The Market Rap
William A. Fleckenstein
06:00 PM 07|20|2001
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Where's The Outrage?
Today's Rap may be a little bit unusual in its form because there are so many important topics to cover. I want to hit them all without having this run on endlessly. In no particular order, we need to cover the earnings news and the erroneous talk about every piece of bad news being the last piece of bad news. We've got to talk about the lack of quality of financial statements and the earnings that are being discussed now. Lastly, we'll describe the market action. I also want to talk a little bit about what appears to be rank market manipulation and other such shenanigans.
Now Playing At The Wall Street Multiplex: Earnings Horror Show By now everyone knows that Microsoft (MSFT) lowered guidance. Last night, we had a plethora of bad earnings reports and guidance. This follows all the companies that have lowered guidance and had problems up to this point. Basically, it's been a clean sweep: IBM, Intel, Dell, Microsoft and nearly every chip company, etc. To repeat, the earnings news is bad and it's not going to get better anytime soon. Will it stop getting worse? Possibly, but it's not getting better. What we have to keep in mind is, since the first quarter, people have been saying the bottom has been reached with respect to earnings. That was false. Many companies preannounced once or twice in the second quarter. Bubbleheads thought that once we got past the second quarter, earnings would be fine. We have been saying that the guidance for the third quarter would be disastrous. It has been. Sometimes it's not clear to me whether the dead fish are really this stupid or they are just intent on defending their positions. In any case, things are disastrous on the earnings front. Even if they don't get worse, there's not going to be enough of an improvement to make any difference, when one considers the price of these securities. More about the horror show on the earnings front a little bit later.
Spreading Jam Jobs On Other People's Bread Overnight, the futures were weaker. Remarkably enough, Asia was not too weak on the back of the Microsoft preannouncement and all the other horrific news, possibly because it had been down so much already. However, Europe was weak this morning. When the bucket shop opened for business, even though the Nasdaq futures were indicating a down opening of about 3% and the S&Ps were down about three quarters of a percent, there was a real feeling of bravado on the tape. Then we had a straight-up jam job that took us to a point where the S&P was down about a quarter of a percent and Nasdaq was down less than a percent. Whether this was related to the expiration today or was just part of heavy-handed buying on the part of certain mutual fund organizations that feel it's their job to defend the market, I do not know.
Consumers Connecting The Dots This morning, Colin e-mailed me his thoughts on the early action: "People buying NDX [Nasdaq 100] and preparing to buy stocks in general. 'It's just got to get better.' No, it doesn't and it won't. The recovery has been around the corner for 18 months now. This hope has sustained the largest segment of the economy, the consumer, who is showing evidence just recently, for the first time, of starting to grasp reality."
A Lament Whether people are attempting to manipulate the market is not knowable without a subpoena. We do know that quarter-end markups have become a generally accepted practice -- the biggest open secret on Wall Street. By my reckoning -- and that of others I talk to -- on days like today when the news is horrific, stocks are bought "for effect." Not to own them, but to hold the tape together. Obviously, no one is bigger than the market, and in the end these efforts are destined to fail. This rigging went on for the longest time in Japan in the late 1980s before it finally stopped working. I generally am somewhat reluctant to talk about this, because I think when you discuss market manipulation, it can sound just like a loser's lament. But in this case, it seems to me to be so blatant that I think it needs to be discussed in the open. And no, I don't think, as some do, that this is part of an activity of the "plunge-protection team." I think it's just the big fund organizations buying stocks. If they mark stocks up on the quarter end, which we almost know for sure goes on, why not do it when they need to "save the day"?
Henry Blodget, Look What The Cat Dragged In What I'd like to know is, where is the outrage? For the longest time during the IPO mania, it was clear that funny business was going both with allocations and with what the analysts were doing, and there was no outrage. Now there is outrage. In today's Wall Street Journal, there is a great story by Charles Gasparino called "Merrill Is Paying in Wake of Analyst's Call on Tech Stock." (Registration required for two-week trial.) That this case will open the floodgates is vividly described by John Coffee, a Columbia University professor who is quoted in the story: "It's like putting out warm milk for a stray cat that meows. You get 30 more cats the next night." As I've said many times, I believe these brokerage firms will be the asbestos litigation of the next few years.
Earnings, And All That Improvisational Jazz Manipulation has become a way of corporate life, through the crafting of bogus financial statements (and hiding behind safe harbor language). Virtually every company now that reports in technology gets to make up whatever it wants to claim are earnings. I talked about this a little bit yesterday. Last night, I happened to look in the earnings release and the financials for Integrated Device Technology Inc. (IDTI). The company claims it had about a break-even quarter. At the bottom of the financials, it said the financial statements were pro forma, and the notes then suggested that all in, the company really lost about $170 million. The earnings numbers mean nothing anymore because people just decide what they're going to report or what they're going to call earnings. This insanity has to be stopped. Where is the SEC? Where is the FASB?
Inside The Microsoft News Room The outrage continues. Last week, I mentioned how disingenuous it was that Microsoft would preannounce a write-off that if material could and should have been done sooner, or if not material could have waited for the earnings release; and if it was going to meet estimates on the quarter that ended 11 days prior, then why did Microsoft turn around and lower guidance seven days later? I mean, that is the kind of prank usually reserved for companies of much less stature. Microsoft succeeded in boosting the market and the stock price about $7 or $8, but what good was done? What was its intent? The more earth-shaking news was that the company was going to have to lower guidance, not what it announced last week. Microsoft chooses to preannounce the non-event and not to preannounce an event. Why?
The Best Option I have come up with an admittedly speculative explanation for Microsoft's change in tactics. I have no idea whether it is true or not, but it does seem plausible. When Microsoft's stock was rising and things were going spectacularly, the company always poor-mouthed its earnings and constantly beat them, as did many tech companies. This had the effect of knocking down the stock, thereby allowing options strike prices to be set at favorable prices. However, now that things have gotten tougher in the business arena and the stock is sinking, it seems that Microsoft is trying to prop up its stock price (to help the same employees). Microsoft would hardly be alone in this gambit. While it may be well and good for the employees, these are public companies, and they have responsibilities not just to their employees, but to the shareholders to do the right thing.
This simply has got to stop. There should only have been one announcment, pre- or otherwise: when all this news was disseminated. It would be more useful if these kinds of practices were ended now, before real trouble hits, instead of after the horses run out of the barn, as we're now doing in the IPO and analyst investigations/scandals. The market has devolved into much worse practices than went on in the 1920s.
Rays Of Insight Turning to the news from last night, one of my favorite quotes was from Scott McNealy, the CEO of Sun Microsystems (SUNW). When pressed about when things are going to get better, he said, "Nobody knows what is going on in the U.S. economy." He went on to say, "You can draw any conclusions you want. We don't draw conclusions. We ship computers. Sun is out of the business of projecting macro-economic activity. I am a trained economist and I don't know. Alan Greenspan has all the data in the world and he doesn't know." So, straight talk from Scott McNealy.
Gateway: R.I.P. Turning to Gateway (GTW), in terms of what's going on in the PC world, it basically stated that the consumer PC business was a disaster and the business sector wasn't much better. To quote the new CFO, Joseph Burke: "The overall U.S. consumer PC market has declined each of the last three quarters -- that's the first time that's ever happened. We are not confident that it's necessarily going to reverse itself back to historical levels." It's amazing how adversity breaks the ice with respect to truth telling. Of course, on Bubblevision, you wouldn't have found this disastrous news. When I turned it on for 10 seconds this morning, I heard one of the commentators suggest that Gateway just missed by a penny. I listened to the conference call last night, just one of many. It was a complete horror show. I have long been skeptical of Gateway's businesses, and now it is finally starting to do laps around the drain for some of the crazy things it did in its attempt to make the numbers in the past.
Floundering Foundry Basically, all the news from the chip companies last night was frightful. Those trying to speculate in the semiconductor equipment stocks ought to see what Chartered (CHRT) had to say. Its revenues are down to $100 million for the last quarter. Its capacity utilization is 36%. Chartered cut capital expenditures. Oh, by the way, it's the third-largest foundry on the planet. I could go on but I won't. You get the point. It was just a disaster on the corporate earnings front.
Mr. O'Neill, Please Call To Schedule An Eye Checkup On NBC's "Today" show this morning, Treasury Secretary Paul O'Neill reaffirmed his continuing streak of cluelessness, as we have been commenting. According to a story that passed on Reuters, he predicted a robust U.S. economy "as far into the future as the eye can see." For those of you who share my incredulity at the obliviousness of Mr. O'Neill and who subscribe to Grant's Interest Rate Observer, you're in luck. In this week's issue, Jim Grant has penned a great article about Mr. O'Neill called "Contagion of Obliviousness." When we get into big trouble down the road, our treasury secretary is only liable to make it worse.
And now, to segue from my editorial on outrage to its source, the market action. . . After the initial jam job that we had, the market sold off and we predictably had another bounce. Things quieted down after the first couple of hours. We had a slow, steady grind back almost to the lows at about mid-day, and we had another sloppy jam job that fizzled, and the averages closed around where they opened. Check the box scores for specifics. I'll keep today's action to a minimum because I've vented on so many other subjects. I didn't see anything too remarkable besides the fact that many stocks that ought to have been slaughtered were not. Having said that, many kinky stocks got roughed up, that was about the only place where I see anything interesting. Once again, I would like to point out that if stocks were acting well in the face of bad news, and bad news had been thoroughly discounted in the form of cheap prices, then this would all make sense. But when folks buy bad news because other folks are buying bad news, and they convince themselves that it's been discounted, that is basically just the greater fool theory.
Away from the bucket shop, the metals and fixed income were essentially unchanged (gold was up a modest $0.50). Oil bounced a buck. The dollar was down against the euro, the yen, and the Swiss franc.
This Little PC Went To Market And Collected Dust Lastly, we haven't talked much about DRAMs lately. They continue their state of collapse. The dead fish are always looking for reasons to be bullish on DRAMs, but Samsung Electronics on Friday said it thought that the demand would be below supply at least until the fourth quarter. Ladies and gentlemen, the PC business has basically become the TV business, as I have been saying. Even Microsoft thinks that it will only get 4% to 6% growth in PCs -- probably too high, but that's the optimistic case. So, how can people pay 50 times earnings for Dell and infinite times earnings for Micron and 50 times earnings for Intel? We could talk about other insanity that goes on in technology, but given the news of this week, what could be more obvious than the fact that the PC market is a replacement market with no growth and yet people are still willing to speculate on these stocks? I'd like to believe that they aren't so stupid as to do this with their own money and this is just the "professionals" they've given it to who choose to act like complete fools. Once again, all I can say is, Where is the outrage? Do people need to lose all their money before they demand some changes?
And we would be remiss if we did not point out that we have a G8 shrimp-fest this weekend. I would not expect much to come out of this, but folks need to know that it's going on. Lastly, in the lost credibility department, there is a good article in The Wall Street Journal, in the C section, right below the aforementioned Merrill Lynch article. It chronicles the Cisco travails, and illuminates what happens when someone loses credibility as Mr. Chambers has. It winds up by quoting Paul Sagawa from Sanford Bernstein: "A lot of investors would feel more comfortable by management that was more realistic." Amen to that. |
