Intel Earnings Don't Provide the All-Clear - TheStreet

Intel Earnings Don't Provide the All-Clear

Deflation today, consumer retrenchment tomorrow threaten the economy and the market, one bear growls.
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SAN FRANCISCO -- A funny thing happened on the way to the selloff. Instead of faltering, as many participants were expecting after early morning strength faded, stocks rallied into the close, leaving major averages with modest gains for the day.

The

Dow Jones Industrial Average

rose 0.3%, the

S&P 500

gained 0.7% and the

Nasdaq Composite

rose 0.5%.

In sum, the session amounted to investors awaiting the earnings report from

Intel

(INTC) - Get Report

. After the close of regular-hours trading, Intel reported fourth-quarter earnings of 15 cents a share, excluding acquisition-related charges, and revenues of $7 billion.

At first glance, the chip giant's results appear far better than estimates, as the consensus forecast was for earnings of 11 cents per share and revenue of $6.84 billion

Still, nothing in Intel's report and nothing about today's session is likely to dissuade the bears from believing the end is nigh for the market's post-September rally.

"Thus far this bear market rally is very normal, particularly given the decline that preceded it, and has done nothing to dissuade me from my call for Dow 5000-6000 and Nasdaq 1000," said Dave Hunter, chief market strategist at Kelly & Christensen.

The strategist agreed with my assessment

last night that "the recent swift increase in negative sentiment probably argues for further upside." Intel's earnings seems likely to help as well, although the firm's shares were down after-hours along with many chip-equipment names, reflecting Intel's announcement it expects capital spending to be approximately $5.5 billion in 2002 vs. $7.3 billion in 2001.

Hunter, who turned bullish in the wake of the Fed's reaction to the Sept. 11 attacks but reverted to a bearish stance in late October, believes the economy is going to be "far worse

in 2002 than any economist is now projecting" as the U.S. consumer finally retrenches. He also continues to argue that global deflationary pressures are ultimately going to put downward pressure on "paper assets," notably U.S. stocks and the dollar.

If intermediate and long-term interest rates rise, while earnings fall far short of current expectations, as he expects "it is going to be hard to even hold above

those already dire projections," Hunter cautioned.

The dollar rescinded some of its recent gains vs. the yen today after People's Bank of China Governor Dai Xianglong and South Korea's Finance and Economy Minister Jin Nyum separately expressed consternation over the yen's recent weakness. Also, machinery orders in Japan climbed 14.9% in November, their biggest rise since August 2000. The implication of the comments and the data is that recent weakness in the yen vs. the greenback had become overdone.

Strategy Session

Following today's

Midday Musings about earnings, I thought it would be instructive to check in with how one money manager approaches what some call the silly season.

"Everyone gets more tense when earnings are being reported, but hopefully if you're in the right companies you don't have to get too worried upon each report," said Steven Check, president of Check Capital Management in Costa Mesa, Calif., which manages about $200 million. "Of course, I'm aware of who's reporting when, but I try not to make a big deal about it."

Of course, if a company posts a sharp downturn in profits or warns about the coming quarter, Check is apt to change his mind. Still "I usually won't sell at the time it's announced" because the rest of the world has the same information, he said. "But I'll have a different view of that stock" thereafter and plan an exit strategy.

One example being

Jones Apparel

(JNY)

, which Check claimed was the only stock in his portfolio to post a year-over-year earnings decline in the third quarter. But Check Capital held the stock because "it dropped to a P/E of 10

in reaction and looked cheap," he said. With the stock "now up in the $30s

again, it might be another story."

On the surface, Check's approach to money management is simple: He looks for companies with positive earnings growth trends and whose stocks are attractive based on a comparison of its price-to-earnings ratio to the yield on the 10-year Treasury bond. This is a slight variation of the called Fed model, which compares a stock's earnings yield (forward earnings estimate divided by price) to the yield of the 10-year.

Currently, Check sees value in financial and financial services names, including

Fannie Mae

(FNM)

, which yesterday posted fourth-quarter profits of $1.40 per share, up 25% from year-ago levels.

The company is trading with a P/E of about 14 based on both forward earning estimates and trailing 12-month results.

The roughly 125 stocks in Check Capitals' universe, including Fannie, trade with an average P/E of 16 with expected earnings growth of 14%, which is "attractive relative to 5% bond

yields," the money manager said. "That's what we focus on. We're not thinking in terms of trading the stock but would we buy the whole business if we could?"

In other words, they look at a stock as buying a piece of a company, not a piece of paper to be traded. Such a style seems out of step with the current churn 'em and burn 'em mentality. But maybe there's something to the old-fashioned approach; Check Capital rose 21% in 2001 and 28% in 2000.

Other names the firm is currently long include

MBNA

(KRB)

,

Household International

(HI) - Get Report

,

Aflac

(AFL) - Get Report

,

Berkshire Hathaway

, as well as consumer staples such as

Safeway

(SWY)

.

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.