review of earnings report and bottom indicators:
(see post 20067 for 6/10/98 bottom indicator list)
1. semis have hit bottom and are heading up. The only sector I'm worried about is DRAM. I wish micron hadn't gotten those two sugar daddies to provide cash, though, because it means the overcapacity in the sector will continue through 1999. Still, overall, the semis (inventories, pricing power) look like it is past the bottom. Semi stocks (intc, mu are good proxies for the entire sector) certainly have been heading up. INTC bottomed in June, AMAT in October=4-month lag. In 1996, it was a 6-month lag.
2. We never did hit capitulation with the big semi-equips. Support seems directly proportional to market cap, so only the likes of cymi and asmlf got to capitulation.
3. BTB trending up. Hasn't happened. Since June, I've decided bookings are a better number to follow. And I just decided that net bookings are better than bookings. I think a lot of people were confused by the numbers in the last earnings report. The headlines shouted "new orders 684M, which beat expectations". Look closer. I pay attention to bookings, because it tells me what sales and earnings will be in two quarters. If 99M in previous orders got cancelled, that means 99M less in future business. How much of that 684M is "soft", and will get cancelled next quarter?
4. While we're on the subject of confusing numbers, how about those earnings? They motorolaed them, this last quarter. (To motorola: a verb, meaning: to beat earnings expectations, and post a small profit, by excluding huge charges. The charges are the result of management mistakes, incorrect forecasts, huge amounts of money spent on building capacity and getting ready to make products that, as it turned out, noone wanted to buy.) In a zero-visibility market like semi-equip, even the best managements will make mistakes every cycle, and have to make rapid (and costly) adjustments. This is not a one-time-only-special-never-to-be-repeated event. It's just a normal part of doing business in this industry, and should not have been excluded from reported earnings.
5. PSR, at 2.9 today, is in the middle of my fair-value range (2.0-3.5). The only reason the PSR is above 2.0, is that noone wants to repeat the mistakes of 1996. That is, noone wants the train (rocket, actually) to leave without them. So, by making sure they don't repeat old mistakes, they stumble into new and original mistakes. The market's mistake of 1998 is getting in too soon. I think, when the market realizes that we are at the bottom of a prolonged U-shaped downturn, not a short V-shaped 1996 downturn, that the momentum guessers will abandon the sector, and we'll re-visit the 20s.
6. My biggest concern, now, is the market risk, not the sector or company risk. If not for the market risk, I'd have taken my entire position between 9/1/98 (I issued a strong buy, see post 23713), and 10/23/98 (downgraded to hold, post 25664). The market sentiment today is exactly the same as in Feb.-July 1998. Everyone is saying "we've seen the bottom, from here on out it only gets better, there won't be any more nasty surprises". The market PE (trailing, of S&P 500) is 29 now. The previous peak in July 1998 was 30. The Fed will keep us out of recession, but that's all. Current market valuations assume the following:
a. earnings will go up 10% next year. Won't happen. Noone has pricing power, unemployment is at a level where wage increases will outpace productivity increases. Margins will continue to erode throughout 1999, as they have since late 1997.
b. the Japanese will really fix their banking mess. Maybe. Then again, maybe they will just keep making the same empty promises we've heard the last 8 years, throwing money at the problem without restructuring. AMAT's CEO said "Japan is the key". Everyone agreas asia can't recover if Japan doesn't lead.
c. Brazil won't collapse. Maybe, maybe not. They are looking at recession in 1999, and it remains to be seen if they have the fortitude to cut government budgets and defend the currency with interest rates of 50%.
d. no exogenous shocks. The market is priced for a perfect future. Another Gulf War (in any gulf) will chop a couple thousand points off the Dow.
e. emerging markets are allowed to continue exporting freely into the U.S. Won't happen. Protectionism will rear its ugly head as the trade deficit heads toward 300 billion in 1999. That is politically and economically unsustainable. When it does, but not before, the asian (and latin american, and russian) mess will truly hit bottom.
I really don't care how much higher the markets and the semi-equips go in the next few months, because I remain convinced it will all be given back. I made a big mistake, in selling into this rally (and buying puts) way too early. But, at current valuations, there is nothing to do but wait till the fundamentals reassert themselves. I reiterate my hold rating on AMAT. |
