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The Market Ticker – Forecast For Next Week: Complacency
With the VIX at 13.05, down 3.8% on the day, there is no fear in the market right now. We're in the same place where we were in 2006 and 2007 — when all hell was about to break out.
Not that there should be with the S&P at 1473 and the Transports on fire since the first of the year.
Then there's The Fed transcripts from 2007 which were released this morning. They show a Fed that was unable to deal with reality nor what they knew what (at that point) was coming — particularly given Ben Bernanke's ridiculous statements regarding housing previously (which were, I remind you, made under oath.)
The market folks are trying to spin this as “mistakes.” There was no mistake made with “subprime” and similar lending — it was the intentional policy of all arms of government, including The Fed, to permit lending to take place (1) without any capital behind it and (2) without regard to actual ability to pay.
There is no other way to interpret what happened. You cannot explain AIG, for example, any other way — a company that wrote a ridiculous amount of credit insurance with exactly nothing in the ability to actually pay claims.
This sort of behavior, or its kissing-cousin in writing $2m in mortgages to someone who makes $100,000 a year and thus could not possibly pay under the original amortization schedule is nothing more or less than outright fraud.
Someone is going to get screwed. We are only arguing over who gets screwed with the entire game run by these institutions being one of trying to dispose of the ticking nuclear financial device before it explodes, never being exactly sure how much time remains on the clock.
Today we're doing the same thing but with the Federal Budget. Nobody knows exactly when the market wakes up to this and decides to say enough! But that time will come.
In the meantime companies are once again juicing earnings with buybacks, which amplify movement in the stock price in both directions. What looks great on the way up is terrifying on the way down, and was largely responsible for the more than 50% decline in 2008 and early 2009. It appears that nobody has learned this lesson, however — nor will they until it happens again and again. Never mind that a stock buyback is a statement by management that they have nothing they can spend retained earnings on that will grow the business' top-line revenue at a margin better than what they're doing now.
In short, a buyback is a statement that management is incapable of innovating and growing the company. It's a declaration of failure, yet it is commonly cheered in the marketplace.
Never believe that “analysts” are in fact smart. They're just salesmen.
Next week we get into the “meat” of earnings season. GE looked good today, but Johnson Controls, which is one of the fingers on the pulse of American manufacturing and industry, offered soft guidance and got hammered for 3.5%.
I believe JCI's forward look more than I care about GE's backward view.
Intel is another example. Intel cited soft PC demand. The truth is a bit more complex.
PCs have been commodity items since Compaq came on the scene, and then the Japanese clones showed up (Tatung anyone?) But there has been a relentless strive forward for most users, driving a roughly 18 month replacement cycle. You wouldn't know that from some folks, but it's there and it's been very significant.
Until about two years ago.
Current-generation PCs are about all that the common person will get benefit from. In the last year I performed the last upgrade I'm likely to on my desktop machine for the next several years.
Why?
Because I can't get anything more out of my common workday applications — even the higher end ones — by buying more hardware. And my applications are pretty rigorous, including video editing and production.
The same is true of my laptop. I can't come up with a performance reason to upgrade it, which means I'm not in the market any more. There is simply nothing that I can buy which will be materially better in performance on the tasks I perform — no matter how much money I spend.
The price:performance ratio of a new PC acquisition is therefore infinite, since the available performance increment in terms of actual material impact is zero!
Everyone claims the real problem is the “shift to tablets.” Nonsense. Those are mostly add-ons; they simply are not suitable for anything other than media consumption. For that they're fine, but for any sort of actual creation of content, even simple content such as emails, they suck now and will continue to suck tomorrow until and unless near-perfect voice recognition becomes available, if it ever does. And even then it will only cover a small part of the need — are you willing to dictate a letter to your boss out loud in an airport waiting area?
I didn't think so.
If you think this won't hit phones and tablets next, you're wrong. It has already to some degree (Apple anyone?) and will continue to. Reality is that these cycles have shortened every year since I began working in this industry in the 1980s, and we're approaching the zero-return point for phones and tablets as well. Tablets are a year or two behind phones, but when it comes to high-end smartphones what is there you'd like to see that the iPhone or Galaxy III doesn't do and yet can still fit in your pocket?
This is one of the reasons that RIMM has momentum right now — they have one more cycle with which to play. Apple has fallen more than 20% precisely because they don't, and Samsung is currently riding its terminal wave in this regard. Those who cite “China” or “India” as the next place to try to find an exponential growth curve are nuts; there aren't enough people with money in those nations to do so, and as such what you need to build for those markets is inexpensive products, not high-margin top-line ones. (That, incidentally, is one of the markets that RIMM still kills their competitors in — markets for relatively inexpensive smart phones that are very conservative in the amount of data they require — something the Blackberry is very good at managing.)
I am negative on Google's outlook, although their 4th quarter is probably going to be pretty good. It's the forward view that's trouble there, just as it is for JCI.
Overall the financials have put up good numbers, but I believe they're the high point for this earnings season, particularly on forward expectations.
And the market doesn't pay for previous performance — it pays for forward expectations.
This next week should be interesting; with the S&P sitting right on a technical breakout but unable to build on its early-morning advance. Any material pattern of misses is likely to lead to a big move southbound given the complacency exhibited and “expectations” that all will be well. Adding to the risk is the fact that the market is closed Monday, and you have a recipe for quite a bit of volatility next week, with the direction of the next big move being set in the coming week tailored by the outlooks reported — not their actual EPS.
2013-01-18 10:30:08
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