Selected quotes from this week's Barron's.
enjoy,
ST
We have a huge issue with the fact that hedge funds are now the principal pricing agents in the marketplace, while on the way up it was individuals. On the way down it is hedge funds. And you are starting to see glimpses of the same kind of manic enthusiasm for short selling that you saw for buying dot.coms on the way up.
Q: While we're on the subject, I understand that you aren't a big fan of Applied Materials?
Wick: True. I base my opinion on valuation and also on the fact that Applied Materials, and all the other semiconductor-equipment companies, are really at the bottom of the food chain. And unless you can make an argument that the device industry is going to recover anytime soon, there is no reason for the semiconductor- equipment industry to recover either. The largest end markets for semiconductor devices are PCs, cell phones, networking-telecom equipment, and they all look like they are dead in the water for the next two years. So while I think Applied Materials is a great company, I think the macroeconomic environment for the semiconductor industry is going to be challenging for the next two years. On top of that, the easy days of market-share gains for Applied Materials are over. In virtually every business segment, the company is now grid-locked against very difficult competitors. [For a more favorable view of Applied Materials, see Follow-Up.]
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Galvin doubts the U.S. will suffer through a Japan-like stagnation. Japan's bubble lasted for a decade, he notes, while ours popped after 1,000 days. Japan's excess capacity was in long-lived assets, like buildings, which can take years to fill up, while the U.S. has excesses in services and technology, which have shorter lives and become obsolete faster. Also consider that Japanese financial institutions owned the bubble assets, while the U.S. financial system remains healthy. Only 8% of the volume of commercial and industrial loans on the books of domestic banks are to technology and telecommunications companies. Finally, the U.S. Federal Reserve has aggressively lowered rates, which should help our economy rebound.
We have hopefully finished the downside of what Galvin believes is a three-year business cycle. He tracks the Organization for Economic Cooperation and Development's G7 leading indicator, in which the U.S. has a 40% weighting. The cycle peaked in 1995 and '98 and bottomed out a year later. Galvin hopes the pattern repeats and notes that the index increased in May for the first time in 12 months. He forecasts S&P operating earnings of $51.50 this year and $59 in '02.
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Charlie Sachs, chief strategist at 21st Century Option Hotline, is also watching the VIX for a buy signal but isn't focusing on a particular level for a trigger. He is looking for a VIX spike and "inflection" or reversal to identify a market buy signal. This methodology would allow one to perhaps avoid a premature signal if the VIX keeps climbing as the market keeps falling. Of course what exactly constitutes a valid inflection is a matter of interpretation. The VIX low of a few weeks ago -- near 22 -- was one of the reasons Sachs turned bearish in August. He is also fearful of very negative seasonality in the September-October period.
Charlie points out that over the past 30 years, these two months are the only ones that have produced negative returns: "Since 1964, there have been 12 autumn declines in excess of 10%, and in seven of those, the worst damage was done in October."
Along with the low VIX of early August, Charlie was also chilled by the low percentage of bears unearthed in the Investors Intelligence survey. At 23.7%, the proportion of bears stood close to a five- year low. As of last week, the bear camp's numbers had risen to 30.6% of all investors polled, but Sachs wants to see the bear level above 45%.
An ingredient missing to make a bullish case here may be the heavy domination of calls, rather than puts in the QQQ, which is the Nasdaq 100 Trust. Late last week, we saw the largest single concentration of options open at a single strike residing in the September 40 call, with 170,923 contracts. The largest put concentration below the current QQQ level is in the September 30 series, with only 36,981 contracts open.
Much better for the bulls if this were reversed with a big put open interest in the ascendancy. It is thought that a large "peak" put-open interest would lend support to the market.
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Lehman Brothers and Eurasia Group, an emerging-markets consultant, will launch a political stability index September 26 that followers of events and companies in eastern Europe might find useful. Eurasia Group president Ian Bremmer says the effort will begin with ratings that assess investment risk in seven eastern European emerging-market countries, as well as Thailand, Indonesia and Azerbaijan. Eventually there will be measures on 20 to 25 nations.
The idea is to assess places where political will for economic change matters more than economic capacity, he adds. It will be a numeric index that focuses on these main factors: the capacity to survive exogenous and endogenous shocks, and the propensity to create internally-generated crises. |
