months of dramatic reductions in orders and yet the stock was still up 33% this year.  This makes you wonder if analysts are properly doing their due diligence or does our new fragmented equity model no longer provide the economic incentives in the form of spreads as compensation for firms to properly research a stock?

 Today is the 2nd anniversary of the March 9, 2009 bottom in the stock market.   Much has changed in our market since then.  The S&P 500 has nearly doubled and the Fed has pumped in billions and billions of dollars of cheap liquidity to keep ensuring that the equity market continues to go higher. But this money printing has done nothing to alleviate the real problems with our economy: extreme high levels of unemployment and a housing market which continues to flounder.  

The Fed’s plan appears to “hope” that increased stock prices will lead to more consumer confidence which will lead to more spending.  Well, any owners of the optical stocks this morning are feeling anything but confident.  This segment is an example of what happens when the music finally stops and there are not enough chairs for everybody to sit in.



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