Posted on 06/17/2003 4:58:20 AM PDT by arete
When the 'pros' lap up forecasts from money-losers, ignore the risk of disaster and believe a 13th rate cut will do the trick, the party's on its last legs.
Imagine this: Tech guidance that dares to disappoint folks by saying "Business stinks." Imagine a tech analyst who downgrades a stock because its stinking business sells for a silly price. Imagine a Fed that says, we made a mess of monetary policy, but we'll try not to make things worse with further rate cuts. . . . Let's drink to dreams, as we delve into reasons to rant.
Texas Instruments (TXN) dropped a bomb last week when it lowered guidance. But to anyone who's been paying attention to the state of the wireless sector, the news shouldn't have come as a shock. There was a huge inventory buildup occurring in Asia, and then SARS (Severe Acute Respiratory Syndrome) hit. The bullish interpretation is that now that SARS is behind us (an interpretation that I do not share), there will be a rebound. But I think the inventory buildup predated SARS, and it will continue to be a problem. Texas Instruments cut its earnings forecast from 8 cents, plus or minus a few cents, to 6 cents, plus or minus a few cents. Now if that doesn't show how silly the whole process is -- as if 8 cents a quarter could support a $20 stock price, which is where Texas Instruments shares closed the day before the company's news.
The other point I find interesting is that up until its announcement, Texas Instruments had been so eager to reiterate its prior positive guidance multiple times. This is a pattern seen with lots of tech companies. Why any of these companies still have any credibility, I don't understand. Of course, I don't understand why Wall Street itself has much credibility, or Greenspan has any credibility, but they all still do (for now).
A lot of bombast and not much substance
Staying in chip land, last week there was a rather humorous development by way of Micron Technology (MU), the flying pig. But before going into the particulars, I would just like to explain why Micron has earned its "wings." During the mania, folks were all too eager to believe whatever stories were spun by the company's investor relations spokesperson, Kipp Bedard. My comment back then was that if Micron could actually do what it snookered folks into believing, then pigs could indeed fly.
But back to the present. For those of you who don't know, Micron has lost money in 18 of the last 23 quarters. That's how good the company is at anticipating changes in business conditions. Micron, best known for memory chips, is perennially bullish about its own abilities and about PC demand, and it is perennially wrong. Nevertheless, at a technology conference last week, the aforementioned Bedard said something to the effect that demand for personal computers may be tracking better than the company had previously thought. According to a Dow Jones story, the company expects PC shipments to be down in mid-single digits, rather than high-single digits, from a year ago.
Is he paying attention?
In fact, if Bedard had paid any attention to what Circuit City (CC), Ingram Micro (IM), CDW Computer Centers (CDWC), Tech Data (TECD), or Dell Computer (DELL) (you know, the people who actually sell PCs) had said, he would know that this is pure nonsense. But of course, that didn't stop him from passing along his views, nor did it stop idiots from believing him. Here is a company that can't figure out its own business well enough to make any money. Now it's presuming to forecast an end market that's growing to a degree of precision -- i.e., a couple of percentage points -- that folks in the end market can't even seem to get right.
The net of it is that now Micron is going to make more parts this quarter. What's particularly hilarious about that is, lately, when they've made more parts, they've wound up losing more money. Last quarter is kind of insightful. Micron had revenues of about $785 million, and its cost of goods sold, just for reference, was about $1 billion. Micron lost about $600 million on that $1 billion before interest costs. So, that should give you some idea of what kind of a basket case this company is.
As I was gathering these facts last Wednesday, none other than Kevin Rollins, the COO of Dell, reiterated the point that I am making when he said his company sees no pickup in demand for technology. I bring all this up to underscore just how speculative the environment is, and to show just how little thought goes into the way supposed professionals manage other people's money.
Presuming Big Blue's blue skies
A slightly different example will show how little thought goes into dead-fish recommendations. Last week, one fish from Merrill Lynch upped his opinion of IBM (IBM), even though the Securities and Exchange Commission is investigating IBM's revenue-recognition practices. In fact, he said he'd "be surprised if the findings have any significant negative impact on the shares." The same dead fish, I am told, recommended that since many mutual funds were underperforming, they would have to buy tech to catch up, and suggested the shares of certain dogs and cats. (This, like the above, is secondhand, as I did not see the report.)
For this dead snapper to be correct in his analysis that the SEC findings would have little negative impact, he would have to suppose essentially that there was no "there" there. How he can make this assumption, given the potential for problems, just shows the lack of any serious thought on his part. And, based on other research recommendations I have seen from him, this is not an isolated example. The attitude on Wall Street continues to be, let's get this behind us, rather than let's get to the bottom of this.
You know there’s a problem when . . .
I also think the public is back to speculating in the market. A contact of mine at a rather large retail shop says that volumes this month are up sizably over last month, which itself was up sizably over the month before.
What makes the bullishness even more incomprehensible is the fact that overcapacity and poor demand plague businesses in general, not just those in technology. Last week, Bloomberg News passed the headline "Deere Sells Low-Cost Tractors in Home Depot as Farm Sales Sag." The problem for Deere (DE, news, msgs): Tractor demand is at a five-year low. So, the company hopes to reduce its inventory by appealing to hobbyists.
Meanwhile, the U.S. government is basically broke. State and local municipalities are floundering in the red and laying people off. Other than wild speculation in housing, there is not much to point to in terms of economic strength. In fact, all those folks who believed that the previous stimulative effects were working are now counting on another Fed rate cut at the end of the month to bail them out. But they never explain why the 13th cut should work when the previous 12 have done nothing, or the previous tax package did nothing. Things are a mess, and they're not going to get any better because Al Greenspan cuts rates again.
Bulls in extreme, bears in exile
The fact of the matter is that the stock market rally is just a bear market rally, like all the others have been, grounded on nothing more than hype and hope. In that same vein, sentiment has swung a long way. Last week, Investors Intelligence reported its latest survey of investor sentiment shows that bulls are up to 58.7% and that bears are down to 16.3% -- the lowest reading in 16 years. Before this rally began in February and March, when I was constructive about the prospects for a rally, I said to friends that I thought before it was all through, the bulls would get to 60% and the bears would be in the teens. Well, I'll take last week's statistics, declare victory and move on. Sentiment is about as lopsided as it gets. Folks who are partying on the long side better have a plan to get out early, because when everyone finally decides they need to hit the exits sometime later this year, it's going to get mighty crowded.
That brings me to a quote I'd like to share with readers: "It is apparent that the public preference for stocks is not only as marked as ever, but also, the will to speculate is still a speculative factor not to be overlooked. The prompt return of huge speculation and the liberal manner in which current earnings are again being discounted indicates that it will be difficult to quench the fires of stock market speculation for long."
Well, maybe not that long. This quote came from "The Trader" column in Barron's, published on March 24, 1930. The high of that bear market rally was less than a month later, on April 17, from which the stock market plunged for the next 18 months to its ultimate lows. So, the denial trade, while bigger and more pervasive than ever, is not unique to the 21st century.
Bill Fleckenstein is president of Fleckenstein Capital, which manages a hedge fund based in Seattle. He also writes a daily Market Rap column for TheStreet.com's RealMoney. At the time of publication, he was short IBM and long IBM put options. His investment positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy, sell or hold any security. The views and opinions expressed in Bill Fleckenstein's columns are his own and not necessarily those of CNBC on MSN Money.
This quote came from "The Trader" column in Barron's, published on March 24, 1930. The high of that bear market rally was less than a month later, on April 17, from which the stock market plunged for the next 18 months to its ultimate lows. So, the denial trade, while bigger and more pervasive than ever, is not unique to the 21st century.
It's a new new bull market. Party on.
Richard W.
Comments and opinions welcome.
Richard W.
Pier 1 Imports just lowered, and Wal Mart reports only 2% growth. Given WalMart's marketshare and canabalizing it's competitor sales - this & Pier 1's lowering indicates the consumer is pulling back.
The bullish interpretation is that now that SARS is behind us (an interpretation that I do not share), there will be a rebound.
Yep. Like unemployment, SARS is a lagging indicator.
So Lehman is expecting a 40% increase in the price of MSFT with no material pick-up in IT spending. Interesting.
Richard W.
The next 18 months eh ? This sounds more like a veiled political policy over the market and economy statement to me. Elections 2004 ???
Funny it was made in 1930, not June 2003 and if they have their way, history will not repeat itself and the market will weather the storm for the next 18 months.
Well, yes and no. I am positioned now where I think that I want to be, so I'm planning on just sitting and watching. I didn't expect my mining stocks to move up so strongly right here, so I may do a little profit taking. We're making history, so I might as sit back and enjoy it.
Richard W.
Richard W.
I'm with you on that. Gimme an umbrella and a lounge chair on the beach. Any tips on juniors like GG, etc.
GG is my largest holding and I'm not going to even think about selling it until it hits $50/shr. Of course, by then we'll be paying $20 for a loaf of bread. I really have no tips. If the miners continue up, I'll probably take profits on KCG and MDG and hold the NEM, GG and PAAS. Also holding some PM fund shares. Greenspan is the dealer in this card game so we'll just have to wait and see how "unconventional" he gets. I will admit that things seem to be coming unglued a bit faster than I thought they would.
Richard W.
That is true. Of course, that is the obvious and "known" risk you must take to be liquid and flexable. "Investors" are taking on risks right now chasing yields and profits that may or may not materialize. Anytime so many think that it is easy and risk free to make money in the stock market, well . . . that's about the time many are going to have their pockets picked.
Richard W.
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