Irrational Exuberance from the Bears:
Can Fed Speed A Tech Rebound?
Wall Street bears say Federal Reserve won’t be much help as shares keep falling
By Jed Graham
Investor's Business Daily
There’s one big exception to the old truism "don’t fight the Fed," says Fred Hickey, author of the bearish "High-Tech Strategist" market newsletter.
"Whenever you have a bubble economy, the Fed is somewhat powerless," said Hickey, who is based in Nashua, N.H.
He says it’s hard to refute the evidence that the economy last year was inflated by a tech-inspired bubble: too much money, too much spending, too much speculation and too much debt.
The title of his latest issue: "Time to Fight the Fed."
The Nasdaq has sunk nearly 55% from its record high, set March 10, and companies like Cisco Systems Inc. and Nortel Networks Corp. have stunned Wall Street with forecasts of a brutal first half of the year. But Hickey is among those who believe the worst is yet to come.
The bears say not even the Federal Reserve’s aggressive efforts to cut interest rates and reignite the economy can avert a further tech wreck. Thus, Hickey’s "Fight Fed" title.
Slowdown In Tech Spending
Lackluster spending on information technology may persist well into next year, some pessimistic prognosticators believe. Shaky fundamentals, combined with still-high tech valuations, suggest more pain ahead, they say.
"We have had a long-term gross misallocation of capital," Hickey said. "I see the largest overcapacity that’s ever been created. You don’t erase that with a one-quarter or two-quarter inventory correction."
All this doom and gloom might be a good sign. When things seem most awful and everybody has thrown in the towel, stocks tend to have hit bottom. But there are mixed indicators whether everyone indeed has thrown in the towel.
On one hand, short interest on the Nasdaq remained at a near-record 3.45 billion shares as of Jan. 12, the latest date for which information is available. Short-sellers bet stocks will fall. Last month’s short interest was 43% higher than a year ago and up 85% from January 1999.
But other indications of investor sentiment present a different picture. The Investors Intelligence survey of market newsletters, released Wednesday, showed 61.2% are bullish and just 28.6% bearish. The rest are on the fence.
Bulls Are Endangered
Still, there used to be more bulls. Investor optimism is slowly being crushed, says John Bollinger, founder of BollingerBands.com, a Web site that focuses on technical analysis of the stock market. And the process has much further to go, he says. "Everybody is still trying to buy the lows in these hero growth stocks" like Cisco Systems Inc. and Amazon.com Inc., he said.
The last major bubble in equity prices occurred in the late 1960s and early ’70s, when everybody wanted to own the Nifty 50, the biggest blue chips, such as Xerox Corp., Bollinger notes. During that time, those stocks lost 75% on average and didn’t really recover until 1982.
On Feb. 12, Bernie Schaeffer, chief executive of Schaeffer’s Investment Research and a tracker of market sentiment, wrote that investors have been exhibiting "irrational exuberance" in the face of a weakening economy.
"The belief that the rate cut process that began last month is going to very quickly jump-start the economy and the stock market, and most specifically the techs, is so pervasive as to approach a religious belief among investors and Wall Street spokespeople," Schaeffer wrote.
On that note, the usually bearish Don Hays, president of Hays Advisory Group in Nashville, Tenn., believes stocks could be in for a respite, but a brief one.
"I expect a period over maybe the next two or three months when people begin to believe that the Fed can save the day," Hays said. But in his scenario, the Fed won’t be able to navigate a soft landing for the economy. Stocks will rally, only to begin another downward phase.
"Technology will come down because the rest of the economy is coming down," Hays said.
The stock market reflects investor expectations. It’s in the interest of those who short stocks to spread dire predictions. But some respected economists also are forecasting a sharp slowdown in information technology spending, even if the U.S. averts a recession.
David Wyss, chief economist at Standard & Poor’s Corp., recently forecast that Fed rate cuts and a tax cut might stave off recession and help the gross domestic product grow a respectable 2.1% this year. But the outlook for tech, and telecom in particular, isn’t so comforting.
No Rebound Until 2003?
After increasing 25% in 2000, spending on telecom, networking and wireless gear should fall 3% this year, Wyss says. And he forecasts a further decline of 5% in 2002, with growth resuming in 2003.
Why such a severe drop?
"The tech bubble is a factor," said Wyss, who was ahead of most economists in predicting a slowdown. "Last year, everybody and his brother were starting new technology companies. We thought the huge jump was unsustainable. For one thing, we couldn’t figure out where they were going to get the funding."
Other tech sectors shouldn’t get hit quite as hard. Standard & Poor’s expects computer spending, which rose 21% last year, to level off at about 6.5% growth this year.
But despite his bleak telecom forecast, Wyss thinks telecom-related stocks may have fallen far enough to be attractive. "Relative valuations are looking reasonable," he said.
That’s where he differs from tech bears such as Hickey.
"P-E (price-to-earnings) ratios are three times higher than they were in ’95, and the ‘E’ is falling hard," Hickey said.
Many Internet and telecom companies were built "with no capability of generating a profit," he said. Now they’re laying off employees and selling their equipment. As demand wanes, the tech companies that grew rich by providing equipment to all these start-ups are seeing inventories back up.
"We overbuilt," Hickey said. "We have too much capacity. Prices are plunging. There are no major demand drivers. What exactly is going to turn this around? I don’t see it." |
