Fleck's take on IT
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Contrarian Chronicles
Ignore the arm-waving. An IT rebound's just a mirage
The fact is, companies are still
delaying projects or canceling
them outright. That -- plus overly
bullish sentiment--sets the stage
for disappointment.
By Bill Fleckenstein
Wall Street has analysts and
arm-wavers. Analysts -- members
of an endangered species -- take
their homework seriously. They
scrutinize financial statements
and gain perspective by paying
attention to what a company's
customers are saying. Ubiquitous
arm-wavers, on the other hand,
think a job well done means
issuing hype-filled
prognostications, or parroting
investor-relations pabulum. For
them, the term "dead fish" is too
kind.
A big dead-fish house upped its opinion of Intel (INTC, news, msgs) last week. As I read the
"research" from this particular dead fish, a couple of things came to mind, which I'd like to share with
readers of the Contrarian Chronicles. Was he trying to curry votes among portfolio managers who
were hoping to see that much-loved stock ramped up at quarter's end on June 30? His thesis for
believing that Intel will make the numbers and not lower them for the third quarter is the categorical
statement that "overall chip demand is decelerating" but demand for Intel's products is "beginning to
accelerate."
Poof goes the burden of proof
Once again, it's a case of arm-waving by the dead-fish community, because the report by this dead
fish is completely lacking in evidence to support his case. It contained no corroborating data in the
form of what PC vendors have been saying, or what motherboard makers have been saying, or what
components manufacturers closely aligned with PC makers have observed, or what the corporate
buyers of IT have been saying (more about that below). The omission of such supporting data is, of
course, no oversight, since it doesn't exist in the first place.
On the contrary, as I have pointed out many times, PC vendors such
as Ingram Micro (IM, news, msgs), Tech Data (TECD, news, msgs)
and the PC companies themselves have said they see no signs of
"acceleration." In fact, knowledgeable industry observers will tell you that anything but acceleration
is taking place. Intel has only "succeeded" in the second quarter because it has a new product, and
it's been able to, in my opinion, stuff the channel with its Centrino chip. Ex that, nothing is happening.
Further, Intel faces big trouble in Q3, not just because of weak demand but also due to competitive
inroads and pricing pressure from Advanced Micro Devices (AMD, news, msgs), via its Athlon and
Opteron chips.
Itty-bitty IT spending = uphill battle for Intel
In any case, if dead fish can dispense with reality when it gets in the way of a tech fantasy, reality is
the singular view from the knowledgeable technology insider whose e-mails I have reprised in my
"Market Rap" column over the course of the year. This week, I would like to share his final
commentary from the vantage point of corporate America (as chief architect of a major Fortune 100
company that consumes massive amounts of IT), as he heads off shortly for an IT position with the
government. Here are his thoughts:
"Just wanted to give you a quick summer technology update. As I figured, budgets are not
expanding in any way to support the idea of a second-half-technology-spending rebound. This
comes not just from me but from many people I speak to in the industry. It's just flatness and
stabilization in terms of money spent. Unit volume is up in terms of hardware purchases, but that is
primarily coming from the fact that, again, you can get more for your money, not because of higher
demand. We are able to replace hardware without any increase in our budget.
"Again, so much for the replacement cycle; it has not existed for years now, but people keep harping
about it on TV. Software spending, as I had explained previously to you, does not ratchet up in the
summer, and it is not any different this year. We also have gotten the expected uptick in project
cancellations as business units refuse to fund further technology efforts for the summer. Expected
this, and we have had to downsize staff accordingly. We now have moved to almost 80%
offshore/20% onshore at (XYZ Company) to cut costs. Yet somehow, monetary stimulus will fix that
trend. Beats me. And monetary stimulus is generally considered a joke in terms of fixing overcapacity.
We had a joke last year that we will begin taking out 0% loans at (our company) to buy equipment.
It's not a joke anymore; we have received several offers of this idea from sales executives.
"On a lighter note, I have decided to move from my current position and take the plunge to working in
the government IT sector. For me, it's a step up in my career, and also gives me a chance to get
away from what I see as a stagnating corporate tech-spending situation, to move into a government
tech spending picture that is much brighter. I am tired of the constant cancellation of projects due to
lack of funds, the outsourcing trend to offshore resources, due to cost, and the overcapacity that
plagues the corporate side. I also think that many in IT sense the outsourcing trend that is under
way, and are reacting accordingly. I have been able to recruit several others I know from previous
jobs to work with me in a contractor role for the government.
"Suffice to say, there appears little hope in my eyes or the eyes of many others in the IT industry that
a second-half tech rebound will be coming (save for the tech vendor CEOs, of course). It's still sad to
see many who believe otherwise, and who would believe that the hypergrowth rates of the past might
return, but the corporate spending budgets just are not there to support the idea."
So, an unvarnished view from the frontlines of IT spending -- one that Fred Hickey (who pens “The
High Tech Strategist” from Nashua, N.H.) and I have been espousing. Folks should compare this to
what the dead-fish community has been saying and decide where they want to cast their vote. Over
the course of the next two quarters, we'll find out whose view is more accurate.
A possible triple play in Japan
Turning our attention abroad, a most interesting development has occurred in Japan recently. Stocks
have bounced, and Japanese government bonds have been hit in a major way, with 10-year
Japanese government bonds (JGBs) now yielding up to 85 basis points, half that yield from a couple
weeks ago. These moves are way out of the ordinary, as anyone looking at that market can see. It
certainly appears that the bull market in Japanese bonds has come to an end.
In any case, if Japan begins to emerge, at last, from its protracted bear market in stocks, the idea of
being long equities/short bonds/long the yen may hold some merit. I have been thinking about this
intriguing triple play for quite some time, but have done nothing thus far (especially on the long equity
side in Japan), due to my enormous concern for the second half here.
To answer the many e-mails I have received, let me emphasize that these ideas are not suitable for
everyone. Folks need to have an understanding of those markets and get involved only if they feel
comfortable. There is no exchange-traded fund (ETF) for Japanese government bonds, and there is
currency risk. As I said, I’m still sitting on the sidelines myself, though I am more tempted than ever
and will probably do something pretty soon, especially as far as shorting JGBs.
The countdown to downtick time
Now for some thoughts about where we are at this moment. Since early February, when I concluded
that the path of least resistance for the market was up, I have been waiting for this time period to look
for an opportunity to start selling stocks short in a major way. I believe that chance is approaching
and may coincide with an interesting opportunity in the metals and foreign currencies. I think the
market may have peaked, and we’re in the process of putting together the failing rally that I’ve been
waiting to see.
Meanwhile, to judge by the lopsided sentiment readings, most people are counting on a continued
party in stocks. Given the problems that we face on any number of fronts, I regard this bullishness as
completely mind-boggling. By comparison, the psychology in the bubble seems tame. Back then, no
one had a care, and the problems that were brewing were a function of the not-yet-burst bubble. Now
our troubles are no longer theoretical, but they’ve been ignored nonetheless.
Of course, for all the fixed income investors at the receiving
end of the Fed’s lowering interest rates -- in its maniacal
attempt to bail out of the bubble -- there is no running from
the aftermath of their incompetence. Along those lines, a
number of fixed-income investors have e-mailed me about
what to do in the present environment. I firmly believe that
if one can afford to do so, now is not the time to buy fixed
income.
Grasping for yield, gasping at loss
As the current issue of Grant’s Interest Rate Observer
notes, dipping into principal for a few percentage points to
get one through this rough patch before rates rise is
probably the lesser of several evils. (For more about Grant’s, click on the link at left.) If one does the
math, reaching for yield in the form of Treasurys, corporates, junk bonds, or equities in all likelihood
will turn out to be a far worse alternative than turning to one’s principal just a little bit at this unique
moment in time.
After all, it wouldn’t take much of a change to produce losses of 5% to 10%, which today is several
years’ worth of income. As Ray DeVoe of The DeVoe Report says, “More money has been lost
reaching for yield than at the point of a gun.” For all of you prudent savers out there, that’s my two
cents’ worth. |
