The Market Rap (great greenspan rant at the end by fleck!)
William A. Fleckenstein
05:45 PM 10|17|2001
IBM shows its colors: big and blue and red all over.
There's a lot to cover, ladies and gentlemen, so buckle up. Overnight, the foreign markets were rejoicing on the back of our earnings results. So, a silk purse was spun out of a sow's ear in the form of what IBM and Intel had to say. With about half an hour of pre-opening, the Nasdaq 100 futures were up about 3%, and the S&P and the Dow were up about 1%. But when the market opened, it was unable to match those gains because more of Senator Daschle's staff were found to have anthrax, a spore was found in the ventilation system, and Congress was shut down. That took the bloom off the rally, sending the S&P down 0.5% on the day and producing a similar reaction in other indices. Now if anthrax scares and buying opportunity don't fall from your tongue in the same breath, you were obviously not part of the dip buying that followed the news from Washington. At least, that's what the tape was indicating in the early going. Finally, in the department of spinning a sow's ear into a sow's ear, despite the "wonderful" news from Intel and all the dead fish flopping around to re-recommend the stock, the Sox was initially down about 1%.
Why The Sell? Hard To Tell The early-morning dip was just a precursor to the rout that ensued over the course of the day. We had a couple of attempts at bounces, but they were to no avail in a day that saw steady selling throughout. For all intents and purposes, we opened on the highs and closed on the lows, but check the box scores for the particulars. Of the sub-indices, the leader to the downside was the Sox, down more than 7%. All in all, it was not a good day for the bulls. The big mystery was how much of the selling was due to the fact that stocks were ready to come down after the exhaustion of running up too high, and how much of it stemmed from anthrax-related anxiety. That's really hard to tell. Maybe we'll be able to get a better feel for that over the next few days. The problem continues to be that stock prices are in the aggregate far too high, and businesses are not good and not liable to get better anytime soon.
Away from stocks, the metals were slightly higher and fixed income was slightly lower. The dollar was quietly firmer.
Whispering Sweet Earnings Nothings There is a fair amount to discuss in today's news. Let's begin with IBM, whose game of "Beat the Number" has been well described. It's worth noting that a couple of months ago, IBM was supposed to earn around $1.15 and revenues were expected to be $22.5 billion. They came in at about $20.4 billion. Earnings were $0.90, supposedly beating the $0.89 estimate. What I'd like to know is, where was the preannouncement? You didn't see it either? That's because there wasn't one. IBM engages in the game of whispering to analysts to guide the numbers down, a practice that was supposedly outlawed by Regulation FD. But in this pathetic environment of using whatever means necessary to talk up stock prices -- in the misguided name of patriotism -- no one seems to care about what IBM did.
Magical Thinking Is The Province Of Children And Idiots Of course, that goes hand-in-hand with the SEC relaxing the rule that barred companies from buying their own shares in the first and last half hour of trading. (The regulation was made to prevent companies from influencing the stock prices and prevent people from believing something that wasn't going on.) Post-September 11, all that seems to have gone by the boards. It's as though "the powers that be" have decided that any means justifies the end of higher stock prices, to promulgate the fallacy that as long as they're higher, all is well and nothing can be wrong.
October Is The Accrualest Month of All In any case, it appears that IBM made its number by upping its accrual rates in the service business. All of the hardware businesses have been weak, while the service businesses grew 5% sequentially, one of the slowest rates in some time. But surprise, surprise, IBM's service income jumped 20%. With respect to accrual rates in the service businesses, there is no dearth of shenanigans for deciding how to match revenues and expenses. That appears to be how IBM did what it did.
The Guiding Lightheadedness IBM stock was up about 4% in the early going. People were smiling because the company did not see fit to lower the guidance for Q4, which is going to be even more problematic than the original expectations were for Q3. Why? Well picture yourself a fly on the boardroom wall in Armonk. Observe "the powers that be" resolving to engineer expectations down, rather than lower expectations. From here it's a simple matter of "making" the estimates, and yet another successful round of playing "Beat the Number." But, a losing streak may be in the offing. It is exceedingly unlikely that IBM is going to make the $1.39 mean estimate that analysts have set for it.
Intel Visits The Shrink Intel was a slightly different case. There was nothing spectacular about the company's numbers, other than that it didn't miss its previously set guidance. However, when one looks at Intel's Q4 expectations, it is now apparent that Q3 and Q4 will not produce the fabled second-half story that people have been expecting. It seems that Intel benefited by a little change in inventory practices: Apparently, some customers have decided that rather than pursue just-in-time inventory management techniques, they will follow a just-in-case strategy of accumulating a little extra inventory. Thus, Intel sales to the distribution channel appear to have picked up. That is the reason why Intel's inventory shrank and its numbers turned out as good as they did.
Blank Or Get Off The Bubble Make no mistake about it, ladies and gentlemen. By the time we get to Q1, there is only going to be an air pocket for Intel, as demand shows no signs of picking up. Of course in the interim, we will probably hear all kinds of stories about how Windows XP is going to drive demand, but that won't be the case. Windows XP will be even less of a demand driver than Windows 2000 was, and you know the latter to be more or less a nonevent. The question is, how long can people pretend that $0.10 a quarter is enough to prop up a $25 stock price? It seems that people are rather forgiving in terms of comparing today's earnings with what went on during the bubble. They appear to be giving companies a free pass, yet they seem to want to have the valuations from the bubble days. Once again, investors want it both ways. By the first quarter next year, Intel's $0.10 a share is liable to go well into the single digits. That is the same place the stock is ultimately headed for, short-term rallies notwithstanding.
No Bottom Yet In Downward Revisions Of Productivity Growth In today's New York Times, there was a very fine article entitled "Deepening Wrinkles in the New Economy" by Louis Uchitelle. (Registration required.) A report by management consulting firm McKinsey says that productivity growth was a mirage. I'd like to share a few choice vignettes from the Times: "During the boom years . . . many economists, journalists and Wall Street analysts declared that a new economy had emerged, one in which the productivity growth rate -- and standards of living -- had improved more rapidly because of information technology." The McKinsey report points out that the boom has turned into a bust in need of reevaluation. Uchitelle goes on to discuss more of the McKinsey findings: "In this post-boom period, in which the stock market bubble has burst, exuberant business investment is disappearing and Labor Department revisions have reduced earlier estimates of productivity growth. More downward revisions are expected."
Greenspan, Meet McKinsey All of that is certainly true and right on the money. The report notes that productivity numbers are falling back toward 2%, down from the 2.8% that we supposedly saw in the late 1990s, but up from the 1.4% of the previous 20 years. While 2% is an improvement over what came before, the Times story notes that it is "a far cry from the optimistic proclamations of an increasingly efficient new economy, an optimism still maintained by Alan Greenspan, [who] is counting on a higher productivity level to help limit the damage from the recession." Apparently, there is a new study coming out from the Federal Reserve Bank of New York that may tend to corroborate these weaker numbers. It should be interesting to see if that actually occurs and how the Fed deals with its own New York branch if it has data different from what the Fed wants to believe.
Faster Computers, Slower Consumers Lastly, to explain everything succinctly so that people who haven't been paying close attention kind of understand what was happening, the story talks about the productivity surge: "The assembly of computers and the manufacturing of semiconductors contributed significantly to the productivity surge in the late 1990s. But that was mainly because the time spent in production remained essentially unchanged while the speed of these devices increased several fold. (The italics are mine.) As speed rose, so did 'quality,' and therefore dollar value as measured in the government's accounts -- and therefore worker output." William Lewis, the director of McKinsey's Global Institute, opines, "Computer speed is likely to increase at the same rate in coming years, but people and companies are likely to buy fewer computers." He believes that's the case because the private sector no longer needs additional speed.
Storing Chips For Nuclear Winter All of these points, which we have been making for a long time, tie into the whole technology spending boom we had in the bubble, and the misallocation of capital that went with it. This is why PC vendors and the attendant chip suppliers face the secular trend that we and Fred Hickey dubbed "Nuclear Winter" six months before it occurred.
Off-Key Oratory If that wasn't stunning enough, almost right on cue Easy Al strode into Congress and delivered a speech today replete with stunning quotes that prove, beyond a shadow of a doubt, that he is completely clueless and doesn't understand the past (much less have any sense of where we are going). That is of course why I continue to refer to him as a menace to society. To give you some examples of his off-the-mark oratory, early in the speech he says, "Industry analysts suggest that motor vehicle sales were running close to August levels, and chain store sales were only modestly lower." I bring up that quote because once again, he appears to be relying on the dead fish community for his analysis. But where he really gets into trouble is when he starts talking about the spending boom: "Indeed, the exploitation of available networking and other information technologies was only partially completed when the cyclical retrenchment of the past year began. High-tech equipment investment at elevated rates of return will, most likely, resume once very high uncertainty premiums recede to more normal levels." (The italics are mine throughout.)
A Chicken In Every Pot, A Computer In Every Nook And Cranny Now, this is preposterous. Every nook and cranny in America was filled with computers and networking equipment, as we had the massive build-out for the dot.com boom that has now gone bust. Of course he believed there was going to be a new era, so we weren't supposed to have cyclical retrenchments -- two complete faux pas right there. Then he went on to opine, "The level of productivity will presumably undergo a one-time downward adjustment as our economy responds to higher levels of perceived risk. But once the adjustment is completed, productivity growth should resume at rates in excess of those that prevailed in the quarter-century preceding 1995."
America The Beautiful, Not the Clueless What he misses is that a supposed surge in productivity was largely illusory, and now we are ratcheting back to lower levels. He just cannot see the face in front of his nose. Lastly, he goes on to say, "For the longer term, prospects for ongoing rapid technological advance and associated faster productivity growth are scarcely diminished. Those prospects, born of the ingenuity of our people and the strength of our system, fortify a promising future for our free nation." So, there we go. He's citing things that have always been true about our great country. This is nothing new and it is certainly not a reason to expect that productivity growth rates ought to ratchet up prospectively. The man is clueless and shouldn't be in a position of such power. |
