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Posted 9/19/2005
Contrarian Chronicles
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Best Buy's message: The consumer is spent
Even before Hurricane Katrina slammed into the Gulf Coast, consumer spending was starting to soften. That translates to big trouble this fall.
By Bill Fleckenstein
Let's begin with the front of the consumer food chain -- end demand.
Last Tuesday, Best Buy (BBY, news, msgs) was forced to lower quarterly/yearly estimates, stating in its press release that the guidance was pre any effect from Hurricane Katrina. (Of particular interest to me: Same-store desktop personal computer sales declined.)
On the conference call, Best Buy also said its guidance excluded higher energy costs as well as the potential competitive fallout from the automakers' employee-discount programs (i.e., folks buying cars instead of flat-screen TVs). Management stated that since it doesn't yet know the impact of those items, it can't factor them in.
My friend Fred Hickey, editor of "The High-Tech Strategist" newsletter, listened to the call and told me that after Best Buy made that disclosure, it received not one follow-up question about those macro variables or Katrina -- once again illuminating what passes for research amongst the dead-fish community.
Computer-oriented weakness was also apparent last Tuesday based on the August year-over-year comparisons from CDW (CDWC, news, msgs), which were below expectations. Interestingly enough, the company had negative revenue growth in notebooks. Since notebooks have been the hottest area of the PC market, I think that these announcements from Best Buy and CDW bode poorly for Dell (DELL, news, msgs) and Intel (INTC, news, msgs).
Related news and commentary on MSN Money
Sell-out vs. sell-in
Contrast that with the glad tidings from Nokia (NOK, news, msgs), and you have a perfect example of what's occurring at the front end of the food chain, versus the middle of the food chain. Best Buy and CDW are examples of "sell-out" companies. They're dependent on selling out from the retail channel, i.e., they need real product sales. Nokia, a "sell-in" company, sells into the retail channel -- or into products sold into the retail channel.
Thus, Nokia and its component-suppliers, i.e., chipmakers (as well as companies like Nokia that sell into the retail channel), are all in the process of announcing wonderful quarters, while end demand has apparently started to stumble.
Though I expect that the components suppliers will do OK in terms of their near-term guidance, they will have problems sometime soon -- though perhaps not this week -- since the companies that sell stuff (like Cisco Systems (CSCO, news, msgs), IBM (IBM, news, msgs) and Dell) all saw weaker-than-expected demand last quarter. Dell, I would just note, has been acting very sluggish lately, and I think there's no reason to believe that business has gotten better there.
We have watched this movie before. (Check my Dec. 15, 2003 column, "Building a gadget isn't the same as selling one.") Inventory gets built in anticipation of strong end demand, and then the end demand isn't strong enough. Of course, Katrina is going to muddy the waters somewhat, from an analysis standpoint, and will provide a scapegoat for many companies.
Hike now, halt later
Though we may not have seen many signs of a slowdown yet, I anticipate we'll have plenty soon enough. I expect the consumer to hit the wall this fall.
Meanwhile, as the clock winds down to Tuesday's interest-rate decision by the Fed, let me offer a prediction: I think the Fed will raise its federal funds rate 25 basis points to 3.75%, take out its "measured" language and allude to thinking about pausing. Before long, though, we'll see enough data suggesting economic slowing to cause the Fed to pause.
For now, any signs of higher inflation will continue to be rationalized, quite willingly, by the bubble-blowing Fed and everyone else on Wall Street -- though inflation is far higher than the officially sanctioned number. (For more, see "Caught in the Fed's inflation trap.")
As I have often said, the Fed is run on the applause meter and nothing more. In other words, if GDP growth printed 0% and the CPI printed 5%, the Fed would think about easing. Its rationale? A slowing economy would surely mean that inflation is coming down or some such variation of that theme.
Window-dress for 'success'
Finally, a belated tip-of-the-hat to The Wall Street Journal's Jesse Eisinger for his Sept. 7 story "Lifting the Curtains on Hedge-Fund Window Dressing." Jesse discussed a recent incident of what seems to be month-end tape-painting, and he even appears to have identified the Rembrandt in question (although, without a subpoena, one can never know).
This month-end window dressing, of course, is just an extension of the quarter-end window dressing that's gone on forever. One wonders why the Securities and Exchange Commission hasn't used its subpoena power to stop this abuse.
I remember my outrage over tape-painting about 10 years ago -- thinking that just as one little white lie usually leads to big lies, the condoning of this illegal activity was just one small problem that would lead to bigger problems (like the Enron-sized debacle we ultimately had). Yet, one of the seemingly innocent activities that predated the corporate shenanigans continues to occur on a regular basis. It just boggles the mind that after all this time, nothing has been done.
Bill Fleckenstein is president of Fleckenstein Capital, which manages a hedge fund based in Seattle. He also writes a daily Market Rap column on his Fleckenstein Capital Web site. 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 or MSN Money. At the time of publication, Fleckenstein was short Dell and CDW. He was also short Intel and long Intel puts.
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