<<We need MASSIVE TAX CUTS, huge infiltration of Liquidity and Moderate Tax Rate Cuts and we NEED IT NOW.>>
JDN ... you sound like Joey "the Batman" of Gruntal, Larry "the trickle down man" Kudlow and Abby "the pantload" Cohen of Goldman Sachs ...
... from Contrary Investor last night (subscription only) ... sorry I can not replicate the charts, but you will get the idea ...
ContraryInvestor.com - Market Observations - 03/08/01 "It's Your Favorite Foreign Movie"
Hero's Are Hard To Find...But that clearly does not stop the folks on the Street from continuing to give it a try. When yesterday's hero's have used up their respective 15 minutes of fame, it's simply on to the next thing. For Abby Cohen, it appears she still has a few minutes left on the clock. Despite have buried dutiful followers over the last twelve months. The CNBC crowd was naturally gushing yesterday when Ms. Cohen raised her recommended equity exposure from 65% to 70% of portfolios and proclaimed the US stock market undervalued. You may remember that she "called it" last year in dropping from 70% to 65% last March. Whew, just in the nick of time. After all, that's why Street investment strategists get paid the big bucks. To make gutsy calls like these.
It does seem a bit odd that a good number of also prominent Goldman stock analysts just got through trashing a number of former darling stock recommendations just last week. Now it's time to up equity exposure? This was summarily explained away by the fact that Ms. Cohen is looking out 6 to 12 months as opposed to the analysts that are more "short term" in nature. Long term, huh? Hmmmmm. Well, just what was Abby recommending 12 months ago? Wouldn't you know that we just happen to have the "Super Seven" long term stocks she recommended early last April. Have a peek:
Stock Recommendation
Price 4/6/00
Price 3/7/01
% Gain/Loss
CSCO
$ 71 13/16
$ 24
(66.6) %
DELL
51 9/16
25 15/16
(49.7)
EMC
65.11
41
(37)
FDC
45 3/8
58.95
29.9
ORCL
41 3/32
18 5/8
(54.7)
PMCS
185
38 1/16
(79.4)
TER
96 1/4
36.18
(62.4)
Arithmetic Average
(45.7) %
We're certainly not intending to pick on poor Abby by any means. As you know, she has more than plenty of
company on the Street in terms of blowing the bullish horn all the way down. It does seem funny, though, that all of the best of the best Street strategists (as voted by Institutional Investor participants) completely missed the worst NASDAQ showing in its history last year and the worst Dow and S&P performance in decades. You may remember that almost one year ago one of the last remaining bearish strategists on the Street, Charley Clough at Merrill, was made to walk the plank. Just as soon as the Street was dutifully swept of the last remaining bear strategist (Barton Biggs doesn't count. He's not going anywhere unless he wants to.), it is nothing short of poetic justice that the beginning of the bear market ensued within months.
Want to really call the bottom on this bear market? Simple. It will end within months of the last remaining perma-bull Street strategist being pushed off the side of the ship in favor of a cautious replacement.
Deleveraging Revisited...It's just our luck that as soon as we suggest that we may be witnessing the beginnings of household deleveraging in our Tuesday piece, the Fed comes out and tells us, "not so fast". At least that's what the consumer credit numbers released on Wednesday have to say. Analyst estimates of $6.5 billion in one month growth were only off by a small rounding error - $9.5 billion of error to be exact. The $16 billion one month increase in consumer credit was evenly spread between revolving and non-revolving debt accumulation. Cards and cars.
Concurrent with the consumer credit report, the Fed Beige book also released yesterday found that people were paying off smaller shares of their credit card balances due to home energy bills having spiked recently. Conflicting signals abound at the current time as both consumers and the overall economy adjust to a slower pace of economic activity. In looking at the recent consumer confidence numbers we have shown you with each successive report, a spike up like this in credit would not have been on our radar screen. Given that this monthly experience is one of the top three monthly numbers in the last five years, suffice it to say that our guess would be that this type of leverage accumulation is clearly unsustainable moving forward.
Chain Of Fools?...As you know, retail sales in the month of January were a bit better than fourth quarter 2000 trends would have suggested. As we opined at the time, our belief was that extraordinary price discounting moving into retail January fiscal year end time periods was the catalyst. Today's 2.8% rise for February pretty much met consensus expectations on the surface, but the components tell a story not exactly wildly bullish for the future. And not exactly bullish for consumer confidence as a whole.
The important message in today's report is that strength was seen in the discounters, the so-called wholesale
outlets and the drug stores. Except for the drug stores (due to the rising price of drugs), all low end retail sales
growth. Conversely, the department store and specialty store chains experienced just the opposite. Almost all of the majors (Sears, Dillard's, May, Saks, Gap, Ann Taylor, etc.) saw year over year declines. Kurt Barnard of the respected Barnard Retail Trend Report characterized the department and specialty apparel performance as follows: "Terrible is a kind word." What does a consumer shifting to the low end of retail tell you? For what it is worth, this is exactly the experience witnessed during the last economic downturn/recession. The first move is a shift down in price points. The second is a contraction even at the low end.
A Little Too High On Life?...It is important to remember that drug store comps have been running in double digits for some time now. In February alone, drug store comps were up 11.3%. How can this be relative to retail performance as a whole? Drug pricing, plain and simple. Inflation in drug prices over the last few years has picked up quite handsomely and the retail drug stores have been one of the primary beneficiaries. We've been meaning to discuss this for some time anyway, the retail sales report just provides us a convenient segue. For what it is worth, extremely long time readers of CI may remember that we recommended Longs Drug Stores way back in 1999 when it had collapsed from almost $40 to our $24 buy point. We never included it in the Managed Account Section as it was purchased prior to the year 2000. We are selling now. We may be too early, but we put fair value on this one at no more than $35. It's our view of the world that the drug stores are way ahead of themselves on a valuation basis. Likewise, what is sure to be increasing scrutiny of drug pricing in a broader economic slowdown will not be a good thing for the retail drug industry.
Yes, excellent earnings track record. Yes, demographics play into their favor. Industry leading management. Top notch margins and ROE. The question is, does one pay in excess of 50x's earnings for a company with a forward earnings growth rate in the mid to high teens? For a company selling at close to 45+x's cash flow? How does a company with pro forma sales of almost $25 billion grow that number in the mid teens consistently over the next 5-10 years when it and its large cap public competitors do about $65 billion in total pro forma sales right now? Enough ranting and raving. Walgreens and the other drug store companies have been major beneficiaries of the new "green light" strategy of investing. No more momentum. No more valuation concerns. No more technical analysis. Just buy whatever is green on the screen. Sorta makes it easier, now doesn't it?
If we were a stock touting service, we'd be telling you that WAG has a piece of paper with the message "short me" pinned to its back.
It's Your Favorite Foreign Movie...It amazes us that by and large the mainstream press, the CNBC's of theworld, and the wonderful Wall Street brokerage houses largely focus on the domestic economy when discussing the implications for the domestic equity market. The Ed Hyman's of the world and the Steve Roach's of the world look at the big picture, but we do not remember Abby mentioning the word international at all in her soliloquy yesterday. Just last night, Finance Minister Kiichi Miyazawa told the Parliament in Japan that "Japan's finances are abnormal, its fiscal position is near a state of collapse" (more on this in a minute). This morning, we could only find the text either from an Australian or UK source. Bloomberg was simply too busy covering the ongoing Yahoo debacle to be bothered with dramatic international events as major headline fodder.
We remain convinced that news on the international front is of vital importance to US investors in our domestic markets for two overriding reasons. First, as we have mentioned too many times now, the current economic
slowdown is global in nature. The powers that be at the ECB have hinted that Europe will come through unscathed, but that is getting harder to believe by the day as individual EC countries report unemployment,
manufacturing stats, export numbers, etc. Likewise, the drama being played out in Japan is serious stuff. Secondly, and possibly most important, is that we need to keep an ear to the ground regarding global capital flows. Remember, our wonderful new era party of the last half decade or so was in part brought to us by the credit extension generosity of our foreign compadres. Even if you do not believe in current global economic synchronicity, you better be watching the capital flows and anticipate change given the status of the dollar, our trade deficit, and lack of domestic savings.
The One Way Street...It just so happens that the wonderful US Treasury Department just released their US Long Term Capital Flows report for the 4Q. Unfortunately given that it really comes in voluminous raw data form, we have not had the time to rip through the entire numbers mess and delineate country flows line item by line item. For the moment, you are going to have to settle for the highlights. We'll bore you with the details later.
Foreign capital flows into the US financial markets have been nothing short of a one way street for years now. Is it really any surprise given the incredible trade deficit we've enjoyed at the financial largesse of the global community? Government agency, corporate bond, and stock purchases have been big ticket items for foreigners over the last "x" years. Clearly, the dollar is crucial in at least maintaining these investments. let alone growing the flow. The question that remains to be seen, now that US corporate profits have hit the skids, is how sticky these investments will be. The country Wall Street is yawning over, Japan, just happens to hold more foreign currency reserves than any other nation on planet Earth. Given their massive current account surplus, they happen to hold $5 trillion in foreign government debt paper. Humble question: How does Japan reliquify it's financial system (banking system)? Well, they have about 5 trillion possible answers. After all, what's a trillion here or there among global buddies, right? It's simply ironic that the scolding former Clinton Administration officials gave Japan regarding their inflexibility in printing money was occurring during a time when the US was printing way too much of the stuff. As they say, payback is a bitch.
It's not just Japan that has so graciously returned foreign trade dollars in the self addressed and stamped envelope to Wall and Broad. Again, we'll work through the 4Q and YE 2000 numbers (long hand, unfortunately) in the weeks ahead.
It's only a natural that Europeans parked more money in US assets during 2000 as the Euro continued its out of the chute bungee cord routine. Additionally, European buyers kept buying into the disastrous 4Q of 2000. Why? As you may know, so many European institutions "missed" the initial NASDAQ run up due largely to disbelief that it could have happened in the first place, that it was simply knee jerk institutional reaction in the form of "I'll be damned if I'm going to miss it again." The largely one way street of global capital flows is clearly not sustainable over any kind of longer term horizon. In Japan's case, the need for domestic capital in some form to rebuild the banking system is clear and present. Now that the US has begun to slow, the trade deficit has already taken one step up from the bottom of the gorge. Already foreign manufacturing has felt the initial reverberation of slowing US imports. What makes matters a bit more dicey at the moment is the recent "slippage" in the dollar. Who knew that the tech term "interconnectivity" would be so meaningful to the global financial system? And here we thought only networking firms really cared about that kind of stuff.
Look To The East...What is unfolding in Japan is of incredibly significant importance. This may be the crisis point that ignites fundamental change in the Japanese banking system. As we mentioned above, Finance Minister Miyazawa's comments using the word collapse are as much political as they are telling of the problems. Clearly the Japanese Ministry of Finance and the BOJ (Bank of Japan) need to work in coordination ahead. Increasing the money supply, lowering capital gains taxation, allowing further currency depreciation, fundamental restructuring of the banks, allowing banks and other insolvent institution to fail, etc. is all fair game in terms of policy implementation. Maybe it's one path or a multiplicity of paths. Japanese banks may be black holes, but their manufacturing sector is anything but. The savings rate in Japan stands in stark dichotomy to the US experience. The current account surplus stands in stark dichotomy to that of the US currently. We may be about to witness the end of an era in Japan. Keep your eyes and minds open. If real substantive reforms are enacted and adhered to, we may be witnessing the bottoming process in one of the major industrialized world's worst bear markets of the past 50 years. Alternatively, if there is backpeddling on policy reform, prepare for a breach of Nikkei 10,000.
Now Now Brown Dow...The Dow has clearly been shelter from the storm in terms of tech fallout. Who would know there is a global economic slowdown with the likes of Deere and CAT moving higher? As you know, so much institutional money is mandated to fully invested at all times that we believe it clearly creates distortions in the market. Distortions in stocks such as Walgreen. The almost year long trading range of the Dow simply could not be tighter. What tech stocks can do in one day, in terms of percentage moves, has held the Dow range bound for some time. In many cases, resolution from these type of ranges can be violent - on either side of the equation. |
