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Saturday, 25 October 2008
Can A Horror Movie Have A Happy Ending?
Was this the stock market, or raw footage for Saw 6? Last week’s horror show seriously tested the notion that equities have bottomed. Amidst the carnage, the only thing missing was the guy in the pig mask.
By Leslie P. Norton and Eric J. Savitz – Barron’s 25 October 2008
Was this the stock market, or raw footage for Saw 6? Last week’s horror show seriously tested the notion that equities have bottomed. Amidst the carnage, the only thing missing was the guy in the pig mask.
There was a small glimmer of hope at the end of the week, as the big caps clung above their Oct. 10 intraday lows of 7882.51 and 839.80 for the Dow industrials and the S&P 500, respectively. Still, they ended the week under the Oct. 10 closing levels, and Nasdaq fell through its Oct. 10 intraday support to set a new multiyear-low.
Here’s a brief recap: After a Monday rally, stocks collapsed on Tuesday amid worries about global growth, briefly interrupted by a surprise comeback late Thursday, but then Microsoft reported a weaker-than-expected outlook. In Asia that night, Sony slashed its full-year profit forecast, Samsung said third-quarter profit plunged by 44%, and investors fretted that Korean corporates had over-borrowed.
When the pre-Halloween selling resumed, Asian stocks nose-dived, and Europe followed, with Daimler dumping its profit forecast; U.S. stock futures plummeted and were briefly halted. On Friday came fresh speculation about liquidity problems at a big hedge fund. The Dow was off more than 500 points at one point, though it rebounded in the afternoon.
The body count: The Dow industrials ended the week off 5.35% to 8378.95, below the Oct. 10 low, and 40.85% down from its October 2007 record of 14,164.53. The S&P 500 fell 6.78% during the week to 876.77, its lowest close since April 2003. And the Nasdaq fell 9.3% on the week to 1552.03, down 45.7% from its Oct 31 multiyear high of 2859.12.
The global economy is surely weak; at home, the drumbeat of layoffs included cuts at Goldman Sachs, Xerox, Chrysler and Merck. The dollar’s ascent – 6.5% against the euro alone, last week – is also about the unwinding of leverage. As Stephanie Pomboy of MacroMavens said: “The majority of the positions [people] are being forced to unwind have either been financed with, or settled in, dollars.”
Hedge funds raising money for redemptions also are being blamed. There’s no easy way to gauge when the unwinding will be over; Jason Trennert of Strategas thinks a marked slowing in the dollar’s advance could provide a clue. Many funds have a Nov. 15 notification deadline for year-end redemption requests, Goldman Sachs points out; once the date is passed, money could flow back in to the market.
Friday’s volume was relatively light, observes John Roque of Natixis Bleichroeder, suggesting that fresh lows might be tougher to establish. Odds of a short-term rebound are good. The S&P 500 is 25% below its 50-day moving average, something that’s only happened five times since 1928. Each time, the S&P 500 has typically rallied at least 14%, says Paul Hickey of Bespoke Investment Group.
Longer term is anybody’s guess, given the current panic. The last time the Dow closed below 8000 was March 31, 2003’s 7992 close. Goldman Sachs sees a trough late next month after short-term credit markets return to “functioning,” a new president is elected, and hedge-fund liquidations and redemptions end.
At 7:30 a.m. on Friday, Jim Dunigan and his colleagues at PNC Wealth Management met to assess the carnage, and decided to stick to their strategy: Underweight foreign stocks and Overweight U.S. large caps. The S&P today is pricing in a “relatively severe recession,” says Dunigan, in which earnings would fall 30% to $65 a share. He thinks that’s unlikely; consensus estimates still peg ‘09 earnings at just below $98 a share.
In a big week for S&P 500 earnings announcements, more than half the companies that reported by Thursday afternoon increased earnings, points out Mani Govil of RS Large Cap Alpha fund. “There are companies that have hit our valuation parameters for the first time in five to six years.”
The mammoth downdraft in stock prices has knocked some technology shares to stunningly low levels. At last week’s Barron’s Art of Investing conference in New York, tech-fund manager Paul Wick of J.W. Seligman noted that contract-manufacturing stocks have shrunk to nearly unheard of price/earnings multiples. Sanmina SCI (SANM) now trades for 4.3 times forward earnings. Jabil (JBL) trades for 6.5 times. And Flextronics (FLEX) trades for an astonishing 3.4 times next year’s estimates. The stocks are priced as if the entire industry is headed for bankruptcy court.
Let’s hope that won’t happen. The contract-manufacturing sector produces most of the world’s computers, handsets, routers and other electronic gear. Companies like Dell, Apple and Cisco long ago stopped operating factories, and outsourced. When these businesses slow down – which they are certainly doing right now – the contract manufacturers feel the pain. But with P/E multiples for most of the companies in the low-single-digit range, it looks as though much of the risk has been wrung out of the shares.
And they’re not the only tech stocks the market has abandoned. Consider, for instance, Seagate (STX), the largest U.S. manufacturer of hard-disk drives. It’s been going through something of a turnaround the past few quarters, and its earnings have hit a rough patch. But CEO Bill Watkins says Seagate has lately started to retake market share in laptops, desktops and enterprise drives, while reducing costs and speeding up the introduction of new products. In an interview last week, he sounded almost bullish about the drive maker’s prospects.
The stock sold off sharply last week after Seagate posted fiscal first quarter results, ended September, and the Street was particularly disappointed with guidance for the December quarter. By Friday, the stock had dropped to $7.04, the lowest closing price since Seagate re-emerged as a public company in December 2002 at $12 a share. The stock is now down 72% year to date.
But it may be time go bottom fishing. Watkins says he did something recently he’s never done before as CEO: He exercised 50,000 restricted stock options and kept the shares rather than sell them off. In part, he says, it is a reflection of the company’s increasingly alluring payout: The stock now yields a hefty 6.8%. And the company still figures to earn about 80 cents a share in the June 2009 fiscal year, giving it a P/E of under 9. Meanwhile, Watkins says the company is actually having a pretty good month in October.
Watkins also contends that some of his rivals – in particular Toshiba (6502.Japan), Fujitsu (6702.Japan) and Samsung (005930.Korea) – are losing gobs of money in the drive business and could be forced to consolidate. That would be fine with him; any deal that reduces industry capacity is good for Seagate. Note that Microsoft last week projected 2009 PC unit growth of 8%-12%, and essentially every PC will have a disk drive. Meanwhile, Seagate’s dividend can keep you warm at night.
While we’re on the subject of tech stocks and dividends, we would note that the big sell-off has driven prices down to where some shares now provide fairly hefty yields: Imagine a portfolio of Taiwan Semiconductor (TSM),with a 5.4% yield; Microchip (MCHP), which raised its payout just last week and now yields 6.3%; Nokia (NOK), 4.6%; Verizon Communications (VZ), 6.6%; AT&T (T), 6.2%; and the king of dividend payers, British Telecom parent BT Group (BT), 17.3%.
1 comment:
Can A Horror Movie Have A Happy Ending?
By Leslie P. Norton and Eric J. Savitz – Barron’s
25 October 2008
Was this the stock market, or raw footage for Saw 6? Last week’s horror show seriously tested the notion that equities have bottomed. Amidst the carnage, the only thing missing was the guy in the pig mask.
There was a small glimmer of hope at the end of the week, as the big caps clung above their Oct. 10 intraday lows of 7882.51 and 839.80 for the Dow industrials and the S&P 500, respectively. Still, they ended the week under the Oct. 10 closing levels, and Nasdaq fell through its Oct. 10 intraday support to set a new multiyear-low.
Here’s a brief recap: After a Monday rally, stocks collapsed on Tuesday amid worries about global growth, briefly interrupted by a surprise comeback late Thursday, but then Microsoft reported a weaker-than-expected outlook. In Asia that night, Sony slashed its full-year profit forecast, Samsung said third-quarter profit plunged by 44%, and investors fretted that Korean corporates had over-borrowed.
When the pre-Halloween selling resumed, Asian stocks nose-dived, and Europe followed, with Daimler dumping its profit forecast; U.S. stock futures plummeted and were briefly halted. On Friday came fresh speculation about liquidity problems at a big hedge fund. The Dow was off more than 500 points at one point, though it rebounded in the afternoon.
The body count: The Dow industrials ended the week off 5.35% to 8378.95, below the Oct. 10 low, and 40.85% down from its October 2007 record of 14,164.53. The S&P 500 fell 6.78% during the week to 876.77, its lowest close since April 2003. And the Nasdaq fell 9.3% on the week to 1552.03, down 45.7% from its Oct 31 multiyear high of 2859.12.
The global economy is surely weak; at home, the drumbeat of layoffs included cuts at Goldman Sachs, Xerox, Chrysler and Merck. The dollar’s ascent – 6.5% against the euro alone, last week – is also about the unwinding of leverage. As Stephanie Pomboy of MacroMavens said: “The majority of the positions [people] are being forced to unwind have either been financed with, or settled in, dollars.”
Hedge funds raising money for redemptions also are being blamed. There’s no easy way to gauge when the unwinding will be over; Jason Trennert of Strategas thinks a marked slowing in the dollar’s advance could provide a clue. Many funds have a Nov. 15 notification deadline for year-end redemption requests, Goldman Sachs points out; once the date is passed, money could flow back in to the market.
Friday’s volume was relatively light, observes John Roque of Natixis Bleichroeder, suggesting that fresh lows might be tougher to establish. Odds of a short-term rebound are good. The S&P 500 is 25% below its 50-day moving average, something that’s only happened five times since 1928. Each time, the S&P 500 has typically rallied at least 14%, says Paul Hickey of Bespoke Investment Group.
Longer term is anybody’s guess, given the current panic. The last time the Dow closed below 8000 was March 31, 2003’s 7992 close. Goldman Sachs sees a trough late next month after short-term credit markets return to “functioning,” a new president is elected, and hedge-fund liquidations and redemptions end.
At 7:30 a.m. on Friday, Jim Dunigan and his colleagues at PNC Wealth Management met to assess the carnage, and decided to stick to their strategy: Underweight foreign stocks and Overweight U.S. large caps. The S&P today is pricing in a “relatively severe recession,” says Dunigan, in which earnings would fall 30% to $65 a share. He thinks that’s unlikely; consensus estimates still peg ‘09 earnings at just below $98 a share.
In a big week for S&P 500 earnings announcements, more than half the companies that reported by Thursday afternoon increased earnings, points out Mani Govil of RS Large Cap Alpha fund. “There are companies that have hit our valuation parameters for the first time in five to six years.”
The mammoth downdraft in stock prices has knocked some technology shares to stunningly low levels. At last week’s Barron’s Art of Investing conference in New York, tech-fund manager Paul Wick of J.W. Seligman noted that contract-manufacturing stocks have shrunk to nearly unheard of price/earnings multiples. Sanmina SCI (SANM) now trades for 4.3 times forward earnings. Jabil (JBL) trades for 6.5 times. And Flextronics (FLEX) trades for an astonishing 3.4 times next year’s estimates. The stocks are priced as if the entire industry is headed for bankruptcy court.
Let’s hope that won’t happen. The contract-manufacturing sector produces most of the world’s computers, handsets, routers and other electronic gear. Companies like Dell, Apple and Cisco long ago stopped operating factories, and outsourced. When these businesses slow down – which they are certainly doing right now – the contract manufacturers feel the pain. But with P/E multiples for most of the companies in the low-single-digit range, it looks as though much of the risk has been wrung out of the shares.
And they’re not the only tech stocks the market has abandoned. Consider, for instance, Seagate (STX), the largest U.S. manufacturer of hard-disk drives. It’s been going through something of a turnaround the past few quarters, and its earnings have hit a rough patch. But CEO Bill Watkins says Seagate has lately started to retake market share in laptops, desktops and enterprise drives, while reducing costs and speeding up the introduction of new products. In an interview last week, he sounded almost bullish about the drive maker’s prospects.
The stock sold off sharply last week after Seagate posted fiscal first quarter results, ended September, and the Street was particularly disappointed with guidance for the December quarter. By Friday, the stock had dropped to $7.04, the lowest closing price since Seagate re-emerged as a public company in December 2002 at $12 a share. The stock is now down 72% year to date.
But it may be time go bottom fishing. Watkins says he did something recently he’s never done before as CEO: He exercised 50,000 restricted stock options and kept the shares rather than sell them off. In part, he says, it is a reflection of the company’s increasingly alluring payout: The stock now yields a hefty 6.8%. And the company still figures to earn about 80 cents a share in the June 2009 fiscal year, giving it a P/E of under 9. Meanwhile, Watkins says the company is actually having a pretty good month in October.
Watkins also contends that some of his rivals – in particular Toshiba (6502.Japan), Fujitsu (6702.Japan) and Samsung (005930.Korea) – are losing gobs of money in the drive business and could be forced to consolidate. That would be fine with him; any deal that reduces industry capacity is good for Seagate. Note that Microsoft last week projected 2009 PC unit growth of 8%-12%, and essentially every PC will have a disk drive. Meanwhile, Seagate’s dividend can keep you warm at night.
While we’re on the subject of tech stocks and dividends, we would note that the big sell-off has driven prices down to where some shares now provide fairly hefty yields: Imagine a portfolio of Taiwan Semiconductor (TSM),with a 5.4% yield; Microchip (MCHP), which raised its payout just last week and now yields 6.3%; Nokia (NOK), 4.6%; Verizon Communications (VZ), 6.6%; AT&T (T), 6.2%; and the king of dividend payers, British Telecom parent BT Group (BT), 17.3%.
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