With last night’s announcement from Dell, the streak remains alive. Intel, Microsoft, eBay, AOL, and EMC – big cap tech has not been the place to make money for some time now.
Despite the naked evidence before your eyes, too many traders indulge their rosy memories of days gone by. How many times have we heard over the past 5 years that this will be year for the large cap tech stocks? Sounding like the Verizon commercial – yet another large cap stock to be avoided – more market watchers and stock analysts continue to incorrectly ask: Can we buy them now? How about now? Now?
Alas, it is still not meant to be.
We could merely guess –and all these calls for buying big cap tech stocks in the face of declining stock prices, decreasing P/E multiples, and rapid commoditization of their products have been nothing more than blind guesses. However, we find it is much more advantageous to wait until a given stock, sector, index or market proves itself before leaping into the fray.
This is an admittedly humble approach (surprised?). We acknowledge that the future is unknown, that us Humans are particularly bad at conjecturing what lies ahead, and that most people on Wall Street refuse to acknowledge this.
We confess to having no idea what the hell is going to happen even next year. Will the GOP lose control of Congress? Will bird flu kill millions? Will Iraq get even worse? And what about Katharine McPhee – can she win it all on American Idol? We own up to having no clue about any of these burning issues.
And neither, we must tell you, does anyone else.
So rather than merely speculate, we would rather allow a given sector to develop on its own. When we got bullish on Oil in December 2003, crude had broken out over $30, and was heading higher. Similarly, our calls on US Equities post Tax cut in 2003 wasn’t until the technical picture improved. We got bullish on Japan in 2004 when it was apparent that it had started to work; Those who were merely “guessers” had 15 years to get it wrong. Our bullishness on Gold was for similar technical reasons – after a long period of under performance it was starting to work also.
Regular readers are all too familiar with our expectations for how this bull market ends – an ugly and violent death – but as long as the trend remains up, we are loathe to fight the tape and get short. Indeed, we still are not short any US equities, although we have some in the money VIX options and a few Q puts – as hedges.
While we may wax eloquent and muse about what may come eventually, our investments stay on the same side of the market as the overall trend – or at worst, in cash. Once we see proof positive that a stock, sector or market has shifted direction, then we can jump in.
Until then, big cap tech is best avoided . . .
You evidently don’t see the gotterdammerung beginning with one big fireball.
No, I see it as more likely beginning with a rapid devaluation of the dollar !
Lol. 7% decline in a few months might be called rapid in some camps.
It is not all that tough:
“We are experiencing a little of the ‘Blue Chip Blues,'” Immelt said.
Or maybe this:
“How many new products or jobs did IBM create for the $17 billion it spent on stock buybacks? Zero! ”
If you want to see advancement in big tech, watch the hiring. In most industries, more demand leads to more hiring, but in tech, more hiring leads to more demand since the largest users of tech are tech workers. When Sun’s critics are demanding slashing the workforce to improve profitability, there is only going to be diminishing demand going forward. While the market for specialized skills may be tightening some, there really hasn’t been any growth in five years.
But the falling value of the dollar is ‘suppose’ to benefit the multinationals corps– i.e. caterpillar, exxon mobil, mccdonalds etc., raise exports and reduce the trade deficit. And with the Fed still increasing the ‘M3 money supply’ to astronomical levels (no longer reported!!), and increasing commodity prices seamingly not having an effect on Inflation and the spending habits of the U.S. consumer, I’m not sure what will trigger a Big Stock Market Decline in the coming months or in the latter part of the year… That is, what ‘event’ will serve to precipitate a big change in investor psychology/sentiment?
What? I can’t go short tomorrow? I’m cancelling my subscription to “The Sweater Report” today! Damn! It had such nice cover graphics too. There was Barry all decked out in The Sweater (of course) and him having Kudlow in a headlock while he gave him a noogie. I thought it was cleverly done. Oh well, there’s always that Gilder report to get my cues from.
John,
Do you have a reference on the increasing M3? I can’t find supporting data.
All I come up with is a M2 chart that shows decreasing % change from same period year prior for the last 5 years:
http://www.economagic.com/em-cgi/charter.exe/fedstl/m2sl+2001+2006+3+0+0+290+545++0
M2 has 99% correlation with M3, according to this article I think BR linked to earlier:
http://www.financialsense.com/fsu/editorials/2006/0425.html
Bastiat, the chart (and rationale for my M3 comment above ) came mainly from this site: http://www.safehaven.com/article-5131.htm
Although I’m not sure about it’s reliability (it’s a fairly new site I’ve come across) I have seen other charts showing fairly recent levels of M2 and M3 (at least up until last March). And what I probably should have said was that with current levels of Liquidity in the Global Markets, and the other factors mentioned above, I’m not sure what would cause the pullback BR was calling for later this year. It seems to me that the costs of borrowing money are still historically pretty low and could remain that way for some time. And even with the pull back in Housig prices people still have a lot of Equity tied up in their Houses.
Obviously, however, I would like to see BR be right on his call. I think this Stock Market rally we’ve seen since 2003 is much more of a massive Liquidity rally than one fueled by Demand.
Uh-oh. The increased use of “we” instead of “I” is never a good sign.
Wouldn’t a rapid devaluation cause a boom in demand for American products and a bust in demand for Chinese products? Right? Right? Am I crazy?
“But the falling value of the dollar is ‘suppose’ to benefit the multinationals corps– i.e. caterpillar, exxon mobil, mccdonalds etc., raise exports and reduce the trade deficit.”
I have a problem with that argument and would argue that Dell, IBM, Intel, Microsoft are going to see their Indian labor costs go much higher.
I would also argue that we don’t really export much.
There is only so much scrap metal or lumber we can export and so many missles we can sell. As far as expesive imports, who are you going to buy a TV from? Oil? Computer?
Barry,
If the dollar is falling, who do you see benefitting in the market?
Sounds like what we need to jump-start the big-caps is a bird flu that kills Intel-based PCs and ISP equipment…
The tech market isn’t investing in its employees the way it used to. We were recruited out of engineering schools as kids, put into management and advanced engineering programs, and groomed in the 70s. Who does that today? Nobody. I hear my husband bitching he can’t hire sys admins, but when I say well why don’t you just bring in some college kids and train them, he gets all bitchy at me. Then wonders why our 20-something can’t get a job.
Idiotic, really.
We don’t even have the infrastructure or capacity to replace what is produced in Asia. The world has achieved some sort of equilibrium with centers of excellence, so to speak, in output. We aren’t going to start picking up the slack for consumer electronics, as an example, because we don’t have one iota of capacity or competency to even do that today. So, to assume we would replace their capacity with ours is likely invalid. Instead, there is a chance global trade might be choked off unduly harming export driven nations. Couple that with rising commodities as the dollar drops and you have an unpretty picture.
A weakening dollar could cause a bust in the non-US, specifically emerging market, global economy unless the Asians reform their economies to drive consumption. And those reforms are not going to take place very quickly, if ever. What it does to our economy short term is a little more unclear IMO. If this comes to pass, there is alot of risk and uncertainty all the way around. IMO the risk globally is much more severe than here. IF the dollar does weaken beyond historical bands, a safe haven oversees will be beneficial because of the forex trade. Of course, so would gold if you don’t mind buying at 25 year highs. I’d rather own the gold majors. I wouldn’t want to be invested internationally unless it was Europe…..and maybe Japan if they keep their reforms going. ie, I would not want to be invested in an economy highly dependent on the American consumer. ie, Brazil, India, China, Russia, Korea, Malaysia, Taiwan, etc.
If, If, If, If. We just have to wait and see what is going to happen.
Dollar’s down 7% against the pound in the last month (and, yes, I bought INTC at $20.8 thinking it didn’t have much further to fall; it has to get to $22.3 for me to break even, assuming the dollar falls no more which is unlikely).
It seems to me that an orderly fall of the dollar, long term, would make the US stock market more attractive. Once the dollar is viewed as ‘cheap’, more foreign investors, like Tom above, would be willing to put their money here to take advantage of both the potential gains within the market as well as the potential gains of the dollar.
Of course, a disorderly fall of the dollar could mean that current foreign investors will pull out as they see their holdings depreciate daily.
Due to the price of commodities, it probably costs them more to import them than what they get for exports.
They’ve invested too much, they’re suffering from overcapacity, pollution and huge migration to the city. I read not so long ago that they don’t have enough workers in their farms anymore.
Since commodities are priced in US dollars, at this point in the game, it makes sense for China to work towards a quick 20% devaluation in the US dollar.
They need ressources, make the whole thing tank and pick it up cheap.
the big problem with the dollar is that we now have a Fed that has chosen not to defend and we have a gov’t who just extended the tax cuts, confirming no fiscal responsibility, leaving the bond market to do the dirty work. currency traders will force the dollar down until one of these forces stop it. my guess is it will be the bond market through a much wider yield curve and thus higher long term interest rates. this will be the straw. when it happens i don’t know, but tomorrow we should know much more by how the dollar and the bond market behave after the Fed’s statement.
interesting sidebit, foreign participation in our treasury auctions seems to be waning (foreign central banks bot just 25% of today’s 3YR note). i’m sure it’s no coincidence that the dollar has been falling over the same period. will domestic buyers pick up the slack? at a 5% repo rate that makes returns pretty skimpy..
I wouldn’t dismiss all large cap tech now. You conveniently left out of your list companies like HP and Apple that have been pretty strong performers. I think DELL and INTC look reasonably priced at 16-18x earnings, much lower than they’ve traded in the past. And their business is expected to grow in the long term. Some traditional value investors have started to notice (Longleaf Partners, Davis Advisors, Wellington Management, etc.) I think their depressed valuations have to do with short-term disappointments and also with investors paying little or no premium for high quality companies with little debt, strong and stable cash flows now.
Nasdaq Big Cap (Qs) vs Russell 2000: Why Guess?
With the Nasdaq down 1.56% intraday, and the NDX 100 off more than 2%, its time to revisit the issue of sector selection. We noted earlier this week that Big Cap Tech Continues to Disappoint; Here’s a graphic representation of that: Russell 2000 Nasdaq…