Based on macro factors I wouldn't be calling a long term bottom right here. Not based on PEG or T/A or Fed rate cuts.
PEG? Like many of its brothers, that new-economy emperor has no clothes! The once-and-future king is and always was cash flow and the crunch has just started.
T/A? Charting the progress of lemmings as they rush pell mell across the tundra is useful most of the time. But when the terrain on which they run changes suddenly, such plots are diminished in usefulness.
Fed? Rate cuts are necessary to ease the urgency of what must come to pass... Think of interest as the cost of waiting to be paid. If the cost was zero, would you give up on the principle too? No, you'd just wait forever. Dues will be collected.
Businesses are awakening to a recession. Electrons on phosphor will not get milk from cow to glass ten times more effectively. Despite what it says on some glossy prospectus. Sure. Our more productive infrastructure allows us to spend more time commuting in the gas-guzzling SUV checking the closing price of CSCO and debating world economic matters online as if such actions really make a difference. Couple this to mis-allocation of a generation's capital into ventures of the harebrained.bomb variety... The chickens of such "net" productivity gains are coming home to roost.
Leading the tech wreck is a special breed of business, the carriers. They get to bear the increasingly crushing burden of servicing debt. Debt incurred to pave the planet in bandwidth. Bandwidth that one day will be insufficient to slake the thirst of our on-line existence...
But today, thanks to them we have broad bandwidth highways frequented by hordes of penniless travellers who refuse to pay the tolls. In a recessionary environment.
Put this and more all together and we have a problem. The sum of money owed is greater than the sum of money paying back. In short, a glut of credit.
This is where the similarity to 1929 and to Japan is exact. There is more money owed than will ever be collected. "Ever" is the key word.
The only solution is to evaporate some of the expected future collections. Wake up and smell the coffee folks, THE major source of "expected future collections" is that paper profit some of you were sitting on last summer, which has not yet been fully converted into a most noble and charitable donation to society.
The entire tech food chain from chip maker, to manufacturer, to carrier, to consumer is engaged in a giant real-time game of hot-potato to figure out who isn't going to get paid what they expected to get paid. It doesn't take too many functioning neurons to figure out how this plays out.
There aren't enough people moaning in misery for this to have finished... from a macro perspective we've only just begun! Corporate paper, particularly tech equities, has a 90% chance of downside - regardless of how good the business is.
How does this affect CSCO? The stock is still priced ahead of itself so it has room to the downside without getting out of misalignment with fundamentals. Ordinarily one might argue it's going to rapidly grow into this valuation. But this time it's different. The next two quarters will see the worst growth ever. Bet on it.
This would allow the stock to correct to value over the next six months, and then grow with the rate of the business whenever that growth materializes again.
So in my admittedly cloudy crystal ball I see trending lower with three upcoming opportunities to bottom below whatever bottom you see here: (a) in conjunction with the published 10Q when people get a glimpse at the cash flow picture; (b) Chambers guides on revenue for Q3 (he just set the stage) and (c) Q3 results.
Just MHO.
I think I'll stay in my cash-like bunker.
Good luck out there.
John. |
