Productivity Does Not Equal Profitability
By Bill Fleckenstein
05/07/2002 17:21
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Index Close Change
Dow 9836.55 +28.51
S&P 500 1049.49 -3.18
Nasdaq Composite 1573.82 -4.66
Nasdaq 100 1159.25 -1.91
Russell 2000 498.98 - -3.93
Semiconductor Index (SOX) 470.14 -3.00
Bank Index 863.52 -0.03
Amex Gold Bugs Index 113.77 -0.96
Dow Transports 2683.84 -19.57
Dow Utilities 304.40 -2.67
NYSE advance-decline -377 +715
Nikkei 225 11,316.04 -234.97
10-year Treasury Bond 5.07% -0.006
Better-Than-Expected Bettors : Not surprisingly, the overnight markets were weaker on the back of our dismal performance yesterday. But tribulation turned to celebration when, about an hour before casino time, the government announced that productivity exploded at 8.6%, beating the expected 7% number. Also better than expected were unit labor costs (which fell 5.5%), as well as our futures, which reacted to the sunny data by spiking up not quite 0.5%, the approximate level where they opened.
Then, after a requisite initial selloff, the market quickly plunged about 1% in the Nasdaq , and somewhat less in the S&P and the Dow . From there, we settled bifurcated fashion into a flop-and-chop mode, such that a couple of hours into the day, the Nasdaq was down about 0.75% -- paced by the SOX, which was down 3% -- and the S&P and the Dow were modestly green, led by the bank stock index, which was up 1.5%.
Bulls Train for Volume Ball : After the initial wide swings, the market kind of quieted down, flopping and chopping in the top half of the range till the FOMC told us that it would do nothing. Next, we had the perfunctory rally/dip/rally, and proceeded to flop around some more. Then, with about an hour to go, when it was clear that the market just wouldn't rally, it sold off and closed near the lows of the day.
As you can see from the box scores, it was a mixed bag for indices, with no large movements. Even the SOX was down less than 1 percentage point. In any case, I think the big news was that once again, the bulls were unable to produce a rally. We did see volume build a bit today, but I believe we'll need to see some very big volume days before this washout is over. Away from stocks, the metals were slightly higher, as was fixed income. The dollar finally bounced against the euro and the yen.
Soft-Dollar Contribution to Hardware : Returning to the action for a moment, I'd like to point out a couple of software stocks that were hammered today, because they are not exactly household names. Lawson Software LWSN , a pretty good little company that provides mission-critical enterprise software, announced that its licensing revenues were below expectations, and the stock did a two-for-one split, the hard way.
This follows on the heels of what AutoDesk ADSK said recently, and the net of the news was not lost on Manugistics MANU , which was down about 40% in the early going today. My point is, if a lot of these companies that write nonfrilly software are imploding due to business being soft, what does that say about hardware?
So, things obviously deteriorated in April, even more than in March, which in my opinion does not bode well for technology at large, or the economy in general. To look at a prominent example, IBM's IBM travails certainly suggest that fact, as well. And for people who might think the situation is anything but pervasive in tech land, that is why I wanted to highlight some of the software stocks that don't appear on everyone's radar screen.
Stock Reflex Now, Acid Reflux Later : Preopening this morning, I received an email from a friend, and because it contained some illuminating thoughts, I decided to pass them along: "The futures are up again. Didn't they close badly enough yet to scare people out of this reflex behavior? The bullishness is still there every day. I don't think you can get a bottom with that kind of sentiment. The SOX, the S&P, and the NDX are all in a technical netherworld in search of some solid ground."
Jaded Yields to Livid : Then he proceeded to opine about the crisis in confidence that is now under way: "In many respects, we, as professionals of the investment community, take for granted the crass way financial results are disseminated, and the blatant misinformation given to the public. The company reports -- they distort the actual results by throwing out modifiers like 'pro forma' and 'one-time charge' -- and we look through them because we're conditioned to do that, because we've been told to. They have a conference call where they focus as much on the positives as they can. And until recently, rarely were the negative disclosures included in the formal research. The analysts write up glowing reviews of their results, and we know there are banking relationships influencing their opinions, but we look through them because we're jaded and used to it."
He continues: "And all of this, in a post-Enron age, in an era where Infospace has been to $300 and back, after Global Crossing was a top pick all the way into the dirt, where 'piece of crap' companies were disparaged behind the scenes, while pushed into retail accounts ... has become unacceptable. And the mutual funds hold stocks on behalf of the masses who have only recently had their eyes opened to what we are conditioned to overlook -- that results aren't what they appear. This is causing a confidence crisis in our equity market. Note the overlay chart of the SOX and the euro. I don't think the situation is lost on investors abroad, either."
So, to put a summation sign under the above, at the same time that corporate earnings are down and prospective accounting reforms will strip them further, we have a gathering mass of shareholders newly awakened to the fact that stocks remain ridiculously overpriced. And that, ladies and gentlemen, is an ideal recipe for a fall.
Mind Your Ps and 10Qs : And now for some comments, as the sun sets on our productivity "miracle" du jour. In my opinion, everyone who continues to vapor on about the data ought to ask themselves, if productivity has been so great, how come profitability is so poor? And in fact, even during the mania, now that people can see how jiggered the numbers were, productivity did not really equal profitability. So maybe we should stop getting ourselves all lathered up over productivity and focus more on that other "p" word. And while we're at it, let's make sure we're looking at real profits, not earnings before expenses. |
