Fleck: Awaiting Tech Miracle in Gulf Mirage
By Bill Fleckenstein
02/07/2003 17:43
Last night, preannouncements from EDS EDS and Tech Data TECD had implications for the tech sector (more about that below) but no impact on our overnight futures trading. Asia was rather quiet, save for South Korea and Taiwan, which were both hit hard again, down a couple percent. Europe was doing not much of anything when, lo and behold, the employment report printed better than anticipated. The jobless rate dropped to 5.7% from 6%, and 143,000 jobs were added, vs. expectations of 68,000. On that news, the futures immediately catapulted higher, roughly 1% apiece.
The White Noise in Pink-Slip News: When one looked behind the numbers, there were reasons to be skeptical. Last month, it turns out that we lost about 55,000 more jobs than previously thought. Also, one could argue with some plug factors regarding jobs in the retail sector particularly. For a variety of technical reasons, this particular employment report had more noise than usual, but suffice it to say, the headline was deemed to be good news.
On many, many Fridays when the employment report was bad, we have seen the market open under a ton of pressure and then manage to go violently higher. Before the open today, however, I thought there was the potential for just the opposite to happen. My antennae were up when the market opened much weaker than the futures had been indicating, and in fact, a selloff is what we saw. A couple hours into the day, the Nasdaq led the slide, down 1%, likely due to last night's preannouncements, and the S&P and Dow were down about half that much.
Box Scars: After the sharp slide of the early morning, the market slid more slowly for the balance of the day, until we had a small short-covering rally in the last half hour. But for all intents and purposes, the market closed on its low. A quick look at the box scores shows that the Nasdaq outperformed the Dow and S&P to the downside. In the subindex category, the SOX was the loser, down a couple percent, but given the news, it could have been worse for that index. Away from tech, the selling looked pretty even, with nothing worth noting. Biotech stocks did a little bit better on Johnson & Johnson's JNJ potential buyout of Scios SCIO . All in all, today was a day where once again, they didn't go down well, but they certainly didn't go up well. Today's leakage was a little bit worse than what we have been seeing.
Index Close Change
Dow 7363.96 -65.34
S&P 500 829.64 -8.51
Nasdaq Composite 1282.46 -19.27
Nasdaq 100 957.04 -13.51
Russell 2000 358.94 -5.80
Semiconductor Index (SOX) 260.91 -4.95
Bank Index 711.64 -5.48
Amex Gold Bugs Index 139.66 -1.26
Dow Transports 2138.42 -42.27
Dow Utilities 199.85 -3.56
NYSE advance-decline -1,140 -228
Nikkei 225 8448.16 -36.03
10-year Treasury Bond 3.92% -0.021
Away from stocks, there was a good deal of motion. Fixed income saw sizable swings before finishing up slightly. (Amazingly enough, the currencies were kind of quiet today, with the dollar finishing unchanged vs. the euro.) The metals saw a lot of action as well, with gold up at one point almost $5, before closing down 20 cents. It's worth pointing out that the Comex increased margin requirements for gold. Previously, margin requirements had been $1,000 per contract. They are now $1,500. To put that number into perspective, $1,000 equates to about a $10 move in gold. So, given gold's recent volatility, I'd view this as a normal response by the exchange, and not some attempt to "impede" gold's progress.
TECD's BTW: Turning to last night's preannouncements, EDS guided lower on the back of "continued weakness in technology spending and the general economy." Tech Data, the world's second-largest technology distributor/reseller, sneaked a pretty ugly preannouncement into an acquisition press release: "Due to uncertain demand for IT products and margin pressure the emphasis is mine , coupled with our previously announced investment in the harmonization and upgrade of our European systems infrastructure, earnings for fiscal 2004 could decline by as much as 15% to 25%."
That, ladies and gentlemen, is a big preannouncement -- a rather unmistakable signpost for how bad things are in technology world. Now, this should not be a big surprise to anyone who has been paying attention and attempting to connect the dots. It will only come as news to the dead-fish community and its audience of unquestioning listeners.
Acolyte-Weight Reasoning: In any case, Tech Data opened by taking it on the chin, down about 20%. Ingram Micro IM , the world's largest distributor/reseller, was down about 50% in the early going. But on the opening, in a show of complete bravado/cluelessness, CDW Computer Centers CDWC , which is a stock I have remained short, was briefly up on the day. I took that opportunity to add to my short position, because I thought the notion of that stock being up was so preposterous.
To put this into perspective, Tech Data and Ingram Micro have collective revenue of almost $37 billion and a joint market cap of about $2.5 billion. CDWC has revenue of about $4 billion but a market cap of $3.5 billion. It's very clear that a price war is certainly happening in PC-related goods. The reason for the price war is no demand. No demand leads to price wars; price wars lead to margin pressure. Word of margin pressure is something I expect we will hear from Dell DELL when it gets around to telling us about its quarter. The news from EDS and Tech Data also has implications for CDWC, Dell, IBM IBM and, by extension, Intel INTC .
Regimen Change: Were it not for the potential war's power to induce bull amnesia and belief in a second-half recovery, I would be massively short technology stocks right now. I have been kind of sitting on the sidelines, with just my CDWC short, but today I decided to reinstitute my shorts in most of the stocks that I just mentioned. I may only be short them for a few days, but in light of last night's preannouncements and the inability of the market to rally, I felt it was something I needed to do. This should not be viewed as a recommendation for other people to follow, but just an explanation of my thought process, for what it's worth. |
