Contrarian Chronicles
Business stinks, but don't blame the war
In fact, don't blame anyone except the execs who polished the numbers and the cheerleading bureaucrats who helped them do it. The bear market isn't over until we stop making excuses for stocks.
By Bill Fleckenstein
Until somebody can come up with a filter that extracts fact from Wall Street fiction, investors will have to hone their sense of skepticism. In the 1990s' stock market mania, many companies could count on a wide-eyed public to accept their spew, no questions asked. Despite the rot that the ebbing market tide has left in plain view, lots of folks still carry a torch for stocks. That desire will have to turn to disaffection before we can safely turn bullish.Fast filing
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Last Tuesday, Best Buy (BBY, news, msgs) pre-announced lower results for next quarter, thus reaffirming the verdict from other companies that actually sell technology-oriented products to customers, i.e., business stinks. Best Buy trotted out an excuse that I expect to hear on virtually every disappointing earnings call: the "CNN effect." That is, "People stay at home watching television, instead of shopping," as Darren Jackson, Best Buy’s CFO, put it. (Presumably, if they wanted to monitor the war news on a larger screen, sales would have seen a bit of a lift.) Best Buy also attributed the current retailing environment to "the outbreak of war, related geopolitical uneasiness, and very weak consumer confidence." For what it's worth, the stock still closed higher that day, and it rallied the next day as well.
I anticipate hearing such excuses ad infinitum, though in the short term, there may be some grounds for the war’s exacerbating people's willingness to sit on their hands. But, remember, our economic problems predate the war, and we would be witnessing them anyway. I'd also like to note another area that has the potential to be used as a scapegoat, beyond its legitimate concerns – the outbreak of severe acute respiratory syndrome, or SARS. I think businesses will continue to be affected by this, as we have seen with the travel industry. (The World Health Organization on Wednesday advised travelers to avoid going to Hong Kong and the nearby Chinese province of Guangdong.) Given how fast the epidemic is growing and considering people's angst in general, I’d expect that this, too, will throw a damper on business. But again, it will only exacerbate our earlier problems.
No MO cash flow
Shifting to another target of blame, I'd like to spend a minute on Altria (MO, news, msgs), nee Philip Morris. (Where do they come up with these pathetic name changes?) Last week, the company said it might have to file for bankruptcy after losing a suit to Illinois for "false advertising" on light cigarettes. That scenario has potential widespread ramifications. Many states, not the least of which is my own, Washington, borrowed money against what they expected to be future tobacco settlement payments. Apparently, these bonds total something on the order of $18 billion, so the knock-on effect could be felt by municipalities just about anywhere. I always thought those bonds were a bad idea, a way for states to temporarily fund a "lifestyle" that is beyond their means. Relying on these payments may come back to bite them.
Along those lines, it seems to me that in this day and age, if you still smoke, you deserve whatever you get. I am no fan of the tobacco industry, but here is another example of torts run amok. Somewhere along the way, we have to find a means of punishing wrongdoers without bankrupting Corporate America via class-action suits.
The inflate/restate sequence
Turning to a company that's done a pretty good job of inflicting its own pain, Gateway (GTW, news, msgs) announced last Tuesday that it would delay its 2002 financial statements and restate results for 2000 and 2001. In recognition of that, I'd like to revisit my "Fudgement Day" comments to make a point. (You can access the column by clicking on the link at left under Related Sites, then scrolling to “Confine Poster Baby Behind Baby Gate.”)
Back in the mania, Gateway, like Micron Technology (MU, news, msgs), was a regular target of my rants. The company spent huge amounts of money on advertising and built out all kinds of Country Stores. At the same time, it kept reporting great results and impressive margins. That never made any sense to me, and I stated so regularly.
My guess is that if you were to go back to this period and properly accounted for the company's costs, you'd learn that Gateway was never making much, if any, money at the time. (And it has since taken large write-offs.) The key point that could be made about tons of other companies is that attempts to pursue short-term solutions to embellish the numbers often blow up the business. Gateway is a perfect example of how many tech companies did just that.
While on the subject of the mania and the distortions it created, I'd like to pass along some worthwhile comments from The Wall Street Journal’s Jesse Eisinger, in his recent story, "Dow Industrials Shouldn't Be Nation's Mood Ring." His theme was that the stock market has become a psychological barometer for the nation. But, as a proxy for gauging short-term economic reality, it is fairly inaccurate. The stock market has been perhaps useful in the past in ferreting out sea changes in the economy. Since the market bubble burst, however, every rally has been heralded as a return to prosperity. More recently, the market has become a barometer for how the war is going.
A-Pauling advice
To prove his point, Eisinger quoted Treasury Secretary John Snow on the beginning of war: "The overall response of the equity markets, the bond markets, the debt markets has been positive. The dollar has risen, so overall the response (to war) has been favorable."
Let me pause here to warn against listening to stock market advice from Treasury secretaries. I saved a quote from Snow's predecessor, Paul O'Neill. On Sept. 17, 2001, when the stock market reopened after the terrorist attack, he opined, "I think it's conceivable we could be approaching the top on the Dow in another 12 or 18 months." Then, he added, "If they let me trade, I'd be buying a lot of stocks today."
It’s lucky for O’Neill that they didn't let him trade: He would have lost a lot of money. On Sept. 17, 2001, the Dow ($INDU) was at about 8,500, the S&P 500 ($INX) was approximately 970, and the Nasdaq Composite ($COMPX) was at about 1,400. Of course, if O’Neill had bought stock in his former company, Alcoa (AA, news, msgs), he'd really be underwater. It closed that day at around $30, and last Friday at $20.
Reigning culture curdles
In his Journal article, Eisinger noted that, during the mania, "companies sometimes (more than just sometimes) took action simply to help their stock prices. In the process, they squandered capital on foolish investments. The equity culture reigned. And it made us feel good." He also observed, for people who haven't studied much stock market history, that sometimes the market goes nowhere, even when the economy does well. That, of course would be a shock to anyone who was operating in the market in the late 1990s. "From the late 1960s to the early 1980s, for example, gross domestic product roughly tripled, unadjusted for inflation, despite bumps along the way. The Dow industrials, however, didn't return to their late 1960s highs approaching 1,000 until the early 1980s."
Then, in my opinion, he laid out his most important point: "What the market might need to recover is to fall out of focus, as much as is possible. If that happened, prices would drift lower and lower on the lack of demand. (The emphasis is mine.) ... In the early 1980s … stocks were thought of as dead. In fact, it was then that stocks were the greatest investment. Neglected assets often are the most attractive because they are the cheapest. Not only that, when companies need to compete to attract investors, they do good things, like invest wisely and try to increase their dividends. If they take demand for granted, they get lazy, greedy and prone to malfeasance."
A key determinant to how successful your investment will be is a cheap entry price (valuation). Remarkably, this has been unremarked on in the mainstream media, which still seems not to understand that investing is about valuation, risk and reward. It still seems to focus on the price of everything and the value of nothing. Successful investors do just the opposite.
Bill Fleckenstein is the president of Fleckenstein Capital, which manages a hedge fund based in Seattle. He also writes a daily Market Rap column for TheStreet.com's RealMoney. At the time of publication, he owned none of the securities mentioned in this column. His investment positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy, sell or hold any security. The views and opinions expressed in Bill Fleckenstein's columns are his own and not necessarily those of CNBC on MSN Money. |
