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GLOBAL TRENDS
Stockmarket
Driven by Cashflows, Not Economic or Corporate Results
Wall Street-Main Street
Chasm Widens
EDS Stock Plunge - Prime Example of Perceptions Winning over Reality
PHOENIX, July 3 - Never has so much good news led so much red ink in equity investors’ portfolios. Never has perception ruled reality by such a wide margin. Never has there been such a wide chasm between Wall Street and Main Street.
Of
course, ever since 1997, we
have been saying that Wall Street has become a casino; that
corporate fundamentals have little to do anymore with stock values.
And now even some Wall Street insiders agree (see “Wall
Street Casino,” June 21). What
has happened this week has also confirmed that - in spades.
Consider,
for example, the following “good news” stories that the economy kept
pumping into the market this week. And then look at the steep declines on
Wall Street that greeted the plethora of positive news:
U.S. factory orders up 0.7% in May
10:00am 07/03/02 (CBS) - U.S. companies ordered and took delivery of more capital goods in May, a sign that business investment is finally improving. Total factory orders rose 0.7 percent in May, the Commerce Department said Wednesday. It's the third increase in a row and the fifth this year.
Initial jobless claims fall 11,000 to 382,000
8:30am
07/03/02 (CBS) - First-time claims for
state unemployment benefits fell 11,000 to 382,000 in the latest week, the
Labor Department said Wednesday. Initial claims haven't been this low since
March 2001. The more informative four-week average for initial claims
dropped 250 to 392,000, the lowest since early March of this year.
World semiconductor sales rise 2.8% in May
SAN
JOSE, Calif., July 1 (Reuters) - The
worldwide sales of semiconductors rose 2.8 percent in May from April, as
chips used in mobile telephones and consumer electronics offset a slump in
computer chips, according to an industry trade group…. The cyclical
semiconductor industry has only begun to emerge from two years of
slumping sales.
June manufacturing index 56.2% vs. 55.7% in May
10:05am
07/01/02 (CBS)
- The manufacturing sector grew again in June for the fifth straight
month after 18 months of declines, the Institute for Supply Management
said Monday. The ISM index rose to 56.2% from 55.7% in May…
"June was a good month for manufacturing," the ISM said.
US Q1 GDP revised to 6.1% on higher investment
8:30am 06/27/02 (CBS) - The U.S. economy grew at a 6.1% annual rate in the first quarter, up from the 5.6% previously estimated, the Commerce Department said Thursday. U.S. companies invested and earned more in the first quarter than previously estimated, a hopeful sign that the economic recovery is gaining strength. Final sales rose 2.6% in the quarter, up from 2% previously. Growth in the quarter was the fastest since Q4 1999, led by a large swing in inventories, a healthy consumer and a burst of defense spending.
Not
only is the defense industry going through the roof, but railroad and
trucking revenues and profits are also soaring. The housing starts and real estate sales are also up.
Automotive sector is thriving.
So
once again, “What
Recession?” is the question Main Street seems to be asking, as we
did when EDS reported its stellar 2001 business results in February.
But such economic facts seem to be of little interest to Wall Street investors. Nasdaq and S&P indexes plummeted to levels lower than even those in the post-911 period. This is proof that there is now a nearly complete disconnect between the stockmarket and the economy (see the chart).
As
we have been also saying all along, this stockmarket is driven more by
investment cashflows and rumors than by companies’ results and reality.
As many foreign investors pulled out of U.S. equities, the market
dropped like a stone, positive economic news notwithstanding.
EDS Clobbered
Nowhere
was this more apparent than in the beating that the EDS stock took this
week. Having been caught up
in the backwash of the WorldCom corporate disaster, investors dumped the
EDS stock, notwithstanding the company’s explanations and appeals to
reason.
WorldCom's accounting problems
have led investors to focus on the way EDS books revenue and expenses from
big projects, which typically span a number of years. But in a July 2 teleconference with analysts, EDS’ chairman
and CEO, Dick Brown, stressed that, “our accounting at EDS is clear,
conservative and concise.”
Brown said he expects EDS to continue to work as a contractor for WorldCom. He said EDS could handle any exposure it might suffer if WorldCom's troubles worsened.
But Wall Street ignored such reassuring comments, driving the price of the EDS stock below $28 at one stage, a level unseen since 1993. Even IBM looked better by comparison, despite the fact that Big Blue has also traded around $66-$70 per share, a 45-month low (see the chart).
Of course, EDS didn’t exactly help its cause by releasing a couple of “bad news” stories in the midst of the WorldCom maelstrom. One was the 2,000 new job cuts. Another was its withdrawal from a Procter & Gamble outsourcing contract bidding.
Which put the EDS CEO on the defensive again. Brown said the job cuts had nothing to do with the company's exposure to WorldCom.
“This action has absolutely nothing to do with our relation with WorldCom,” Brown said. “EDS is a solid company with a straightforward business model. We watch our money and we stick by our clients.”
The 2,000 jobs represent about 1.4% of the total EDS work force of 140,000.
IBM, HP Cut Jobs in Europe, IBM Hit
with Apartheid Suit
EDS was not the only high-tech company to announce job cuts this week. IBM and HP also did it in Europe. IBM Germany’s cuts, announced today (July 3), were less than the 4,000 expected earlier. About 700 full-time and 500 part-time positions will be eliminated. At least so far.
Most of the cuts will affect the hard-disk drive plant in Mainz, which employs around 2,000 people, according to the IBM spokesman quoted in an IT World report.
In June, IBM Corp. and Hitachi Ltd. agreed to consolidate their hard-disk operations into a joint venture in which the U.S. company owns 30%, the Japanese company 70%. The Mainz unit, however, is not part of the joint venture, according to the IBM spokesman.
IBM also plans to eliminate around 350 jobs at its Oberhausen-based IT services subsidiary, Datenverarbeitungs-Service Oberhausen GmbH (DVO), IBM said.
Hewlett-Packard (HP) cuts were
more aggressive. The company
said today it plans to cut 5,900 jobs in Europe from a total of 15,000
already announced worldwide, as part of its merger with Compaq Computer
Corp., according to a Reuters
July 3 news report.
HP
is expected to find cost savings of $3 billion by the end of 2004 from the
merger, and will hit its original $2.5 billion cost-savings target in
2003, Compaq has said. Executives have said the merger would cost $2.6
billion.
As if IBM didn’t have enough troubles with the marketplace, now the company will have to defend itself from what appears to be an ambulance chasing-type legal action. Three German banks and Big Blue were added to a class action suit seeking huge sums in reparations for victims of South Africa's apartheid regime, John Ngcebetsha, a lawyer for the case told Reuters on July 1.
The
claims against IBM and the banks - Deutsche, Commerz and Dresdner, a unit
of insurer Allianz AG - were filed in a U.S. court on Monday (July 1).
They are the latest targets in a $50 billion class action suit
announced by maverick U.S. lawyer Ed Fagan last month.
Swiss
banks Credit Suisse and UBS, and U.S.-based Citigroup, were first named in
the suit, but Fagan had warned other firms would be targeted. The Swiss
banks have dismissed the claims as "preposterous", and the Swiss
government has said the suit was not the right way to resolve a political
problem.
The
claim against IBM dates back to 1952 when it and other international
computer companies began supplying technology and equipment to South
Africa, Ngcebetsha said.
Bush: Fox Guarding Chickens
Meanwhile, back at the ranch, few people would dispute that the massive flight of capital out of the U.S. equity markets, led by foreign investors, has been caused by a massive loss of confidence in the system. Starting with Enron, dozens of heretofore beaming icons of corporate America have crashed and burned in the eyes of the investors.
When something like that happens, most people look to where the buck stops - the President (according to President Truman, anyway) - for protection and action. And we have heard some pretty stern sounding warnings from President George W. Bush. But expecting Bush to restore the lost public trust is like putting a fox in charge of the chicken coup security detail.
As
Texas oil man, Bush engaged in some of the same kinds of business
practices he's now promising to clean up in response to a wave of
corporate scandals, according to a July
3 Associated Press report (no surprise there for Annex Research
clients… check out “Bush
League All-Stars,” Feb. 5, 2002).
Bush
was a board member of Harken Energy Corp. in 1989, when the company
engaged in an insider trading transaction that later prompted an inquiry
by the Securities and Exchange Commission (SEC).
The
SEC forced the company to amend its books to reflect millions of dollars
in losses that had been masked by the sale of a subsidiary to a group of
insiders. And Bush, who was on the company's audit committee, was the
subject of a separate insider stock trade investigation by the SEC.
In
the 1989 transaction, Harken financed the sale of a subsidiary to a
partnership of its own executives. The company then counted the sale price
as income, reducing its overall losses. Under pressure from the SEC, the
company redid its books to reflect additional losses.
Sound
familiar?
More
than a decade later, the SEC is investigating insider deals and
questionable bookkeeping at Enron, WorldCom and other companies, and Bush
is promising to crack down on corporate wrongdoers.
How
credible do you suppose such threats are, coming from an erstwhile insider
trading culprit, and a close pal of Enron’s chairman and CEO, Ken Lay? No wonder capital is fleeing the U.S. equities enmasse.
“Real
estate, Treasury bonds, commodities… here I come,” do we hear Das
Kapital say?
Happy
bargain hunting!
Bob Djurdjevic
APPENDIX
A
(an
excerpt from Annex Newsflash 2002-12)
PHOENIX, June 21 - Mark this
day... summer solstice 2002. Just a few moments ago, we were stunned (and
pleased) to hear what John Gutfreund had to say, speaking "live"
on CNBC (at about 2:16 EDT). The former Salomon CEO, who was forced to
resign in 1991 amid another corporate scandal, had this message for the
investing public:
(Realize
that) you're in a (Wall Street) casino, and the odds are against you...
the laws have to be changed.
Well,
we said the same thing in a
1997 letter to the SEC and to a number of U.S. Senators (see "Some
IBM Insiders Cashed In..."). But no one was listening five years
ago, when we called for a change in Wall Street rules.
We are also "pleased" because we have been saying at least
since 1997 that Wall Street has become a casino, and that corporate
fundamentals have little to do anymore with stock values.
Now that several corporate scandals break out almost every day, it may
be useful also to remind our clients and the investing public of what we
said four years ago in "Corporate
'Cabbage Patch' Dolls of the 1990s" (Annex Bulletin 98-39, Oct.
1998). That it's their own fault if they allowed themselves to be played
for suckers:
As in any casino, it takes a sucker to enrich the "house" through the gambler's greed or gullibility... the Wall Street casino is for suckers...
"The Great American Hoover," this writer's Washington Times column (1997):
Can't you hear that great
sucking sound of the Wall Street Hoover which was revved up in the
aftermath of the crash of Oct. (1997)...
"When Will Wall Street's Bubble Burst?", this writer's Washington Times column (1998):
Wall Street Hoover runs on a
mixture of hogwash and Main Street's greed....
"Where
Armonk Meets Wall Street, Greed Breeds Incest", an Annex
Bulletin, Nov. 1998:
If the latter day Armonk
connotes "Greed Inc." (and most indicators point that way), then
the latter day Wall Street stands for "Incest Inc." (as most
signals also suggest). And where Armonk meets Wall Street, greed evidently
breeds incest. While the Big Blue was buying back its stock by the tens of
billions of dollars, IBM insiders were selling their shares by the tens of
millions of dollars. Talk about self-dealing. And NOT putting their money
where their mouths were.
"Wall
Street Boom, Main Street Doom," this writer's Chronicles magazine
column (1998):
Today's stock exchanges have become almost totally decoupled from the economic reality of the companies whose shares they trade. Instead, they are Casinos at which the Big Business elite do what "Joe 6-pack" does when and if he can afford a trip to Las Vegas. Both play the odds on whim and emotion; the former wearing pin-striped suits; the latter in jeans and T-shirts.
Modern Wall Street is a game
of cashflows, not that of GDPs (Gross Domestic Products)...They are a part
of a ruse; a brainwashing effort to help the Wall Street Hoover to suck
the savings out of the Main Street suckers' mattresses.
"From a Nation of Producers, to a Nation of Gamblers ", a 1999 Annex Bulletin:
The 'get rich quick' life's
philosophy, is transforming America from a nation of producers to a nation
of gamblers.
And
so on... click on the following links to read our other stories on the
same theme:
"Wall
St.'s Conquest of America"
... The "Wall Street Hoover". Such a "socialization
of America" enabled the Big Business elite to install a direct line
into our wallets, sucking out our money ...
"Small
Caps Sinking First"
... activities. Like a gambling casino, it is largely driven by investment
cashflows, not profits or losses of the companies it trades. ...
"A
Slam-Dunk of Bunk" - (Jan. 20, 2000)
... Yes. Why? Because any sane analyst would have left the crazed
Wall Street casino long ago. ... The sin at the Wall Street casino these
days is to be found out. ...
Analysis
of IBM First Quarter Results (Apr 17, 2002)
... We used to refer to Wall Street of the 1990s as a casino. Strike that.
... Or a casino with a bordello on the side, if you prefer.
“Independent” Analysts? ...
Analysis
of Stock Market Reaction to 911/WTC (Sep 26, 2001)
... A cashflow-driven market, which is what we’ve been
saying for years the Wall Street casino has become, simply shifted
its assets away from some US equities ...
Armonk's
Fudge Factory (Apr. 9, 1999)
... Nor were the casino players concerned about the fact that it is
now nearly impossible to reconcile IBM's 1998 business segment information
with prior years ...
"Wag
the Big Blue Dog"
... So the Wall Street Casino, which trades on perceptions, not
facts, is "the ultimate measure" of a company's performance,
according to the Big Blue's chairman? ...
"Gerstner:
Best Years Are Behind" (Aug. 10, 1999)
... Further proving the point that the market has become little
more than a glorified casino with minimal relationship to business issues
of the companies it trades ...
Annex
Bulletin - 98-16 ("the new blue")
... It is factually unsupportable because less than one-third of
Americans play at the Wall Street Casino despite its long "bull
run" and decades of financial hype ...
King,
Prince of "Fluff" Spin More "Fluff" into Market...
... deal. And the gullible "investors," read gamblers at
the Wall Street
Casino, lapped it up as if the "fluff" were real gold. Which ...
Analysis
of Accenture's 2001/1Q02 Results (Jan 11, 2002)
... Plus its stock is traded at the Paris bourse, not at the Wall
Street casino. So which was the IT services company whose stock topped all
competitors since Sep. ...
"Dell:
Easy Come; Easy Go"
... have been dealing in dill pickles, indelible ink or
snake oil, rather than in PCs - for all the difference that would have
made to the Wall Street's casino ...
"A
Flash-in-a-Pan Perot" (Aug. 20, 1999)
... results and its stock performance is yet another example of a
disconnect between reality and perceptions which rule the cashflow-driven
Wall Street casino. ...
Death
of The City, Too? NYT's Faux Pas (Dec. 30, 1999)
... with the Free Market." Each article is written by the suckers for
the suckers among the Wall Street La-La Land gamblers, to which this
downtown New York casino ...
"Two
Faces of Globalism; Yin and Yang; Princes and Paupers"
... executives are collecting. It's just that the Casino
has so far managed to contain the stench. For the most part, anyway.
Instead, the ...
Happy bargain hunting!
Bob
Djurdjevic
