Martin’s busy writing his Safe Money Report this weekend. So I’m filling in for him.
My name is Tony Sagami, and I own one of the few dot-coms in the country that not only survived but actually prospered during the tech wreck of 2000-2002.
We bypassed the boom and bust and made a nice profit year after year. How? By staying out of debt and avoiding the Internet hysteria.
But that’s not exactly the recipe for success that Wall Street has been following. In fact, right now …
THE GOOGLE IPO IS GENERATING AS
MUCH HYSTERIA AS AN ELVIS SIGHTING
One analyst said “Google will have the effect of rekindling or reinforcing that Silicon Valley spirit of optimism and techno-utopianism.”
Another gushed that the Google IPO will stimulate the economy, create new jobs, improve the unemployment rate, and even “play a big role in helping to return President Bush to office this fall.”
But while Google was grabbing one side of the headlines,
on the other side …
TECH STOCKS HAVE JUST SUFFERED
THEIR WORST WEEKLY DECLINE SINCE 2002!
This week, the Nasdaq plunged 6.4%, its sharpest one-week plunge since the week ending October 18, 2002, near the nadir of the bear market.
On Friday alone, stocks like Global Crossing and Ingram Micro, fell 28% and 26%, respectively.
So what’s really going on here?
My answer: Wall Street and the financial press are behaving the same way the president of the United States did in the 1998 movie “Wag the Dog.”
In that movie, the president manufactured a fake war to deflect attention from the story of an extra-marital affair revealed less than two weeks before election day.
This time, instead of a war, the distraction is Google. And this week, the real story that Wall Street wants you to ignore is …
A NEW WAVE OF DISAPPOINTING
RESULTS FROM BIG-NAME TECH COMPANIES
Take the cell phone business, for example. It’s SUPPOSED to be hotter than a pistol.
But RF Micro Devices, which makes cell phone chips, has disappointed Wall Street by warning that it expects profits per share of only 3 to 4 cents in the second quarter, compared to Wall Street’s expectations of 5 cents.
This implies its biggest customers — Nokia, Samsung, and Motorola — are also likely to disappoint.
Another industry that was supposed to be hot: Microchips. But chip equipment maker KLA Tencor has just admitted that it now expects sales to FALL by as much as 15% in the second quarter.
Expect a similar trend for its prime competitors — Applied Materials, Novellus, and Tektronix.
Meanwhile, LSI Logic has just updated its second-quarter sales forecast — somewhere between $455 million and $470 million, disappointing Wall Street’s expectations of $472 million.
Implication: Its largest customers — Hewlett Packard, IBM, and Sun Microsystems — are slipping as well.
What about the high-flying companies that boost the speed and capacity of fiber-optic networks? According to John Chambers of Cisco, this industry is going great guns.
But the information trickling out of JDS Uniphase throws cold water on that notion. The company has just warned Wall Street that, instead of making money, it expects to LOSE money this quarter. And it’s revealed that three large customers may push orders into later quarters.
Heck, customers don’t postpone orders because their business is booming. They do it because their business is bad. And JDS’s customers include BIG names — Texas Instruments, Agilent, Alcatel, Ciena, Lucent, and Nortel.
Genesis Microchip makes cutting-edge video and display chips that are used in flat panel TV and computer monitors — two of the hottest growth spots in the tech world, right? Maybe not.
Genesis also reported a disappointing first quarter and warned that the second quarter would also be worse than expected — sales in the $52 million to $56 million range — below analyst forecasts of $58 million.
Look. If Google were really a sign of a broad-based comeback in Internet stocks, then RealNetworks and its streaming video business should be booming too, right?
Wrong again. RealNetworks saw its first-quarter loss widen from $2.8 million in 2003 to $10.4 million in 2004. Ironically, its sales actually did increase — by a hefty 29% in the last 12 months. But it’s just another example of the profitless “prosperity” that Wall Street seems to always fall for.
PC INDUSTRY! SOFTWARE! TELECOM!
What about the PC world? Hah! Gateway reported a $166 million first-quarter loss on $868 million in sales and is laying off another 1,500 employees. This is ON TOP OF the 2,500 jobs Gateway eliminated when it closed its 188 retail stores on April 9.
And it lost all this money by actually selling 19% MORE computers last quarter than it did the same period a year earlier.
This must be the “big PC replacement cycle” that the big wheels at Intel and Dell keep telling us is about to happen. Trouble is, instead of bringing more profits, it’s bringing more losses.
Ingram Micro is the biggest seller of computer hardware and software in the world. But its shares got killed on Friday when it pre-announced that it would fall far short of second-quarter expectations.
Wall Street was looking for 22 cents of profit on $6.1 billion in sales. “Sorry, folks,” was the word this week. Ingram will make only 13 to 16 cents on $5.6 billion to $5.8 billion in sales.
MCI: The telecom business is booming again, right? Wrong! On Thursday, MCI warned that it expects a sharp drop in revenues in 2004 — around $21 billion, or down 14% from last year. What’s the issue? According to MCI, overcapacity and weak demand!
Lucent reported a profit for fiscal 2004, but only expects sales to grow by “low single digits.” Here’s a company that has had zero earnings and lost $25 billion in the last three years … but has a stock up over 50% in the first three months of 2004.
And Lucent only expects to grow sales by low single digits this year? It’s just another example of investors piling into what they think is hot, while ignoring the ugly realities of the underlying business.
Thinking these may be old, cherry-picked examples from the last few months? Heck no! This slew of ugly news is all from just Thursday and Friday! But there’s more …
EVEN COMPANIES WITH ROSY PROFIT REPORTS
HAVE HIDDEN WARTS IN THE FINE PRINT
Motorola is a prime example.
Wall Street cheerleaders are going bonkers over Motorola’s better-than-expected numbers and are forecasting a new burst of cellular phone sales. But they haven’t connected the dots with the pathetic news from Nokia a few weeks ago.
Nokia dropped two profit warnings in less than a month and warned about inventory buildup, disappointing sales, and weaker demand going forward.
My take is that the majority of Motorola’s sales growth is at Nokia’s expense — not increased overall demand for cellular phones. That’s why Nokia’s market share fell from 34.9% a year ago to 29.2% in the first quarter, while Motorola’s market share rose by 1.2% points to 16.5%.
So … what’s all this have to do with Google? Plenty.
Wall Street’s big pitch for Google is that, this time around, it’s NOT like the old dot-coms. They’re supposed to finally have a company with real profits, real sales, and no smoke and mirrors.
Problem: Profits and sales in the ENTIRE Web and tech industry are weakening just as Google is coming to market.
Worse, although Google plans to sell $2.7 billion worth of stock in its IPO, some wide-eyed Wall Street analysts are saying the total market capitalization will rise to as high as $25 billion to $35 billion. That creates exactly the same kind of balloon-about-to-pop danger as the first tech bubble.
How big is the Google balloon? Think of it this way: A market value of that magnitude would make Google worth twice as much as AT&T, five times more than Radio Shack, four times more than the New York Times, and three times more than Albertsons.
At that size, Google would be a bigger than Best Buy, Costco, Federal Express, Ford, Goodyear Tire, Harley Davidson, Kellogg, Maytag, Nike, Sears, Whirlpool, and hundreds of other large, long-established American companies.
Bottom line: The Google “techno-utopia” enthusiasm is not based on value. It’s still all about momentum and hype.
DÉJÀ VU
One of the young men who works in my office has a friend who’s a first-year med student at Vanderbilt. We’re talking about an obviously very bright young man.
But, like some other very smart people we’ve known over the years, he got sucked in. He took $2,000 of his student loan money and invested it in Taser, the maker of less-than-lethal weapons for law enforcement.
He had expected to make enough money to pay for a big chunk of his med school tuition next semester.
Problem: Taser has just dropped from a split-adjusted high of $64.16 to a Friday close of $32.35 — all in just 9 trading days.
It’s déjà vu — speculation is in vogue again. But instead of dot-coms, the new spec-du-jour has been tech stocks, mega-momentum stocks (like Taser), and red-hot IPOs (like Google).
Some of the names have changed. But it’s still the same game: Wall Street hype. Media hoopla. And big losses coming for thousands of investors.
What will they attribute the market’s decline to this time? The pundits will have their pick of several different poisons:
* rising interest rates,
* the massive pile-up of bets on low interest rates by Fannie Mae, Ginnie Mae, Wall Street banks, and investors. (Be sure to see “Abreast of the Market” in this morning’s Wall Street Journal, page C1.)
* Cash-strapped consumers who can no longer play the mortgage refinance game or use their houses as ATM machines.
* the out-of-control budget deficit,
* record trade imbalances,
* record gasoline prices,
* surging commodity and raw material prices,
* sky-high stock valuations, or
* terrorism and the war in Iraq.
My best advice:
One: Eliminate as much debt as you can.
Two: Build as big a war chest of cash as possible.
Three: Keep the maturities of your fixed-income portfolio very short.
Four: Stay far, far away from high-flying stocks and mutual funds.
Defense is your top priority.
Best wishes,
Tony
Tony Sagami
Contributor, Safe Money Report
