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» JenL_2 - Sat 6/3/00 MoneyTalk
BB also referred to this Alan Abelson article in 6/5 Barron's:By Alan Abelson
Poor Ma Bell! Somewhere in that great telephone booth in the sky, the doughty old soul is burning up the wires.
At least the powers that be at her old stomping grounds had the minimal good taste not to break the news on Mother's Day.
What prompts these lamentations was the disclosure last week that AT&T plans to carry The Hot Network, a hard-core sex channel, on its cable unit.
Everyone knew the company has been having problems. The stock isn't down from 61 to 34 because business is booming. But who would have dreamed things were so bad it had to go into peep-per-view TV?
Sure gives that old slogan "reach out and touch someone" (or was it somebody?) a whole new meaning.
The news apparently caught William Bennett, the nation's Commissioner of Morality, asleep at the switchboard. So far, he hasn't uttered a word of reproach. But it could be that Mr. Bennett is deeply immersed in researching The Hot Network in order to get up a decent head of righteous indignation to loose on the errant telephone company.
Wall Street should have been delighted. Not, let us hasten to add, that the Citadel of Capitalism is host to a population of letches. But it has been badgering AT&T to acquire "content" ever since the telecom tyrannosaur stumbled into the cable-TV business. So AT&T dutifully follows that advice by signing on The Hot Network -- and, in a market going bonkers on the upside, Telephone goes up a big, fat fraction. Perfidious Wall Street!
But investors are to be forgiven: They were simply too busy celebrating the coming demise of the economy to take time out to applaud AT&T's move into dirty movies. (There's no truth to the rumor, incidentally, of a name change to AT&X.)
That celebration, triggered early in the week by some downbeat data on housing, durable goods orders and slowing growth reported by corporate purchasing managers in their latest monthly survey, turned positively rousing, not to say rowdy, when Washington released May employment numbers that were decidedly on the punk side. Except for census-taking, job additions were conspicuous by their absence -- in fact, private payrolls dropped by 126,000 -- and the unemployment rate, sigh, popped back over 4%.
As colleague Randy Forsyth was quick to note, there was something a touch fishy about the report. For one thing, the canvassing period came awfully early in the month -- the week beginning May 7 -- and as a result, a huge gaggle of college students were still too busy guzzling beer and cracking books to be included in the job count.
Further, the limp statistics don't square with weekly unemployment claims or the empirical evidence of wage pressures. They also don't square with brimming consumer confidence, since jobs are the key to that sentiment (and even the Bureau of Labor Statistics would hesitate to suggest that people don't know whether or not they have a job until they read the official employment report).
None of this is to deny that the report was a downer. Rather, it suggests it wasn't by any means as miserable as it appeared at first blush, and in any case, next month's tally could easily show that the great job machine is up and humming again.
Besides, the market was dying to rally (although, frankly, it looked to us like it was just dying). After consulting the entrails of animals, many a technician of late solemnly proclaimed that the market was "oversold." And you can't quarrel with the notion that after a couple of months of getting battered from pillar to post, the wrecked techs, for one, were entitled to a breather -- oh, let's be generous, to a rally.
The rallying cry in this case -- that the end is nigh for rate increases -- seems more than a little suspect. For openers, we think the old Scottish verdict of "not proved" applies to the argument that the economy is slowing significantly. But even if the economy is slowing, inflation isn't, and unless its charter has been secretly changed, inflation remains the bottom line for the Fed.
And there's this, too: If the market continues to soar on expectations of a slowing economy and lower interest rates, then it's only a matter of time before runaway stock prices revive the wealth effect, stimulate the economy and force a fearful Fed to raise rates. That's the new paradox -- the logical successor as an investment influence to the moldy old new paradigm.
Friday seemed like old times. Right up front of the pounding pack was Amazon.com, racing ahead by more than seven points.
The stock benefited, of course, from the sudden resurgence of interest in virtually all Internet issues. But it also got a special lift from a recommendation by Merrill Lynch. Citing the company's transition from a "momentum story to a growth story," analyst Henry Blodget said he was maintaining his Buy/Buy rating (until last week, a lot of investors mistook that for a bye/bye rating and acted accordingly) and sees the stock ultimately hitting $100.
Even if he uses phrases like "momentum story" and "growth story," Henry's a very bright fellow. But, and it grieves us to say so, we somehow can't share his enthusiasm for Amazon.
The stock was really creamed in the recent unpleasantness, falling from a peak of 113 in early December to a hair over 40 a couple of weeks ago. So, even after Friday's smashing run, at 57-and-change it was barely half its high and a fair piece from Henry's 100 target.
Ironically, a day before the stock's dazzling eruption, it had been hit by a warning from another analyst, laboring for Lehman Brothers, that Amazon would be forced to adjust its liberal accounting ways. More specifically, it and other online retailers will have to change how they book the costs of handling and shipping goods. Such expenses, which Amazon had been carrying in its income statement as sales and marketing costs, will instead be included under cost of goods sold.
Before your eyes glaze over (if they already have, please blink twice), this bookkeeping switch will exert a sizable impact on Amazon's gross profit margin, the ratio between revenues and the cost of goods sold. Thus, by the reckoning of Holly Becker, Lehman's analyst, the company's first-quarter gross profit margin would be cut more than in half, to 10%, from 22.3%.
The accounting change, slated to be mandated by the Financial Accounting Standards Board, will not affect Amazon's bottom line. But then, Amazon doesn't have a bottom line; it has a bottom hole.
In the first three months of the year, for example, on sales of $574 million, it had a net loss of $308 million and an operating loss of $198 million. So, on a not-quite doubling of sales in this year's first quarter compared with last year's comparable span, Amazon's operating loss came close to quadrupling. We can understand why that disqualifies the company as a "momentum story," but we're a little puzzled how it qualifies it as a "growth story." Oh, well.
Riffling through the 10-Q, we found some other engrossing items. Like the fact that the company used up $320 million worth of cash in the opening three months of this year, rather a big leap up from last year's $17 million. The explanation was that it had stocked up heavily on stuff in the fourth quarter of last year, when the bulk of retail sales are done, and had to pay for them in the first quarter of this year.
Amazon also cheerfully expects to enjoy positive cash over the rest of the year. We'll see. But it's important that it does. For the company's balance sheet is not a thing of beauty.
It has $1 billion in cash and marketable securities. But it also has $2 billion in debt, an accumulated deficit of over $1 billion and stockholders' equity of a mere $25.6 million. In fact, the company forecasts that net worth will disappear by the end of this quarter.
Amazon also has a bundle of equity interests in this dot.com and that dot.com. Some of these strike our jaded eye as long-term investments only if one is willing to employ the most generous definition of longevity.
The market is valuing the company at $19 billion. That's roughly seven times this year's likely sales and an infinite multiple of both earnings and book value, since the company never has had any of the former and the latter is about to disappear.
Of course, that brings us back to Henry and $100 a share. So far as we can tell, he doesn't anticipate Amazon violating solemn tradition by scraping together even a modicum of earnings. But then, Henry follows the sacred injunction: If you give a date, don't give a price, and if you give a price, don't give a date. And while he's predicting $100 for the stock, he won't say when.
We said he was a bright fellow.
A stellar member of the golden circle of tech stocks is Dell Computer, king of the PC makers. And with good reason. By any measure, the company has compiled a spectacular record and one that has won it legions of friends and fans in the Street, most of whom confidently predict another great performance in the current fiscal year, ending January.
The stock has hardly been spared the blood bath visited on most techs. From 59-plus late last month, it has plummeted into the low 40s until gratefully finding some support last week. But in Friday's big rally, the shares managed the paltriest of rises, closing a bit above 43.
One of the reasons for the stock's failure to wholeheartedly join Friday's big bash, we suspect, was a recent critical report by our old friend David Tice, in his excellent "Behind the Numbers." David, we should note, on at least one occasion was bullish about something, but that was when he was prepubescent and headstrong.
In contrast to the heavy breathers on the stock, he views Dell's recently reported April quarter as less than electrifying. He notes that while revenues were up 31.5%, operating income advanced a modest 4%, and earnings per share (ex investment gains) edged up all of a penny (or 6%). Suggestive of pretty subdued performance in themselves, those numbers, David believes, by no means tell the whole sad story.
Among the worries that the quarter's results inspired are the especially strong sales by Dell to dot.coms; he wonders -- and who can blame him -- how long those customers will have the means to continue their heady buying. Since the year-earlier stretch was kind of blah, moreover, he feels that this year's comparisons were nothing to write home about.
David also has reservations about Dell's apparent gross margin improvement in the quarter. That ratio, he observes, was up from the previous quarter but down 1% from the corresponding year-earlier soggy quarter, when price-cutting was rampant. According to the company's CFO, lower-than-expected component prices chipped in two cents a share to April-quarter earnings. Absent that fortuitous windfall, David points out, the margin improvement all but vanishes. And component prices are now rising, not falling, scarcely a happy portent for Dell's future margins.
Still another caveat is the source of growth in computer sales. David contends that the engine of such growth, to judge by the April quarter, continues to be notebooks, not, as he phrases it, "a reawakening of corporate demand for more and more computers."
Nor does that exhaust his list of concerns. But we'll mention just one more: that Dell's cash flow from operations is declining; it slid 9% in the April quarter from the previous quarter and a hefty 28.9% from last year's corresponding period. What the drop in cash flow from operations means, he declares, is a deterioration in the company's "quality of earnings."
It probably won't shock you to discover David's verdict is that the stock, selling at something north of 40 times estimated earnings, is a "sell."
Subscribe to WSJ & Barron's Online @ http://www.wsj.com
Let's take a look at Dell & Amazon.com:
Dell & AMZN & Nasdaq 6 MO Chart
....Jen
-- posted by JenL_2
» Kirk - I can bearely read Abelson…
I can bearely read Abelson…Here is Dell
<img src=http://chart.bigcharts.com/bc3/intchart/... width=430 height=218>
. IT went into a flat period right after I said in early 1999 that I prefered HWP over DELL.
<img src=http://chart.bigcharts.com/bc3/intchart/... width=430 height=218>
HWP isn't updated on most sites yet for the Agilent Split, but Yahoo! has updated numbers.
<img src=http://chart.yahoo.com/c/2y/h/hwp.gif width=490 height=288> This chart back calculates the Agilent spinoff as if it were a cash dividend.
Amazon, what can I say? I was warning that I wasn't buying the company. I'd perhaps consider if on weakness but with a Price to sales at 8.9 where Walmart has a P/S of 1.5 makes me avoid this stock. Can Amazon increase sales 4x without a 4x increase in BTL cost?
<img src=http://chart.bigcharts.com/bc3/intchart/... width=430 height=218>
I wonder if Abelson has been wrong on any of late or is he just pounding on his rare winners?
<img src=http://chart.bigcharts.com/bc3/intchart/... width=430 height=218>
I've made good money on Intel and I remember he panned that stock pretty well, correct?
-- posted by Kirk
» Rande - Kirk,
Kirk,I feel your pain re Ableson. Since time IS the ultimate commodity (we only have so much left, and it's getting shorter every second), why WASTE it? I appreciate a cogent bearish view, but this one is a broken record with a turn-off style to boot. Starting to feel that way about a certain weekend radio show as well.
-- posted by Rande
» Kirk - To:
To: Wally Mastroly who wrote (14382)From: Dave-in-MarinCa Monday, Jun 12, 2000 11:36 AM ET
http://www.siliconinvestor.com/stocktalk...
Lurking...listened to all of Bob's Sunday show. Bob commented on a call in the last hour of his show asking if he had read the Barron's interview with Russel on the Dow Theory....said he sees no validity in his work and it plays no part in his consideration of the market and his timing model. Reiterated that his May call on the QQQ's was based entirely on his TA and his "take" on the market. FWIW
-- posted by Kirk
» Oaktoad - Russell's comments
are a little hard to grasp when he states that the bear started a year ago.Frankly, I don't know what kind of a market we have here. We seem to keep having this rolling bear/bull and at times we have bear markets and bull markets happening at the same time.
Must admit my recollections of 1929 are very dim, but in 73-4 I don't remember this. At this time I am nervous, but when the market went down to about 600 it was all I could do to keep from selling everything. Ain't got those feelings now.
I feel similar to when we had housing booms and then busts. We may be close to topping, but don't seem to be there yet.
Fisher (younger one in Forbes) has written that the first year of a presidency is generally a poor year for the market.. OK, if we have a poor year, how bad does it have to be for most to bail???
The mavens at the big firms tend to have upward bias' so I tend to discount some of their comments, but still so many of them still see new highs this year. Cannot remember this from 73-4 either???
-- posted by Oaktoad
» JenL_2 - Sat 6/17/00 MoneyTalk
During the monologue BB mentioned Gene Epstein's article about Greenspan in 6/19 Barron's:Dr. Al's Monetary Ritalin Has Yet to Calm the Economy
By Gene Epstein
Has Dr. Al really managed to administer enough monetary Ritalin to this hyperactive economy to truly slow it down? Or is the patient merely grabbing a quick nap before planning even more mischief?
Well, rumors about the death of this economic boom seem greatly exaggerated. Despite the recent rise in the rate of unemployment, joblessness should continue to fall, and the Fed chairman's cherished "pool of available workers" along with it. And despite the recent decline in retail sales, the consumer's fattening paycheck should soon bring him back to the stores big time.
Moreover, with stronger economies abroad now fueling a surge in U.S. exports, and with state and local governments spending huge chunks of their accumulated surpluses on public works, 2000 should go down in the record books as the fifth year in a row of better than 4% growth in gross domestic product, a streak that has never been surpassed. So whether or not Mr. Greenspan truly believes he's finished his work, he'll soon find out there's more to be done. He may well stay his hand at the Federal Open Market Committee meeting scheduled for the end of this month, but by the August 22 conclave, he should find sufficient evidence to warrant yet another 50-basis point hike in the fed-funds rate, from the current 6 1/2 % target to 7%. (He's likely to go as much as half-a-point by August because the next FOMC gathering will be held October 3, too close to the presidential election to do anything so aggressive as hiking fed funds.)
Let's take the first head-fake in the economic data: the recent decline in retail sales, which helped spark a rally last week in stock prices.
The Commerce Department reported that sales fell 0.3% in May, and with the downward revisions to March and April, inflation-adjusted sales fell at an annual rate of 1.2% over the three-month period. But May sales were still up 5.6% from the like month a year ago. And as economist Jason Benderly points out, short-term patterns can oscillate wildly around the long-term trend. For example, in mid-'97, the three-month trend plunged nearly 4%, only to snap back to a positive growth rate of 15% a few months later. And the recent decline is also coming off a peak of 15% as January.
All one can discern is that the shopping public has a pronounced tendency to loot the malls and showrooms for a concentrated period and then retrench in the next. But wage and salary growth was running at an 8 1/2 % annual rate in the first four months of this year, much too strong for us to doubt that we're witnessing a retrenchment period and that the shoppers will soon return for another spree.
Then there's the recent back-up of the unemployment rate, to 4.1% in May from April's 3.9%, plus the shocking news that last month the private sector shed more than 120,000 workers. But this decline is likely to prove a one-time event, especially since it was muddied by the bizarre fact that in that same month, the Census Bureau hired nearly 360,000 temporary people, many of whom might have worked in the private sector if Census hadn't lured them away.
Moreover, every other labor-market indicator is screaming that the labor market is extremely tight: unemployment insurance claims, the Help-Wanted Index and the consumer-confidence measure of jobs -- hard-to-get. And at this stage of the boom, if past patterns are any guide, employers generally find they're understaffed in relation to the volume they're doing. So they're eager both to hire more workers and to hoard the ones they have.
Finally, the current insensitivity of the interest-rate sensitive sectors of the economy provides us with a sure sign that the fed funds medicine is not yet having the desired effect.
Start with autos, which are generally bought on credit. In the first five months of this year, unit sales of new cars and light trucks were running 8.1% above the same period a year ago, and the more recent April-May average was also running higher. In fact, auto-loan rates peaked in the early part of this year and have since declined. And whatever rate shoppers are paying for those other consumer durables, furniture and appliances, sales of those items are also running higher than a year ago.
Of course, the big enchilada of interest-rate sectors is housing, and the way the script is generally written, rate hikes are supposed to punish this sector the most severely, with spillover effects on the rest of the economy. But while there are no longer any signs of growth in this sector, there are few signs of weakness. True, based on the most recent data available, sales of new and existing homes were down 5.8% from a year ago in the first four months of this year. But the Mortgage Bankers Association index of mortgage applications has recently surged to a record high, which means sales will likely go gangbusters over the next few months. Housing starts have about matched the pattern of a year ago, and sales of new homes are actually running higher.
Underlying all this is a race between rising mortgage interest rates and rising incomes. Benderly calculates that a 1% increase in the mortgage rate brings a 5%-6% cut in home buying. But on the other hand, the purchase of homes rises by 5%-6% with a 1% increase in incomes. And with incomes rising, the housing market is hovering around its plateau.
Now take another standard rule-of-thumb: Fed policy normally gets one-for-two, meaning that a hike in the fed-funds rate of 2% slows GDP growth by 1% about a year later. Well, over the past year, the funds rate has gone up by 1 3/4 %, so we might begin to see some effects. And maybe we have: Perhaps the torrid rates of growth of the fourth and first quarters would have been even greater if the monetary tightening hadn't happened. But Dr. Al knows he must do better than that, and he no doubt soon will.
When I poked fun last week at the benighted Fed officer who thought that Treasury surpluses are shrinking the money supply, I received a firestorm of protest from readers who thought the joke was on me. Austrian-school economist Frank Shostak even sent me a long quote from the great Ludwig von Mises, which stated that surpluses do indeed deplete money.
But Mises was assuming what must have been the standard practice in his day. If a government takes in more than it spends and then hoards the surplus against a rainy day, the surplus does indeed reduce the stock of money in private hands, at least temporarily. But that isn't at all what the U.S. Treasury is currently doing.
It pumps its surplus right back into the economy. To some extent it's bought bonds in the market, but for the most part it simply pays down a portion of maturing debt at each Treasury auction. Bondholders receive cash, which they can spend or reinvest.
The confusion arises because the Treasury actually has an account at the Federal Reserve against which it writes all its checks. (Sort of like the rest of us, except you might have noticed that your refund check from the IRS was written against the central bank instead of one on the periphery.) Now, if it allowed the balance in that account to build up as the surpluses poured in, it would indeed be extinguishing money.
But that's exactly what it consciously avoids doing. For quite a while now, it's been maintaining a balance of a mere $5 billion, and doesn't permit that sum to go above that level for very long. If it does have extra cash on hand, then it places that money in commercial banks, in what are known as Treasury tax and loan accounts. And of course, those deposits can be used by the banks to make short-term loans to their customers. And the rare times the Treasury's balance at the Fed rises unexpectedly, the central bank routinely offsets that drain on bank reserves through its open-market operations.
Finally, those readers lucky enough to have never taken a Principles of Economics course wondered what I had in mind when I spoke of the mind-rot on the topic of monetary policy put out by the standard textbooks. Here's this from Harvard economist N. Gregory Mankiw's bestselling Principles of Economics:
"Decisions by policy-makers concerning the money supply constitute monetary policy." Well, no. The topic of the money supply rarely, if ever, comes up when the Federal Open Market Committee huddles.
Subscribe to WSJ & Barron's Online @ http://www.wsj.com
.....Jen
-- posted by JenL_2
» Mark_J - It'll probably upset those betting on the dice with money on th
It'll probably upset those betting on the dice with money on the pass line. Epstein is about the only one out there worried about more rate hikes. Everybody else is hanging their hats on the one-month numbers showing a slowdown.Best comment yesterday was the one where Bob said that a soft landing AND a recession would both mean earnings slowdowns and disappointments. And that we'd have to wait and see if investors are still willing to push up the multiples on these high-flyers as they're announcing a slowdown in their businesses...
-- posted by Mark_J
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