Some more interesting links:
IMHO: Bill Alpert is a frequent visitor to CNBC. He is a committed bear. This gives another point of view.
interactive.wsj.com
Gleeful Bear - Bill Alpert
As the market cratered last week, short-seller David Tice made good money. He thinks Intel, Gateway, Amazon.com and MBNA are still wildly overvalued.
Excerpts on Gateway and Intel:
Those who agree might want to piggyback on Tice's short-sale ideas-or at least lighten up on the issues on which he's bearish. Gateway 2000, the lovable South Dakota maker of personal computers, is one such stock. At a recent price of $45, it was selling at 21 times consensus earnings for 1998. Yet with prices declining for powerful PCs, Tice argues, "this will turn into a commodity assembly business."
Gateway is opening Holstein-spotted Country Stores, which Tice fears will raise overhead and legally establish Gateway's presence in states that will then demand sales tax on sales to their residents. An economic downturn would crimp capital spending, adds the analyst, and leave investors to discover that a PC, after all, is a capital good. Gateway's share price, from $45, could be halved, warns Tice.
He puts Intel in the same boat. Most of Intel's growth is coming from its lower-end chips, so average selling prices are declining, and with them, profit margins. Historical gross margins of 60% are trending toward 50%, and Tice sees them falling to the mid-40% range. "They've always been able to move the customer along to the faster PCs and sell the higher end chip that generates larger margins," he observes. "But that game is over."
A spurt in PC sales won't bail out Intel, Tice claims. Dramatic price cuts in 1996 spurred 30% annual growth in PC unit sales, he notes, but even today's falling prices haven't juiced unit growth above 10%. Microprocessor clones from Advanced Micro Devices and the Cyrix division of National Semiconductor have just enough market share to weaken Intel's pricing power at the low end, where demand is strong.
In the past six months, Intel's year-over-year earnings are down 30%. Tice thinks 1999's numbers will be even worse and that Intel, now in the high 70s, would be more fairly valued in the 40s.
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Change of Heart - Andrew Bary
Merrill Lynch's once-bullish Richard Bernstein turned cautious on stocks in June. He still is. But he does like Merck, GE, Disney and Fannie Mae.
interactive.wsj.com
Excerpts:
The past few weeks have been humbling for bullish Wall Street seers like Goldman Sachs' Abby Joseph Cohen, PaineWebber's Ed Kerschner and Lehman Brothers' Jeff Applegate, as the first half's big stock-market gains evaporated in the worst selloff since 1990. Yet one lesser-known Street strategist has pretty much called the market dead-on. Richard Bernstein, director of quantitative research at Merrill Lynch, turned cautious on stocks in June after about 3 1/2 years of nearly steadfast bullishness.
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Bernstein says many investors wrongly assume that quality stocks always are pricey. It's true that companies like Coca-Cola, Pfizer and Microsoft have lofty price/earnings ratios, but many others are far less dear.
Look at the accompanying table, which shows the P/Es of stocks grouped by their S&P ratings. The top companies, with A-plus ratings, such as Coke, Gillette, Merck, General Electric and Johnson & Johnson, do have P/Es averaging 22.6 based on estimated current-year profits. But A-rated companies like Bristol-Myers Squibb, Fannie Mae and Walt Disney actually have an average P/E of just 18, lower than the multiple on B-minus-rated stocks.
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"From A down through B-minus, there is no quality differentiation based on P/Es. I don't feel you're being compensated for the risk of lower-quality stocks," Bernstein says. The little-known S&P stock ratings, which differ from the company's debt ratings, are computer-generated, based on the consistency of profit and dividend growth over the past 10 years. "Not all quality stocks have high multiples. And even if they do, the P/Es may be justified," Bernstein adds. "Small-cap stocks may be statistically superior in that their projected profit growth rates are high relative to their P/Es. But the market doesn't care about that because investors are putting a premium on the certainty of profit growth." Bernstein believes many small-caps have yet to prove themselves in a recession, and he suspects that large numbers of them will be found wanting.
"People say the big high-quality companies like General Electric and Coke manage their earnings," he observes. "My argument is that at least they can do that."
Bernstein says the time for small stocks and economically sensitive issues won't come until the Fed eases and, importantly, short rates fall, relative to long-term ones, creating a positively sloped "yield curve." Such an environment has generally pointed toward a strengthening economy.
Bernstein turned cautious in the spring, "because virtually every one of our profit indicators showed that earnings were eroding." Unlike most strategists and analysts who analyze the prospects of the S&P 500, he focuses on reported profits -- which include writeoffs and restructuring charges. "I'd argue that reported profits provide more information than operating profits," Bernstein says. He notes that reported S&P 500 earnings fell about 4% in the second quarter after declining 1.7% in the first quarter. Operating profits, in contrast, climbed over 3% in both periods.
My view is that writeoffs are a way for companies to hide the cyclicality of their businesses," Bernstein says. He puts it this way: Would you rather own a company that earns $2 a share and doesn't take writeoffs or one with $2 in operating earnings but just $1 in reported profits due to writeoffs?
He observes that companies that take big writeoffs generally trail the market. Just look at habitual restructurers like General Motors and AT&T. Their performance has been nothing special. It's no surprise that the stock market's premier companies generally take minimal writeoffs.
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