Cisco Systems, Intel, Advanced Micro Devices, Dell and other pieces ...
... wait until John Murphy gets back from vacation and discovers such candor in his absence ... Michael Pinson will be toast, but thank you Michael ...
Ken Wilson
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from MurphyMorris Market Message, Thursday, August 09, 2001 - Will the Broad Market Re-Test the March Lows?
by Michael Pinson
The broad stock market is once again set for a decline in the near term. Over the last six weeks, we have witnessed the Dow Jones Industrial Average, NASADQ and S&P 500 attempt to rally up to their 50-day moving averages, only to fail. This has been followed by a pull back down to their 20-day moving averages. One could debate that the major stock indexes are forming a technical bottom around the 20-day moving average, compared to another possible market decline. While the "Bulls" are trying to convince us how this is a bottom, I just do not see it. Corporate earnings are still declining, capital spending is still shrinking, and retail sales are still very weak. So why is this a good time to become 100% invested in stocks? I do not think that it is.
I continue with my outlook that major appliances, electronics, auto and furniture sales will remain disaster as we enter into the fall season. Retailers will continue to be forced to offer 0% financing for 6 to 12 months, while at the same time offering deep discounted sales. This will cut sharply into operating profit margins, and increase competitive pricing. My outlook for the holiday season this year remains the same, weak sales, and thin profit margins. This is bad news for retail stock prices, but good for the consumer who will begin shopping for the holiday season in November. The home improvement sector is the exception to the rule of retail stocks. Home improvement sales are performing very well with Home Depot (HD: $47 3/4) and Lowes (LOW: $35 7/8) leading the way. Both stocks should be purchased on market weakness. In the very near term, the charts are suggesting that Lowes could pull back to $28 - $33, and Home Depot could fall back down to the $40 - $45 area. Our research from MarketMavens.com is showing that Home Depot is experiencing very strong consumer traffic in the stores and management could surprise Wall Street when the company reports its financial results for the third quarter. A solid strategy for both Lowe's and Home Depot common shares is to consider writing covered call stock options if you already own these stocks. This would provide an excellent opportunity for growth, plus portfolio income. While the market is expected to remain weak in the near term, the covered call option income will help off set short-term declines, while generating portfolio income.
Another major problem that I am seeing in the economy is that despite increased unemployment, home foreclosures, record personal bankruptcies and massive stock market losses, American banks have actually boosted consumer loans by 10 percent to $1.59 trillion in the last year. The rise is driving the average household to spend 14.3 percent of the consumers after-tax take home pay on debt obligations. As the economy continues to worsen, this picture will become even darker by the end of this year as consumers rack up more debt. Over the past 20 years, personal debt has risen 280 percent, compared to a 165 increase in household income, according to SMR Research. Know one knows just how far the customer can charge up more debt. I guess as long as the banks keep supplying credit at 19% to 26%+ interest rates, that the average family will continue to borrow. The negative July retail sales numbers that were reported this week strongly suggested that the consumers had held back from spending money. Is this a mid summer slow down in retail sales, or is the consumer starting to tap
out his credit card lines? August retail sales numbers will be very important to watch because this report will include the back to school sales.
Frankly, we are witnessing the worst banking scam in our countries history. Banks are enticing consumers in at 2% loan rates, and then increasing the rate of interest to 25.9% after six months. Another scam that the banks have implemented is that banks are promising 10.9% to 12% rate of interest. If you carry a balance of more than 50% of your credit line, or for longer than 6-12 months, then the bank will increase the rate to 18% to 26%. When you apply the annual credit card fee with the annual rate of interest, most consumers are paying over 28% in annual loan costs. It would be better for the stock market over the long term if consumers stop buying on credit, paid off their debt, and began building wealth by investing in mutual funds and/or stocks. These same consumers would have a guaranteed rate of return of 20%+ per year by not carrying any credit card debt at all. As the banks had their hand in the crash of 1929, we could very well see the banks contribute to the decline of the U.S. economy in the very near term by sucking in the retail consumer to the point of personal financial disaster in the coming years.
The "Bulls" continue to wait to the next big rally with the belief that the stock market should rally 9 to 12 months after the Federal Reserve cuts interest rates as many times as it has this year. This is usually true with the U.S. Markets. However, investors should remain cautious because the United States has fallen into a Global economic slow down. The bad news is good news for interest sensitive stocks such as banking stocks, insurance, utilities, and also bonds. It is anticipated that the Federal Reserve will cut interest rates again later this month when the FMOC meets. However, it is too late to purchase these interest rate sensitive stocks because another rate cut is already factored into current stock prices.
I must stress that this fall is expected to be very rocky for the broad stock market, and you should look for portfolio gains 4-12 months from now, compared to the next 1-3 months. Buying stocks while they are lower priced over the next several months is a good way to get positioned for year 2002 growth. The NASDAQ and S&P 500 could re-test the March/April 2001 lows and create an excellent buying opportunity for both long-term investors, and short-term traders.
STOCK UPDATES... Cisco Systems (CSCO: $18) is currently selling at 139 times trailing earnings, and 70 times next years estimated mean average earnings per share of a mere $0.26 per share. The company reported that earnings for the fiscal fourth quarter fell 99 percent to an anemic $7 million. What I find interesting is how Wall Street brokerage firms are trying to support the common shares by stating to investors that the company earned $163 million, or 2 cents per share, excluding goodwill and other items. Give me a break! Are inventors that gullible? Cisco's revenues for the fourth quarter were a mere $4.30 billion, a 25 percent decrease from the same period last year. For the full fiscal year ending July 28, 2001, Cisco lost $1.01 billion, or 14 cents per chare, compared to earnings of $2.67 billion, or 36 cents per share in the previous year. Let me see now. Cisco's earnings and revenues are declining. They are expected to report lower sales and in the two quarters ahead, but investors should pay 70-times next fiscal year's (ending July 2002) theoretical bottom line anyhow. I just cannot justify this logic by the brokerage firms. Cisco will end up trading under $9 - $12 per share in the near term and will not rally to $30 as the brokerage boys have predicted over the last several months.
We once again are hearing brokerage analysts on CNBC trying to convince investors that the worst is over that that the NASDAQ will rally over 3000 by year-end. CNBC needs to start implementing drug-screening tests for their guests because there is no reason for the NASDAQ to rally 50% in the next four months. What is the gang on Squawk Box thinking when they interview these brokerage and investment company guests? Cisco is rated as "AVOID."
When Intel (INTC: $29 ¾) announced last Monday that it is planning to cut its computer processor chip prices by 50%, one must ask, why? The reality is because those computer sales are weak, and Advanced Micro Devices (AMD: $16 5/8) is gaining market share on Intel. AMD has successfully increased its market share against Intel from 13 percent to 21 percent over the past two years. However, this will be the bloodiest of all chip wars. Intel will still have a very tough time because even after reducing its price on the 1.8 GHz chip from $562 to $260, compared to AMD chips that sell for under $100 each. Investors who own Intel's stock are clearly in the wrong place at the wrong time and should consider selling Intel. At best, money invested in Intel's shares is classified as dead money for the next year. Advanced Micro Devices is in another boat. In the short term AMD shares will be weak with the chip sector during the price wars. AMD is very attractive on market weakness Between $14 - $16 1/2, with a twelve-month target of $25 - $30. After reviewing the technical side of AMD, it is possible that AMD shares could decline as low as AMD has been a lot of fun to trade this year. We bought it at $16 and again at $21. We took profits and bailed out at $29 ¾. If we play our cards right, investors could re-purchase on the lows again and be positioned for aggressive growth opportunity over the next 6 to 12 months. The good news is also that when computer chip prices drop, the computer box makers such as Dell Computer directly benefit. We continue to recommend holding Dell for the longer term, and accumulating on market weakness. Dell's common shares offer a great opportunity to implement covered call stock option strategies with.
MICHAEL PINSON... J. Michael Pinson is the founder and senior analyst of MarketMavens.com which is the largest source of independent analysts on the web. He has 17 years experience in the financial industry and has appeared on CNBC and CNN. In 1994 his stock recommendations returned 62% and has been featured in the Wall Street Journal's Pick of the Pros.
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