... DE-NIAL is a river
ContraryInvestor.com - Market Observations
04/12/01 - charts not included
Time To Turn Tail And Run?...For retail sales, apparently so. As we mentioned in our discussion regarding consumer credit on Tuesday, we were awaiting the big retail sales report today as relative perspective against what had been a spike in revolving consumer credit for February. As you may remember, retail sales in February were flat relative to January as revolving consumer credit jumped over 20% on an annualized basis in February. Not a good sign for either consumer confidence or the near term direction of the consumer led real economy. Retail sales following through in March after that $11 billion increase in outstanding revolving consumer debt in February was nil. In fact, a touch worse than nil. The consumer is not spending increased debt balances at the retail level. The money is going somewhere else.
The consumer is at best sputtering over the last year or so. It also seems pretty clear representation that monthly changes in retail sales are correlated with short term changes in the stock market. It may not be perfect correlation by any means, but looking back at late 1998, early and late 2000, and recent experience surely suggests that short term market movements influence nearby monthly retail sales. As you know, the bulk of household wealth in this country may be caught up in real estate values, but discretionary spending is certainly driven in part by the stock market wealth effect. Although the Fed did not have much trouble implicitly putting its stamp of approval on the cause and effect relationship of stock prices and retail sales on the way up, it's now left to fight what appears to be a serious negative feedback loop "on the other side". Again, revolving consumer credit growth accelerating against this kind of retail sales activity is not a positive by any stretch of the imagination. Quite the contrary.
We'll be watching for consumer confidence numbers ahead. Just today the University of Michigan survey displayed a decent month over month drop. Who knows what the Conference Board data will show. For us, consumer confidence is measured by action (revolving consumer credit, retail sales, etc.), not by the opinions expressed in surveys. Watch what they do, not what they say.
One last bit of good news just to cheer you up. Recently, retail sales have been supported by "strength" in the Western US. What's happening in California right now simply doesn't suggest a gold rush in the macro retail numbers ahead. Risk of further slowing in the monthly retailing numbers is a reality dependent on the California economy.
Back To The Futures...Although retail sales were down for March, it was not a disaster. Not the disaster that the Fed Funds futures traders may have wanted. It will again be very interesting to see what is said in the upcoming earnings announcement season and the subsequent reactions of market participants. Just today when Juniper Networks did not come through with an absolute doomsday scenario, the stock vaulted over 15%. You know, sorta like the good old days.
Without an absolute implosion on the retail front, will the Fed have the real ammunition to push rates another 100 basis points lower? We don't think so. In fact the futures now suggest 75 basis points at most by October. With that in mind, we expect little progress on the US Treasury bond front ahead. Notice anything else here? The futures say no intermeeting rate cut. After all, who needs one when stocks are going up. Right?
Heeeeeere's Johnny...As had been widely anticipated beforehand and is now actual reality, semi analyst John Joseph of SSB "called" the bottom in semi stocks yesterday. As you may know, Joseph has been feted for his so-called prescient negative call on semi's last July. We wonder what the clue was back then. Do you think it was semi stock darlings selling at double digit multiples to revenues and, in some cases, triple digit multiples to cash flow that was the clincher? Basically Joseph's current bottom call on the stocks is based on the fact that with semi fundamentals just about the worst in two decades, conditions just can't get any worse from here. As we learned many moons ago, the most dangerous words in investing include, but certainly are not limited to, "it's different this time". Next on the phonetic danger list is "it just can't get any worse from here". Other runners up include "this stock is so low, how much further can it fall?" and "this stock is so cheap, how much can I lose?".
Perceptual star analysts have a tendency to get about 15 minutes of fame in this world. Rarely does the clock tick all the way to 30 minutes. We wish Joseph well with his call, but have a few comments of our own. We surmise that the more important question in semi's, and tech in general, is not where the bottom may or may not lie, but rather what the growth trajectory will look like when industry recovery arrives as it ultimately will. Given the excesses created in semi capacity over the last few years, for the moment we have to bet that growth will be sluggish and may bump along at low rates for some time. In the meantime, these companies will have to continue pouring money into R&D in the race for tomorrow. Not exactly a prescription for "robust" profits or margin "traction". Don't get us wrong, there are some great companies in this industry. As always, it's simply a question of what you pay to own them and when. Today's investors, characterized as having the patience of a gnat, immediately began discounting the next new era overcapacity build in these stocks. To be sure, there are a good number of shorts who also decided to stand aside as it turned out to be a freight train in the tunnel and not the proverbial light.
You Think That's Where It's At, But Is That Where It's Supposed To Be?...We can't help but do a quick check on the numbers:
Company
Price To Sales
Price To Cash Flow
AMCC
15.4 x's
63.3 x's
AMD
1.7
6.3
Broadcom
7.2
35.2
Dallas Semi
3.2
8.8
Intel
5.5
14.4
Linear Tech
14.2
28
LSI
2.1
10
Micron
3.5
12
Maxim
12.4
23.6
National Semi
1.9
11.3
PMC Sierra
8.5
34.6
Texas Inst.
5.0
27.0
Just to let you know, the above table is calculated using trailing 12 month revenues and cash flow set against prices seen this morning. Presumably in many cases both revenue and cash flow will be down on a forward twelve month basis. We are trying to be nice, but many of these valuations are understated. You don't have to go back too far to find an Intel selling at 1-2x's revenues. The mid 1990's will do the trick. You only have to go back to 1998 to find Linear at half this PSR. (As a tangential comment, you may or may not know that Jan. and Feb. of this year were the two of the worst months for analog semi sales on record. According to some analysts, March is worse.) Even super star Maxim sold at a 30% discount to the current PSR in 1999. Bottom? Go Johnny Go.
Semi Bullish...No this is not a new Wall Street stock rating, but it might become one before it's over. In addition to the semi's themselves, their suppliers are worth a quick look in terms of calling a bottom. After all, if the semi's themselves have bottomed in stock price, so too should their suppliers:
Company
Current PSR
1998 Bottom PSR
1996 Bottom PSR
Current Price To Cash Flow
Applied Materials
3.7 x's
< 2x's
<1 x's
23.7x's
Lam
1.9
.85
.48
27.3
Novellus
4.9
1.4
1.1
21.3
As you know, the unknown at the moment is whether what we are living through is an inventory correction or something else. In hindsight, the 1996 and 1998 bottoms in this industry were cyclical lows followed by V recoveries. As you can see, within the context of cyclical downturns, price to sales ratios got pretty low. From current valuation levels, God help current semi investors if what we are now living through is something worse than a cyclical downturn and there is no V on the other side.
As you know, stock prices look ahead. The real job of the financial markets is to discount the future. We'll be looking for all of the evidence we can that bullish investors in semis are correct. Until then, we prefer to defer capital commitments here. After all, picking bottoms is not what long term investing is all about. We just want a good chunk of the "middle".
Decision Making On A Wim...In a tiny bit of an unexpected move yesterday, The European Central Bank passed on lowering interest rates. So far it has refused to accommodate what is perceived as the greater global economic need of liquidity and monetary ease. They do not want to play in the sandbox with Al and friends. The ECB flatly planted its inflation feet in the ground at refusing to move on rates with the CPI anywhere above 2%.
In response to popular sentiment having expected an ease, ECB President Wim Duisenberg responded that "I hear, but I do not listen". He went on to comment that there are "no indications of the risk of a global recession". Let's get this straight. Hearing? Yes. Listening? No. Seeing? Debatable.
The ECB will come around. Unlike others we know, they probably don't want to convey the impression that they are caving in to market pressures. Anecdotes of real world economy slowing abound in the Euro zone. As you know, American companies such as HWP are making plenty of noise about spreading weakness abroad. The rate of change in Eurozone industrial production appears to be peaking.
Likewise the Euro Stoxx 50 isn't exactly indicating all is well, if you believe the predictive powers of financial markets (and in most cases, we do).
The Golden Spike...As crazy at it may seem to the rational mind, some of the largest historical one day advances in the major indices on a percentage basis have been seen within the context of some pretty hairy bear markets. In fact, some of the worst. We showed you last week that of the ten largest one day percentage moves up in the NASDAQ, nine occurred in the current NASDAQ bear market. So what about the Dow? Well, those moves also occurred within the context of a greater than 60% bear market drop in the Dow. They just happen to have occurred some 70-plus years ago:
Largest One Day % Advances In The Dow
Date
Price Move
% Change
10/6/31
12.86
14.9 %
10/30/29
28.4
12.3
09/21/32
7.67
11.4
10/21/87
186.84
10.2
08/3/32
5.06
9.5
02/11/32
6.8
9.5
11/14/29
18.59
9.4
12/18/31
6.9
9.4
02/13/32
7.22
9.2
05/6/32
4.91
9.1
The so far historical experience of the NASDAQ and the Dow caution investors to beware of incredible one day percentage advances in these indices. They have all happened at what seem the worst possible times to have been invested in the markets. The record is clear. The buy and hold adherents often cite investment performance, had investors missed some of the largest one day moves in the markets, as being just mediocre, suggesting that trying to time markets is for fools. History clearly shows that a much broader view is necessary in any serious discussion of timing macro entry and exits from the markets.
As a quick tangential comment, half of the ten largest one day absolute point advances have occurred during bull markets in the Dow:
Largest One Day Point Advances In The Dow
Date
Price Move
% Change
03/16/00
499.19
4.9
04/5/01
402.63
4.2
09/8/98
380.53
5.0
12/5/00
338.62
3.2
10/28/97
337.17
4.7
10/16/98
330.58
4.2
03/15/00
320.17
3.3
04/3/00
300.01
2.8
01/3/01
299.6
2.8
09/1/98
288.4
3.8
The absolute point moves are a mixed bag. We consider the percentage gainers much more important. Spikes don't have sharp pointy tips for nothing. How else to financially impale the unaware?
Gonna Party Like It's 1998?...Despite serious negative economic anecdotes around us, the technical patterns of the major indices deserve consideration here. On almost a concerted basis, the Dow, S&P and the NDX all came down, touched, and have bounced off of their 1998 technical breakout points. Look at the patterns of the 1998 index bottoms. They are very similar to what we have lived through in the past few weeks. Fundamentally, we just cannot envision a new bull market springing to life here. But, as you know, fundamentals have really only been important in the last six months of what has been a three to five year mania for equities. We are long overdue for a serious bear market rally by historical standards. We have no way of knowing what is to come ahead. At the moment, we suggest everyone give the charts some serious attention ahead. Especially in terms of risk control on the bearish side of the equation. This past week has clearly been enough to pin a few shorts to the wall. Remember, next week is options related antics as well as earnings releases. Emotions are clearly running high on both ends of the equation.
He's Got The Action, He's Got The Motion. Oh Yeah, The Boy Can Play. Dedication. Devotion. Turning All The Night Time Into The Day...The S&P has just poked its head above the 2+ month downtrend line. The quasi "W" short term bottom has been formed. This is the day to day.
Looking at the longer term, the S&P is back to it 1998 technical breakout point. An important technical consideration.
The NDX 100 clearly revisited the 1998 scene of the crime breakout point and has firmly bounced off it (for the moment). The top of the NDX bear channels are still a good way up from here. As wild as this sounds, from a purely technical standpoint, this index could rally 400-1600 points and still have a technical bear market remain intact. (We can hardly imagine it.)
The Dow has likewise tested and bounced off its 1998 breakout point and is pushing back toward the bottom end of the powerful diamond topping formation.
From our standpoint, it simply goes without saying that if the bear market rally(s) fails and these indices meaningfully close below those 1998 breakout points, there will be hell to pay technically. What does all of this mean right here? At worst, it probably means staying away from making big bets in either direction is a smart thing to do for the moment. We should know soon enough which way the road will be leading ahead. |
