Dead-fish analysts are still hooked

By Bill Fleckenstein

"It's Soooooo Obvious." That's how I headlined my daily column on my Web site last Tuesday. I was referring to the data points that have been signaling the onset of recession, but which continue to elude stock -- and especially tech stock -- bulls.

Ringing the recession bell

Among the mounds of data they have willingly ignored was the most recent negative reading on the leading economic indicators (LEI). Here is how Paul Kasriel of Northern Trust discussed the implications in a report last week:

"If we don't see revisions to the January and February numbers, then in order for the first quarter to be positive, it (March) would have to increase 1.7%. We have not seen an increase anywhere near that magnitude in the last couple of years. (That matters) because a year-over-year contraction in the quarterly average LEI has heralded every recession since that of 1960, yielding only one false signal."

Kasriel also said that "after the first quarterly year-over-year change in the LEI is negative, successive quarters are also negative." In other words, the LEI has not given any head fakes after it first signals recession. As regular readers will note, his observations dovetail exactly with mine, which are based on what the cracking of the housing ATM means.

But, as I pointed out in my column two weeks ago, stock bulls continue to mistake the technology arena for a safe harbor, one that offers protection from the economic problems spawned by the collapse of the housing ATM.

Goldman Sachs and Dell facts

Consider that Dell Inc. (DELL, news, msgs) lifted the tech tape last Monday, thanks to an upgrade by a dead fish at Goldman Sachs (GS, news, msgs). What passed for her analysis? That essentially Dell would be able to "renew communications and buybacks," since it was finally going to file its financials. There was absolutely no concern about the Securities and Exchange Commission investigation or what it might turn up about the integrity of Dell's past profitability.

It's just stunning to behold this kind of garbage pass for research, but we see it every day. Dell is a company that can't file its financials because of an ongoing SEC probe. It's lost market share. It's flailing. And all this dead fish can think about is that Dell will now be able to file its financials and buy back some stock (though it's not clear it has enough cash available to buy that many shares).

Merrily missing end-demand details

Or take what a Merrill Lynch (MER, news, msgs) chip analyst used last Wednesday as a reason to buy chip stocks: "By the time company managements start admitting that business is improving, unwinding the all-time-high short position in our coverage universe is likely to drive a substantial move up in the SOX," the Philadelphia Semiconductor Index ($SOX.X).

His note was suspiciously lacking in data to support the thesis that chip demand would improve. But why quibble over such details? What the tech dead fish conveniently and consistently miss is that at a time of huge inventory and overcapacity, end demand is waning, a direct result of the consumer being pinched by the collapse of the housing ATM.

For example, last Wednesday Circuit City Stores (CC, news, msgs) camouflaged a quarterly pre-announcement as a warning for the fiscal year just ended. It was very vague with the details, but it looks like when Circuit City reports in the upcoming week, we'll learn that not only was the just-ended quarter pretty ugly, but in all likelihood next quarter's guidance will be, too. (I also anticipate problems when Best Buy (BBY, news, msgs) reports this week.)

With that quality of analysis yielding "buy" recommendations, it's no wonder that these dead fish never want to sell anything.

Of Newmont & knuckleheads

That is, unless the recommendation to sell is equally baseless. Which was what we saw last Tuesday, when a dead fish who follows the mining-stock sector downgraded Newmont Mining (NEM, news, msgs). The rationale behind that? He believes the company's production is going to decline.

I'm not saying that Newmont has been a spectacular operator the past two years, as the company has had problems. However, to recommend selling the stock due to the belief that Newmont's production is going to decline -- when the problem has been that it has declined, and Newmont's production will begin to increase in about nine months -- is ridiculous. I would have bet that there could not be any worse analysts than the ones in technology, but the guys who follow the mining business are giving them a run for their money.

That great casino in the sky

Meanwhile, Wall Street continues to view stocks as one-way bets, with positive outcomes. Every day, I am more and more astounded by the bravado/denial that I see. If you told this crowd that the world was going to end on Friday, they'd be buying stocks in anticipation of the rebound they would expect to occur after its demise. How anyone can be sanguine about how this movie ends is beyond me.

At the time of publication, Bill Fleckenstein was long Newmont Mining, long Dell puts, and short Dell, Circuit City and Best Buy.