What HP Says About The Market
Kenneth L. Fisher, Forbes Magazine, 10.15.01, 12:00 AM ET
The Compaq deal and a PaineWebber ad show that you should
still be bearish.
I remain bearish, and this has nothing to do with the way the market
has reacted following the national tragedy. I remain bearish because,
in a perverse way, UBS PaineWebber's management and
Hewlett-Packard's board told me to be. They seem to assume we've
seen the market bottom and that better days lie ahead.
To show how they're mistaken, let's take UBS Paine Webber first.
The firm launched a huge national ad campaign this summer claiming
the market's "fair value" at year-end 2002 would be 50% above current
levels, based on the rationale of its chief strategist, Edward M.
Kerschner. Following the terrorist attack, he remains bullish and
lowered his target only slightly. (So far this year the S&P 500 is down
25% to 984.) Well, everyone is entitled to an opinion. But you would
think readers would want to know how well Kerschner did with prior
forecasts. If he hasn't done well, why pay heed now?
Early each year FORBES reports on how its financial columnists did
the prior year. But FORBES' approach is uncommon. If readers knew
how bad Kerschner's past forecasts have been they would pay zero
attention to the UBS PaineWebber claims.
Take 1999. Kerschner originally forecast that the S&P 500 would end
that year at 1250, up 1.7%. He was smack in the middle of the range
of forecasters then, many of whom were knock-kneed nervous over
Y2K. The S&P finished 1999 up 21%. As 2000 dawned, Kerschner
forecast it would rise 8.9%, to 1600, again in the midst of most
mavens. The index fell 9.1%. As 2001 began he foresaw a 30% rise,
to 1715, once again within the pack. Three strikes and you're out.
As detailed in my Apr. 3, 2000 column entitled "Break Their Crystal
Balls," and this May 14 in "Fall Till the Fall," the middle of the range
of professional forecasts never comes true. The reason is that the
market is a discounter of all known information. Professionals as a
group have access to a body of information that is pretty complete.
Hence what they can agree on must already be discounted into
market pricing and can't happen.
This is straight finance theory. No one who really understands
markets would ever lay a market forecast in the middle of peers. In
fact, average professional forecaster sentiment right now still is much
too bullish for a new major bull market to develop yet. When we hit
the real bottom, UBS management won't spend good ad money to
support proven losers. The firm's willingness to spend big bucks on
nonsense shows the ugliness will continue.
Then comes Carly Fiorina. After nearly 20 years at AT&T and Lucent
Technologies, she arrived in July 1999 with great fanfare as the
imported chief executive of Hewlett-Packard, charged to "reinvent" it.
Two years later little has changed; this onetime icon of technology is
drifting aimlessly.
So what does Fiorina do two days after the stock hits a five-year low?
Announce that HP is acquiring Compaq Computer for $25 billion in
stock. For Fiorina's career this deal is a time-buying smokescreen.
Now no one ever will be able to see if she accomplished anything
fundamental for at least several more years. The time and energy
spent integrating Compaq will take center stage and obscure her past
mistakes at HP.
Trouble is, you don't put two sick outfits together and get a well one.
The management that can't fix itself in two years can't fix another
troubled giant in that time.
As I detailed in my 1987 book, The Wall Street Waltz, merger and
acquisition activity in both dollars and deals parallels the stock
market cycle. You don't see many deals, especially big ones,
announced right around market bottoms. They dry up. Why? Because
even the very best boards of directors are sheeplike. They get too
timid to take real risks buying anything when prospects are bleak.
That HP's board will back a failing chief executive by spending $25
billion of new equity for a troubled company says folks aren't scared
enough for there to be a market bottom.
Takeover numbers in America and overseas increased throughout
1999 and peaked in the spring of 2000. They have fallen gradually
since then, but not enough yet for a real market bottom. On the very
day of HP's Compaq news, six more midsize deals were announced.
In the weeks around this market's final bottom, you won't see deals
like Hewlett's. You won't see ads like UBS'. In fact, you will see scant
anecdotal evidence of folks seeking opportunities. You will see fear.
That's why you should remain bearish for now. Buy Treasury bills.
Buy put options. Avoid equities.
Kenneth L. Fisher is a Woodside,Calif.-based money manager.
Find past columns at www.forbes.com/fisher. |
