Enviado: 21/4/2008 15:56Depois destas semanas "Bullish", Kass explica porque volta a ficar "bearish".
"Wave Goodbye to the Rally"
By Doug Kass
4/21/2008 9:59 AM EDT
"Encouraged by a nearly 5% ride to the upside last week, investors have been emboldened.
For the record, The Edge did not endorse a Cassandra-like market/economic prediction even when things looked dark during the height of the credit crisis in January and March.
Back in early February, I suggested that the SocGen market bottom would likely mark the averages' nadir and that the March test would prove to be another successful one. About a month ago, for emphasis, I became very bullish in my short-term market outlook, suggesting that a vigorous upside trading opportunity to the top end of the recent trading range could be forthcoming.
Those market expectations have been met. Year-to-date, the S&P 500 has declined by only 5.3%, at the bottom end of the 5% to 10% drop I suggested in my list of surprises for 2008. And now the S&P is nearly 10% above 2008's low. Many stocks (especially of a materials kind) have risen by even a greater amount.
Importantly, I would not confuse the current rally as evidence that business conditions are improving; they are not. From my perch, the pendulum of valuation has simply bounced off depressed, oversold and panicky levels toward fair to slightly overvalued levels. Indeed, equities continue to face a number of headwinds (the most significant being a consumer-led downturn), which suggest that optimistic profit expectations for the last half of 2008 and for 2009 might be unrealistic, posing a risk to continued stock market gains.
Economic Activity Is Slowing
While investors have been giddy with several high-profile profit beats last week (albeit from previously lowered expectations), a marked deceleration in organic growth at two of the larger diversified industrial companies -- General Electric (GE - commentary - Cramer's Take), sequentially from 8% to 5%, and Danaher (DHR - commentary - Cramer's Take), from 5% to 2% -- signal a more accurate reflection of emerging negative economic momentum. From my perch, a second-half recovery in the U.S. economy seems less likely than is widely assumed by market participants. If my thesis is correct, the strength in the emerging market economies (and the new paradigm of decoupling), which have served to stir the drink of non-U.S. profits, might be tested.
An Increasingly Giddy Market for Tech Stocks
The Nasdaq, after climbing vigorously in the second half of 2006, is now above January 2007 levels. (At Friday's close, I shorted the Powershares QQQ (QQQQ - commentary - Cramer's Take).) Now trading at approximately 18 times forward earnings estimates, the technology sector incorporates the forecast of about 19% profit growth, which, based on current macro and micro trends seems unrealistic.
At the same time, the investment strategists at Merrill Lynch and Goldman Sachs warn that technology is among the most overweighted and least shorted sectors by mutual funds and hedge funds (reminiscent of six years ago). Moreover, amid continued economic uncertainty, business and tech expenditures will likely be reduced over the next six months. For example, despite the media's fanfare IBM's (IBM - commentary - Cramer's Take) hardware business was down 7% on a constant currency basis.
The two most important sources of end-market demand -- consumers and financial companies -- have only recently begun to cut back (within the context of the aforementioned and growing hockey stick expectations for recovery). It takes a while for large corporations to slam on the IT budget brakes (e.g., the summer 2002 downturn). Historical data on IT spending shows the cutting usually doesn't start until we are well into a recession and actually continues past the end of a recession and takes some time to recover. And there is no guarantee this will be a short recession either.
In light of the carnage in the financial sector, Citibank (C - commentary - Cramer's Take) stands as a template of how profit pressures will weigh on bank tech budgets and corporate tech budgets overall. Citibank has been under enormous pressure for a long time now and is just getting around to slashing its technology budget. The rest of corporate America is the same. It takes a while to put the brakes on a battleship, and this is the reason for the aforementioned pattern of technology budget cuts not occurring until well into a recession as budgets are adjusted.
Finally, European tech strength is a myth as it is almost only foreign exchange translation that is (optically) helping tech companies. On a unit basis, their European business has already turned down.
Conditions Mischaracterized at High-Profile Tech Companies
Intel (INTC - commentary - Cramer's Take) is an example of a tech company that is largely exposed to PC unit sales but also has a number of company-specific factors (inventory, share gain/loss, product cycle, etc.) Investors' focus on better-than-expected numbers at Intel is the most baffling. Intel lowered guidance for the March quarter when it reported in mid-January. Then the company pre-announced the quarter to the downside again. So, in essence, Intel incrementally beat twice lowered numbers.
Also, take into account that the company resides deep in the supply chain and has very little feel for real end-market demand. Intel knows what its order book looks like, but often that view is vastly different than demand as either inventory is building or demand has slowed while customers have not cut orders yet.
The company seems to view things through rose-colored glasses. That is why it seems to miss or lower guidance about every third quarter. Also, in this case, Intel is gaining a lot of market share from Advanced Micro Devices (AMD - commentary - Cramer's Take). The sum total of AMD and Intel performance was not impressive nor were the misses and poor guidance from Avnet (AVT - commentary - Cramer's Take) and Seagate Technology (STX - commentary - Cramer's Take), which are exposed to broad demand trends.
Lastly, the recently reported IDC PC unit data showed that U.S. PC demand for the first quarter slowed sharply to 3% year over year and included this caveat that went widely unreported:
"The preliminary results show that the price pressure during the quarter was greater than we expected. Indications are that the market felt the squeeze in the second half of the quarter. The U.S. market is softening, and this can potentially hasten downward price pressure and further intensify competition for the rest of 2008."
Or consider the euphoric reaction to Google's (GOOG - commentary - Cramer's Take) earnings after the market closed on Thursday, which seemed to be the proximate cause of Friday's market celebration. If I remember correctly, Google missed the previous quarter, estimates were cut several times during the most recently reported quarter, and the company only delivered on the original forecast. On top of which, Google's results showed another deceleration in its growth rate (especially of a domestic kind), and the company's earnings quality, as chronicled by Bill Fleckenstein below, might be an issue for analytical discussion in the weeks ahead:
"Google helped ignite an explosive party as it managed to win at 'beat the number,' as expectations had been lowered. And then, Google dropped its tax rate about 4 points, which wound up creating the illusion that the company experienced a spectacular quarter.... Google's earnings results, even with the tax-rate fiddle, were about where expectations had been set initially. Meanwhile, Google experienced a total collapse in its revenue growth rate. So, all in all, it was really much ado about not much."
The Times They Are A-Changin'
Fifteen months ago (when the Nasdaq was lower than current levels), domestic credit was cheap and readily available (as the subprime meltdown had not climbed the ladder of credit), the consumer was "healthy", job growth was solid, the world's financial institutions had experienced only limited writedowns (and their net worths and returns on capital were still intact), domestic bank bailouts were a figment of the bears' imagination and so was the need for bailouts across the pond not seen as necessary or with any clarity, there was little evidence of a scarcity or inflation in food prices, crude oil prices were 50% lower than today, private equity had an endless pocketbook, China's stock market was scaling new heights (and its economy embodied the newest paradigm), and housing activity (though moderating) was still elevated. Today, the aforementioned conditions have all turned negative -- in certain cases dramatically so -- and, with that, the specter of lower profit margins are immediately ahead. For example, housing faces an uncertain future as mortgage rates respond to higher Treasury yields.
The Political Climate Still Augurs Poorly for the Markets
A Democratic populist attack of "prosperity killers," portending more burdensome regulation, higher tax rates, a weakening U.S. dollar, rising protectionism and higher inflation, moves closer in time and probability. While RealClearPolitics reports that the Democratic nominees' lead has been narrowing, a "blue" November Presidential victory remains my baseline expectation and, with it, policy initiatives that could prove to be a challenge for the equity markets.
Just One of Those Crazy Flings
To be sure, many of the positive factors that I highlighted weeks ago have not disappeared, but, from my perch, the market's rise has resulted in market participants (who previously ignored the positives) to adopt an increasingly optimistic demeanor without an eye for headwinds and risks.
Accordingly, I am moving ever so slightly toward the bearish camp in my short-term market outlook for the first time in many weeks. The rally has been great fun, but, to paraphrase Cole Porter, it has just been one of those crazy flings. "
(in www.realmoney.com)
"Wave Goodbye to the Rally"
By Doug Kass
4/21/2008 9:59 AM EDT
"Encouraged by a nearly 5% ride to the upside last week, investors have been emboldened.
For the record, The Edge did not endorse a Cassandra-like market/economic prediction even when things looked dark during the height of the credit crisis in January and March.
Back in early February, I suggested that the SocGen market bottom would likely mark the averages' nadir and that the March test would prove to be another successful one. About a month ago, for emphasis, I became very bullish in my short-term market outlook, suggesting that a vigorous upside trading opportunity to the top end of the recent trading range could be forthcoming.
Those market expectations have been met. Year-to-date, the S&P 500 has declined by only 5.3%, at the bottom end of the 5% to 10% drop I suggested in my list of surprises for 2008. And now the S&P is nearly 10% above 2008's low. Many stocks (especially of a materials kind) have risen by even a greater amount.
Importantly, I would not confuse the current rally as evidence that business conditions are improving; they are not. From my perch, the pendulum of valuation has simply bounced off depressed, oversold and panicky levels toward fair to slightly overvalued levels. Indeed, equities continue to face a number of headwinds (the most significant being a consumer-led downturn), which suggest that optimistic profit expectations for the last half of 2008 and for 2009 might be unrealistic, posing a risk to continued stock market gains.
Economic Activity Is Slowing
While investors have been giddy with several high-profile profit beats last week (albeit from previously lowered expectations), a marked deceleration in organic growth at two of the larger diversified industrial companies -- General Electric (GE - commentary - Cramer's Take), sequentially from 8% to 5%, and Danaher (DHR - commentary - Cramer's Take), from 5% to 2% -- signal a more accurate reflection of emerging negative economic momentum. From my perch, a second-half recovery in the U.S. economy seems less likely than is widely assumed by market participants. If my thesis is correct, the strength in the emerging market economies (and the new paradigm of decoupling), which have served to stir the drink of non-U.S. profits, might be tested.
An Increasingly Giddy Market for Tech Stocks
The Nasdaq, after climbing vigorously in the second half of 2006, is now above January 2007 levels. (At Friday's close, I shorted the Powershares QQQ (QQQQ - commentary - Cramer's Take).) Now trading at approximately 18 times forward earnings estimates, the technology sector incorporates the forecast of about 19% profit growth, which, based on current macro and micro trends seems unrealistic.
At the same time, the investment strategists at Merrill Lynch and Goldman Sachs warn that technology is among the most overweighted and least shorted sectors by mutual funds and hedge funds (reminiscent of six years ago). Moreover, amid continued economic uncertainty, business and tech expenditures will likely be reduced over the next six months. For example, despite the media's fanfare IBM's (IBM - commentary - Cramer's Take) hardware business was down 7% on a constant currency basis.
The two most important sources of end-market demand -- consumers and financial companies -- have only recently begun to cut back (within the context of the aforementioned and growing hockey stick expectations for recovery). It takes a while for large corporations to slam on the IT budget brakes (e.g., the summer 2002 downturn). Historical data on IT spending shows the cutting usually doesn't start until we are well into a recession and actually continues past the end of a recession and takes some time to recover. And there is no guarantee this will be a short recession either.
In light of the carnage in the financial sector, Citibank (C - commentary - Cramer's Take) stands as a template of how profit pressures will weigh on bank tech budgets and corporate tech budgets overall. Citibank has been under enormous pressure for a long time now and is just getting around to slashing its technology budget. The rest of corporate America is the same. It takes a while to put the brakes on a battleship, and this is the reason for the aforementioned pattern of technology budget cuts not occurring until well into a recession as budgets are adjusted.
Finally, European tech strength is a myth as it is almost only foreign exchange translation that is (optically) helping tech companies. On a unit basis, their European business has already turned down.
Conditions Mischaracterized at High-Profile Tech Companies
Intel (INTC - commentary - Cramer's Take) is an example of a tech company that is largely exposed to PC unit sales but also has a number of company-specific factors (inventory, share gain/loss, product cycle, etc.) Investors' focus on better-than-expected numbers at Intel is the most baffling. Intel lowered guidance for the March quarter when it reported in mid-January. Then the company pre-announced the quarter to the downside again. So, in essence, Intel incrementally beat twice lowered numbers.
Also, take into account that the company resides deep in the supply chain and has very little feel for real end-market demand. Intel knows what its order book looks like, but often that view is vastly different than demand as either inventory is building or demand has slowed while customers have not cut orders yet.
The company seems to view things through rose-colored glasses. That is why it seems to miss or lower guidance about every third quarter. Also, in this case, Intel is gaining a lot of market share from Advanced Micro Devices (AMD - commentary - Cramer's Take). The sum total of AMD and Intel performance was not impressive nor were the misses and poor guidance from Avnet (AVT - commentary - Cramer's Take) and Seagate Technology (STX - commentary - Cramer's Take), which are exposed to broad demand trends.
Lastly, the recently reported IDC PC unit data showed that U.S. PC demand for the first quarter slowed sharply to 3% year over year and included this caveat that went widely unreported:
"The preliminary results show that the price pressure during the quarter was greater than we expected. Indications are that the market felt the squeeze in the second half of the quarter. The U.S. market is softening, and this can potentially hasten downward price pressure and further intensify competition for the rest of 2008."
Or consider the euphoric reaction to Google's (GOOG - commentary - Cramer's Take) earnings after the market closed on Thursday, which seemed to be the proximate cause of Friday's market celebration. If I remember correctly, Google missed the previous quarter, estimates were cut several times during the most recently reported quarter, and the company only delivered on the original forecast. On top of which, Google's results showed another deceleration in its growth rate (especially of a domestic kind), and the company's earnings quality, as chronicled by Bill Fleckenstein below, might be an issue for analytical discussion in the weeks ahead:
"Google helped ignite an explosive party as it managed to win at 'beat the number,' as expectations had been lowered. And then, Google dropped its tax rate about 4 points, which wound up creating the illusion that the company experienced a spectacular quarter.... Google's earnings results, even with the tax-rate fiddle, were about where expectations had been set initially. Meanwhile, Google experienced a total collapse in its revenue growth rate. So, all in all, it was really much ado about not much."
The Times They Are A-Changin'
Fifteen months ago (when the Nasdaq was lower than current levels), domestic credit was cheap and readily available (as the subprime meltdown had not climbed the ladder of credit), the consumer was "healthy", job growth was solid, the world's financial institutions had experienced only limited writedowns (and their net worths and returns on capital were still intact), domestic bank bailouts were a figment of the bears' imagination and so was the need for bailouts across the pond not seen as necessary or with any clarity, there was little evidence of a scarcity or inflation in food prices, crude oil prices were 50% lower than today, private equity had an endless pocketbook, China's stock market was scaling new heights (and its economy embodied the newest paradigm), and housing activity (though moderating) was still elevated. Today, the aforementioned conditions have all turned negative -- in certain cases dramatically so -- and, with that, the specter of lower profit margins are immediately ahead. For example, housing faces an uncertain future as mortgage rates respond to higher Treasury yields.
The Political Climate Still Augurs Poorly for the Markets
A Democratic populist attack of "prosperity killers," portending more burdensome regulation, higher tax rates, a weakening U.S. dollar, rising protectionism and higher inflation, moves closer in time and probability. While RealClearPolitics reports that the Democratic nominees' lead has been narrowing, a "blue" November Presidential victory remains my baseline expectation and, with it, policy initiatives that could prove to be a challenge for the equity markets.
Just One of Those Crazy Flings
To be sure, many of the positive factors that I highlighted weeks ago have not disappeared, but, from my perch, the market's rise has resulted in market participants (who previously ignored the positives) to adopt an increasingly optimistic demeanor without an eye for headwinds and risks.
Accordingly, I am moving ever so slightly toward the bearish camp in my short-term market outlook for the first time in many weeks. The rally has been great fun, but, to paraphrase Cole Porter, it has just been one of those crazy flings. "
(in www.realmoney.com)