Post by Conrad Alvin Lim on Oct 3, 2006 4:53:03 GMT -4
Contrarian Chronicles
Beware of the 'Bubbleonians'
Earnings warnings and history don't seem to be enough to discourage bull-market believers.
By Bill Fleckenstein
10/2/2006 12:00 AM ET
Throughout the years, I have come up with some slang terms that from time to time appear in my daily and weekly columns. One of them is "Bubbleonian," and in the guide to Fleckisms that accompanies the Contrarian, this is how I define it: "Individuals who believe we are in a perpetual bull market."
That's the black-and-white. To see Bubbleonians in action, all you have to do is look at the recent stock market action. That's where "beta chasers" can be found -- driving up prices even as they ignore the ongoing deterioration in the health of corporate America and our economy.
For example, the housing bubble -- that engine behind our economy -- has clearly begun to unwind. Recently, however, housing equities took in stride the news that (a) the median price of an existing home for sale fell for the first time since 1995, and (b) inventories rose to about 7.5 months for houses and 6.5 months for condos -- the highest figures since 1993.
The complacency has been topped by mass euphoria in the tech sector, where bulls have ignored a long string of pre-announcements. Thus far, more than three times as many tech companies have pre-announced so far this quarter than had done so at this time last quarter.
And Balda makes three
Take cell phones. Nearly every company involved in that food chain has recently pre-announced earnings problems. But my favorite is Balda, which makes plastic components that go into handsets -- and is yet another foreign supplier to Nokia (NOK, news, msgs). Its retraction of prior guidance follows on the heels of two other European suppliers to Nokia: Elcoteq Network (ELCQF, news, msgs) and Perlos (PLOJF, news, msgs). Balda's press release was so refreshingly honest and summed up other data points so well that I thought I would share parts of it:
"At its global sales meeting in China last week, the group intensively examined and carefully assessed the current customer forecasts and possible new business. … Balda notes that the revival of customer calls, upon which its forecast of mid-July was based, has not occurred asanticipated. Furthermore, the company expects new projects to start up later than scheduled. … The aforementioned effects apply, above all, in Asia. The shortfalls that have already occurred there in the second quarter will continue in the remainder of 2006."
A downwardly mobile business
Moving around the globe: "The European region was on target in terms of sales and profits at the end of the first six months of 2006," the Balda announcement said. "Even so, it will not be possible to maintain this trend for the full year. The company cannot entirely absorb the pressure on prices from customers in the mobile-phone market. This pressure is so intense that while the global market for mobile phones has grown in volume, it has in fact shrunk in turnover terms. This trend can be attributed to the keen competitive situation for Balda's customers in the global mobile-phone market, but also to increasingly intensified competition among suppliers to the mobile-phone manufacturers."
Finally, to our shores: "The American region will miss the target for 2006."
Everything that Balda says has been corroborated by a multitude of data points, and there are similar problems in the personal-computer market. Nevertheless, the party continues. People chase tech stocks because they believe in a soft landing/new economic rebound, or just because stocks are going up. Similarly, housing stocks continue to be lusted after, because they've stopped going down (for now) on bad news. Had we been in recession and had these stocks been beaten up to really cheap valuations, you could say that the worst had been discounted. But in this case, I believe we are seeing a massive disconnect.
Jabil, swallowed whole
Meanwhile, in a display of massive connect to the mania, electronics company Jabil Circuit (JBL, news, msgs) accomplished last Tuesday evening what companies tried to do during the tech boom, and have been trying to do ever since the tech bust: It reported revenues before the bad stuff, and only those revenues. It didn't even report EBITDA (earnings before interest, taxes, depreciation, and amortization) or non-GAAP (figures using other than generally accepted accounting principles) numbers, because it can't produce its financials.
On that glorious revelation, Jabil Circuit closed up about 3%. Thus, like bad poker players, folks seem determined to bet that the inside straight will keep cashing for them on the river.
However, if one takes a step back, the world is a remarkably different place than when the Dow reached its high in late January of 2000. Looking farther back, most of us weren't in the business in September and October of 1973, but two friends who were have noted the similarities between the Dow's rally then and the one occurring now.
In '73, when stocks seemed worry free
That September/October rally was the last one before the market got annihilated. In fact, after the rally ended in late October 1973, the market dropped close to 20% in a month's time. A year later, it was down almost 40% from those October highs. Fast-forward to the present, where the macro backdrop is worse, and the contrast may prove telling.
Obviously, with animal spirits running high and folks thinking they have a free pass because it's the "fundamentally correct" time of the quarter to buy stocks, any bit of craziness is possible in the short run. However, it will be temporary. There will be no bailing out the housing bubble that bailed out the equity bubble. There's no way that the flagrant disregard for risk on the part of folks chasing stocks can end in anything other than tears for this temporary rebirth of Bubbleonian mentality.
Getting up to snuff on Nastech
Turning to the department of potential wins, I haven't mentioned the last handful of positive developments for Nastech Pharmaceutical (NSTK, news, msgs), which is one of my favorite longs. I assume that readers who care are able to monitor the news for themselves, but here's a rundown, just in case:
Nastech recently announced the initiation of Phase I trials for its intranasal insulin. The company has also received two grants to fund research into small-interfering RNA (siRNA) therapeutics, for the prevention and treatment of influenza -- including one from the National Institute of Allergy and Infectious Diseases, a division of the National Institutes of Health.
Also, at a conference in Europe two weeks ago, Procter & Gamble (PG, news, msgs) noted an important data point: PTH delivered through the nose saw "reduced subject variability," compared to injections. PTH increases concentration of calcium in the blood.
Finally, I think there is also reason to believe that inhaled calcitonin, an osteoporosis treatment, is not a dead subject. While not a product with huge potential, if FDA issues can be surmounted, I believe it would definitely enhance the company's credibility. From my vantage point, Nastech continues to make progress on all fronts.
Beware of the 'Bubbleonians'
Earnings warnings and history don't seem to be enough to discourage bull-market believers.
By Bill Fleckenstein
10/2/2006 12:00 AM ET
Throughout the years, I have come up with some slang terms that from time to time appear in my daily and weekly columns. One of them is "Bubbleonian," and in the guide to Fleckisms that accompanies the Contrarian, this is how I define it: "Individuals who believe we are in a perpetual bull market."
That's the black-and-white. To see Bubbleonians in action, all you have to do is look at the recent stock market action. That's where "beta chasers" can be found -- driving up prices even as they ignore the ongoing deterioration in the health of corporate America and our economy.
For example, the housing bubble -- that engine behind our economy -- has clearly begun to unwind. Recently, however, housing equities took in stride the news that (a) the median price of an existing home for sale fell for the first time since 1995, and (b) inventories rose to about 7.5 months for houses and 6.5 months for condos -- the highest figures since 1993.
The complacency has been topped by mass euphoria in the tech sector, where bulls have ignored a long string of pre-announcements. Thus far, more than three times as many tech companies have pre-announced so far this quarter than had done so at this time last quarter.
And Balda makes three
Take cell phones. Nearly every company involved in that food chain has recently pre-announced earnings problems. But my favorite is Balda, which makes plastic components that go into handsets -- and is yet another foreign supplier to Nokia (NOK, news, msgs). Its retraction of prior guidance follows on the heels of two other European suppliers to Nokia: Elcoteq Network (ELCQF, news, msgs) and Perlos (PLOJF, news, msgs). Balda's press release was so refreshingly honest and summed up other data points so well that I thought I would share parts of it:
"At its global sales meeting in China last week, the group intensively examined and carefully assessed the current customer forecasts and possible new business. … Balda notes that the revival of customer calls, upon which its forecast of mid-July was based, has not occurred asanticipated. Furthermore, the company expects new projects to start up later than scheduled. … The aforementioned effects apply, above all, in Asia. The shortfalls that have already occurred there in the second quarter will continue in the remainder of 2006."
A downwardly mobile business
Moving around the globe: "The European region was on target in terms of sales and profits at the end of the first six months of 2006," the Balda announcement said. "Even so, it will not be possible to maintain this trend for the full year. The company cannot entirely absorb the pressure on prices from customers in the mobile-phone market. This pressure is so intense that while the global market for mobile phones has grown in volume, it has in fact shrunk in turnover terms. This trend can be attributed to the keen competitive situation for Balda's customers in the global mobile-phone market, but also to increasingly intensified competition among suppliers to the mobile-phone manufacturers."
Finally, to our shores: "The American region will miss the target for 2006."
Everything that Balda says has been corroborated by a multitude of data points, and there are similar problems in the personal-computer market. Nevertheless, the party continues. People chase tech stocks because they believe in a soft landing/new economic rebound, or just because stocks are going up. Similarly, housing stocks continue to be lusted after, because they've stopped going down (for now) on bad news. Had we been in recession and had these stocks been beaten up to really cheap valuations, you could say that the worst had been discounted. But in this case, I believe we are seeing a massive disconnect.
Jabil, swallowed whole
Meanwhile, in a display of massive connect to the mania, electronics company Jabil Circuit (JBL, news, msgs) accomplished last Tuesday evening what companies tried to do during the tech boom, and have been trying to do ever since the tech bust: It reported revenues before the bad stuff, and only those revenues. It didn't even report EBITDA (earnings before interest, taxes, depreciation, and amortization) or non-GAAP (figures using other than generally accepted accounting principles) numbers, because it can't produce its financials.
On that glorious revelation, Jabil Circuit closed up about 3%. Thus, like bad poker players, folks seem determined to bet that the inside straight will keep cashing for them on the river.
However, if one takes a step back, the world is a remarkably different place than when the Dow reached its high in late January of 2000. Looking farther back, most of us weren't in the business in September and October of 1973, but two friends who were have noted the similarities between the Dow's rally then and the one occurring now.
In '73, when stocks seemed worry free
That September/October rally was the last one before the market got annihilated. In fact, after the rally ended in late October 1973, the market dropped close to 20% in a month's time. A year later, it was down almost 40% from those October highs. Fast-forward to the present, where the macro backdrop is worse, and the contrast may prove telling.
Obviously, with animal spirits running high and folks thinking they have a free pass because it's the "fundamentally correct" time of the quarter to buy stocks, any bit of craziness is possible in the short run. However, it will be temporary. There will be no bailing out the housing bubble that bailed out the equity bubble. There's no way that the flagrant disregard for risk on the part of folks chasing stocks can end in anything other than tears for this temporary rebirth of Bubbleonian mentality.
Getting up to snuff on Nastech
Turning to the department of potential wins, I haven't mentioned the last handful of positive developments for Nastech Pharmaceutical (NSTK, news, msgs), which is one of my favorite longs. I assume that readers who care are able to monitor the news for themselves, but here's a rundown, just in case:
Nastech recently announced the initiation of Phase I trials for its intranasal insulin. The company has also received two grants to fund research into small-interfering RNA (siRNA) therapeutics, for the prevention and treatment of influenza -- including one from the National Institute of Allergy and Infectious Diseases, a division of the National Institutes of Health.
Also, at a conference in Europe two weeks ago, Procter & Gamble (PG, news, msgs) noted an important data point: PTH delivered through the nose saw "reduced subject variability," compared to injections. PTH increases concentration of calcium in the blood.
Finally, I think there is also reason to believe that inhaled calcitonin, an osteoporosis treatment, is not a dead subject. While not a product with huge potential, if FDA issues can be surmounted, I believe it would definitely enhance the company's credibility. From my vantage point, Nastech continues to make progress on all fronts.