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Posted 10/27/2003
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Recovery fears muffle earnings 'cheers'
Trouble percolates beneath a budding prosperity, but you'd never know it by listening to dead-fish analysts. Their chronic cheerleading in this earnings season can't alter the truth.
By Bill Fleckenstein
This week, I thought it might be useful to offer a little recap of the bidding, so to speak, in earnings season thus far. About 90% of the companies have successfully won the game of beat-the-number (special commemorative "pro forma" edition). Some, like Amazon.com (AMZN, news, msgs), which made 4 cents and reported 11 cents, are a complete joke. With the exception of Intel (INTC, news, msgs), Texas Instruments (TXN, news, msgs) and 3M (MMM, news, msgs), I can't think of any other stocks on my radar screen that actually rose on the "great" numbers, and financial stocks best exemplify selling off on the news.
3M scotches rumors of recovery
Likewise, the earnings were none too spectacular with corporate America's biggest companies. (More about the significance of Microsoft's Thursday-night bombshell next week.) For example, General Electric (GE, news, msgs), DuPont (DD, news, msgs), IBM (IBM, news, msgs), Merck (MRK, news, msgs) and AT&T (T, news, msgs) all managed to equal the number, but how it was arrived at, or what they had to say, didn't create any warm fuzzies. In its earnings report last week, 3M took a guarded view of the economy, witness three related headlines on Bloomberg: "CFO Sees No Signs of U.S. Industrial Economic Recovery," "Says Manufacturing Is Particularly Weak" and "Says Company Remains Cautious About 2004 Planning."
So, here we have a situation where corporate America does not appear to be seeing signs of the vaunted recovery, either by words or actions -- the latter, in the form of continued layoffs, most recently at AT&T and Merck. Granted, companies with a nice tie-in to the consumer (thanks to the tax cuts that hit in August and September) did "better" in the quarter. So, too, did companies that benefited from the inventory build in chip land, a phenomenon I have been discussing in my daily Market Rap. But I expect that with the October and November data, the economy will show a softening, as the housing-refi/equity-removal game, I believe, has ended.
What's the story with inventory?
On the subject of inventory building, we can't yet determine too much by comparing last week's numbers from RadioShack (RSH, news, msgs) with Texas Instruments. I listened to the RadioShack call, hoping for an indication of the company's thoughts about October, but none of the dead fish bothered to ask. They sat back and heard RadioShack crow about wireless sales being up 12% year-on-year for the quarter just ended. Given how strong consumer spending was in the third quarter, I don't think that number is so great.
The data are still inconclusive, but they do hint at an inventory build. RadioShack says sales of its wireless products were up 12%. But Texas Instruments, which sells the parts for those wireless products, just reported that its own sales were up 30% and its orders up 25%. That 12%, ladies and gentlemen, ain't enough to clear out the inventory that's building.
Of course, you will never see that kind of dot-connecting in the dead-fish community. The amount of cheerleading that passes for analysis has been absolutely breathtaking. To repeat a vocabulary lesson from several weeks back, I used to refer to analysts as cheerleaders. But about five years ago, I realized that was an insult to all the young men and women who actually don the costumes and wave pom-poms. So, I decided to rename them "dead fish" -- decaying carcasses of no value that float downstream and rot. It's mind-boggling that these losers keep doing the same thing after all that's transpired.
'Analysts' abrogate responsibility
It's also interesting to see mania heroes like Abby C., Tommy G., and Joey B. getting airtime. (Editors note: the trio are Abby Joseph Cohen, Thomas Galvin and Joseph Battipaglia, all famous bulls.) How anybody can listen to these folks after they have demonstrated they didn't understand what was happening is beyond me. (Of course, people still listen to Alan Greenspan, Ben Bernanke, Robert McTeer, etc.) I guess all these pied pipers continue to command the attention of believers in the greater-fool theory. What other reason could there be to own stocks (generically) at these prices, with the macro backdrop as risky as it is?
Those aforementioned pundits, as well as many others, fall into the camp of those who never understood that we had a mania and what that means. Therefore, they believe every rally to be the start of a bull market and better times. A fraction of folks fall into the other camp -- those who think the business of rectifying the damage from the mania is unfinished business. This epic bear-market rally has served one purpose -- to show the mammoth divide between those two camps.
Wild speculation, up close and personal
Now, for an up-close look at the speculative mood of the moment, I'd like to share some comments by Justin Mamis, who in a recent newsletter wrote: 'ARE YOU DOUBLING YOUR MONEY EVERY 90 DAYS? LEARN TO SPREAD TRADE ON LINE.' That was the lead line for an infomercial which was accidentally discovered on CNBC last Saturday morning. If you'd seen it, you'd have had the same reaction we did: "Wowee! Is that ever a top signal . . . and confirmation of how the bubble mentality has taken over."
Justin continues:
The theys have learned their bubble lesson -- so hedge funds became popular, and now trickery is the way to play, via options and spreads, and "never losing money even if the stock doesn't do what you expect it to do." There is also, in the same vein, CNBC's glitzy new edifice -- such structures historically having been coincident with market peaks, the way magazine covers have been. We are, of course, also concerned about the exceedingly low mutual fund cash ratio, the exceedingly steep increase in Nasdaq (member firms') margin debt, and the exceedingly worrisome increase in what we'd dub "the manicurist's stock" (otherwise known as Bulletin Board stocks) -- i.e., when our spouse comes home from having her nails done and says, "Did you ever hear of such a stock?", which, of course, the manicurist heard from a previous client whose husband got it off the Internet. I believe online trading is directly responsible for the increasing levels of margin debt at Nasdaq-member firms. I believe many of today's stock-market participants are resolved not to get wiped out, should the market go down again. Many have set pre-determined trigger points where they will attempt to get out. This is just one of the reasons I expect a dislocating event somewhere down the road.
Pondering what lies below a placid pond
My view also is bolstered by the economy, whose recent signs of "strength" mask weakness below the surface. I picture a frozen pond, seeing and hearing cracks all over the place. One day, the ice will give way and the crack of doom will occur. We can follow the bouncing ball from the mania to the post-mania period, where the Fed has moved heaven and earth in terms of rate cuts. But were it not for the refi game (and tax cuts) that allowed folks to live beyond their means, we already would have been deep into recession and the cleansing process that comes after the boom.
So, the Fed and the government (via the tax cuts thrown at us) have seen fit to postpone the readjustment, at the same time engendering massive speculation. When the inevitable readjustment occurs, it will only be more severe because of this intervention. Without even taking into consideration our massive external current-account/trade-deficit problem, our excess-capacity economy and wildly leveraged speculators are literally a recipe for disaster.
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 Fleckensteincapital.com site. At the time of publication, he was short Amazon, IBM and Intel. 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 MSN Money.
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