Contrarian Chronicles
Wall Street needs a dose of reality
The chip business is tough. Higher rates hurt. But the only problems traders see are in South America.
moneycentral.msn.com
By Bill Fleckenstein
Denial, disconnect and enlightenment. In the past two weeks, Wall Street has offered vivid examples of all three, as I'll show readers in this edition of the Contrarian Chronicles.
Let's begin with April 27, when dovish comments by Ben Bernanke, our Fed chairman, prompted the following headlines on Bloomberg: "Bernanke Says Fed May Pause to Await Further Data on Outlook" and "Bernanke Says Fed May Pause, Even If Risks Aren't Balanced."
Speculators' don't-fret mindset
As the day wore on, I was most interested to see if we would get a "sell the news" decline in the various markets. By midday, we had a partial answer; commodities gave up their gains and closed weaker. But while that was going on, stocks were being lusted after.
It's as though the speculative community decided: Let's play sell-the-news by dumping commodities. But let's not do that when it comes to stocks.
Nothing better exemplifies this disconnect than seeing copper down 3%, while at the same time seeing Micron Technology (MU, news, msgs) -- a pure commodity tech stock -- up 3%.
I find it very interesting that all the clever sell-the-news people wanted to sell the news in the market (i.e., commodities) where the news was incrementally bullish. Yet, they wanted to buy the market (i.e., stocks) where the Fed-will-pause news has been the only thing holding it up.
Fed fairy godmother
Another example of that mentality: Last Tuesday, home builder Hovnanian (HOV, news, msgs) was forced to take guidance lower -- thus adding to similarly disappointing news from its brethren Beazer Homes (BZH, news, msgs), Pulte Homes (PHM, news, msgs) and Centex (CTX, news, msgs). We also learned that pending home sales (on top of the most recent data for new-home and existing-home sales) were a little worse than expected.
And yet, as the air came audibly out of the housing bubble, stocks outside of the housing arena were being bought. Wall Street, under the grip of denial, pretended that all will be well, because the Fed is about to stop hiking rates -- as though there's some other bubble to create that will bail out the housing bubble, which bailed out the equity bubble.
Speaking of our government's home-sales data, what I had been unaware of, and am embarrassed to admit, is that the results are in essence not very reliable. As a friend pointed out: "From the headline, right on through the report, you're hard-pressed to find a number that makes the cut as 'statistically significant.'"
Which is why the government can show results (like a reduction in inventories from 6.3 months to 5.5 months) that fly in the face of recent data from the National Association of Realtors and even what the aforementioned homebuilders have admitted to.
No escaping the ecosystem
Turning to denial, I find it rather interesting that two of the big technology stars, Dell (DELL, news, msgs) and Microsoft (MSFT, news, msgs) (and, for that matter, Intel (INTC, news, msgs)), trade as abysmally as they do -- and the rest of tech is ambivalent towards this development. Of course, I think Dell and Microsoft have traded far worse than Intel -- adding to my conviction that Intel has a lot more downside ahead of it.
Up until now, Intel's problems have been sort of Intel-specific, but if there's going to be a problem with PC demand generically (which I expect), there will be a whole other leg down yet to go. Along those lines, a recent report by Gartner Dataquest suggests that the new Windows Vista operating system may be delayed until the second quarter of 2007; Microsoft has said it will come out in the early part of 2007. Obviously, changing that shipping date would wreak havoc with companies connected to the PC industry. (Microsoft is the publisher of MSN Money.)
The fact that the PC industry and the cell phone industry together are responsible for more than two-thirds of chip consumption and the fact there are signs of inventory problems in the cell phone arena mean that the whole chip sector is potentially vulnerable. But you'd never know it, to judge by how chip stocks trade. That's especially so when you look at some of the tertiary and trashier companies.
Apex fears an 'Et tu' from Evo
The best antidote to denial is enlightenment -- which brings me to a complimentary lesson served up by Mr. Market last Tuesday. First, the background: Precious-metal stocks were roughed up, led by Apex Silver (SIL, news, msgs), which has a huge mine under construction in Bolivia. After having just ordered the nationalization of his country's energy sector, Evo Morales, the new president, made a speech Tuesday suggesting that Bolivia's mining companies were next.
At the risk of looking stupid, I'm a little suspect about that. There's a world of difference between operating a natural gas field and operating a mine -- especially something as large and complex as what Apex is building. Having said that, the Bolivian government could obviously raise mining taxes there.
Pain, à la La Paz
In any case, the news was responsible for a drop of about 30%-plus, at one point, in the price of Apex, and the panic it engendered dragged down other stocks in the sector, even companies with no exposure to Bolivia. I guess the thinking was: Every country in South America will nationalize all of its mines, or some variation of that theme.
So, let’s turn to one of those countries: Peru. Two companies I care about with large exposure in Peru, Pan American Silver (PAAS, news, msgs) and Newmont Mining (NEM, news, msgs), have been tarred with the same brush. Newmont and Pan American are being penalized, to some degree, by concerns about Peruvian presidential candidate Ollanta Humala. (He is behind in the polls, though obviously that could change.)
However, folks should be aware that Peru is not Bolivia. There is a congress in Peru. Should Humala emerge as the winner, he would be extremely unlikely to gain control of it. Thus, he would not have the ability to make decisions unilaterally, as Bolivia’s Morales has done. Also, investors in the Peruvian stock market seem not to be as concerned as Americans about the potential prospects for Peru. This is not to say that nothing can go wrong. It is just to suggest that the angst over Peru specifically might be overdone. |
