Editor's Note: Bill Fleckenstein's column runs exclusively on RealMoney.com; this is a special free look at his column. For a free trial subscription to RealMoney.com, click here. This article was published March 22 on RealMoney.
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Read This Rant-Some Note, But Send No Cash
: Buckle up, ladies and gentlemen, and be forewarned. This will be a long one. I'm going to rant first and discuss the casino action (which is, of course, the basis for my rant) afterward. It's not even worth discussing the action in the rest of the world, because yesterday's late-day and after-hours folly over here is what counts. For its sheer ridiculousness, it bears reprising, so let's begin right now.
Rundown on the Ramp-Up
: If you recall, late yesterday afternoon, a ramp job began. My suspicion was that it had to do with trying to get the
deal done. Yes, people, the market gets bought so that deals can get sold. In any case, as I disgustedly noted yesterday, comments out of none other than
were cited as the reason for the tech bottom. (I talked about why I thought that was so outrageous, so I'm not going to repeat myself today.) Then, after the market closed, results were released by the holiest of holies,
, that the quarter was an abomination. I gave a quick summary of it to
Herb Greenberg, so I don't want to spend too much time going over that now, other than to say it was ugly.
Swallowing Micron Burgers Whole, and Hold the Hynix
: What I said pretty much takes care of it, other than to note that when I got around to listening to the conference call (I gave Herb those comments just from looking at the numbers), I was stunned that not one member of the dead-fish school had asked Micron a single question about the much ballyhooed Hynix deal. This has been the raison d'etre for that company for the last three or four months, and not one question was asked. On the conference call, Micron tried to spin a yarn about server demand screaming back. Now, that's not what you hear from
. And, of course, yesterday
lowered its guidance for the next quarter, when it's normally been flat.
: Then this morning, we were treated to some comments from Hewlett-Packard in a story that ran on
: "Hewlett-Packard's revenues and earnings from services
! are 'well below plan.'" This came from an internal memo (whose existence the company confirmed to
) that was circulated just before the Compaq deal. Obviously, services and servers are not the same, but it's just another data point indicating that there is virtually no incremental IT spending taking place in corporate America.
: And that is why it is completely ridiculous for Micron to make up a story like this. Of course, they basically stole it from Andy Bryant on the
call, when he said that servers were the bright spot. Never mind that none of the guys who sell servers actually agree. When I phoned in my commentary to Herb, I had no position in Micron. In any case, when I saw the stock run up and trade higher than its closing price in New York, I couldn't resist. I shorted some, and I shorted some again today. (I also shorted some
after the ridiculous spike on the back of Sunny Jim Morgan's announcement of a stock split).
: As for the Applied Materials stock split, I know that most of you probably don't have your stocks-split beepers anymore. Remember how crazy things were in the mania when people used to actually think that stock splits were going to make stocks go up? Remember? People thought stock splits were positive. Well, I thought we learned that lesson postbubble, post-Internet scam, post-9/11, post-
. You would think that adults would not speculate with their hard-earned money, buying stock because they announced a stock split. It just goes to show you that either the public or the people hired by them in the form of professional hedge fund managers and mutual fund managers are still "playing the market" like it's keno.
Mandatory Spring Break-Even
: Turning back to Applied Materials, when was the last time anyone can remember that a company whose stock was 50% below its all-time high and only $50 in the first place, and was still forcing employees to cut back hours? According to a story about Applied Materials out of a dead-fish house, "More forced vacations in the current quarter. Independently, we learned that employees at grade level 39 (just below 'director') and above will have to take another week of vacation by the end of April. The additional expense control suggests that management's scrambling to get to break even for the quarter. Our 4-cent estimate is probably too high."
Banana Splits More Compelling
: I guess Internet companies did split their stocks when they were barely making any money, but I don't think they were forcing people to cut back on their hours, and their stocks surely weren't down 50% from the high. Even most Internet companies had the decency to wait until the stocks were $100 or higher before they split them. At their meeting yesterday, Applied Materials said that while its end customers' capacity utilization is running at 50%, they believe it will reach 80% this year, as it has recently bounced up from 35%. Not exactly boom times mandating a stock split, in my opinion.
2, 4, 6, 8, Whadda We Do? Obfuscate
: Let me ask you this: Where's that going to come from? Do we think that end demand for products using semiconductors will double to take capacity utilization rates back to 100% to force people to add capacity? I don't think so. What this is about, ladies and gentlemen, is stock-price management. That's the kindest phrase I can come up with. And Applied Materials is one of the more blatant examples. After all, what do they do? They sell equipment to semiconductor foundries, which make chips that go into doodads that you use.
Why do they need a $30 million ad campaign with great scenery and fancy music, showing a guy speeding down a highway? What does that have to do with what they sell? Once you see that commercial, do you race out and make sure that all the chips in your cell phone were made from equipment manufactured by Applied Materials? Of course not. If, say,
split their stock, would that be applauded or viewed suspiciously?
Gunning It at the Stock Car Races
: Last night's hijinks just go to show you how prevalent speculation still is and how completely and totally unscrupulous managements are in terms of trying to gun their stock prices higher. That's what Micron's nonsense is all about when they get the analysts to set the numbers too high and then walk them down later in the quarter, as we described. That's what Applied Materials' price management is all about, trying to get the stock prices up via a stock split -- the oldest, most idiotic game in the book.
Speculation Dredges Safe Harbor
: So, when I say it's all about speculation, and when I say it's all about muscle, this is what I mean. It's the reason why I focus on these speculative darlings. You may say, "Well, I don't care, I only buy stocks like
" -- which, by the way, preannounced this morning, that's how great their business is. But please bear in mind that when we have this degree of speculation, this much money dislocated in such fashion, and such mass misallocation of capital, we are still headed for real trouble.
Lock Up Your Women and Children and Cash
: Which brings up thoughts of the clueless
Chairman Greenspan, who continues his attempts at inflating the bubble of his own making, and of the other members of the Fed, who are doing the country a great disservice by trying to get people to speculate again. But people at home have to accept some responsibility for what is going on. They work hard for their money, and yet at the drop of a hat, they willingly just throw it away in the stock market. They need to know that engendering all this speculation causes huge problems when it finally unwinds.
The Light at the End of the Seething
: That was my message during the Internet craze, and it remains my message today. A whole lot of people have been hurt, not just the ones who worked at Internet companies. When this huge bubble that we are still in right now finally comes to an end, it will be clear why those of us who seethe this way are as outraged as we are.
: Turning to the pot-calling-the-kettle-black department, this morning, a headline on
caught my eye: "Fannie Mae Said GE Was Hypocritical to Criticize Other's Disclosure." The story said, "'It's the ultimate in hypocrisy for GE to be going in there talking about our disclosure. ... We know less about financial conditions of GE Capital than we do about any bank,'" said Robert McCarson. It's beyond ironic that two large institutions, both of which are involved in financial engineering and neither of which likes to give out much in the way of disclosure, are now slinging mud at each other. If it weren't so serious, it would be hilarious.
In Hoc and Company
: Mr. McCarson went on to say, "Investors are right to be concerned about GE. This is an industrial company that has morphed into a financial services company." Well, he happens to be right about that, but if we're concerned about GE, how can we not be justifiably paranoid about
, considering that Freddie and Fannie collectively have about $2 trillion in debt outstanding (according to
Of Self-Cleaning Ovens and Self-Cleaning Corporations
: Speaking of GE, I should note that in last night's postclose melee, the company reiterated its guidance (for the second time in about a week) that it would make the numbers if the economy was OK. And following up on the stories that have been swirling around about Bill Gross, there was a very fine article in today's
Wall Street Journal
entitled: "How Bond Guru Gross Decided to Take Swat at GE." Even though Mr. Gross was forced to acknowledge that he was wrong about earnings accretion resulting from issuing shares and making acquisitions, he had a couple of very interesting and bold points that I want to reprise: "Everyone on Wall Street knows that GE plays games; it's totally legal but just another example of how companies aren't coming clean with investors."
: Then he went on to say about how after raising money, GE filed another shelf registration, which really made him angry. He commented that "This was an example of how companies trample on investors . . . executives care more about their options than their balance sheets." Obviously, that statement needs no seconding. In any case, the article concluded with a statement of his motives: "I really just want GE to come clean, not to knock them down a notch." I think that is true for all of us who would like to see more integrity in financial statements. It would be better for the market, better for the economy, and better for our country. All of history shows that periods during which standards are reduced dramatically always end in tears.
Of Scapegoats and Lame Duck CFOs
: Finally, I am not alone in thinking that something needs to be done about the way corporate America behaves. Its appetite for reporting bad numbers was the subject of an Op-Ed piece by Holman Jenkins Jr. called, "One More Dirty Job for Accountants: Take the Blame," which ran in Wednesday's
Wall Street Journal
. Though the accountants have obviously signed off on the chicanery, he points out that it all originated inside the corporations themselves. His suggestion was that rather than just making the accountants scapegoats in a witch hunt, "more in need of reforming is a relatively new creature in the corporate landscape, the chief financial officer."
The Exercising of Conscience
: He continues: "Once a sidekick and a gopher for the chief executive, the job increasingly calls for an independent professional who can stand on his own against his boss. For better or for worse, the CFOs have come to personify their companies' image in the marketplace, their career prospects and self-esteem fluctuating hourly with the stock price. This can be an enormously productive managerial incentive -- but also a recipe for going off the rails (think Al Dunlap
yeah, or Enron)." His suggestion is the following: "CFOs won't be happy to hear it, but perhaps the solution is to unhitch their job from the stock incentives that drive the chief executive. One way or another, boards have to find a means to keep the stock-performance engine they've unleashed grounded in economic reality. Turning the CFO into a professional conscience may be it."
: While I obviously agree that something needs to be done to check the unbridled enthusiasm and zeal with which CEOs and CFOs and the rest of corporate executives promote their stocks to make themselves rich, I'm not sure that just creating a CFO with a conscience will be enough to do the job, but I guess it would be a start. All right, that's enough ranting and raving for one day.
AMAT Applies for Green Card
: Turning back to the action, the market opened firmly with high expectations, up fractionally. The SOX was attempting to be powered on the back of the previously described fantasies, but that rally was met with selling. Then we had a good little dip, then a rally back, though a couple of hours into the day, all the indices were down roughly half a percent, and the SOX was down 1%. The only green stock in chip land was Applied Materials, up 29 cents after having been up over a dollar last night and early in the morning. It briefly turned red in early going before coming back.
Box Seats Behind the Box Scores
: Then a tug of war ensued. For about three hours or so, the market ground steadily higher, and by about noon, all the indices were fractionally positive. Then, a sort of slip-sliding took place. The rest of the afternoon was spent surrendering the gains of the rally, and we basically finished pretty close to the lows of the day. A glance at the box scores shows that none of the indices moved that much, and even for the SOX and the bank stocks, the percentage changes were not all that large. That said, there seemed to be a bit of ferociousness in terms of trying to horse the market higher in the early going. At midday, it seemed to stop trading, and then it slowly slipped away. So, there was a little more drama, at least as I saw it, than might appear just from a cursory glance at the box scores. I might also point out that my new barometer, the housing stocks, were on fire today, all storming back 6%, plus or minus, after their beating over the last couple of days.
The Nifty $4.50
: Away from stocks, the metals were quite strong, with silver up a percent and gold up $4.50 to $297.60. The dollar was stronger, both against the yen and the euro. Fixed income was down fractionally.
Lopsided in La-La Land
: Lastly, it should be noted that the recently released poll of the American Association of Individual Investors shows the percentage of bears as down to 11%. I believe that the figure was once a little lower than that. But combine the sentiment number with the volatility indices being at record lows or extremely low (depending on which one you look at) and we are rapidly getting to the point where everyone is in on this rally.
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 AMAT, short IBM and short MU, 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