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[Ulisses Pereira]

"Amazon's Rise Proves Irrationality Still Lurks"

By James J. Cramer
04/25/2003 08:58 AM EDT


"Amazon is one of those stocks that will make skeptics out of tons of people. It won't make them skeptics about Amazon, but about a market that rewards a stock that sells so richly simply because it issued a "better than expected" number.

And you know what? I don't blame anyone for being skeptical, because Amazon's ability to rally is really a sign that all is not yet well with this market.


Let's understand that, like eBay's rally, Amazon's can't be justified on earnings. We know from the collapse of the bull that when stocks start selling at ridiculous multiples to earnings, they eventually collapse and collapse hard.

If you are unwilling to reach that conclusion after what we have been through, then I can't help you and you must stop reading this column right now and go read the comics.

But there are certain professional managers who don't care one whit about valuation. There are other managers who care only about "BTE," or better than expected. Then there are hedge fund managers who mimic the "BTE" momentum funds because they know the BTE momentum funds will buy regardless of valuation. Then there are hedge funds that short overvalued stocks so, by their charter, they have to short Amazon. And then there is the ensuing short squeeze when the doctrinal hedge funds are forced to cover by the mimic hedge funds and the momentum mutual funds.

This stuff got so obvious in the late 1990s that I actually devised fictional characters, Buzz Gould and Batch Hammer, to show you how this all worked. They were the totally non-rigorous hedge fund managers who sought to create short squeezes by taking offerings from multiple brokerages simultaneously totally based on momentum and nothing else. And then it got so nasty that there were actual managers who threatened to sue me because they thought I was portraying them through Gould and Hammer! The whole thing was pretty surreal, when you think about it.


Nevertheless, three stocks -- eBay, Amazon and Yahoo! survive as legacies of the 1990s. These stocks play out right now as if it were 1999. They can't seriously be justified on earnings. They are only justified as aberrations of the faulty mechanics of the investing process. (In the late 1990s, you had daytraders and the public chiming in, and the floats were totally restricted by stupid lock-up rules that helped generate instant short squeezes.)

When true professionals see this stuff happen, they get nervous about the rest of the market. These stocks represent the irrational in a process that many pros desperately want to see as rational -- and that certainly is rational, over the long term. They can't stomach seeing Amazon go up 10% simply because Amazon let people know a few weeks before the quarter-end that business was soft. That seeded the shorts, who now are covering, and the longs, who are buying. The imperfections of the process make some people cringe and others sell. It makes no one buy.


Regardless of what big macro numbers you hear today, the reason the market seems sluggish and profit-prone here has to do with the good performance of an overvalued stock and not the bad performances of undervalued securities. "

(in www.realmoney.com)