SAN DIEGO – Not that long ago, as their business was getting worse, housing companies would use the word "bottom" in presentations to investors and their stocks would rally until they allegedly bottomed one too many times without the bottom ever really having been in sight.
Semiconductor-related stocks are starting to act in a similar fashion. No matter how bad the news gets, notes money manager Bill Fleckenstein of Fleckenstein Capital, a longtime chip bear, the stocks tend to move higher on sizzle rather than substance.
Fleckenstein isn't alone in wondering if chip stocks are heading down the housing road, as investors eager for a return to the glory days hear what they want to hear, regardless of what's really happening. It's what Cowen & Co.'s chief technology strategist, Arnie Berman, in his refreshingly candid (and funny) report, "The March of the Penguins," calls "taking the Nestea plunge." "Are chip analysts and investors acting like a bunch of penguins, marching in step in response to data points and tone, while paying too little attention to context?" he asks. "Hint: Yes ..."
For example, Berman says, in February Analog Devices missed forecasts and lowered expectations "but still managed to set off a feeding frenzy with conference-call comments that cited a market improvement in activity levels in the month of January." Likewise, National Semiconductor "heralded the arrival of 'the bottom' in its March 8 conference call. Not wanting to be left out, Xilinx also did its darnedest to give investors any reason to party announcing a narrowing in its March revenue expectations from 'flat to down 5 percent sequentially' to 'flat to down 4 percent sequentially' in its mid-quarter update on March 5. (Whoopee!)"
Berman didn't stop there. "In recent sessions, many investors had managed to work themselves up into quite a lather even to the point of asking 'how much' Texas Instruments would raise the high end of its prior revenue guidance ... despite continued indications of slack demand from (its) wireless handset customers. "As it turns out, rather than raising the high end of its former guidance, Texas Instruments earlier this week did the opposite. Its stock responded by slipping a few percentage points, a breather after its recent run.
The Philadelphia Semiconductor Index, meanwhile, continues to hover slightly below recent highs, though well below year-ago levels, as inventory was building up. Now, chip companies are struggling to work off too much inventory, not unlike the situation in 2004 and 2001 two years many chip investors would rather forget.
The difference, Berman points out, is that in 2004 there was too much supply; now, as in 2001, there is a shortage of demand. Not good for stocks priced as if business is about to boom. Says Berman, "As investors have marched in step in response to data points and tone like a bunch of penguins a 'less they know, better they feel' dynamic at the companies has had a significant impact on the trading dynamics of the stocks." Just as it did for housing until it didn't.
Profiting from the mortgage mess
You might call Mike Farrell, chief executive of Annaly Mortgage, the ultimate contrarian. A few years ago, when Wall Street was throwing money at anything mortgage-related, he turned it down because he didn't want to be forced to buy the kind of mortgage securities that don't fit with his vision of stable or lower rates. When his competitors were raising cash, he said, "This is a stupid game to play."
So he sat back and waited until he believed the time was right, dipping his toe in last April and August for a total of $1 billion and again several weeks ago for nearly $800 million, the most his company has ever raised in one swoop. "We talk to a lot of smart, big investors, and half still don't get it," he says. "They still think this will all be soft-landing OK."
Farrell, whose company is an anomaly of sorts among financial-services firms in that it doesn't own derivatives or anything too fancy, doesn't agree. "The big mistake the markets are making on a macro basis is that there was a misjudgment of liquidity ... If you could bail out a corporation or individual, it made their credit-rating or FICO score look better." Which they did, but he believes it is an illusion that has tricked investors into "mistaking liquidity for credit performance."
That should play into his lower-rate scenario, Farrell says, but don't expect stocks and housing prices to react as they have in the past. This time, he believes, truly will be different. (Deflation, anyone?)
Copyright (c) 2006 MarketWatch, Inc.