Trindy:
I've been fairly low profile this summer, mainly due to the demands of an intensive field work schedule. All the tech sector elements that I monitor have been pointing to an extremely ugly autumn, and I wanted to be very certain of my perspective before the summer ended, hence the heavy schedule. Having more or less completed this work, I am now convinced that the markets, and in particular the tech sector (which is where the heavy mo-mo and institutional ownership exists) is going to take a torpedo at the waterline in the near term. Here are a few reasons for that perspective, with "big picture" thoughts first, then tech sector specifics (old habits die hard).
Asia is starting to cave in again, and this time, there will be no life line. Trade among the Asian jurisdictions, (which pre 1998 was vibrant) remains a corpse, which means that Asian economic well-being relies solely on the U.S.A. Greenspan knows this, which is one of the key reasons why he has kept the liquidity flowing into the U.S. system. Unfortunately, the world's most prolific borrower, the U.S. consumer, appears to finally be starting to pull in his horns, which is already putting the squeeze on Asia. Forget the IMF, which is effectively broke and is a joke in any event. Korea, Thailand, Taiwan, etc., are already under both stock market and currency pressures. As an aside, I warned clients of mine to avoid the Asian markets when many investors were leaping into it late last year. It was a good call.
Japan, which has been the banker to the world for decades, remains on life support. Virtually every single set of numbers emanating from that country point to a continuing deflationary spiral, in spite of massive deficits and zero interest rates. Unfortunately, Japan has reached the end of the rope. The accumulated deficit is starting to spook the bond markets, which means that those deficits must be reduced/addressed. Note the recent first (of what will be a series of) interest rate increases (hello, Yen carry trade participants). This will positively nudge the Japanese consumer, but will crater the banks, insurance companies and financial entities (look for significant bankruptcy activity this fall). Japan is a huge holder of U.S. treasuries. It would dearly love to convert this wallpaper into badly needed cash, but has been under huge pressure to maintain it. There are signs evident that Japan (as well as others) is already in sell mode. Obviously it doesn't require rocket science to understand why Greenspan has no choice but to keep the interest rates up.
The N. American economy is definitely slowing. Given the fact that the U.S. economy is not nearly as strong as the nonsensical statistics would have the public believe, and given the fact that it is so terribly dependent on consumer borrowing, it is a given that any slowing in that manic borrowing will have ugly repercussions for the economy. Our work this summer suggests a definite change in borrowing attitudes (Probably tied to a reduced "wealth effect" as stock market parabolic price action reversed this spring). In fact, the consumer savings rate is UP (which is very bad for profits). This is key for me. If the consumer continues to retrench, the economy will suffer accordingly. Normally, the stock market smells this coming, but even if the mania mood delays its onset, this tulip market will still cave as gravity takes hold. As has always been the case, the degree of employed margin will define the negative overshoot. Currently, margins remain historically high.
While the markets do not yet worry about the massive U.S. trade and current account deficits, they soon will. Currently, the flow of funds from offshore manages to offset that staggering and growing sum, but much of that inflow results from U.S corporations (already overburdened with historic debt) borrowing in Europe (interest rates are two percentage points lower, which provides mute evidence as to the messy U.S. situation). This keeps the dollar strong and the Euro weak in the short term, but is terrifying over the longer term. Soon, the growth of the deficits will exceed available foreign funds. The U.S. dollar is living on borrowed time.
Another huge problem for the U.S that relates to Europe is the fact that in September of next year, the Euro will be available in cash form. Already, the Euro is viewed by all of Europe and much of the rest of the world as a new and much more desirable RESERVE CURRENCY. The Euro is backed by 15% gold. The dollar is backed by zip. The Euro has no "baggage" in the form of tons of treasuries, bonds and greenbacks sloshing around the globe. Already, much of the world's international deals are being contracted in Euros (particularly oil). Aside from the obvious problem (people always keep the more desirable currency and dump the less desirable), there is the further problem of the fact that the European jurisdictions hold huge quantities of U.S. treasuries, bonds, and cash (as reserves) that are now superfluous to their needs. Obviously, they would like to dump these holdings, but this would precipitate a global firestorm (as well as an instantaneous reduction in the value of their unsold holdings) so to date, the selling has been gentle. Behind the scenes, the Europeans have pestered the U. S. to convert this wallpaper into a form that recognizes reality,..... "generational loans". So far, the U.S. has seen fit to ignore this problem, but the problem will only get bigger and it will have to be addressed. Otherwise, the U.S. bond market, already the scene of rising spreads and swaps, will become a wasteland. Sooner or later, the delightful ability of the U.S. to simply print more greenbacks with which to pay for imported products, is going to come to an end. The appearance of the Euro in cash form will hasten the arrival of that day. Personally, I think late this year or early next year will witness very heavy pressure on the U.S. dollar with obvious implications for holders of U.S. assets.
Every single economic marker that I have learned to rely on for early warning of economic slowing (truck back-haul pricing, tool and die shop "back logs", ship "day rates", etc. are all suggesting further slowing.
Mutual funds have not had a good year. Many of their huge holdings have seen 30-40% falls from grace. By way of example, MSFT, which is a premiere position in every mutual fund portfolio, has been stripped of 40%. There will be some painful reading for the faithful at year end, and some of them are going to get antsy and call for redemption. The funds are carrying low cash balances. Incidentally, many pension funds have already taken serious hits and their managers tend to be conservative. I've talked to several who smell problems ahead. These guys are famous for quiet exits. Some are already pestering their boards to move to "greater cash allocations"
For many quarters, both Fred Hickey and I have detailed the obvious slowing of PC sales growth (particularly REVENUE growth). Normally, this would have long since caused a shrinking of growth-based PEs but in this mania, it has been slow to come home to roost in stock prices. This fall, staggering inventory growth (already evident at every point along the distribution channel)and an escalation of already nasty price wars will force a "new" reality on investors. It is going to become as ugly as the bottom of my feet before we get into the new year. Recall that corporate PC buying has been non-existent since last September (as evidenced by the bankruptcy of several large resellers) and corporate buying has historically represented 2/3rds of total PC buying. As I forecast last year, corporations will not be consequential buyers for the foreseeable, hence the already saturated consumer market is all that is available to soak up the torrent of product. There is just too much finished product and too much production capacity, given the desultory demand.
Semi producers are facing a bleak winter. The problem? What to do with all the chips. Most chips go into PCs and the box builders triple ordered this spring, fearing a shortage (incredibly dumb), so they are buried in chips (by way of example, even as I write this note, a large U.S. direct PC seller is trying to quietly unload a massive block of AMD micros at darned near any price). And the cell phone business is also entering saturation (recall my comments of last year that cell phone sales were following exactly the same curve as PC sales, but a year displaced). Every company that relies on the cell phone market is already warning of problems at hand or surfacing, and again, inventories are both huge and growing. Currently, both memory and micro spot market prices are in free fall, and I see nothing in the near term that will slow this descent. Meantime, the Semi stocks are in the stratosphere.
Adding all of this up, I am now advising clients to enter the fall with very minimal long stock positions, large tech-based put/short positions, and to buy a few "junior" gold stocks that have large proven reserves (as a hedge against currency problems).
Best, Earlie |
