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Posted 12/16/2002
Contrarian Chronicles
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| | Contrarian Chronicles
My holiday wish: Give the market time to heal
You hear a lot of calls for government action to put oomph into the economy and help the stock market. But the gift the markets need most now is patience.
By Bill Fleckenstein
For all you embroidery experts, here's a last-minute Christmas gift idea: Why not stitch "Time heals all wounds that the government cannot" onto a pillow and send it off to the needy folks minding the economy in Washington. As the post-bubble recovery remains elusive, they've been losing sleep lately, and this tweaked adage could be a bit of comfort. In the things-we-can-do-right-now department, I, myself, have a couple of suggestions to pass along to the powers that be.
The Fort Knox/Fed knucklehead equation
First off, let's step into the commodities corner, for some thoughts on gold. Lately, the metal has given a very good account of itself around the $325-to-$330 level, where in the past, if it was not making upside progress by the minute, it tended to get clubbed. I am told by friends in the know that we are seeing an unusual level of physical demand at these prices, from buyers not usually active at these prices. In other words, it appears that this is not just a bunch of speculators buying futures in hopes of some kind of breakout. What we are witnessing is real physical demand, something that gold bulls would obviously like to see happen.
The gold market does appear to have taken on a different tone ever since Fed Governor Ben Bernanke talked about the printing press, and by implication, the sheer worthlessness of these pieces of paper called dollars. (Here's the playback of that admission: "The U.S. government has a technology, called a printing press -- or, today, its electronic equivalent -- that allows it to produce as many U.S. dollars as it wishes at essentially no cost.") Whether or not there is a true cause-and-effect, I don't know, but it certainly makes sense to me.
Pin the tail on the shift key
Shifting from stores of value to sources of excess capacity, let's spend a few minutes in the PC arena, where the news has been consistently less than pleasant. In the last two weeks, we heard Gateway (GTW, news, msgs), Hewlett-Packard (HPQ, news, msgs), Circuit City (CC, news, msgs), and Best Buy (BBY, news, msgs) all report weakness in PC sales. Ingram Micro (IM, news, msgs), the big computer equipment wholesaler, just noted disappointing fourth-quarter results, as well. Add that to what Tech Data (TECD, news, msgs) (Ingrams closest rival) reported recently, and you now have the two biggest PC distributors/resellers on the planet announcing soft sales.
Then, last Wednesday, CDW Computer Centers (CDWC, news, msgs) finally gave up the ghost and preannounced that the PC market has been "softer than we anticipated since mid-November." (There was massive, across-the-board insider selling in early November, just before things started to turn "soft in mid-November." It's amazing how lucky these insiders get sometimes, isn't it?) So, save for Dell Computer (DELL, news, msgs), it's now a clean sweep in the PC sector.
Dell a cappella, for now
But given the unison of this Greek chorus, Dell is now looking as vulnerable as it has in a couple of years to potentially miss earnings estimates, even as people's expectations remain rather high for this quarter. (Of course, when you have a multiple like Dell's, that would suggest a disproportionate consequence on the downside.) That said, considering the cult following the stock enjoys, we'll probably need even stronger evidence of lousy PC sales for Dell really to take it on the chin.
In any case, it should be apparent from all the news that things are worse in PC land than anticipated by those people of bullish persuasion. (However, anyone who has been paying close attention did not expect things to improve.) It also means that Intel (INTC, news, msgs) will be vulnerable, and other suppliers to the PC market will be, as well. Obviously, if the people selling the PCs misjudged their inventory requirements, unless demand somehow springs to life, there is going to be some carryover in the first quarter, and the first quarter will be worse than it otherwise would have been. All in all, it's not a pretty picture.
Oh to be in Washington, now that cherry-picking time is here
Speaking of workplace proficiency, in the special blurb that I wrote on MSN a week ago (White House shake-up lifts stocks), I observed rather skeptically that the people picking the replacement for Treasury secretary would be the very same individuals who first brought in Paul O'Neill as Treasury secretary and Harvey Pitt at the Securities and Exchange Commission. It seems that in light of John Snow's appointment at Treasury, my original skepticism was well-founded. As my ever-eloquent friend Jim Grant put it, "Mr. Snow looks like the perfect country club Republican, who stands for nothing except personal self-advancement." Though I like to think of myself more as an Independent/Libertarian, I would admit here to being a Republican. So, these are not purely political comments.
In any case, I am certainly not against wealthy, talented businessmen going to Washington to try to do what they can. But even if two outstanding candidates were appointed, neither would be able to fix the economic problem. The problem, of course, is the damage from the bubble, and only time will solve that. Let me state, however, that while the government cannot undo the aftermath of the bubble, it can surely complicate matters by making unwise decisions in its choice of economic leaders, who may make things worse.
A chicken in every pot-bellied bear
So, if they made me king (as of late last week, my office had not fielded any inquiries along these lines), what would I do? First off, I would point out that besides our bubble problem, we face a very competitive world. China and other Asian countries are breathing down our neck. In an attempt to make corporations look leaner and meaner, a lot of jobs were farmed out to Asia in the 1990s. I noted recently that plants in Mexico were closing and being relocated to China. So, we have some very serious issues ahead of us that will not be solved by taking on more debt and speculating.
Meantime, I would advocate three things from Washington:
- A flat tax
- Term limits
- Tort reform
If by some miracle we could pass a flat tax (which happened to be one thing I agreed with O'Neill on), that would eliminate a lot of waste. If we could somehow pass term limits -- you know, a one-term-and-you're-out kind of a thing -- this would make short work of the career politicians who spend their time in office by making our problems worse. Term limits would provide elected officials with the incentive to try to do something constructive, rather than perpetuate their own careers and serve at the pleasure of the lobbyists. Tort reform would obviously lower the cost of insurance, freeing up Corporate America and others to do more productive things than defend themselves against lottery tickets.
I realize that all three reforms are unlikely to happen, and I realize that some readers may violently disagree with my belief in them. But those are solutions well within our control, if politically impractical. They could help us to eliminate waste and the things that hamstring citizens and Corporate America. If we can channel our energies into dealing productively with the challenges we face, rather than promoting more speculation and debt accumulation, we will be well-served going forward.
Ingest, inflate or diet
Finally, turning to an example of commentary that does no one any good, I'd like to share a few thoughts about a recent Op-Ed piece in The Wall Street Journal by James "Dow 36,000" Glassman, titled "Invest, Innovate or Die." This just goes to show just how clueless the new-era apologists tend to be. In a prime example of whistling past the graveyard, Glassman weighs in on why the market will face a third down year in a row: "One reason is that investors, not having seen a bear market, overreacted." Well, I agree that investors haven't seen a bear market in a long time. But that has resulted in more denial, rather than overreaction. Most people continue to hope, near as I can tell.
In any case, when citing how corporate profits for the S&P ($INX) have dropped 27% in the last year or so, Glassman then goes further astray by calling the cutback in business spending "a mistake." He thinks that Corporate America should just continue to make capital investments. After all, as his simplistic little slogan says, either "invest, innovate or die." The problem is, in the aftermath of the '90s bubble, we have a surplus of just about everything, from retail stores and restaurants to semiconductor-fabrication facilities. And even if Corporate America had something it needed to invest in, the misallocation of capital spawned by the bubble has left many of its businesses lacking the wherewithal to do so.
When I said that time -- not government action -- is whats needed to fix all these problems, it's just a shorthand way of saying that a number of things have to occur to get us back on track: Enough time must pass for consumers to retrench and rebuild their balance sheets. To do the same, corporations must close the capacity that's never going to be utilized and let demand pick back up to where supply is. Again, there is no shortcut to accomplishing this. Time -- and the creative destruction side of capitalism -- will do what Glassman's animal spirits cannot.
William Fleckenstein is the 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, William Fleckenstein held short positions in CDW Computer Centers, Dell and Intel. 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 MSN Money.
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