Don't buy the recovery story
No matter how much economists bend the statistics, we're still not
creating jobs; plus, a falling dollar could disrupt both the market and the economy.
For last week's final "Market Rap" on RealMoney, I sketched an overview of where we were when my column first ran there, and where we are today.
It's a perspective that I would like to share in this week's edition of the Contrarian Chronicles. (You can subscribe to Market Rap at my Web site.)
A blameworthy bubble
After the Sept. 11 terrorist attacks in 2001 and having written my
column for a total of about five years, I actually considered putting the keyboard away altogether. I decided against this, however. It seemed to me that too many people believed the problems of the stock market and the economy were the result of the Sept. 11 attacks, and I wanted to tackle those issues.
To recap, I believed that the problems confronting the economy in 2002
stemmed not from the terrorist attacks, but rather from the residue of
the 1990s bubble. In early 2002, the economy appeared to be strong, but there were a lot of seasonal-adjustment snafus that resulted from warm weather. As the year wore on, it became clear that the economy wasn't recovering, nor was the stock market. In early 2003, we had another version of the same thing with the weakness blamed on the buildup and then the war with Iraq. But I also thought we were on the verge of a big relief rally that would ultimately fizzle, setting the stage for a big wipeout in the fall.
As we entered the second half of 2003, the new tax cuts kicked in,
and the economy looked a little better. (The economy actually did better in the last year or so than I would have guessed. Folks leveraged up their homes. They lived off the equity built up in the housing bubble, which itself was precipitated by Al's 13 panicky interest-rate cuts.)
The data will bring disappointment
As many of you know, I have felt for some time that folks' belief in
the rebirth of good times during the second half would fall apart. I expected that once the tax cuts washed through, and the refi game had seen its last spurt (as rates rose), the economic data would show slippage, starting with the September numbers. Folks were initially disappointed by last week's statistics, as consumer confidence was reported at 76.8, vs. 80.5, but then came Friday's employment data, and hopes soared anew.
However, as we move deeper into the fall,
I expect that the data will depict an economy that is slipping, because no matter how much you're willing to torture the statistics, you can't have a self-sustaining recovery if you don't create jobs. (That we are still not doing, despite the hoopla over Friday's employment report - - as two-thirds of the gain was from the temporary-help category.)
A lot of hopes have been hung on the fourth quarter, which is where
all second- half hopes now must reside, and much is hoped for in 2004.
I think both the economy and the stock market
are going to be in trouble in the fourth quarter and 2004. Even though it's a low-probability event, I still would not rule out a crash-like ending to this bear-market rally.
Intervention cavalry in currency land
The key right now is the dollar. Last week, it fell in near-freefall
fashion, notably weak against the yen, even though the Bank of Japan intervened twice last Tuesday to try to drive it higher. Were it not for the end-of-the-quarter book- closing going on around the globe and the end of the half-year in Japan, I would feel very confident that the dollar rout is under way, and a smashing of equities is not too far off, either.
However, there may be an extra dollop of momentum that's been tossed
into the currency arena, due to the calendar as I just described it. Perhaps we will see a dollar bounce before the decline begins anew, which would probably bounce equities as well. If that scenario plays out, I would think it would be a failing rally that folks would want to sell.
Bounce notwithstanding, the most bearish thing about the decline in
the dollar is that it has been occurring for no stated reason in the last few days. The dollar index has now returned to the lows of the spring. If and when that level is breached, I expect to see some real fireworks in equities and precious metals.
Sketching a stock sextant, a metallic map
Turning to equities and the metals, in particular, here's a rough roadmap of what I see for the fall. I sold gold a week ago (as I stated at that time), though I did not disturb my Newmont Mining position. That is a very large position for me. As I mentioned last week, I thought gold was ripe for a setback. I am now watching closely for where I want to re-establish my position. I will note it in Contrarian Chronicles when I do (but it may be a few days after the fact). However, there is no guarantee I'll actually be able to buy gold back below where I sold it. That's why I don't advocate people trying to trade the metals market. If you have an outsized
position, it might make sense to trim it from time to time. That way, you won't be penalized if it gets away from you. But if you don't have an outsized position, you don't want to get left behind.
As for stocks, I have not been surprised by the paucity of earnings
pre- announcements by companies coming into the end of the third quarter.
A bar that had been set pretty low in most cases, the tax rebates and the last gasp of the housing boom, coupled with inventory building in certain sections of technology, set the stage for companies to make their modest numbers. Nonetheless, I did not anticipate the inventory buildup and consequently was surprised over the summer that Intel did as well as it did. But looking at what we now know about what I just said, the fact that some companies are building inventory and hoping for the vaunted second-half recovery I guess comes as no surprise and is somewhat consistent.
Inventory: the unexpurgated story
In any case, I think most of the chip companies will make the numbers.
Any company supplying parts to cell phones or PCs is benefiting by a big inventory buildup. This is especially true in cell phones. However, once we get those earnings released, I think the opportunity to capitalize on the downside will be at hand. The key moment for those stocks, barring any outside forces that impinge on the markets prior to then, will be a couple weeks from now. Intel will be the key stock at that time. I have no idea what these companies are going to guide to. I just know that the end markets for their products are not moving. All this inventory that's being built will back up the food chain, and the chip sector will experience real problems in the next six months.
I think the places where there could be some problems are with the
companies that actually have products to sell. Obviously, last Tuesday's pre-announcement from Sun Microsystems shows that servers aren't flying out the door. Hewlett-Packard's comments a month or so ago are indicative of things being slow there. So I think that companies that actually have to sell to customers, as opposed to companies that can benefit from inventory-building, will be where the problems are.
Uncertainty facing the networking sector
I think the network sector could be particularly vulnerable, because
the regional Bell operating companies (RBOCs) have announced that they
are cutting capital expenditures, and there are no real signs of life there.
That means the Cisco Systems and Juniper Networks of the world may be the most vulnerable. And I believe IBM could potentially see some problems, too. Despite rumors that it has gotten some big service contracts, I haven't seen them announced. And it didn't look like Hewlett-Packard got that many big service contracts.
I think semiconductor-equipment stocks are vulnerable, but I am not
quite sure when to focus on them. I think Nokia also could be vulnerable.
Out of this list of stocks that I just discussed, I am presently short
a little of all the following: Cisco, Juniper, IBM and Intel, as well as Applied Materials, though that could change at any time. Obviously, things are going to change, as will my ideas, and I will try to talk about that as I go forward.
Finally, I think all of the Internet stuff is going to get shredded.
I tend not to short Internet-type stocks. They basically have no fundamentals, and therefore they are purely a function of imagination and can trade anywhere they want to. However, I have taken a tiny, tiny short position in Amazon.com and InfoSpace.
Contemplate, don't activate
I go into all this detail not to suggest that anyone do anything I
do -- my positions can and do change quickly at times. My goal, as I have stated often, is to provide food for thought, not recommendations. The last thing I want to do is give out information that's going to get people in trouble. My goal has always been just the opposite -- to try to help folks out.
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No matter how much economists bend the statistics, we're still not
creating jobs; plus, a falling dollar could disrupt both the market and the economy.
For last week's final "Market Rap" on RealMoney, I sketched an overview of where we were when my column first ran there, and where we are today.
It's a perspective that I would like to share in this week's edition of the Contrarian Chronicles. (You can subscribe to Market Rap at my Web site.)
A blameworthy bubble
After the Sept. 11 terrorist attacks in 2001 and having written my
column for a total of about five years, I actually considered putting the keyboard away altogether. I decided against this, however. It seemed to me that too many people believed the problems of the stock market and the economy were the result of the Sept. 11 attacks, and I wanted to tackle those issues.
To recap, I believed that the problems confronting the economy in 2002
stemmed not from the terrorist attacks, but rather from the residue of
the 1990s bubble. In early 2002, the economy appeared to be strong, but there were a lot of seasonal-adjustment snafus that resulted from warm weather. As the year wore on, it became clear that the economy wasn't recovering, nor was the stock market. In early 2003, we had another version of the same thing with the weakness blamed on the buildup and then the war with Iraq. But I also thought we were on the verge of a big relief rally that would ultimately fizzle, setting the stage for a big wipeout in the fall.
As we entered the second half of 2003, the new tax cuts kicked in,
and the economy looked a little better. (The economy actually did better in the last year or so than I would have guessed. Folks leveraged up their homes. They lived off the equity built up in the housing bubble, which itself was precipitated by Al's 13 panicky interest-rate cuts.)
The data will bring disappointment
As many of you know, I have felt for some time that folks' belief in
the rebirth of good times during the second half would fall apart. I expected that once the tax cuts washed through, and the refi game had seen its last spurt (as rates rose), the economic data would show slippage, starting with the September numbers. Folks were initially disappointed by last week's statistics, as consumer confidence was reported at 76.8, vs. 80.5, but then came Friday's employment data, and hopes soared anew.
However, as we move deeper into the fall,
I expect that the data will depict an economy that is slipping, because no matter how much you're willing to torture the statistics, you can't have a self-sustaining recovery if you don't create jobs. (That we are still not doing, despite the hoopla over Friday's employment report - - as two-thirds of the gain was from the temporary-help category.)
A lot of hopes have been hung on the fourth quarter, which is where
all second- half hopes now must reside, and much is hoped for in 2004.
I think both the economy and the stock market
are going to be in trouble in the fourth quarter and 2004. Even though it's a low-probability event, I still would not rule out a crash-like ending to this bear-market rally.
Intervention cavalry in currency land
The key right now is the dollar. Last week, it fell in near-freefall
fashion, notably weak against the yen, even though the Bank of Japan intervened twice last Tuesday to try to drive it higher. Were it not for the end-of-the-quarter book- closing going on around the globe and the end of the half-year in Japan, I would feel very confident that the dollar rout is under way, and a smashing of equities is not too far off, either.
However, there may be an extra dollop of momentum that's been tossed
into the currency arena, due to the calendar as I just described it. Perhaps we will see a dollar bounce before the decline begins anew, which would probably bounce equities as well. If that scenario plays out, I would think it would be a failing rally that folks would want to sell.
Bounce notwithstanding, the most bearish thing about the decline in
the dollar is that it has been occurring for no stated reason in the last few days. The dollar index has now returned to the lows of the spring. If and when that level is breached, I expect to see some real fireworks in equities and precious metals.
Sketching a stock sextant, a metallic map
Turning to equities and the metals, in particular, here's a rough roadmap of what I see for the fall. I sold gold a week ago (as I stated at that time), though I did not disturb my Newmont Mining position. That is a very large position for me. As I mentioned last week, I thought gold was ripe for a setback. I am now watching closely for where I want to re-establish my position. I will note it in Contrarian Chronicles when I do (but it may be a few days after the fact). However, there is no guarantee I'll actually be able to buy gold back below where I sold it. That's why I don't advocate people trying to trade the metals market. If you have an outsized
position, it might make sense to trim it from time to time. That way, you won't be penalized if it gets away from you. But if you don't have an outsized position, you don't want to get left behind.
As for stocks, I have not been surprised by the paucity of earnings
pre- announcements by companies coming into the end of the third quarter.
A bar that had been set pretty low in most cases, the tax rebates and the last gasp of the housing boom, coupled with inventory building in certain sections of technology, set the stage for companies to make their modest numbers. Nonetheless, I did not anticipate the inventory buildup and consequently was surprised over the summer that Intel did as well as it did. But looking at what we now know about what I just said, the fact that some companies are building inventory and hoping for the vaunted second-half recovery I guess comes as no surprise and is somewhat consistent.
Inventory: the unexpurgated story
In any case, I think most of the chip companies will make the numbers.
Any company supplying parts to cell phones or PCs is benefiting by a big inventory buildup. This is especially true in cell phones. However, once we get those earnings released, I think the opportunity to capitalize on the downside will be at hand. The key moment for those stocks, barring any outside forces that impinge on the markets prior to then, will be a couple weeks from now. Intel will be the key stock at that time. I have no idea what these companies are going to guide to. I just know that the end markets for their products are not moving. All this inventory that's being built will back up the food chain, and the chip sector will experience real problems in the next six months.
I think the places where there could be some problems are with the
companies that actually have products to sell. Obviously, last Tuesday's pre-announcement from Sun Microsystems shows that servers aren't flying out the door. Hewlett-Packard's comments a month or so ago are indicative of things being slow there. So I think that companies that actually have to sell to customers, as opposed to companies that can benefit from inventory-building, will be where the problems are.
Uncertainty facing the networking sector
I think the network sector could be particularly vulnerable, because
the regional Bell operating companies (RBOCs) have announced that they
are cutting capital expenditures, and there are no real signs of life there.
That means the Cisco Systems and Juniper Networks of the world may be the most vulnerable. And I believe IBM could potentially see some problems, too. Despite rumors that it has gotten some big service contracts, I haven't seen them announced. And it didn't look like Hewlett-Packard got that many big service contracts.
I think semiconductor-equipment stocks are vulnerable, but I am not
quite sure when to focus on them. I think Nokia also could be vulnerable.
Out of this list of stocks that I just discussed, I am presently short
a little of all the following: Cisco, Juniper, IBM and Intel, as well as Applied Materials, though that could change at any time. Obviously, things are going to change, as will my ideas, and I will try to talk about that as I go forward.
Finally, I think all of the Internet stuff is going to get shredded.
I tend not to short Internet-type stocks. They basically have no fundamentals, and therefore they are purely a function of imagination and can trade anywhere they want to. However, I have taken a tiny, tiny short position in Amazon.com and InfoSpace.
Contemplate, don't activate
I go into all this detail not to suggest that anyone do anything I
do -- my positions can and do change quickly at times. My goal, as I have stated often, is to provide food for thought, not recommendations. The last thing I want to do is give out information that's going to get people in trouble. My goal has always been just the opposite -- to try to help folks out.
