Tony Sagami here, writing from Montana.
When I woke up this morning, the thermometer outside my kitchen window read minus 2 degrees.
That’s cold, but it warms my heart. Because at 34 degrees below the freezing point, it means the ice on our nearby lake is thick enough for my kids to skate safely.
It also means my wife and I can relax in the knowledge that we won’t be hearing a thunderous “crack†of fracturing ice under their feet.
If you’re around here in March, however, you’ll hear me continually warning the children …
“No Late-Season Ice Skating!
It’s Way, Way Too Dangerous!â€
And what’s true for kids on Montana lakes may also be true for investors in Nasdaq tech stocks.
Anyone skating around on the market right now could be on thin ice. In fact, I can already begin to hear some of the telltale “crack†sounds.
I told you about the three of them last Friday — weak doodad sales at Best Buy … disappointing results at HP … and some fishy fund-raising efforts by Intel. Here are some more …
Crack #1
Not-So-Small Plunge in
Popular Tech Stocks
The Nasdaq as a whole is not down very much — yet. But some of the most popular tech stocks are down far more sharply:
Intel, Cisco, Oracle, and Network Appliance are off at least 10% from their 52-week highs.
Dell, eBay, JDS Uniphase, and Sun Microsystems are down over 20%.
This is not a good sign. It’s pointing the way to similar declines for the sector as a whole.
Crack #2
Weak Cell Phone
Sales at Radio Shack
The Wall Street crowd is still expecting stockings to be stuffed with satellite radios, cell phones, iPods, digital cameras, and other assorted electronic doodads.
Not quite. Radio Shack confirms the signals we got from Best Buy last week: The doodad business is far from red hot.
Radio Shack warned that it would fail to meet its own 2005 profit forecast of $2.14 to $2.24 a share. The company didn’t provide any specific guidance, but I’m convinced we’re talking about a crack that’s more than just a couple pennies.
What’s the primary problem? Weak cell phone sales. In their own words:
“Sales of traditionally higher margin products, such as batteries and accessories, have been weak, impacted in part by lower wireless unit sales. … Sales and profitability of wireless in the Radio Shack store chain has been weaker than anticipated.â€
The company plans to release its fourth-quarter sales results on January 12, and you can expect to see some more disappointments.
Crack #3
Hi Ho The Merry-O,
The Farmer in the Dell.
O2Micro International makes chips that power LCD monitors used in laptop and flat panel TVs, both of which are supposed to be red-hot sellers.
Wrong!
O2Micro warned that its Q4 revenues would be lower than expected because of a drop in orders. They now expect Q4 sales to increase by a meager 2-3% and expect a January inventory correction.
But here’s what really, really counts:
Almost all this drop in sales is attributable to one of Wall Street’s favorite stocks: Dell Computer!
Dell cut back its November and December orders by 600,000 LCD monitors and admitted that it still has about 1.6 million LCD monitors sitting in its warehouse, roughly double the 800,000 units that Dell normally stocks.
O2Micro dropped by 8% on that news to a new 52-week low. But the hear-no-evil crowd on Wall Street still hasn’t connected the dots to Dell.
Crack #4
Tech IPOs Getting
A Colder Reception
You can tell a lot about the tech industry by how well (or how poorly) tech IPOs are received. In the last week:
- Spansion, one of the largest manufacturers of flash memory, saw its IPO price lowered two times, by 33% in all, from $16-18 to only $13-14 per share.
- Directed Electronics, a designer of electronic security systems, has seen the price of its stock fall by $2 from its IPO price of $16.
- IDT Spectrum, a provider of wireless networking equipment, canceled its IPO on December 13 due to lack of interest.
- Scopus Video Networks, a digital video networking company, was forced to cut its IPO price from $10-$12 to only $7 a share.
When the market for tech IPOs is hot, the Wall Street crowd can make a fortune by flipping IPOs. The tepid market for tech IPOs tells me things are cooling off.
Heck. The temperature may be hovering around zero in Montana, but the Nasdaq ice looks pretty darn thin to me. If you’re not careful, you could wind up in some very chilly waters.
And as our real estate specialist Mike Larson explains, popular tech stocks may not be the only things coming down.
Housing Bubble:
Big Bust or
Soft Landing?
by Michael Larson
Everywhere you go these days, someone’s trying to persuade you that the housing bubble won’t really go “pop.†They say it will just end with a “soft landing.†In their scenario …
“Home sales will slow, but not crash.
Price appreciation will ease, but stay positive.
The market may favor buyers,
but sellers will make out just fine.â€
Color me skeptical. But we’ve just lived through one of the biggest financial manias in U.S. history. The Fed cut interest rates to ridiculously low levels. Mortgage lenders gave loans to anyone with a pulse. Real estate speculators piled into the market with reckless abandon. These are not exactly the ingredients of a “soft landing.â€
Meanwhile, the Fed is jacking up short-term rates, sending a series of shock waves through the nation’s mortgage market.
Lenders are pulling in their horns.
Speculators are starting to get burned.
And the market is cooling fast.
Look at this chart! It shows the National Association of Home Builders’ housing market index, which tracks buyer traffic, current sales, and expectations for the future. Just two months ago, in October, this index was at 68, reflecting what most people thought was a stable situation.
But then it began to plunge — down 7 points in November … and now another 4 points just announced this week for December. That takes the index all the way down to 57, the lowest reading in 32 months.
During the bubble days, most home buyers were getting over the hurdle of steep, unaffordable prices with easier and easier terms from mortgage lenders.
No more! Now, more buyers are recoiling in horror from sticker shock as housing affordability has plunged to its lowest level since the early 1990s.
During the bubble days, there were acute and chronic shortages of new homes for sale.
That, too, is no more! There are more existing homes for sale than practically at any time in the last twenty years. And there are more new homes for sale than at any time in U.S. history.
Does that sound like a recipe for a nice, tame, soft landing to you?
Plus, Look What The Regulators
Just Said Yesterday Afternoon!
The federal “guidance†on risky mortgage lending just came out. This is joint guidance from all the major banking regulatory agencies — the Federal Reserve, FDIC, NCUA, OCC and OTS.
Here are just a few of the dangers they warned about yesterday afternoon …
“Collateral-Dependent Loans – Loans to borrowers who do not demonstrate the capacity to repay, as structured, from sources other than the collateral pledged are generally considered unsafe and unsound. … Institutions determined to be originating collateral-dependent mortgage loans may be subject to criticism, corrective action, and higher capital requirements.
“Risk Layering – Nontraditional mortgage loans combined with risk-layering features, such as reduced documentation and/or a simultaneous second-lien loan, pose increased risk.
“Simultaneous Second-Lien Loans – Simultaneous second-lien loans result in reduced owner equity and higher credit risk. Historically, as combined loan-to-value ratios rise, defaults rise as well. A delinquent borrower with minimal or no equity in a property may have little incentive to work with the lender to bring the loan current to avoid foreclosure.
“Introductory Interest Rates – Since initial monthly mortgage payments are based on these low introductory rates, there is a greater potential for a borrower to experience negative amortization, increased payment shock … â€
All this sounds pretty damning to me, especially since it comes with the threat of higher capital requirements.
It should push lenders with a lot of exposure to this stuff to tighten up further. Long story short, it’s just another factor that points toward a housing market bust.
First, if you’ve decided to sell property, don’t wait around for a better market. This is probably as good as it’s going to get for quite some time. But don’t aim for pie-in-the-sky prices. Price your home fairly or below market value.
Second, if you’ve decided to keep your property, find investments that can also act as a hedge in today’s market environment.
Right now, for example, the main driver behind rising interest rates is inflation; and one of the best ways to profit from inflation is with investments that are driven higher by rapidly rising natural resources.
Third, no matter what, continue to keep a substantial portion of your money in cash-equivalents like Treasury bills or a Treasury-only money fund. It’s a cash cushion that could come in very handy.
Best wishes,
Michael Larson
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, Beth Cain, Christine Johnston, Amber Dakar, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others.
© 2005 by Weiss Research, Inc. All rights reserved.
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