Hype thrills… and kills
Today's Financial News - Posted October 2, 2009
Did the rally end with the start of the fourth quarter? Now that the hype is getting replaced by facts, the markets are filled with red.
By Andrew Snyder, TodaysFinancialNews.com
Baltimore – (TFN): Just the facts, ma’am. It may be a cliché line uttered by Joe Friday, but it is mantra more important than ever in the investing world.
There is no denying the third quarter was one of the best in decades for investors. Shares of just about everything surged ahead by monstrous proportions. But ask any investor who cashed in on the gains just why the markets made such a large leap and they will likely look at you dumbfounded.
The answer to the question is stocks went up because investors “figured” stocks had to go back up. In a world filled with instant gratification, a V-shaped recovery was the only solution, even if the facts were not there to back up the premonition.
In other words, the markets surged on mere hype.
Unfortunately, this week’s facts prove the economic picture may not be so rosy. Manufacturing declined. New car sales plummeted. The real estate sector remains as weak as ever. And now, unemployment figures took a major leap in the wrong direction.
When we sort the hype from the truth, the economy does not look so good.
The truth hurts
I can think of dozens of stocks that exemplify this notion, but I will stick with just two.
First, remember that publicly traded behemoth General Motors? Now that it is bankrupt, its shares trade under the name Motors Liquidation Company (PK:MTLQQ).
Talk about hype!
Even though there is almost zero chance any equity investor will ever see a penny out of this liquidation, investors have bid the value of the company to nearly half a billion dollars.
Granted, shares of the so-called firm have been on a steady downward trajectory, but to pay even a penny for something that has no intrinsic value is just plain stupid, yet scores of investors are doing it every day.
It is the same situation over at Sirius XM Radio (NYSE:SIRI). I will admit Sirius is a tad less risky than investing in a bankrupt company in a liquidation phase, but is not much out of the same realm. Many experts strongly believe Sirius’ days in bankruptcy court are not far away.
Even though Sirius has piles of debt and revenue growth issues, investors are moving on the hype that inherently seems to follow Howard Stern.
Debate one of these hype-addicted investors and the facts won’t center on debt maturity, capital structure or growth potential. Instead, you will find yourself in an argument that ultimately ends in somebody badmouthing somebody else’s mother.
Hype can only push share price so high and last so long. After that, investors will suffer. Sirius shareholders are feeling the pain this week after their positions lost nearly 10% in value in just the past three days.
If the facts prevail, there will be plenty more red in the near future.
Hype and momentum are great short-term trading tools, but as we are seeing this week, they cannot last. The markets have turned bearish and the notion of a V-shaped recovery is almost defunct.
The facts are in control. That is good news for the bears.
Next Article: TFN eNews 10/02/2009: This simple covered call strategy buys you “plunge protection”
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October 3rd, 2009 at 5:05 am
Do you have any idea what you are talking about? Sirius XM has DRAMATICALLY improved their balance sheet and increased EBITDA in one of the worst recessions in recent times. They will be well over $400M in EBITDA this year. Next year will only be stronger. Bankruptcy court? No. Did you know that most of their debt has been rolled out beyond 2012? Did you know that credit agencies have UPGRADED Sirius XM debt a few times over the last 8 months? They have Liberty Media as a 40% holder of the company.
You accuse Sirius XM investors of being uninformed, but I think the only one uninformed here is you, Mr Snyder.