Last night we had a triple dose of bad news: Cisco's guidance and balance sheet (namely, inventory/receivables), plus preannouncements from National Semiconductor (NSM:NYSE) and Kulicke & Soffa (KLIC:NASD). As you'll see below, those three companies manage to cover virtually everything associated with chip land, and their news also caused our overnight equity futures to be weak.
An Opening of Bearish Foreboding
Within an hour of the opening, the S&P was down about 1%, as was the Dow. But the Nasdaq was down 2.5%, led by a whopping 7% decline in the Sox. (Yes, that 7% is not a misprint.) Housing and financials were trying to buck the trend, and I was waiting to see if they would join the party to the downside (but they never did).
After the initial ugliness, we saw a break in oil (more about that below), and the S&P popped 1.5% in about half an hour. From there we kind of made wild swings and ground higher all day. The market went out near its best levels, though a check of the box scores will reveal red in all the indices. That, however, does not tell the whole story. Though the Dow was barely down and the S&P was down modestly, the Nasdaq was down emphatically.
That said, I saw no real fear. I'm sure the battle cry amongst the bulls was: You gotta buy when there's blood in the streets. Of course, the present-day remake of that statement should be revised to: You're supposed to speculate when you think other people will think there's blood in the streets.
Fear Bows to Bravado
Indeed, in the if-it-wasn't-so-serious-it-would-be-funny department, nearly all day long when we were supposedly experiencing fear on the tape, eBay (EBAY:NASD) was green, biotechs were going wild, and the VIX was hardly up. Likewise, there appeared the following headlines on Bloomberg: "Micron (MU:NYSE) Says Demand for Memory Chips May Exceed Supply This Quarter" and "Micron Says Notebook Makers Getting Strong Demand from Companies." (These are quotes from none other than Micron's IR guy, Kipp Bedard.)
Now I would just say that Kipp makes these claims virtually every time he goes to an investment conference. The fact that they're still passing as any kind of information or news I find remarkable, since the price of DRAMs has been going down every day for about six months -- right through what is allegedly the back-to-school build. Of course, the information he wants you to believe about notebook makers kind of flies in the face of what we could infer from National Semiconductor's comments yesterday. In any case, I don't think this leg of the decline will be over until we see real fear. It will look a lot different from these vignettes that I have described from today's action.
Away from stocks, the fixed-income market could not get going. Meanwhile, foreign currencies were focused on the "tough love" and optimistic view from Easy Al, as they initially continued their slide from yesterday. But by day's end, the Aussie/yen finished up, and the euro closed down slightly, though well off its lows. The initial weakness in currencies was all it took to knock the metals for a loop. Gold closed down a little over 1%, after having been lower earlier, and silver finished down a hair better than 3%.
"The Saudi Shuffle"
Meanwhile, oil was the scene of real action. In the early morning, we saw an attempt at what a friend called "The Saudi Shuffle," where its oil minister tried to jawbone the market lower. You can read all about it in tomorrow's paper, but that briefly knocked oil down about a dollar (and also rallied stocks, as mentioned), before it closed up 28 cents at $44.80.
I anticipate a continued focus on oil, since Easy Al implied it was our only real problem. (Of course, he also told us a while ago that high oil prices were "transitory," but that's a different issue.) Rest assured: The first time oil has a meaningful drop, folks will try to have a party in stock land. It seems they've been attempting to make that bet nearly every day for the last $10 up in oil. In any case, with oil clearly at stage-center, you can count on it being released from the Strategic Petroleum Reserves between now and, oh, say the election.
Inventory Ices Cisco
Turning to the troika of tech stocks I mentioned previously, Cisco (CSCO:NASD) was a disappointment for several reasons. First of all, the anticipated decline in its inventories turned out in fact to be a rise of $100 million. Next, its accounts receivable were up 16.8% sequentially on a 5.4% gain in revenues, leading me and perhaps others to think that maybe Cisco stuffed a few customers to try to make the quarter. And then, John Chambers lowered next quarter's guidance a shade, citing less optimism from the CEOs he spoke with. Given his habitually sunny leanings, things are probably a fair bit worse
So, if you're any kind of component supplier to Cisco, your orders are going to be cut back, and by extension, Cisco's news is also bad for other networking companies. (And remember, there's already a mountain of inventory around with all the contract manufacturers as well.) Bottom line, as I've been chronicling for some time, there is plenty of tech inventory everywhere.
NSM Warns on Demand for Wares
As for National Semiconductor, the company gave us an early look at how poorly this quarter is shaping up. It said there was a problem with demand for flat panels and cell phones -- specifically citing demand issues concerning Chinese cell phones. National Semi itself is a good proxy for parts going into PCs, as well.
Customer Comments Clobber KLIC
Lastly, semiconductor-equipment supplier Kulicke & Soffa said: "Discussions with customers indicate a general slowing in the rate of semiconductor growth," so it was going to lower revenue expectations for the quarter. Importantly, it dropped them from $180 million to a range of $135 million to $165 million. Percentage-wise, that's obviously the potential for a very sizable drop. Meanwhile, it's only the end of July, and its quarter doesn't end until September.
What that implies, and what other similar data points imply, is that things have gotten worse rapidly. KLIC said what it did because its customers, the semiconductor manufacturers, cut back orders. So, the sum of that information essentially left nowhere to hide in chip land.
Bottom Fishers, Beware
I know there have been countless bottom fishers around, thinking that we must be hitting the low. It was only last week that folks believed the 400 level on the Sox made some sort of a difference. I would just caution bottom fishers that the news is just starting to get worse. Meanwhile, valuations are still absurd, since wild expectations drove these stocks to prices that were completely untenable. So even though many of them are down a bunch from their highs early in the year, they've still got quite a ways to go, as those highs, like the highs in the mania, were a false reference point.
Disavow a Bubble, Dig a Deeper Hole
Shifting to Greenspan land, I have repeatedly discussed the fact that the Fed is in a box, and its credibility is on the line. For it to come undone, of course, folks have to become focused on the issues. Along that line, Jesse Eisinger has once again written a terrific column in today's Wall Street Journal," titled: "Greenspan Underestimated Bubble and Now Overestimates Expansion." Here is Jesse's succinct summation of the problem:
"But the Fed and its chairman aren't just in that one box. They are in the middle of a Russian doll of their own making. Mr. Greenspan must now raise rates, because, for Mr. Greenspan's legacy, the economy must be on a steady expansion path. It must be so because he has asserted that he dealt with the bubble and its aftermath correctly. For that amount and duration of stimulus -- coupled with the enormous tax cuts from the Bush administration -- not to revive the economy would mean that the Fed's 'Deal With Bubbles After They Pop' policy isn't a successful course."
Of course, part of why Al is in this box (assuming he understands any of this in the first place), is that: "It is difficult for Mr. Greenspan to say the bubble is the reason for the current lackluster conditions 'because then they have to say the bubble had real consequences, not just financial consequences. It forces them to take responsibility.'" (That last comment is a quote from Goldman Sachs economist Bill Dudley.) This is the discussion folks will have when we experience "the next time down," and it accounts in part for why I think the Fed's loss of credibility will have such far-reaching ramifications.
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