High-Tech Strategist

Doug Kass channels Fred Hickey’s macro concerns, in Fun With Fred:

• Hickey points out another fallacy with the 1995 market meltup and 2006-07. Eleven years ago, the Republican Revolution ushered in lower tax rates on income, capital gains, dividends and estate taxes. By contrast, the Democratic tsunami in the YouTube Election of 2006 should be worrisome to corporate executives, bankers, consumers and investors. Instead, they are partying like it was 1995 and oblivious to what is happening on Main Street and, importantly, in Washington.

• The collapse in housing is spilling over and has begun to impact the general economy. Hickey highlights many of our concerns — the durable goods drop, rising subprime mortgage delinquencies and property foreclosures, a steep contraction in truck tonnage, a surprising decline in the Institute for Supply Management’s manufacturing index and reports (Lazard Capital Markets) that 60% of retailers missed their November same-store estimates.

• As the limited quantities of special deals were gone, retail spending came to a halt after consumers were baited with "doorbuster" deals on Black Friday. At every store he visited after Thanksgiving weekend, Hickey found empty stores and excess inventory. Circuit City (CC) was swimming in iPod inventory ("the new toasters") and at mobile phone stores (Hickey smells an emerging glut) it was the same story with Cingular awash in the new Blackjacks from Samsung, Verizon (VZ) with a plethora of "Qs" from Motorola (MOT) and T-Mobile with xcess Blackberry Pearls.


• Hickey scoffs at the reason (a fashion miss) given by Wall
Street analysts for Wal-Mart’s (WMT) awful November miss. Other
retailers, like Target (TGT), Costco (COST), BJ’s (BJ) and Kohl’s (KSS)
failed to make up for the slack at the world’s largest store.

• Lower forward guidance at Home Depot (HD) and Lowe’s (LOW) are
symptomatic of the trickle down affect of lower housing activity – even
despite lower prices of energy products. So is the production cuts at
Ford (F) (1Q2007 reduced by 14%) and General Motors (GM) (lowered by
9%) – which reflect large inventories of unsold automobiles (eerily
similar to that of the home market!).

• Though Wall Street still urges investors to buy stocks as market
strategists are almost universally bullish, CNBC parades out one
optimist after another, and the Wall Street Journal reports that almost
70% believe the housing downturn is over. Having lived through a few
downturns, all the aforementioned economic indicators coupled with an
inverted yield curve "sure looks like a recession to me," writes Hickey.

• Using massive amounts of debt, private equity has frenetically
announced a series of massive takeovers, levered hedge funds (Citadel
Investment Group has $13 billion of equity but holds $166 billion of
assets — 12.5x leverage), are loading up with high-octane stocks, put
writers have greedily sold naked put option contracts (supposedly a
riskless strategy as it has been backtested, but by only five years!),
and the Barron’s Big Money Poll found investors to be almost
universally bullish (as the Investors Intelligence, Consensus, Market
Vane and most other sentiment polls show "a lopsided number of bulls
over bears." Despite a stream of forward fundamental datapoints, the
financial media all but shouted, "Remain calm! All is well! Ignore the
data" as in their fantasy world, the business cycle is dead.

• Hickey’s newest letter is filled with wonderful anecdotes like his
conversation with his traditionally upbeat local Federal Express (FDX)
route driver who relates that business is so bad that the company is
not making seasonal hires (for the first time in his 18 years with
Federal Express). Indeed, the driver’s hours have been cut back. He and
other drivers have begun to miss delivery schedules but he was told by
management that "with the economy softening a conscious decision has
been made to let customer service levels slip." The same description of
dour business conditions came from a United Parcel Service (UPS) store
owner that he spoke to in California.

• Hickey’s specialty is technology, as the name of his newsletter
suggests. He chronicles the vast inventory buildup through the tech
food chain at Hewlett-Packard (HPQ), Dell (DELL), Sanmina-SCI (SANM),

• Hickey pooh-poohs the Microsoft Vista launch. Vista will not lead
to a large PC upgrade cycle (I read Cowen’s Arnie Berman piece last
night which agrees) and is not a reason to buy Dell, Nvidia (NVDA),
semiconductors and technology. The personal computer market is mature
and the last change in Microsoft’s operating system that had a real
impact was the 1991-92 release of Windows 3.1. Hickey reminds us all
that while Windows 95 was hyped (like Vista), it was a great
disappointment. Hickey wrote back in September 1995, "Before the
launch, the channel expected that five million copies of Win 95 would
sell in retail in the first two weeks. Through four weeks just 2.5
million were sold." There will be no corporate push. Worse yet, some
corporations were holding out until the first ‘bug release’ (officially
known as a "service pack")." Ultimately stores were left with pallets
of unsold inventory of copies of Windows 95 and panic followed as Dram
vendors unloaded excess parts which were manufactured in anticipation
of a successful launch. Dram prices dropped precipitously as it became
clear that Win 95 sellthrough would be a bomb, e.g., Micron’s (MU)
stock fell from $94 to $30 in four months’ time, Intel’s (INTC) shares
dropped by nearly 30% and Mister Softee’s fell by 20%.

Fun With Fred
Doug Kass
Street Insight, 12/5/2006 8:54 AM EST

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What's been said:

Discussions found on the web:
  1. winjr commented on Dec 7

    I trust Fred Hickey’s opinions more than anybody else’s but, wow, he’s getting murdered on his put positions. He’s persistent, though, and will stick with what he believes, regardless of how much time it takes to play out.

  2. matt m. commented on Dec 7

    I can never take a trader seriously when they refuse to mention how wrong they’ve been up to now. The ego is a funny thing in trading/investing. Does Hickey run money or just write? I don’t know the answer,but in this biz,the only thing that counts is your performance. Trying not too be harsh,but the trading/money management game is long on opinions and short on performance. I don’t think it’s a coincidence that the top performance guys offer very few opinions publicly.

  3. HerbieS commented on Dec 7

    the guy is a perma bear who caught one in 2000. eventually they are all right.

  4. joe commented on Dec 7

    you haters are idiots. Hickey consistently says that puts represent a tiny portion of his portfolio, generally around 1%, but lately a couple % more. He’s mainly long gold and silver and NEM. Yeah, I’m sure he got lucky in 2000, because anyone with a brain couldn’t tell that the tech market was due for a disaster. But you were probably loaded up on VA Linux and JDSU and buy.com.

  5. Paul Jones commented on Dec 7

    Gluts are great when they are not based on massive borrowing. When the books are balanced you simply put more money into the hands of consumers by raising wages and they consume more. The problem here is that consumers are tapped out and the nation is also tapped out. We need wholesale change.

  6. JoeyB commented on Dec 7

    The 1995 rhyme really gets under the bear’s skin. They love to point out the differences. Yes there are many. In fact there are many that make the same outcome more likely.

    Prime rate was near 10%…for many years afterward as well. Now interest rates are very stock market friendly. (Sub 6% mtgs?)

    Back then emerging markets were a mess…high inflation and unstable currencies. Now we have “truly” emerging markets, with stability in currencies, inflation, and trade (thank you Nafta, etc). This is a major difference — a FLAT world economy, where millions of new consumers are emerging from poverty to the new economy.

    Hickey mentions the weak manufacturing ISM…well there have been 11 ISM slowdowns in the past 25 years and only three recessions.

    I think there are stronger factors on our economy than a correction in housing prices. The conviction the bears have on this one argument is a strong factor in this “surprise” rally that trashed the 4 year cycle “crash”.

  7. lurker commented on Dec 7

    I am with Matt. Good post. Hickey is smart and a good reader. He should keep his portfolio to himself. As for the nation being tapped out—we can always ask the CEOs to spare a dime? Right?

  8. lurker commented on Dec 7

    meant read, not reader. No hater at all. Just don’t like selective disclosure of winning trades. It is bs and misleading.

  9. Teddy commented on Dec 7

    JoeyB, the reason interest rates are much lower now than they were 10 years ago is because of concentration of wealth, which is deflationary.

  10. JoeyB commented on Dec 7

    Well, we’ll just agree to disagree on that front…Tech led productivity and global markets KILL INFLATION, and lowers interest rates. Inefficient markets have gotten on board the capitalist, flat world. Our major task going forward is to recognize our strenghts and weaknesses, and train/re-tool our work force to compete in the new world.

  11. Teddy commented on Dec 7

    JoeyB, I am so glad that productivity has exploded up in this country since we should see MEDIAN wages in this country explode up soon because currently, for the last 30 years,after adjusting for inflation, MEDIAN wages in this country are negative.I guess it’s just an inefficient market at this point.

  12. Richard commented on Dec 7

    Hickey is a danger to himself and others. The quality of his research is unbeatable. This guy knows his stuff as well as anybody. But his market acumen is non-existent. He suffers from an ego problem as well. As someone mentioned above, he simply cannot bring himself to admit he is/has been wrong. This detracts immeasurably from his credibility.

    Market savvy has as much to do with the mastery of investor psychology as with knowledge of the fundamentals/technicals. This is far more complicated than appears to many highly educated/degreed investment professionals. It requires a completely different set of skills. Brett Steenbarger is an expert here and well worth following. Both Hickey and Doug Kass could do with some sessions with this guy!

  13. scorpio commented on Dec 7

    just planted my flag, short the SPY. been in cash since March, missed the decline this Spring, missed the rally this Fall. see if i get lucky

  14. Chief Tomahawk commented on Dec 7

    How could the economy be slowing down when the Seminoles are buying Hard Rock?!?

  15. James commented on Dec 7

    The whole world is in an all out effort to keep credit flowing to American consumers even though the majority of them do not have any need for it, therefore it is flowing into other areas like MA and LBO’s. *Most* Americans are have enough debt servicing requirements that they no longer want any credit because they are spending the vast majority servicing other obligations. The rest of the world needs to figure out that America is not a bottomless pit of gluttony. I think the law of diminshing returns is playing on interest rates and borrowing.

  16. angryinch commented on Dec 7

    America may not be a bottomless pit of gluttony, but it’s pretty damn close.

    At some point, the U.S. consumer market will finally meet its maker. But who knows if that’s next year, three years from now, 10 years from now?

    I agree that most global corps are seeing diminishing returns from the U.S. and will more and more focus on non-U.S. sales and growth. We are beginning to see that right now even with U.S.-based multinats like INTC, GE and IBM who all now have more non-US sales than US sales.

    After all, if you are a cellphone maker, for eg, why would you continue to overweight your efforts on the US where everyone already has a cellphone, or even two, as opposed to India where 98% of the population have no phones at all—cellular or otherwise?

    But right now, it’s still somewhat easier (thanks to our wealth, consumption habits, willingness to buy on credit) to sell a second cellphone or third car or fifth TV to a US consumer than it is to sell a first phone/car/TV to a Chinese or Indian consumer.

    That will change. And it will be a big deal. There will come a time when the U.S. consumer economy is deep in recession while many other parts of the world are doing just fine. But not quite yet.

  17. BJC commented on Dec 7

    Hickey writes the “High Tech Strategist”, and actually likes buying cheap tech stocks. He believes tech is overvalued broadly and has almost all his money in cash type postions. He also has a few % pts in gold, gold miners and puts. He would never claim to be a “timer”, just someone waiting to buy tech again when its cheaper. Its fairly obvious the US economy’s growth is slowing, the debate is recession vs soft landing. When the growth slows, won’t earnings as well slow? Is this in todays prices and valuations? The S&P500 is at peak earnings, way above the historical 6% long term trend. When it mean reverts, the PE’s will perhaps double from 18 to mid 30’s. This will cause price “adjustments” of 15 to 35%. Are you in good hands?

  18. Larry Nusbaum commented on Dec 8

    Fred Hickey writes a respected newsletter called “The High-Tech Strategist.” He tends to be bearish. It’s useful to read the other side. He writes, “If/when consumer spending buckles, corporate spending will follow. I remain in maximum defensive position. I hold no tech longs. Huge amounts of leverage, a giant disconnect between Wall Street and Main Street (where Hickey lives) and incredible complacency leave me concerned that when Wall Street finally wises up, the result could be spectacular, as everyone rushes for the exits at once.”

    Hickey’s largest positions are in precious metals. “With the dollar’s recent troubles, gold and silver have begun another sharp leg up. I continue to hold a very large position in the gold ETF (GLD), as well a physical gold. I continue to hold a very large Newmont Mining position (the only disappointment this year in my precious metals portfolio). … I continue to hold Pan American Silver stock and the silver ETF (SLV).

    His put options currently account for 3 1/2% of my total portfolio. His put options cover: Best Buy (BBY), CDW (CDWC), SanDisk (SNDK), Texas Instruments (TXN), Lam Research (LRCX), KLA Tencor (KLAC), Nvidia (NVDA), Research in Motion (R IMM), NetLogic Microsystems (NETL), Apple Computer (AAPL), Intel (INTC), Microchip Technology (MCHP), STMicroelectronics (STM), Amazon (AMZN), Google (GOOG), International Rectifier (IRF), Blue Coat Systems (BCSI), Motorola (MOT), Dell, Xilinx (XLNX), Applied Materials (AMAT) and Novellus (NVLS)

    He has been bearish for two plus years and he has lost a lot on his long puts….

  19. dan holloway commented on Dec 10

    Hinkley may be right on the stock market but wrong on gold. Both markets seem to move together these days. It’s all about liquidity. The Fed’s not really tight and if not scared about housing would still be tighting. Watch Japan!

  20. james Miesen commented on Dec 25

    How do I subscribe th Hickey’s High-Tech Strategist newsletter?


    BR: Fred’s publication, “The High Tech Strategist.” (It’s $120 per year for 12 issues of eight pages each.)

    There is NO Web site. Call 603-888-3954.

    To subscribe, send your name, address and check or money order to: The High-Tech Strategist, PO BOX 3133, Nashua, NH 03061.

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