Today's Market WrapUp
by Jim Puplava
12.16.2002
Posted on 12/16/2002 5:11:42 PM PST by rohry
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Today's Market WrapUp |
Window Shopping For The Holidays
It is that time of the year again when portfolio managers window dress their portfolios. It is the holiday season, a favorable time of year for the market. Seasonality’s normally come into play at this time. After dumping stocks with losses, managers redeploy that money into stocks that could rally into the New Year. The January effect may be coming early this year. Wall Street is trying to get a rally going so that things won’t look as bad by the end of the year. They are replaying the script from last year. Techs will lead us into recovery next year so fund managers and momentum traders are all jumping on board and driving the shares up in a way that harkens back to the mania days of the late 1990’s. But like lambs being led to the slaughter, they are going to have their heads handed to them during the first quarter of next year.
Second Half Recovery For 2003
In an effort to entice investors, they are forecasting a second half recovery for next year. This kind of delusional thinking is pervasive throughout the industry, which is frightening in itself. The Street seems to suffer from self-delusion. Wall Street analysts and economists have been forecasting a second half recovery for the last three years, and for the last three years they have all been wrong. Now they are forecasting a second half recovery for 2003, which will be the fourth time they have made this forecast. The third time is supposed to be the charm; the fourth time is delusional and indicative of psychosis. Indicative of this loss of reality and complete abandonment of one’s senses is the unjustifiable run up in the NASDAQ. It proves once and for all that the mania and bullish state of the markets are still with us. This hardly supports the case for a market bottom. The techs, which have been bid up on the basis of Wall Street bullishness, doesn’t jive with reality and what companies are saying about their businesses. As the graph below indicates, insiders have stepped up their selling in a major way during this rally. What does it tell you as an investor when the insiders that run the company have accelerated their sales of shares they own? It should at least give you pause for thought. Wall Street is telling you to buy while the people who run the company are selling off their shares in record numbers. Not since Q4 of 1999 have we seen this kind of heavy selling by insiders.
Street of Dreams
In case you are still bullish or are thinking foolishly of buying, you may want to pick up a copy of this week’s edition of Barron’s called “Down but Dangerous,” which features an article about Fred Hickey who is the editor of the High-tech Strategist. He has been writing his tech newsletter since 1992. In February of 2000 he warned readers of the foolishness of investing in Internet and tech stocks. "Investors are throwing billions upon billions of their hard-earned dollars at tech stocks at ridiculously unsustainable prices and at Internet companies with dubious prospects. Wall Street's brokerage houses and mutual funds and many company insiders are...egging on the ignorant masses to certain financial ruin, but enriching themselves in the process."
Since early 2000 Hickey has remained bearish the sector and has refused to be faked out by any of the short-term bounces in technology. He still remains bearish the sector and believes we are far from a bottom. He believes that investors and fund managers who have taken collective leave of their senses chasing these stocks these last eight weeks are going to have their heads handed to them on a platter. To quote Hickey, he’s “… dead certain that investors who have been wildly chasing tech stocks in the recent eight-week rally are in for a rude awakening. All the companies that are selling PCs and computer products, all of them, are seeing a deterioration in sales." Hickey goes on to cite the deteriorating conditions that still plague the industry as summarized below.
Computer’s drive the tech industry and the “PC” business stinks
Two biggest computer distributors have seen revenues fall by 8%
Electronics retailers Best Buys & Circuit City have seen PC sales slump
Companies building inventories while sales continue to slump
Inventory builds are evident in cell phones as well as chips and computers
Cell phone makers are fighting for market share while new cell phone gadgets are expected to increase sales. Most people who have or want a cell phone already own one. The industry is cannibalizing itself.
Hickey sees a huge inventory correction in cell phones during the first half of the year. It will be even bigger than the one he sees in PC’s.
Over 59 semiconductor factories are for sale worldwide because of the glut.
Intel spent billions on building new factories but can’t keep the present factories running at full capacity. He sees this overcapacity killing the companies first half next year.
Intel’s sales during Q1 of 2003 will barely match Q1 of 1997.
Dell has solid growth in a sorry business but is overpriced and a superb short.
Applied materials is barely running at 30-60% capacity
In summary, Hickey is negative the following stocks: Intel, Taiwan Semiconductor, Chartered Semi, Dell, Nokia, Texas Instruments and Applied Materials to name just a few. As far as earnings estimates for TI, let’s just say “balderdash.”
In his view, there will be more money made shorting these stocks than investing in them. As the year–end rally plays out you may want to consider shorting the sector rather than going long unless you are an adept trader. The worse mistake that you can make is to believe the fantasies and projections that are manufactured on Wall Street, which are pure fantasy rather then reality. Don’t develop the same investor psychosis that now plagues the Street. In fact, if your mutual fund manager is playing this game, fire him. He is about to lose more of your wealth.
Forecasting 2003
Looking at forecasts for a second half recovery next year, which will be the fourth time that analysts and economists will be wrong, there has been the plethora of earnings warnings. Wal-Mart and Federated, the owner of Bloomingdale’s and Macy’s all said that sales are coming in at the lower end of estimates. Federated said that they expect sales to decline by close to 3 percent. GM expects auto sales to decline by 400,000 units because the zero-percent finance incentive borrowed out of future sales. People who might have bought a car next year bought one last year and this year due to sales incentives. Therefore, they won’t be buying next year, so many automakers are reducing next year’s forecasts. There are other reports of industries that are bloated with over-capacity. Earnings estimates are coming down and when this reality hits the markets in January, the sell off in stocks could be even bigger. There is a déjà vu aspect to Q4 this year. Like last year, investors are bidding up tech stocks based on Wall Street hype. Like last year, what companies are saying about their business and what analysts are saying are two different stories, completely opposite of each other. One should reread the speech that Andy Grove gave on the prospects for the chip business. He couldn’t say when it would recover nor could he say or give analysts any guidance. The big question ought to be, what do the Wall Street analysts know that the companies do not know? There is a harsh reality awaiting investors next month when hype and spin will be filled by reality. Along these lines one must applaud Coke’s decision to no longer play the Wall Street earnings game by refusing to provide quarterly estimates and guidance. Coke instead will focus on meeting long-term objectives instead of trying to beat earnings expectations. Three cheers for a company that is finally saying “no” to the quarterly hype, spin, and balderdash that comes out each quarter as recommendations and as investment advice.
Changing the Score Card
After three consecutive years of losses, the keepers of the Nasdaq are changing the index or at least the stocks that make up the QQQ’s. They are removing a good majority of the tech stocks in hopes of improving the performance of the index. They are taking out a good portion of the techs, which have been losing over 70-90 percent of their share value. Many of these companies that are being removed have seen their stock prices collapse. They are being replaced by healthcare. Techs will still make up two-thirds of the index. I would like to suggest that if they really wanted to make the index rise they should consider adding natural resource stocks, gold, and silver. All three areas have been on a terror this year.
In fact, one aspect clearly visible is the breakout of “things” this year. As these long term graphs of the dollar, gold, and the CRB Index indicate, trouble is heading its way to Wall Street. The dollar is breaking long-term trend lines, which is bullish for commodities. Gold has held above $330 for the third consecutive day. For technicians this is significant. And although we got one of those miraculous rallies that started in the futures pit this morning, pushing stocks up and keeping them there the rest of the day, the bond market was braking down. The chart of the 30-year bond shows the big sell-off as foreigners are reported to be dumping their dollars. A long-term trend chart of the dollar shows the dollar breaking down and the CRB and gold prices breaking out. The other long-term chart of lower interest rates shows that it has failed to hold up or be positive for stocks. This suggests that stocks and bonds have decoupled, which may be attributable to deflationary trends that emerged out of Asia in 1997. The fall in the dollar and the rise in commodity, especially gold prices, all point to a significant breakout in what has become a new bull market in “things.”
On this day, while investors collectively bid up the shares of all major indexes, gold, silver, oil, and the CRB index hit new highs. Gold closed above $330 for the third day to close at $337.60 in the futures markets. Silver was up and the CRB Index hit a new record high for the year to close at 237.16. Oil prices broke $30 a barrel to finish the day at $30.10. Natural gas prices and heating oil also rose. The political aspects of Venezuela and what now looks like war with Iraq are starting to influence energy prices. The war premium on oil is back. More evidence of short supplies in energy is impacting these markets of which more will be written about this week.
Today's Market
Looking at today’s casino results from Wall Street, stock indexes experienced their biggest gains of the month after heavy buying in the futures, and the options market drove prices up and kept them there all day. However, volume trends during this rally have been declining. Last week we experienced a rare day where down volume to up volume was 13-1. Advancing issues compared to declining issues has been weak. The number of new issues reaching new highs has also shown no stellar support for this rally. Momentum has remained weak and continues to decline.
Wall Street explained the rally was due to the fact that earnings are improving. That might be more correctly stated as losses are coming in less-than-expected. One Wall Street strategist called for fund manages to reduce their overseas holdings and boost their US equity component from 39 percent to 50 percent. The only problem is that fund cash levels are at an all-time low.
On the earnings front analysts have reduced Q4 pro forma numbers to an increase of only 14.8 percent. They still have along way to go to reach even pro forma reality.
Looking at issues that did well today, financials rose but the real winners were in the energy and precious metals. Energy stocks gained as the price of oil and natural gas continue to climb. Other commodity-like stocks continue to climb along with the price of most commodities.
Volume hit 1.22 billion on the NYSE and 1.39 billion on the NASDAQ indicating there are no convictions behind this move. Breadth was positive by 22-9 on the big board and 21-12 on the NASDAQ. The VIX fell 2.14 to 29.98 and the VXN dropped 1.08 to 49.84. The drop in both of these indexes should be monitored for an approaching market top.
Overseas Markets
European stocks surged, sending the Dow Jones Stoxx 50 Index to its biggest gain in six weeks as proposed takeovers of banks in France and Italy prompted speculation of more mergers among lenders. The Stoxx 50 surged 3.4 percent to 2533.69, advancing from a two-month low. The index has risen 9.5 percent since the end of September and is poised for its first quarterly gain this year.
Asian stocks slid, led by Canon Inc., Samsung Electronics Co. and other exporters, on concern their profits will drop after gains in the region's currencies and a U.S. government report showing falling producer prices. Japan's Nikkei 225 Stock Average declined 0.8 percent to 8450.94, sliding for a ninth day, its longest losing streak in 11 years.
Copyright © 2002 Jim Puplava
December 16, 2002
Similarly, while individual investors are advised to buy and hold "for the long term", mutual fund managers don't practice what they preach.
Some recovery. We are currently in a Greenspan soft spot. Bush just axed a couple of his money men to show that he cares about the economy. I think Bush knows we got more problems than just a Greenspan soft spot and that printing more money won't cure it.
It's ok to pick and choose. I agree that Puplava mostly picks out bad news about the economy. My own eyes can see the 2nd and 3rd shifts at the local factories. On the other hand, Kudlow ignores the reality of overpriced stocks left over from the bubble. People like him ignored economic reality when they were on the bubble bandwagon, and are still on that bandwagon to some extent.
Fannie has more debt than the publicly held Treasury debt. They are also thinly capitalized: debt to equity of 40 to 1. If something were to go wrong with their massive off book derivative positions they would simulataneously take out the real estate and bond markets. BTW, the taxpayers are on the hook for all this...they are too big to fail and too big to bail.
I hope so, rohry, I hope so.
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