Charlie, I changed my mind (again <g>) ... my message # 40555 says ... Charlie, I know that you will be pleased that I am starting (barely) to get a bit bullish on equities (although I have never been anything but bullish on Scotty and the boys - even during periods that I owned no SUNW stock) ... I just bought 1,000 shares @ $34.00 after-hours after listening to Mike Lehman's part of the conference call ... that gives me 2,000 @ an average cost of $45.43 ... on the other hand, I bought a June 2001 S&P 500 'put' today, which is the first half of a straddle I will fill shortly ... I still have two March 2001 S&P 500 'puts' that I will sell sometime this month ... plus my big position in Abiomed ... expect great news there (and soon) ...
I am still bullish on SUNW the company, their products and management ... but I have gone back to being the full 'bear' that I have basically been since January, 2000. I feel that I made a mistake in doubling my SUNW position to 2,000 shares during SUNW's conference call on Thursday, so I sold it all at $32 Friday am. Remember that I had almost a 10 bagger from May, 1997 through January, 2000 so I am not at all complaining.
I now hold Abiomed, two March 2001 S&P 'puts' and one June, 2001 S&P 'put' and lots of cash. I have also changed my mind about the straddle. I will buy one or two more June 2001 S&P 'puts' in the next week or two as I sell the two March 2001 S&P 'puts'.
Basically, I do not like the action of the markets. We may not head down with another sharp drop right away, but I believe we are in a bear rally. Investors who are looking across the valley to economic recovery are hoping and guessing, in my opinion. None of us yet know how deep the economic slump will be - we do not know how severe it will become, nor do we know where or when the slump will bottom, or how long it will take to recover.
I have attached three URLs ... (1) The latest views of Morgan Stanley Dean Witter Economists, January 19 (which I have been reading daily for at least a year). (2) The January 19 "Contrarian" by Bill Fleckenstein column (I know Bill is pretty extreme, so I do filter his comments, which I read daily). (3) I have copied and pasted the January 18 Market Observations from ContraryInvestor.com that I subscribe to (unfortunately, it includes only the text and not the graphs).
msdw.com
siliconinvestor.com
ContraryInvestor.com
Market Observations
ALL ALONG THE WATCHTOWER
The Evening Drops Its Silent Curtain As The Sky Turns To A Deeper Blue...We are accumulating more evidence by the day that the general economy is slipping into a deeper blue economic funk. Numbers that, again, have not been seen for a decade. Numbers either bordering on or at levels seen in the last recession. Especially for the Old Economy crowd. Because academic proof is only given in the rearview perspective, we're willing to bet the Old Economy tier in this country is already in a recession. We're sure you saw 4Q 2000 momentum darling MMM warn yesterday. Looks like the chart breakout players were a bit premature on that one. CAT today reinforced slowing Old Economy drumbeats.
The industrial production number reported yesterday witnessed the largest one month drop for the number since the 1991 recession:
Basic manufacturing is shrinking before our eyes. Currently decelerating at an accelerating rate. The good news is that price inflation in the manufacturing sector is dead. The bad news is that price inflation in the manufacturing sector is dead. Bad news for the manufacturers, that is. With the following circumstance as further characterization of the current environment, price increases at the final customer level will be hard to come by:
Outside In The Cold Distance...Capacity utilization for manufacturing plummeted to below 80% on yesterday's report. Again, a level not visited anytime in the last nine years. Moreover, declines in manufacturing output cross all lines - durable and non-durable goods. With price inflation low, manufacturing output deteriorating, and utilization naturally falling away, a cold wind is blowing across the land of gross and net profit margins for Old Economy America. Clearly costs of the energy component in operating big fixed asset plant is rising. This is a profits squeeze scenario simply right out of the textbook. As we have guessed in previous discussions, a 25 basis point FOMC rate cut at the end of Jan is a virtual given. Does the Fed have the stomach to make it 50 bp's? (We don't mean a strong stomach, but rather a queasy one.)
The answer to that question is "who knows?" Anything is possible. Especially after further vindication of
slowing seen in the Philly Fed numbers released this morning. The Philly Fed index of manufacturing activity
fell from a -4.2 to a -36.8 number December to January. For what it's worth, it's not good and was well below
expectations. There is literally only one period in the last 20 years that was lower. That was the recessionary
period of December 1990.
New orders fell. Shipments fell. Unfilled orders fell. And maybe most importantly, forecasts fell sharply indicating firms see the slowdown as anything but temporary. Suffice it to say, weakness across the board for this measure of manufacturing. Weakness characterized by speed on the downside. We've heard a number of pundits blame the weather for poor performance. Fair enough. But, do you think that in the forecasting component of the Philly index, manufacturers are predicting winter weather for the next six months? We didn't think so. Based on this number today, the upcoming January National Association of Purchasing managers index ought to be a painful sight.
Don't Shed Any Tiers...For technology, that is. At least not yet. The implosion in manufacturing America currently stands in a bit of juxtaposition to the New Economy technology tier. Industrial production for tech rose at an annual rate of just over 15% for the month of December while everything ex-tech declined at an annual rate of 18%. As we spoke about last Tuesday, speed is the appropriate characterization of this downturn. Now that Old Economy America is gasping for growth breath, what will the fallout effects be on New Economy America as we move forward? To us, that is one of the key questions of the moment for both the continuation of the real world economic downturn as well as for stocks.
As you know, the last five years or so were about nothing if not building capacity in techland. Just what do you
think all those IPO's were for? Well, yes, they were partially for putting gobs of money into the hands of the VC
community and company managements, but there was also an incredible amount of capacity building taking
place. Even in a year where tech stocks imploded like 2000, plenty of IPO and VC dough was injected into the
industry:
Even in a year where not only were tech stocks being hit, but the basic near term profit growth potential of the
sector was being called into question, tech companies expanded capacity at an eye popping growth rate relative to overall earnings growth:
So now what? Tech company customers like the Old Economy industrial outfits are coughing up blood instead of cash flow. The last time we checked, tech companies were still only accepting cash flow to deliver tech hardware equipment and software. Blood was not even an acceptable receivable. Well, the following chart may be a bit instructive in terms of what comes next. Already capacity utilization is beginning to fall in certain areas of tech production. Formerly major areas of tech production:
It seems remarkable, if not a bit reckless over the near term, that an Intel, which apparently can already forecast three weeks into the first quarter that total 1Q 01 revenues will fall 15% sequentially, is going to spend $7.5 billion on additional capital expenditures this year when the production utilization rate of many of its customers is shrinking. This may be too broad a statement, but the tech world seems to be facing an overcapacity problem at the moment. Increasing capacity expansion in 2000 set against a utilization rate falling for the first time in three years doesn't exactly spell pricing power ahead. Moreover, this is an industry whose products are usually characterized by falling prices from initial the shipment of the first units. Is the implosion in manufacturing, production and utilization among the Old Economy companies foreshadowing a similar, if lagged, result in the New Economy tier? The final verdict lies ahead. Are happy days here again after a short economic lull, or will this end in a second round of tiers? The fundamentals of the overall economy seem to suggest the latter, although tech stock prices seem to suggest the former.
All Along The Watchtower...As we suggest all investors consider, and as our contrarian rigor dictates, we need to address key points as to what could turn the current macro or generic economic slowdown around or at best achieve some type of stabilization. We're not saying it's going to happen right away, but rather that all points of view need to be considered. Consider it prep work for helping to identify a future turn. Likewise, it can potentially aid in a current assessment of how deep the downturn may run if the economy does not respond to these "refueling efforts", if you will. From where we stand on the watchtower, here's the view.
Two Riders Were Approaching, And The Wind Begins To Howl...There is simply no question that the Fed has arrived on the scene. The reliquification process in the economy has begun. The monetary refueling station is open for business. Check the oil, wipe the windows, check the tires, increase the money supply. Will there be anything else today, sir? Have a safe journey.
In addition to direct interest rate reduction, "open market" operations by the Fed have been set to full throttle. We showed you this chart on Tuesday, but believe it's an important review as the recent growth spurt in money supply has been taken to the limits seen at the heights at any time over the last decade.
As this liquidity finds its way into the banking system and brokerage lending operations, the magic of the
multiplier effect has the ability to turn a river into a torrent. These measures are out in the open. Money supply
growth is a number reported each week by the Federal Reserve. As you know, knowledge of movements in
interest rates is simply commonplace. From the watchtower of precedent over the last five plus years, these
measures deserve attention in their affects on stock prices, consumer spending, etc. Money supply activity is a
bit more immediate in nature as interest rate changes have lagged influences on the real world.
The other rider approaching the refueling outpost is the Bush administration with it's perceptual as well as
altruistic mission of lowering personal tax rates for the fair citizens of this land. Once again, let's have a look at
the numbers behind the message. Thanks to the folks at the National Taxpayers Union for doing the heavy
numbers lifting for us. The following table compares the proposed Bush absolute dollar tax cut with similar
actions taken over the last 40 years by other chief cookie cutters:
Not quite as meaningful as prior actions relative to the measure of the total economy at each point in time, but a
refueling activity nonetheless. As you know, every bit helps. We need to monitor whether these two riders can
calm the cold, howling winds of the economic slowdown. As always, we'll be watching rate of change in the
economic numbers for any type of clues to stability or calming.
Lastly, given the synchronous nature of the global downturn we have referred to in the past few weeks, monetary ease broadly seems a prerequisite to a global economic reacceleration. As we mentioned on Tuesday, UK authorities passed on lowering rates this month. Likewise our guess on the ECB came true - no rate relief for now. Very possibly, the ECB is feeling a bit better about the EURO.
Monitoring The Chip Sector...In this case, wood chips. Clearly, a turn higher in non-oil commodity prices will be an indicator that the domestic (as well as international) economy is firming. The following chart is the PPI for lumber. We all know homebuilding and general construction has been strong over the past year. At the moment, interest rates in general are quite low and the mortgage rate on a 30 year conventional mortgage is one of the lowest of the last three decades. Why, then, are lumber prices hitting new lows? We would take a turn in non-oil commodity prices as a leading sign that the economy was firming.
So far, this evidence is non-existent.
Current Events...Clearly the cost of energy is of major concern to profit margins. And we're not talking just about Fortune 500 corporations. As you know, the official ContraryInvestor watchtower is the San Francisco Bay Area. As you may or may not know, the rolling blackouts due to the energy fiasco in the State of CA are real. Local businesses will be tagged hard with dramatically increasing energy costs. If they can't pass it along in pricing, their profits will suffer mightily. If they can pass it along in pricing, now isn't that inflation? (even in the New Era?). Either way energy costs are a major concern. We have to believe that a turn in the economy to the upside will be accompanied by some type of relief in energy costs. Otherwise, inflation is surely moving much higher. Much higher than the current US Treasury yield curve anticipates. Behold the Goldman energy index:
It's not just in California that this problem is smoldering. Across America in a colder than normal winter, energy
costs are rising. Farmers are already making noise about not planting as much acreage in the upcoming season due to the inflated fertilizer prices they are experiencing, coupled with the energy costs involved in water irrigation (electronic pumps). The main feedstock in the production of nitrogen fertilizer is natural gas. Whoops! Can we call that "grassroots" inflation?
We will be watching the price of natural gas and crude in trying to guage a time and place where incremental
positive economic change can occur. The fact that OPEC is becoming much more price sensitive to global crude in terms of production timing does not warm our hearts. You saw the news yesterday of OPEC production cutbacks. Now that the dollar has tumbled a touch, so have OPEC's dollar revenues for crude. Do you think they are feeling sanguine about that?
Refi-ning The Outlook...The last little touch of liquid refreshment in the current environment is the potential for housing refi activity to put a few more dollars in the pockets of consumers. Current refi applications have shot to the moon given the low mortgage interest rates. (Look out GSE balance sheets, here we come.) The question of the moment is whether successful refi participants will:
A) Lower monthly payments. (We're currently looking for snowballs in hell on this one.)
B) Spend the take-out money on Stocks 'N Stuff. (We're watching.)
C) Actually pay their heating bills when due as opposed to an installment plan. (Do we smell marketing opportunity for the financial services industry here?)
Clearly refi activity will help liquefy the consumer to some extent. It's all a matter of where that liquidity will flow as to how the real economy will respond.
Break On Through To The Other Side...Lastly, the stock market will be a key indicator as to where the economy is headed. Maybe we are dead wrong, but we still place huge faith in the wealth effect being alive and well. Question: Is it simply a mere coincidence that one of the fastest drops in economic activity seen at any time in the last decade coexists with one of the fastest drops in the NASDAQ seen at any time in the last decade? We think not. If liquidity finds its way back into stocks, it is conceivable that the economic self reinforcing mechanism of higher stock prices sparking consumer confidence could lift the economy. As you know, the question at that point would be to what extent.
The exercise of viewing the from the watchtower is not necessarily undertaken just to sit back and wait for an
economic turn. Most assuredly, it eventually will come. It's just what's in between that counts at the moment. A
lot of the same medicine is being applied to the economy as has been applied in crisis periods (real or imagined) past. Will the monetary and fiscal medicine be able to bring the patient to a full recovery, and over what time period? Or have conditions changed and the old medicine have negligible influence ahead? The process is in motion. One conviction we do hold strongly at this point is while this process plays out, there will be plenty of e-motion in the financial markets.
Lastly, I read "The Great Crash, 1929" by John Galbraith (1954) last night. I would confess that that wonderful, well written and sobering story has also made me more cautious (at least for now).
Disclaimer: The above is my personal opinion. I recommend that you do not base your investment decisions solely on any one person's views or analysis (including mine). Do your own research and take personal responsibility for your investment decisions.
Ken Wilson |
