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Posted 8/2/2004
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Chip glut troubles even the Dead Fish
As inventories build here and in China, even market cheerleaders are taking a second look. So should you.
By Bill Fleckenstein
Regular readers know that for the last six to nine months, I have held the view that we would see chip inventory problems here and potentially in China. Last Monday night, Silicon Laboratories (SLAB, news, msgs), which makes chips for wireless phones, confirmed that it took guidance down, citing two to three weeks of excess handset inventory in China. Now, in addition to signs of excess inventory here, evidence is accumulating of trouble in China. Given China's reputation as the growth area for handsets, that spells real trouble for anyone involved in the sector.
Excess inventory, etc.
Interestingly enough, trouble has uncharacteristically surfaced on the radar screen of a prominent member of the Dead Fish community. (Editors note: For an explanation of terms used in the column, see A guide to Fleckisms.) Last Tuesday, he publicly opined that tech land is sitting on some $10 billion worth of chip inventories. (Of course, over $3 billion of that bears the "Intel" label.) If this particular fellow continues to do real research, he may just be the first dead fish upgraded to live fish. For now, however, we'll have to see more before he earns that merit badge.
Also on the subject of excess capacity, note last Tuesday's disappointing results and guidance from Amkor Technology (AMKR, news, msgs), a company in the semiconductor packaging and test-services business. Semiconductor-capital-equipment bulls may wish to pay particular attention, as Amkor announced it would slash capital expenditures to deal with the problem of too much capacity relative to orders. (Intel is Amkor's biggest customer.)
Thumbs-down on rules of thumb
Away from technology, I'd like to dive into a question I received from readers of my daily column: Why are metals are going down and the dollar going up in the face of a stock market that's going down? To my eyes, it appears that the stock market is sniffing out weaker growth at the end of the post-stimulus period I have been discussing.
Many of the problems we've seen in recent quarterly earnings reports have prompted folks to start questioning how great the third and fourth quarters will be. High expectations have engendered angst in the stock market.
Meanwhile, the foreign exchange market has been living in its own world. Currency markets occasionally dance to their own music, being ruled as they are by short-term, technically oriented traders. Apparently these folks' charts have caused them to conclude that Easy Al was going to be right; that the economy is going to be strong; he was going to raise rates; and inflation will not become a problem. (More below about Easy Al and the Blipsters, and no, this is not a rock band.)
It wasn't as though the stock market declined, causing the precious metals to decline (and, by extension, the precious-metal stocks). If you sat here and watched these markets trade tick for tick as I do, you could see that they were, to repeat, in their own world.
This does happen from time to time. The mechanisms that "rule" various markets are not like mathematical laws or the laws of physics. In fact, about the only absolute rule I can think of is that over time, buying value generally wins.
Just as the key to the stock market will be the realization that Easy Al has it backward and the view I espouse is correct, assuming that's what happens, this shift in psychology will completely undermine the dollar. (A dollar rally cannot fix the stock market or the economy. In fact, an argument could be made that it would be counterproductive for the economy.) The Fed's credibility will be in tatters, and it will be clear that the United States has an enormous economic/financial problem on its hands. Said differently, stock-market weakness will reinforce economic weakness, and the two will undermine the dollar, in turn boosting precious metals.
The prewashout whimper
Now to share a couple of valuable nuggets sent to me by a very knowledgeable reader of my daily column, whose extraordinarily successful career in the investment business dates to the 1960s. (Some of his comments will sound familiar to readers of my July 12 column, "Odds of a crash are higher than you think," in which I wrote about the potential for a market dislocation, a.k.a., a crash.) He writes: Over the past couple of weeks, this market has reminded me of a few earlier markets. There seems to be an eerie lack of upticks, while the downward pressure is relentless, though not yet serious enough to be visible to the masses. . . . I'm not predicting a crash, but such an event seems overdue, and there are a few subtle hints showing up.
We have not had a real crash since 1987. The old versions of a crash used to take eight to 12 weeks, with losses in the major averages running from 25% to 40% over that time frame. . . . However, in addition to the 25% to 40%, multiweek crashes, there are numerous examples of 15% to 20% drops throughout market history. . . .
All crash patterns contained a common thread: Day after day, week after week, the market just leaked, while those waiting for that elusive uptick sat there growing more fearful each day and losing their patience. Then, things would begin to accelerate a bit as sellers started to step up and cancel limit offerings, in favor of market orders. . . .
Virtually all the so-called professional money managers running OPM lack any real historical perspective regarding the nature of crashes. Their education/experience has been gained in a bubble environment of endless optimism. They simply have no idea of what real fear looks like or how it manifests itself in the general market.
Furthermore, they lack any sense of values, having abandoned rational thought processes in favor of momentum styles, whereby chasing motion pays the bills. However, momentum thinking produces positive results only in a bull market. When the beast turns south, there is no value anchor to stabilize the price structure, so the decline rapidly becomes mentally open-ended, reinforcing the sense of panic.
So far, all these ingredients have not manifested themselves in a post-bubble decline. Optimism has remained high, players keep coming back to the stuff that worked during the bubble -- chasing tech, Internet junk, anything designed for speed.
This is a classic sign that no one ever learned anything from the 2000-2002 decline. They still believe the long-term-will-bail-you-out nonsense. Before the broken bubble bottoms, we will likely see multiple crash events of 15%, 20%, 25% or more, all entirely within normal, historical expectations.
The next time down
Along those lines, I believe that we are just one data point or observation away from shattering the June-was-just-a-blip thesis proposed by Easy Al and embraced by so many "blipsters." When folks understand that the weakness is no anomaly but in fact reality, we will experience the "next time down" scenario that I outlined in my New York speech last May (posted on fleckensteincapital.com). I believe it's time to be on red alert, because any sign of weakness could turn what has been an orderly stock market decline into an all-out rout.
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. 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. At the time of publication, Bill Fleckenstein was short Intel and long Intel puts. The views and opinions expressed in Bill Fleckenstein's columns are his own and not necessarily those of MSN Money.
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