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You can see raging inflation in surging natural resources. You can see it in falling bond prices. You can see it flowing through the stock market — boosting sectors that benefit, while hitting sectors that are likely to foot the bill and suffer the brunt of the damage. And with last week’s employment numbers, you can even begin to see raging inflation in hourly wages. There are exceptional areas where pricing power is weak, and in a moment, Tony will tell you about one in particular. But nearly everywhere, the sweeping impacts of inflation are both unmistakable and unstoppable.
Raging Inflation The surge in energy prices is pausing. The rise in gold could even suffer a further correction. But does that mean the broader bull market in natural resources has come to a halt? No. Quite to the contrary, while some commodities are taking a breather, others are marching forward in full force.
Copper’s nearly nonstop surges confirm and double-confirm the danger of unstoppable inflation. In 2003, the price of copper more than doubled. But that was just the first thrust. In 2004-2005, it has jumped by half again. And right now, it’s continuing to make new historic highs, week after week, day after day. I repeat: While oil and gold have temporarily come off their highs, copper is now at its highest level of all time. Plus, this pattern is now spreading to aluminum and other basic metals. The surge in these metals is not just a sideshow on the world arena. It’s a pivotal, core event that denotes spreading inflation in almost every sector of every modern economy. This is reassuring to all investors in gold, energy and other natural resources: Even though the copper boom alone may not give your gold and energy investments a direct boost, it gives you the confidence you need to stick with your long-term core positions in the knowledge that the broader boom is far from over. Indeed, what’s happening today in copper and aluminum should soon be happening again in gold and energy.
Raging Inflation
Yesterday, I reminded you how inflation and But you don’t have to go back that far in time to get an idea as to how deeply and quickly bond prices can fall. In 2003, for example, 30-year Treasury bond prices fell 20 points very quickly as interest rates surged. And they could be doing the same, or worse, in 2005-2006. Why worse? Because the evidence of inflation is far broader and stronger today than in 2003. So there you have it: - Inflation ramping up at an accelerating pace - Commodities playing leapfrog in an upward march - Bond prices falling and interest rates rising - Interest-sensitive stocks in a long-term decline - Natural-resource-based stocks in a long-term rise To the degree that you toy with strategies that are conflicting with this big picture, you stand to lose. But as long as you stick with those that are consistent with the big picture, you should come out the winner. That means: 1. Keeping most of your cash short term and invested conservatively. See my Safe Money Report for details. 2. Maintaining a firm stake in natural resource investments. See Larry’s Real Wealth Report. 3. Reducing your exposure to the riskiest stocks. Register at www.WeissWatchdog.com for instant Weiss ratings and follow-up e-mails. 4. For your speculative funds, aiming for doubles, triples and home runs with call options that can go ballistic when energy rises and put options that can go through the roof when bonds fall. Where does the computer industry fall into this broad scheme? Tony is convinced it will get hurt. Reasons: Computer companies don’t benefit from rising commodities. And they’re stuck in one of the product areas that’s still under tremendous downward price pressure — PCs. He explains the details below.
In northwest Montana, there is definitely a chill in the air. The nighttime temperatures are routinely dropping into the 30’s and struggle to hit 50 degrees during the day. Don’t get me wrong. Northwest Montana is my favorite place in the world, but there are days when I sorely miss Austin, Texas, a town that we called home for eight years. We miss the spicy Tex-Mex BBQ, the vibrant music scene, and the beautiful rolling hills of the Texas Hill Country. Most of all, we miss the wonderful hospitality of our Texas friends. One of them takes great glee in reminding me that he’s still dressing in shorts, sandals, and sunglasses. But it isn’t just Austin’s 80-degree weather that permits him to dress like Jimmy Buffet. He can dress any way he wants because he is retired, wealthy, and only in his 40’s. My friend is a “Dellionaire” — Austin slang for a Dell millionaire. He started working for Dell in the mid-1980s and was given options to buy Dell shares before it went public — for just 7 cents a share. And every year, he was granted additional stock options, amassing a fortune. Indeed, throughout most of the 1990s, Dell was the best performer of the S&P 500. The stock split seven times. Its value rose by almost 85,000%. Someone who bought 100 shares when Dell went public on June 22, 1988 would be sitting on roughly $300,000 today. My friend did many times better than that. For such a wealthy man, though, he still lives a simple life. He drives a pickup truck and lives in the same house he bought in the early 1990s. Heck, you couldn’t tell he is rich except for the extremely generous donations he regularly makes to local causes, like youth sports and his church. When he called me this week, I thought for sure he was going to tease me again about the weather. Instead, he called me for advice about Dell. He’s very worried about his still-substantial holdings in Dell shares. My response: Good. You should be worried.
Meanwhile, long-time readers know that I have a low opinion about the PC industry. Dell confirmed my pessimistic view when it warned Wall Street on Tuesday that its Q3 results would be below expectations. But just in case you missed my report on Dell last week, here’s a recap: Dell warned that it would report 39 cents of third quarter profits, down from the 39 to 41 cents it previously forecast and even below the 40- cent Wall Street forecast. The problem is simple: weak sales. Wall Street was expecting Dell to turn in $14.1 to $14.5 billion of sales in Q3, but Dell now says they should expect only $13.9 billion instead. The Wall Street crowd — not to mention my Austin friend — aren’t about to give up their love affair with Dell based upon one bad quarter. Don’t forget — we’re talking about Dell, one of Wall Street’s favorite stocks.
But it owns a staggering 0.89% of the 2.4 billion Dell shares outstanding. Twentieth Century Ultra and Fidelity Blue Chip are not far behind. So with these kinds of huge stakes in Dell, many on Wall Street are going to be loathe to admit the company’s in deep trouble. No matter what, though, any news from Dell is big news, and this particular news isn’t just about one bad quarter. I’m talking about a steady decline in Dell’s profitability with a tidal shift in the entire computer business. And now, the shift is already hitting the fan:
The Dell lovers don’t want to hear it, but …
The Evidence Against the The numbers don’t lie and they’re pointing to a series of bugs crawling in the computer business … Computer Bug #1. Microsoft reported Q3 profits of $3.14 billion, slightly above expectations. However, Microsoft warned that its future isn’t going to be nearly as good as Wall Street was expecting. In Q4, Microsoft expects to report 32 to 33 cents a share on revenue of $11.9 billion to $12 billion. The Wall Street crowd, in contrast, had been expecting the company to earn 35 cents a share on revenue of $12.29 billion. Computer Bug #2. Ingram Micro is the second largest software and hardware reseller in the world. So that makes it a pretty darn good proxy for the PC industry. Ingram Micro delivered good Q3 results, but hidden in the fine print was the admission that their year-over-year PC sales grew by a pathetic 1%. Computer Bug #3. Gateway reported also decent Q3 numbers. But it complained that PC profit margins are shrinking. In Q3, Gateway had an 8.3% profit margin, which is down sharply from the 10% it achieved in Q2 and the 10.1% in the same quarter last year. In a truly healthy, rapidly growing business, profit margins are supposed to expand with economies of scale and good pricing power. That’s not what we have here in this industry. Instead, what we’ve got are shrinking profit margins and sinking pricing power. Computer Bug #4. Flextronics assembles components for a lot of tech companies, including Dell and Microsoft. But it reported 17 cents of Q3 profits, well short of the 19 cents expected by the hear-no-evil analysts. And the company was quite frank about its problem: “Everything” they said, “was just a little bit softer in September than we anticipated, and everything was a little bit softer even than that in October.” Computer Bug #5. Perhaps the most blaring warning about the PC business came from Intel, which supplies processor chips for 80% of the world’s computers. Intel reported 32 cents ($2 billion) of profit on $9.96 billion of Q3 sales. While that may sound like a lot of money, it was below the 33 cents and $9.92 billion the Wall Street crowd was expecting. Moreover, the headline shortfall doesn’t begin to tell the balance-sheet problems building at Intel.
The PC business is in trouble and so are all the members of the food chain. That includes not just Dell, Gateway, and Hewlett Packard but also the component contributors like …
The conclusion is clear to me: stay far, far away from anything to do with computers, especially industry bellwethers like Dell. My Dellionaire friend sure didn’t like hearing this. But I gave him the same recommendation. I hope that both he — and you — will actually act on it. Good luck and God bless! Martin and Tony About MONEY AND MARKETS MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Marie Albin, John Burke, Michael Burnick, Beth Cain, Amber Dakar, Scot Galvin, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others.
© 2005 by Weiss Research, Inc. All rights reserved. |
Behind nearly every major asset — stocks, bonds, commodities and real estate — one unmistakable theme is bursting to the fore: raging inflation.
Prime example: Copper.
inflation fears ravaged bond prices in 1979-1981.
Computers in a
Dell’s shares have plunged virtually nonstop, sinking through one critical low after another — I count four just in the past three months.
Fidelity Magellan, for example, may have only 1.54% of its total assets invested in Dell.
