CEO Comments No Cue for Investors
Executives' visibility is low in current market.
"It's probably the most dramatic recession I've seen in the last 30 years for the high technology industry; the economies of the US, Japan and Europe have slowed simultaneously."
No, that wasn't Intel (INTC) CEO Paul Otellini. It was his predecessor, Craig Barrett, on September 29, 2002, 9 days before the 2000-2002 bear market registered its ultimate low. I'm not implying that Otellini's comments today -- that the current recession may be the worst of his lifetime -- indicate that we'll bottom in 10 days and all will then be well again in the financial world. There are enormous challenges that lie ahead, which is why the S&P 500 is down nearly 40% year-to-date.
My point is that investments cues shouldn't be taken from such CEO comments. After all, it was only 4 months ago in July that Otellini advised that``75% of our sales are not in the US, and global business seems very strong still.'' Do we need to rehash John Chambers' August 2007 statement that "It's the strongest global economy I've seen in my career," which was made 2 months before the S&P 500 peaked at 1576.
I'm not criticizing these very successful executives for providing their honest assessment of the situation, but the fact is this: Visibility, just like the current market mindset, is extremely short-term. Due to the lack of visibility, investors and companies are extrapolating today's dislocations out into the future.
Cisco (CSCO) did exactly that. As Chambers explained: ``We extrapolated, assuming October is the most likely scenario for the next quarter.'' Creating guidance by extrapolating from a month in which credit was seized for several weeks out of the rest of the quarter is as conservative a stance as a company can take. No wonder Cisco outperformed the broad market by 240 basis points today.
Just as my firm argued throughout the year -- when we were bearish because nobody had an idea of how 2008 earnings would look -- how could anyone even venture a guess at the 2009 numbers? Now, the opposite is occurring, as CEOs are predicting the 2009 economy based on the events of October 2008.
Undoubtedly, the past 2 sessions have been frustrating. It's never fun when the 2-day action is benchmarked against October 1987. The small positive of the slide was that, just like Tuesday on the way up, the volume has been relatively light considering the velocity of the move. In an environment where all news is interpreted as bad news, it will be nice to see this data-laden weekend. Next week, economic data will be light, though it will pick up again in 2 weeks' time.
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