'Shame on Us Pesky Nitpickers'
By Bill Fleckenstein
Special to TheStreet.com
04/18/2002 06:07 PM EDT
March of the Toy Earnings: Today's Rap will
have a slightly different format since there's a lot
to cover in one day. (I won't be writing tomorrow
as well as next Tuesday because I will be
traveling to the Grant's Spring Investment
conference in New York.) So, ladies and
gentlemen, buckle up as we dive right into the
earnings news. Last night, software companies
Siebel (SEBL:Nasdaq - news - commentary -
research - analysis) and SAP (SAP:Nasdaq -
news - commentary - research - analysis)
demonstrated what a horror show software and IT
spending continues to be.
Siebel was particularly clear about the fact that if
Q2 matches its terrible March (which is
apparently what the company expects), there
won't be any growth to show for the quarter. As
for SAP, in the past the company had
supposedly been immune to what was going on,
so it's basically been a clean sweep for problems in the software arena.
Comfortable Blue Shoe-In Estimate: Disappointing guidance was also the story
for Apple (AAPL:Nasdaq - news - commentary - research - analysis) and
Broadcom (BRCM:Nasdaq - news - commentary - research - analysis). CDW
Computer Centers (CDWC:Nasdaq - news - commentary - research - analysis)
was forced to acknowledge a slow slide in software growth, but the stock exploded
anyway. Of course, IBM (IBM:NYSE - news - commentary - research - analysis)
made its new, lower number, saying it was comfortable with estimates. Lastly, and
in clear contravention of the yarn spun by Intel (INTC:Nasdaq - news - commentary
- research - analysis), Advanced Micro Devices (AMD:NYSE - news -
commentary - research - analysis) warned of a slump in revenue going forward.
Mama PC's Smoked-Chip Recipe: So, what does all that mean? Basically, the
net of everything I listened to and read was that things just aren't too great, which
should not come as any surprise to regular readers. While the chip companies
chirp as they proclaim a bottom -- citing the trickle of a few orders for various
reasons -- the people out there selling things say that there's a problem. So, you
can choose to believe Intel, or all the rest of the data. Although it might not happen
immediately, Intel is my vote for the Dow stock most likely to get smoked next.
Victimization 101 with Professor Joyce: Segueing to another outfit with
credibility issues, IBM (IBM:NYSE - news - commentary - research - analysis)
gave a conference call whose ample insight into the pathetic state of the dead-fish
community and the company it panders to more than made up for the lean news
actually reported. Basically, CFO John Joyce professed hurt feelings and righteous
indignation about Big Blue's being the object of all these negative stories, though
he did find his way clear to acknowledging no sign of a pickup. (That said, he
expressed some hope for a second-half story, while not making any promises.)
Blue-Lice Special: In any case, after he was done emoting, I heard a staggering
comment from the first dead fish polled that nearly made me fall out of my chair: "I
guess you've had it with all the nitpickers. You seem to be addressing them." And
then, so as to clearly place himself in the opposite camp, he proceeded to ask a
puffball question. So, rather than being embarrassed that he was too dumb to figure
out what was going on, or rather than being upset with the company for bagging
him, this fellow basically said, "Shame on all those dirty rotten nitpickers who saw
this coming and said so."
Live-Fish Fillets Fairytale : This is a perfect example of what the dead-fish
community does over and over and over again. They don't try to find any problems,
and when problems surface, they try to come up with a reason to explain them
away. This is the quintessential example of dead fish on parade. Of the eight
"analysts" allowed on the call, there was one whose great question truly earned
him the name. He asked, in so many words, "How come your backlog for services
continues to run at three times what it's reported as every quarter -- which would
basically imply that business is going to explode -- and yet for the last two
quarters, the services revenues have been down?"
Quibble with the Dribble: The ensuing answer was formed out of both sides of
the company's mouth: The consulting business, which really contributes its fees, is
down; and outsourcing, which is essentially a lot of arm-waving of orders, doesn't
get translated to revenues. In other words, it's basically impossible to try to ferret
out what will come next, given how IBM describes the backlog for the services
business.
The Mother of All Other Income: Turning to the company's affinity for "other
income," it's important to note that out of the $1.7 billion it made, approximately
$500 million was other income treated as a reduction of SG&A, which this time
was broken out. Had it not been for the flap caused by Pulitzer-Prize-winning
journalist Gretchen Morgenson at The New York Times and the ensuing stories, I
doubt we would have gotten that information. So, one can see that even the new,
lower numbers aren't from operations. Of course, IBM wants you to believe that it
will be able to keep producing this other income all the time. In any case, to get a
feel for how the company orchestrates its reporting, I urge people to try to listen to
the call or read the transcript. This big, visible company is just a perfect example of
the farce that is still being played out, despite the uproar over analyst and
corporate shenanigans.
Tone-Deaf Instrumentalist: As for the particulars of the early going, IBM was up a
few dollars, which I can understand. Given the pre-existing level of angst and the
absence of any new bombs in its revelations, I don't find it surprising that the stock
would bounce. But I did find an attempt at a bounce by Texas Instruments
(TXN:NYSE - news - commentary - research - analysis) to be amazing, considering
what Nokia (NOK:Nasdaq - news - commentary - research - analysis) (which was
clocked today for 10%) and Motorola (MOT:NYSE - news - commentary -
research - analysis) said.
It's just stunning that people persist in believing the chip companies (the same
case I just made about Intel) as long as they say good things, rather than
triangulating on all the other plentiful information to find out what's really going on.
Red Polka-Dot Five-Spot: With the evening's results apparently not awful enough
(kind of just in-line awful), we initially had a rally driven by the glass-half-full crowd.
But then the tape turned red after KLA-Tencor (KLAC:Nasdaq - news -
commentary - research - analysis) couldn't paint a rosy-enough picture about what
it saw going forward. The stock was down almost $5 after the first couple of hours,
and that weighed on its mother index, the Nasdaq, which was down 1%, while the
S&P and the Dow were both down just under 0.5%. (More about KLA-Tencor in a
minute.)
Slow-Roasted Sea Gullible: Also roughed up in the early going were all the
equipment stocks, and some of the chip stocks came in, too. That said, an
optimism-fed disconnect was in full swing, with AMD down almost 20% while at the
same time, Intel was barely down. It just goes to show that if you put on a brave
face, people will believe you. The fact is that they will wait for accidents to occur,
i.e., companies have to actually admit it before their stocks get slammed. Of
course, that lesson has been demonstrated by watching how slowly people
responded to IBM's warning signs, dredged up by the "nitpickers."
Hill Mans the Good Sloop Sell: Returning to KLA-Tencor, I think people had their
expectations set too high because of all the things Novellus (NVLS:Nasdaq -
news - commentary - research - analysis) said. Incidentally, in today's "Heard on
the Street" column in The Wall Street Journal, the LYONS issue we talked about a
few days ago is discussed. It also reprised the point we made a while back about
the company's midquarter conference call: If everything was so great, how come
CEO Rick Hill blew out so much stock?
Banging the Conundrum: In any case, maybe the equipment stocks were
mauled in the early going today on the back of expectations being too high, and
KLA-Tencor's skunk-in-the-garden-party report. Not that they didn't deserve it --
because of high valuations and because the thesis is so preposterous -- but it was
an interesting contrast to see the most-loved sector getting beat up when they
didn't announce bad news, and to see stocks that issued bad news not going down
because it wasn't bad enough. Maybe it has to do with the hotness of the money in
the semiconductor equipment stocks, as opposed to some of the other names.
SOX-Less Claws: After the early morning slide, the market attempted to grind
higher and then met with resistance when it was reported that a plane had flown
into a building in Milan, Italy. People were initially concerned that it might be a
terrorist act. After falling out of bed, the market promptly regained its feet, returning
to its level prior to the incident, and spent the rest of the day trying to claw its way
higher. For all intents and purposes, it managed to get back to the opening levels.
The SOX was the index du jour on the downside, led by the equipment stocks, as I
have already described.
Say Limburger Cheese: Other than that, the day was just one giant mishmash,
in which anyone who had a position got shaken. Longs were shaken out of certain
chip-equipment stocks, and shorts were shaken out of stocks like IBM and CDW
Computer Centers. Tonight we'll hear from a bevy of technology titans, and that will
influence tomorrow's action, as will the option expiration. I think I will go out on a
limb and predict volatility, because not writing the Rap tomorrow means I won't
have to deal with my own faulty prediction.
A Piece of Golden Apple Pie (Make That a la
Mode): Away from stocks, the metals were higher
again, up roughly 1% apiece. The dollar was down
against the yen. The euro was back and forth across
unchanged, finally closing up a hair, as did fixed
income.
Of Hopeful Heifers and Waning Zephyrs: Away
from earnings numbers, this morning we had some
economic numbers that I think were basically ignored, though less bullish than the
bulls wanted. The leading indicators were up one-tenth instead of three-tenths, and
initial jobless claims squirted a bunch relative to expectations. I point this out
because I have been trying to make the case that a lot of the good economic news
we had was manufactured via strong seasonals, which of course relate to the
incredibly warm winter we had.
And now, without that tailwind to help the numbers, they're starting to sag. This,
combined with what's really going on in corporate America, is the reason why I
continue to say that the economic fantasy is going to run out of gas sometime in
the next quarter. And that will of course pose big problems for the stock market as
well. So, believers in the fantasy are living on borrowed time.
Bull-Bulging Green Sleeves: Now for some comments on a story in this
morning's Financial Times titled "Greenspan or Greenhorn, the Choice Is Simple."
In it, Gerard Baker basically claims that Greenspan is the greatest and we ought to
have him back. The thrust of the argument is that the people who are critics of
Greenspan, like myself, are wrong, because if we were right about him precipitating
such a big bubble, how come we've had such minimal consequences? This is in
fact the bull case, that we had this great party and the hangover's been so tiny that
it all goes to prove how great he is, and why stocks should be bought at such silly
prices.
Fault Lines in Bully Fan Club: But this case makes the assumption that
whatever bad stuff is going to happen is done. In 1991, the Japanese probably
didn't think things were so bad after their bubble, either. The fact of the matter is
that the jury is still out, which is why I keep saying that by the time we get through
2002, there will be a massive change in psychology. If I'm right, it will be proven
that Greenspan wasn't able to save the day, and the damage that ought to have
come from the bubble was just postponed for a variety of reasons, which I have
described in the past. It's almost as though people have fallen off a 1,000-foot
building. Instead of being scared at the halfway-down point, they're emboldened
because they haven't hit yet, and now they think they can fly.
Sink-Holistic Medicine: This is why 2002 is such an important year. Stock prices
are still silly, expectations are way too high, and if those expectations are not met,
people will have to reassess what the whole last five to seven years have been
about. When reality finally sinks in, we will have a huge mess on our hands, which
is why it's important to be prepared.
__________________________
William Fleckenstein is the president of Fleckenstein Capital, which manages a
hedge fund based in Seattle. Outside contributing columnists for TheStreet.com
and RealMoney, including Mr. Fleckenstein, may, from time to time, write about
securities in which they have a position. In such cases, appropriate disclosure is
made. At time of publication, Fleckenstein Capital was short Broadcom, short
CDW Computer Centers, long CDW Computer Centers puts, long IBM puts and
long Intel puts, although 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 Mr.
Fleckenstein's columns are his own and not necessarily those of TheStreet.com.
While Mr. Fleckenstein cannot provide personalized investment advice or
recommendations, he invites you to send comments on his column to
bfleckenstein@realmoney.com." |
