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Posted 11/8/2004
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Note to GOP: Be careful, your wish came true
Your win was certainly cause for celebration. But if you dont fix the big problems that face the economy, you may not be celebrating much longer.
By Bill Fleckenstein
In the wake of last week's election, Id like to begin with a comment that may sound completely mad to some folks: The fact that victory went to a Republican and not a Democrat doesn't mean a whole heck of a lot to the economy. I say that because neither party will be able to solve the economic problems that we face.
I suppose an argument could be made that either Bush or Kerry would make things slightly better or worse, but the amount by which either could affect things is more or less a rounding error. Republican or Democrat, we are in for some tough times. In the interest of making it clear that my views are economic and not political, I will disclose that though I am a libertarian at heart, I have nearly always voted Republican.
Along that line, I would like to say to the winning party: Be careful, because your wish came true. The economic problems that lie ahead have only been postponed and made worse. Both the stock and real-estate bubbles will unwind on your watch, which includes full control of the House, the Senate, the presidency and most of the governorships.
To the losing party, I would say: It's my belief that these next four years will see many dreams shattered and hearts broken in the aftermath of upcoming economic turmoil. If so, the silver lining may indeed belong to the losing party, which may only have to wait four years for a chance to reign supreme for a couple decades.
Of course, we could all get lucky. The Republican party could decide to pursue a flat tax, tort reform and term limits -- the three major areas of change that I believe could help the country become more competitive and help extricate us from the horrible fix that I see us in.
The market-ought-to-go-up 'analysis'
Meanwhile, in my 25 years in the investment business, I can't recall there ever being a period where psychology was so wildly euphoric and diametrically opposed to the dire state of all the fundamentals. It's almost as though folks believe that simply because it's the month of November, to be followed by the months of December and January, etc., the market ought to go up, and therefore, we should all be bullish. The amount of really childish "analysis" is mind-numbing.
Who knows? Maybe all those who are bullishly inclined will be right, simply because there are so many of them that they will be able to vote (with their money) for higher stock prices in the short run. That's my only explanation as to why companies with rich valuations that report surprisingly bad news continue to see their stock prices rally.
National Semi: Business has gotten worse
A case in point (of which there are many): National Semiconductor (NSM, news, msgs), which said last Monday night that this quarter's revenues will now be down 18% to 19% -- twice as much as the company projected in its Sept. 9 earnings report. Said differently, things are now twice as bad.
Only those folks who practice head-in-the-sand "investing" could have ignored how business has fallen off since then. Rewinding to the Sept. 9 call, I note that National Semi had been somewhat upbeat in its description of problems and had certainly wanted to give folks the impression that things would be getting better soon.
At the time, CEO Brian Halla did not seem to believe that the problems would get worse. When discussing the production shifts and request that employees take vacations, he had noted: "We're just being prudent, saying, let's not continue to manufacture away. . . . Let's cut it back more in line with what the actual demand is." Well, either he couldn't see the problems that were obvious or he chose to ignore them.
Now National Semi is cutting production volumes and spending plans, which is likely the rationale for the timing of last Monday night's preannouncement. The company was not to have given its mid-quarter update until Dec. 9. Interestingly, since they last spoke nearly two months ago, they noted in their press release that orders "have (still) not improved so far."
In short, there's been no sign of a pickup. In fact, it could be argued that things are getting worse; witness the deterioration in its guidance from two months ago. But that does not dissuade chip-stock bulls from pronouncing every piece of bad news as "the bottom." In fact, the past two months has seen National Semi rally just shy of 50% (meanwhile, the day after the huge preannouncement, the stock was down a whopping 2%) on the back of beta chasers pouring in to take advantage of the "opportunity."
National Semi's comments were corroborated last Thursday in a report by market-research group IDC, which has lowered its forecast for worldwide chip revenues, saying that next year's sales will shrink 2%, vs. the 7.5% sales growth it projected last May. IDC also suggested that "unless chipmakers cut capital spending by a fifth next year, industry sales may shrink as much as 11%." (It should be noted that these folks are almost always overly optimistic.)
With the glaring disconnect between fundamentals and the frenzy to buy stocks willy-nilly, I cannot see how any thoughtful person can be anything but concerned and positioned with as low a risk profile as he can stand. As I have been saying, it's not debatable how this turns out. The only question is exactly when reality separates folks from their money.
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. At the time of publication, Bill Fleckenstein was short National Semiconductor. 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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