Cognex Guidance Rated 'R' for 'Realistic'
By Bill Fleckenstein
Second-Half Recovery Thrashes in Net-Net: Overnight, the foreign markets were weaker, and at preopening this morning, our market woke to yet more news that the economy basically missed the number. Fewer jobs were created than expected, though last month's number was revised a fair bit higher. Net-net, the results were slightly worse, as were factory orders.
Index Close Change
Dow 8,313.13 -193.49
S&P 500 864.24 -20.42
Nasdaq Composite 1247.92 -32.08
Nasdaq 100 892.51 -21.08
Russell 2000 376.45 -12.76
Semiconductor Index (SOX) 301.41 -10.47
Bank Index 716.81 -18.25
Amex Gold Bugs Index 113.08 +3.68
Dow Transports 2202.03 -106.23
Dow Utilities 226.07 -106.23
NYSE advance-decline -1,485 -792
Nikkei 225 9709.66 -83.85
10-year Treasury Bond 4.26% -0.140
Glass-Bottom Boaters Observe Sludge, No Bottom: Right off the bat, the market tried to put on a brave face and stabilize, but we quickly had a selloff, followed by a bit of flopping and chopping. But the market just kept leaking, such that after a couple hours, the S&P and the Dow were down 1% and the Nasdaq was down a bit more, with the SOX leading the slide, down about 4%. At the same, the bank stock index was down about 1%, and housing stocks were getting roughed up. While there was nothing cataclysmic about the early going, a look below the surface showed things to be pretty nasty.
Ladies Drink Half-Price at Tonight's Cement Mixer: The early-morning ugliness continued into the afternoon, and things worsened all day long, until we saw a bit of a short-covering rally late in the day. But it didn't amount to a whole heck of a lot, as you can see from the prices in the box scores. It's worth noting that today the housing stocks really got rocked hard. This is an area that I have been watching, to try to determine when market participants started to sell around the economy. Next week it will be interesting to see what happens, in terms of whether the market can stabilize itself.
Away from stocks, bonds were on fire, with the 10-year up a dollar and change. The euro and the metals were also higher.
Tech Line Dancing Features Familiar Sidestep: Turning to the news, there are a handful of items worth discussing. Last night, National Semiconductor NSM announced that it was lowering guidance for the quarter, ascribing most of the trouble to June. But what emerged pretty clearly from the call is that the PC business is weak. Of course, they tried to say, as executives often do, that things have improved in the last couple of weeks. Mind you, that is always the standard line when announcing bad news: Just 15 minutes or two weeks before the call, things have suddenly turned around.
Back-to-School-of-Dead Fish Find Sardines in Lunchbox: Not surprisingly, a few dead fish were trying to find the pony in the room as they inquired about back-to-school. At least the executives at National Semiconductor were kind enough to point out that if you're a components supplier to people who are going to sell things to OEMs for back-to-school, that build is over. National Semiconductor acknowledged the basic hope that its OEM customers could sell enough stuff to necessitate reordering for Christmas, and that perhaps it could expect next quarter to be better. Well, given how I expect the economy to play out, and given my expectations for technology spending in general, I would not be willing to make that leap of faith. In any case, National Semiconductor was weak, and that had its brothers and sisters weak as well -- notably Maxim Integrated Products MXIM , Linear Technology LLTC and Analog Devices ADI .
Shattering Optical Delusions: Turning to a CEO who nailed the problem, and who I just loved for his candor, let's discuss Cognex CGNX , a company that, for those who don't know, manufactures optical inspection equipment. Among the items in its announcement last night, Cognex said that it would be forced to lay off employees, and CEO Dr. Robert Shillman described how difficult this decision was. In his rather strong comments about the economy and what he expects going forward, he was most vocal about other CEOs who continue to whistle past the graveyard and/or tout their businesses when perhaps they shouldn't. I would just point out that since about 60% to 70% of Cognex's business is semiconductor/electronics, semiconductor-equipment bulls ought to pay particular attention to the observations from this man.
Earth to Sunny Jim: Dr. Shillman said, "This has been an especially difficult decision for us because these are hardworking, experienced and dedicated employees. At the start of this downturn, we chose to absorb losses in order to preserve the jobs of these highly valued employees. However, after three quarters of such losses, we have concluded that this slowdown is likely to continue for an indeterminate the italics are mine period of time and, therefore, that it is prudent to reduce our expenses to be in line with the current level of business, in order to return the company to profitability as soon as possible."
He continued: "Many CEOs would follow bad news such as this with comments similar to the following: 'In spite of this downturn, we remain confident about the long-term future of our business, and I am confident that we will emerge even stronger, and better and leaner, than we have been in the past.' But in my view, that is simply wishful thinking; there is little reason for optimism today.
Corporate Cadets, Guide Right: He concluded: "My colleagues and I have spent the better part of our lives building this business, and it is very painful for us to dismantle parts of it today. However, our customers, employees and shareholders should be comforted by our perseverance and by our very strong balance sheet, both of which ensure that we will make it through these very challenging times ... irrespective of their duration." To that, I would only add my hope that such candor becomes a staple of guidance in corporate America.
Journalist Placed on Crediting Watch: In any case, as long as we're on the subject of the economy, I'd like to discuss a couple of editorials in the papers today, beginning with a New York Times piece by Paul Krugman called "Dubya's Double Dip." The thing I find so amazing about Krugman is that despite his understanding of the economic issues, he consistently puts the blame on Dubya. This double dip is not the president's fault. He didn't create the mania, and he doesn't run the Fed . I'm not saying I like some of his domestic appointments any better than the next guy. But let's at least try to keep the issues in the right place: The responsibility for this mess lies with the steward of the money supply ?- the Fed. This is not to absolve others of blame, but without the reckless policies pursued by the Fed for the last five years, and the bailout policies of the last 15 years, we could never have gotten into the soup that we're presently in.
That's No Day Trader, That's My Grandma: Turning to the Wall Street Journal , I would also take exception to an editorial called "The Great Retirement Scare," and in particular to the following quote: "'With stocks plummeting ... Americans' financial futures are in peril,' avers Time magazine, implying that baby boomers will have to work, oh, until they keel over on the factory floor. Then there are those using the bear market to discredit Social Security reform." What the Journal is attempting to do is say that stocks are always best for the long term, regardless of one's starting point, which shows a complete ignorance of the economic history it's chronicled. The paper is using its bully pulpit to try to get Social Security reformed, and it brands those who say the stock market is in trouble as some kind of leftists who want to prevent people from getting rich.
Threadbare-Market Insecurity Blanket: They are right to advocate reform. Social Security is a scam in that there's no money there, and the way the government accounts for it -- using the money to fund current programs and pretending that the deficit is smaller than in reality -- is a travesty. This has been going on for a long time. But to say that Social Security funds should go into the stock market is obviously the wrong lesson as well, because we've seen what can happen to stock prices. Remember, this is supposed to be a safety net.
Apropos of the Prop: I am no fan of Social Security, and especially not of what Congress might intend to do, since, with its own sweetheart deal, it doesn't even have to participate in the program. If we're going to reform Social Security, let's do it intelligently. And let's not suggest that Social Security assets should go into the stock market to prop the assets, as some have suggested. (Now, I'm not saying that's exactly where the Journal is going with this, but many people have.)
Of Nth Degrees and Function Keys: In any case, to repeat for the nth time, the problems that we have are a function of the bubble. The unwinding of the bubble is what ails the stock market, and the stock market is what ails the economy. The economic hiccup we saw in the early part of this year was the consequence of a variety of circumstances that will not happen again. At this time last year, the Fed was promising a second-half recovery. But the fact that it did not take place was forgotten with the tragedy of Sept. 11, on which everyone blamed our problems. Then we saw a little bounce at the beginning of this year.
What Counts, Beyond the Bounce: But that was just a bounce, and now we have to deal with the real problems. (Anyone who wants to review the bounce in the economy can look back at my May 3 column .) In any case, I know I belabored some of the same issues this week, but they are so important that I think it's worth spending the time to at least present what would be dubbed the bear case, though I would prefer to call it the realist case. |
