DANCING IN THE DARK
by Fred Hickey 07:00 AM 04|13|2001
Ignore all those Wall Street 'visionaries' who claim to know where the market, the economy and tech stocks are heading. Call it the "Cloudy Vision Thing."
"He who can see three days ahead will be rich for three thousand years." This old Japanese proverb should be kept in mind when considering the great ongoing debate about where the stock market, the economy and tech stocks are now heading.
The visionaries employed by the powerful Wall Street institutions are out in full force, declaring that they can now "see" a stock market bottom. Merrill Lynch is running a massive print campaign with full-page ads claiming that the markets "are now close to a bottom." Goldman Sachs trotted out . . . Abby Joseph Cohen last month to urge everyone to buy, raising her recommended stock allocation to 70% (from 65%). Credit Suisse First Boston has Tom Galvin proclaiming (once again) that this is the best buying opportunity in years.
Seemingly, whenever I turn on CNBC (as infrequently as possible), I see another Wall Street tout asserting that the stock market is at, or near, a bottom. A recent Reuters poll of 13 top Wall Street strategists found that they, on average, expected the Dow Jones Industrial Average to rise 33% by year's end; the S&P 500 Index to jump 40%, and the Nasdaq Composite Index to soar 80%.
Here's another proverb: "He who believes that most Wall Street market strategists can see three days ahead will be poor for three thousand years" -- Fred Hickey 4/02/2001.
This proverb has been proven true too many times in recent months.
In my world of technology, Wall Street's experts are called analysts. A year ago, these prophets forecast that PC sales would boom due to a post-Y2K corporate buying binge and a new upgrade cycle led by mass Windows 2000 implementations. Telecom analysts predicted that cell phone sales would hit 650 million units in 2001. Network equipment analysts projected shortages of optical equipment until eternity. Semiconductor sales were supposed to surge another 30%+ in 2001, led by DRAMS, which were expected to be in acute shortage by Q4 2000.
Of course, we now know that DRAM prices have plunged nearly 70% in six months due to a supply glut; semiconductor sales are dropping by double-digit percentage rates; cell phone sales are now estimated (by the cell phone manufacturers) at 450 million units; optical networking equipment is mired in a horrible glut, and PC unit sales growth is nonexistent (at best).
Once it became apparent to tech analysts late last year that their rosy forecasts were, shall we say, somewhat off, the analyst community proclaimed the problem to be a short-term inventory correction, and [said] that the inventory would be worked off by Q1, or Q2 at the latest. That forecast also turned out to be wrong, and now the end of the inventory correction is seen in Q3 or Q4, at the latest.
Ironically, while Wall Street claims to see a bottom in the stock market and the analysts see an end to the technology "inventory correction" (therefore, tech stocks should be bought now), tech industry leaders have never had less visibility. The number of this quarter's preannouncements due to missed forecasts is smashing the old record (set in Q4) by a factor of almost two. Some companies have preannounced two or three times in the quarter, as business plunged at an ever-accelerating pace. While most market strategists, chart technicians and analysts are proclaiming in unison that they see a "bottom," the CEOs' most-used phrase today is "no visibility." The only bottom they see is the bottomless pit they're staring into.
No Visibility in Network Infrastructure
Henry Nicholas, Broadcom CEO (and near-terminal optimist), recently stated, after preannouncing for the second time in the quarter, "We don't have the visibility to be able to predict when this softness will abate." LSI Logic, another semiconductor supplier to the communications industry, claimed, "We don't have the visibility now to say when we'll see strong growth again, and we obviously doubt that anyone does."
Corning, a leading producer of optical fiber and components, preannounced two times within a month (February 26 and March 19). With the second preannouncement, Corning's CEO admitted: "We have reduced visibility about when the market is going to bounce back," and "the current slowdown appears to be extending out longer than expected." JDS Uniphase doesn't have any visibility. The company lowered earnings expectations three times in just six weeks.
PMC Sierra now expects a nearly 50% Q1 revenue plunge from Q4. PMC Sierra CEO Bob Bailey cited order cancellations from its customers as the culprit. According to Bailey, "Several of our customers have basically a net booking of close to zero this quarter." PMC Sierra supplies to almost all the major communications equipment makers, including Cisco, Lucent and Nortel.
PMC customers like Nortel keep cutting forecasts. After preannouncing in mid-February, Nortel warned again last week, this time predicting a loss for the first quarter. Nortel dropped its full-year forecast, citing "the poor visibility into the duration and breadth of the economic downturn. Week by week, the downturn continues to proceed -- it hasn't stabilized," said Nortel CEO John Roth. Roth also admitted, "We're seeing some symptoms of a downturn in Europe. We're cautious about Europe at this time." Nortel upped its expected job cutbacks from 10,000 to 15,000.
No Visibility in Computers
Hewlett-Packard CEO Carly Fiorina stated in Europe recently, "I'm not optimistic about recovery in the second half of this year. This slowdown is now clearly spreading to other parts of the world. Candidly, I'm not optimistic about Europe's immunity," Fiorina said. Sun Microsystems' CEO, Scott McNealy, told a TV interviewer that he basically had "no visibility" at this time. Sun last month cut its profit projection for Q1 in half, blaming an unprecedented fast reduction in orders for Sun's computer servers, which power corporate networks and Internet operations.
Intel CFO Andy Bryant admitted that demand had fallen for nearly all of Intel's products -- PC processors, networking chips and flash memory chips. Demand was weak in all geographies, and chips for servers dropped by even more than desktop PC chips. The server business had been holding up better than PCs prior to this year. Bryant also noted, "I don't see any sign of recovery yet. Nothing inspires a lot of hope." Intel Chaiman Andy Grove stated recently, "I don't expect the end demand to snap back. We are in this state for some period of time."
There's also a visibility problem in the computer software industry. SAP, Europe's largest software company, didn't have enough visibility to comment on the second-half outlook due to the uncertain global economic conditions. Leading U.S. software vendor, Oracle, lowered forecasts for the coming quarter, but could not give guidance for the second half of this year. Oracle's CFO, Jeff Henley, told analysts, "I haven't a clue what will happen."
Visibility for the pure Internet software providers? Forget about it.
Fred Hickey is editor of The High-Tech Strategist. A version of this story first appeared in the April 2, 2001, issue of that publication. |
