I thought Microsoft warned today about the next quarter. That they thought the growth in capital gains income may not be sustained at the rate of last quarter.
MARKET OBSERVATIONS - 1/18 (ContraryInvestor)
"Intel"-ligent?...Who says it's not about spin? It seems that these days, everything is about spin. Government media "ops", Greenspan testimonials, you name it. So why should it be any different for corporate earnings? This is nothing new. It's been this way for a long time. The Intel news last Thursday night is just another in a long string of spin doctor specials. At this point, spin just won't really matter until it does. Then nothing will be able to be spun positively. Selectively, we're getting there. It's just that not all players are being treated equally...yet.
Our friends at Intel "beat the numbers" by realizing a $358 million capital gain. As you know, the largest venture capital player in "the valley" is Intel. Without the gain, the numbers would have been about flat with what was reported last year (although last year also witnessed a gain, so maybe it was up a bit). For this handsome $358 million gain on the quarterly earnings report, INTC shareholders were treated to a one day $46.8 billion gain in the stock's market cap. Sounds reasonable, right? A number of analysts did point out the difference between operating and non-operating numbers, but few investors(?) were listening. Instead, INTC management cooed about how wonderful the future is going to be. Better than ever! And dutifully up went the stock price. Want to know the real scary part? Intel still has $5.8 billion in unrealized gains sitting on the books. Believe us folks, that's one helluva lot of future quarterly earnings spin. Even a good sized dent in tech valuations will still allow Intel to reach into the bag of tricks for many quarters to come. As has become the new mantra on CNBC, "try shorting it". (We don't mean to be so sarcastic. At some point shorting Intel will be a highly profitable proposition. It's what happens in the meantime that troubles us.)
News from 14.4K...No we're not talking about the 14th millennium, although some stocks are discounting fundamentals in that time frame. We're talking about certain news items that seem to be traveling across 14.4K modems. You've heard about the eUniverse heist and eblackmail scheme. In our local news we also saw mention of a 16 year old boy who, apparently working in his bedroom with "very old computer equipment", managed to snag 63,000 ISP passwords from PacBell (forcing PacBell to issue new passwords to one and all). A friend in Minneapolis told us of an article where airline NWA admitted someone had broken into their system and stolen credit card numbers of unsuspecting web users booking reservations. The funny part about all of this is that these incidents apparently happened in December and were first made public in January. Whatever happened to the age of bandwidth? Isn't this supposed to be a "new era"? It just goes to show you that the hidden "powers that be" can slow down baud rates anytime they choose. DSL or no DSL. Cable modem or no cable modem. After all, who wanted to be the one to spoil an otherwise perfect eChristmas?
Playing Both Ends Against The Middle (As Usual)...You know who we are talking about. "The imbalances are growing". In the same breath, "future monetary tightening efforts may be less than some expect". Of course, technology continues to amaze him. Greenspan continues to speak out of both sides of his mouth. Some things just never change. The real tragedy in this flippant attitude toward the financial markets is that the bond vigilantes have a sworn solemn duty to punish indecisiveness, and punish they are doing. The middle to long end of the Treasury curve has become a crime scene. The tragedy portion of the story is that the bulk of corporate America is hurt by a rising cost of debt capital. Of course Mr. Greenspan can extol the virtues of the technology companies who seem to be simply unaffected by all of the clamor in the debt markets. At the moment, the "new economy" (read: tech) companies can thumb their noses at bond market participants as they do not require their services. The Net and tech darlings are being spoon fed all of the free equity capital they could ever dream of consuming. Quite unfortunately, the profit bearing portion of our grand economy is suffering by the day under a bond market induced higher cost of capital requirement. In a sense, Greenspan's inaction relative to continued real world requests from the bond vigilantes just exacerbates the stock market dichotomies that have already been in place for far too long now. More tech and everything else can simply go to hell.
We wonder if investors of today have given any thought to the fact that it has been economy-wide capital spending on tech that has allowed Net and tech valuations to "blossom". What happens if continually higher rates put severe downward pressure on the earnings of manufacturers, industrial entities, financial services providers (banks, etc.), etc.? We'll tell you what happens. At some point, they cut back on capital spending. When the next dollar spent in the capital budget does not return $1.05, the game is over. As we have pointed out many times, the earnings numbers we see spewed forth on the Street are largely those of the S&P 500. They are cap weighted. Median earnings gains are far, far below the cap weighted reports. Higher rates do hurt real businesses. Don't let the indices fool you.
Interestingly at the open of the New Zealand market this evening, the New Zealand central bank increased its benchmark interest rate by 25 basis points to 5.25%. You may remember that the last New Zealand rate hike was almost exactly two months ago and was a 50 basis point affair. What is most unique is that the NZ central bank took this action two hours before the NZ CPI was officially reported. Did they know something? Apparently not as the number came in below expectations. Folks, this is what's known in the biz as "ahead of the curve". The NZ bankers cited as a rationale for the move the fact that the domestic and global economies were moving ahead "strongly". Reserve Bank Governor Brash said that "the bank was targeting inflation prospects one-to-two years ahead". As you know, in America this would simply be considered an investment lifetime type of time horizon. Clearly the NZ bankers are people for whom the bond vigilantes have respect.
AO-Oh Well...We won't waste your time with a long discussion on the AOL/TWX merger (too much has already been written) except to say to the folks at AOL, "what took you so long, guys?" This should have been a no-brainer a long while ago. Given the market reaction to this apparent match made in heaven, we have to bet that many a Board member of "old economy" companies will have their personal attorney's joined at the hip when a Net company comes to call on them. For those considering accepting monopoly money for real assets, we suggest you hang on tightly to that "Get Out Of Jail Free" card.
Kontrarian Korner...Just thought we would point out that the Market Vane bullish consensus on bonds is at the lowest level ever seen in this indicators existence. Does that mean a rally is just around the corner? Of course not. What it does mean is that a lot of price risk has been deflated. As you know, we are the last ones to be able to pick a final bottom. Be open to any possibility ahead. In the near term, old gradualist Al should insure choppy waters in bond land.
The Score Card...As usual, we're trying to keep a close eye on those fun loving continual credit creators at the Fed by checking in on the Fed Data Bank numbers. Surprisingly for the week ended last Thursday, Barron's showed a substantial drop in total Fed credit. Before getting too worked up that Alan and friends may actually have mops and buckets in hand, check in at www.federalreserve.gov/releases/H41/Current/ to see that a huge portion of this is accounted for by expiring repurchase agreements originally entered into in late December of last year. It appears to us that the Fed is mopping up nothing. There is no mop. The "milk" it spilled in the 4Q is still lying on the floor. The question remains as to how soon it will turn sour. |
