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.
Semiconductor Index (SOX)
Amex Gold Bugs Index
10-year Treasury Bond
Some Assembly Required
: I had hoped to make today's Rap rather brief, but so many things have transpired that it's important to cover them all, with the exception of the overnight markets, which I won't even bother with. In order to keep this from running on forever, I might just restrict my rant and let readers take the three-day weekend to research some of this stuff themselves. That said, I will be appearing this Saturday, March 30, on Fox TV's "Bulls & Bears" show at 10 a.m. EST.
Bulls Wolf Down Big Macro
: Turning to the macro data, this morning's fourth-quarter GDP numbers were better than expected, ditto the Chicago purchasing managers and Michigan consumer sentiment numbers. That, combined with some hype out of Morris Chang from
, had the tape rocking and rolling in the early going. (More about Mr. Chang later.)
In about 45 minutes, the
was up 1%, the
was up about 1.5%, and the SOX was up 3%, led by the semiconductor-equipment stocks. So, on this last day of the quarter, we had a ferocious party to the upside in tech, as bad news was ignored and good news was pounced upon with reckless abandon.
Kiss and Markup
: The early-morning highs were pretty much it for the S&P and the Dow, as they sold off in the middle of the day, had one attempt at a rally, and then sold off in the last 10 minutes. The prices you see in the box scores for those indices are basically the lows of the day. The Nasdaq did a little bit better, as one can see from a performance standpoint.
Its intraday machinations were somewhat stronger, because it was powered by technology and the mighty, mighty SOX, which was up just under 3%. In the early going, it had been up a little better than that, and then it basically just sat there all day, powered by the equipment stocks and a handful of other stocks that have very concentrated ownership (hint, hint, those are the easiest ones to mark up). Some of the less tightly concentrated chip stocks were weaker. Those included
Curtains for Window Dressing!
: As people can imply from the title of today's Rap, I think there was a fair amount of marking up. But, we won't let me be the judge of that. The reason I suggested the headline I did was that midday, a story passed on the
newswire called "Stocks Up on Window Dressing." It began, "End-of-quarter window dressing and some upbeat economic data are boosting the Dow and the Nasdaq higher. . . . " I, for one, have been complaining about this for years, as have some others. For the life of me, I don't see why this behavior is still tolerated. In any case, that's it for the end of the quarter - - one in which the S&P was down fractionally, the Dow was up 4%, the Nasdaq was down about 5%, and the SOX was up about 14%. It will be most interesting to see how early April goes.
Away from stocks, fixed income was pummeled on the news, with the 10-year down about half a buck. The metals were mixed, with gold slightly higher and silver lower. The dollar was not doing too much in front of the long weekend.
Low-Fat Food Chain
: Turning to the news, there's a lot worth covering, starting with yesterday's preannouncement from
. Many people expected disappointing news, so it was shrugged off. But one has to ask how good business can be at
. Of course, that should come as no surprise, given what we've heard from
. Their biggest customers are all doing poorly, so we know there's no "there" there in networking.
Blackfin Sings Different Tuna
: Since we've covered the PC story many times, there's no need to belabor the fact that for PC land, there's no "there" there. DRAMs were again down slightly last night. This morning, the people at Blackfin Research (my favorite DRAM source) had some interesting comments about the leader in taking prices to the downside -- none other than Samsung: "First dropping distribution prices at the end of last week and then putting out blue light specials to spot this week is an abrupt departure from Samsung's previous stance of limiting supply to the market in order to prop up prices. This is not the typical course of action for a company that supposedly should be expecting robust OEM demand through the end of Q2."
: For those of you not too worried about the spot price because you like contract pricing, they note that a convergence will eventually occur, with either the spot rising or contract falling. They pointed out that the spot price for 128 DRAMs stopped moving up 23 days ago, when it peaked at $4.40, while the price of 256 DRAMs has now fallen under $8, to $7.80. I bring that up (a) because Micron is important from a speculative standpoint, and (b) it shows the lack of real demand in PC land, and that the run-up in DRAM prices previously cited as evidence of demand was basically a fiddle. That takes care of networking and PCs.
There Goes the Network Neighborhood
: We know what
have recently said about cell phones. Then last night, a company called
, which counts
as a big customer, preannounced.
So, you can probably expect nothing great out of Motorola, and there goes the wireless area. We know that the storage sector has problems, based on comments by
, and we know that the server market is really nowhere, based on what
: And, if the news from Sun weren't enough, various memos have been leaked from
. I'm presuming that's because a lot of key employees can't stand Carly and would like to see her and this deal blow up. There's not much demand for hardware or services, a story that's nicely chronicled in the "Heard on the Street" column of today's
Wall Street Journal
Constitutionally Opposed to Amendments
: Of course, that means business can't be very good at Big Blue, a company that is the subject of another good story in today's Journal called "SEC Urged IBM to Amend Its 1999 Annual Report." The article points out that without pension gains, there's been no real growth in
earnings. In fact, in the last four years, IBM's revenues have grown at about 3% and their earnings, ex-pension gains, have grown at about 3% per annum. So, in the biggest tech boom ever, IBM grew its top line and bottom line at roughly 3%, (not counting the pension gains).
Watered-Down Big Blue Lagoon
: Of course, there are other special one-time factors that further water down IBM's earnings. Why people want to pay 25 or 35 times questionable earnings for a company that couldn't grow in the biggest tech boom ever is beyond my comprehension, especially when management's willingness to shoot straight has been called into question. Anyway, outside of a few consumer doodads like DVDs, that wraps up almost the entire tech sector.
Lucky in Limbo
: Now, as we embark on earnings season, a lot of these chip companies that were lucky enough to set the bar reasonably low (as were the semiconductor equipment stocks) may not disappoint. But disappointment may be the story for a lot of companies closer to the front lines, which have to sell stuff.
Mixed Metaphor of Salt & Curry
: Returning to the fireworks set off this morning by Morris Chang's comments, let me just say that I take them with a grain of salt, coming as they do from one who is a perennial bottom-caller. They were made to curry favor with Taiwan's prime minister, in order to facilitate some investments by his company in China.
His company is operating at about 40% of capacity, so there's no urgent need to add more. Most of these semiconductor foundries utilize less than 50% of capacity, so there's certainly no real need for capacity. The amount by which he proposes to increase spending is for less than cuts made by Samsung and Intel.
Luxury Goods Catalog
: Just to put the pyrotechnics into perspective, most all these semiconductor equipment companies and chip stocks trade around 10 times revenues. For example, Intel trades at eight times;
Maxim Integrated Products
, 15 times;
, 20 times;
, 12 times;
, eight times; Cisco, eight times;
, 10 times;
, 10 times. Why do I bring them up? Well, for the longest time, I have not been able to understand what drives people to pay 10, 15, or 20 times revenues. The implications of paying ridiculous prices like these is profound. Some investors would never do it.
: On that score, I urge everyone to read a recent Business Week interview with Sun's CEO Scott McNealy, in which he does the math to show just how preposterous it is to pay 10 times revenues for companies. Obviously, there's nothing magical about his using the example of 10 times. It gets more egregious as you go higher, and it doesn't diminish all that much when you're paying seven or eight times revenues.
McNealy's Assume Lens Brings Folly Into Focus
: In any case, he says, "But two years ago, we were selling at 10 times revenues when we were at $64. At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don't need any transparency. You don't need any footnotes. What were you thinking?" Thanks to my buddy Lance Lewis for calling this to my attention.
: So, there you go, ladies and gentleman. Connect the dots, and you tell me whether you think tech stocks make good investments from a risk/reward standpoint. They might be great trading sardines, and they might trade up violently in the short run, but there's no investment case to be made here.