'See no evil' market avoids the facts

By Bill Fleckenstein

Wall Street seems to have a huge paper shredder at its disposal. Stock bulls have kept it working overtime, as they feed in whatever "offending" facts threaten their Goldilocks -- not too strong, not too weak, but just right -- scenario. Last week, you could almost hear the machinery of rationalization humming.

Dell, Intel take joy ride in a Packard

That's especially so in technology, where bulls last Tuesday took the company-specific good news from Hewlett-Packard (HPQ, news, msgs) and turned it into an excuse to bid up the shares of Dell Inc. (DELL, news, msgs), Intel (INTC, news, msgs) and Micron Technology (MU, news, msgs). Which is almost humorous, given that Hewlett has basically done as well as it has for two reasons:

1. Dell is floundering so badly. Witness the fact that in the first quarter, Hewlett's units were up 26% and Dell's were down 15%, as Hewlett's market share rose from 21% to 25% here in the United States.

2. Component prices have collapsed. Disk-drive pricing has been at its worst level in several years, and DRAM prices dropped about 65% in the first quarter. In addition, there is a price war in processors. Component price collapses always boost margins for the PC vendors for a while, until they get around to their own little price war.

Hewlett-Packard is prospering due to its vendors' problems and its main competitors' problems. Yet, those stocks reacted on Tuesday as though Hewlett's news was also good for them, just another Goldilocks moment in the sign-of-the-times department. (That's not to take anything away from Mark Hurd, who since his arrival has done a good job at the helm of Hewlett.)

You're company-specific; we're terrific

On the flip side, bulls deemed Cisco Systems' (CSCO, news, msgs) sluggish business to be Cisco-specific last Wednesday, with most tech stocks rising despite the news, although virtually every time the company has reported good news, those very same bulls have deemed it relevant to the whole tech tape.

As for its semiconductor-equipment wing, Applied Materials (AMAT, news, msgs) bulls shrugged off an important data point last Monday from Taiwan's AU Optronics. The maker of liquid-crystal displays (LCDs) stated that it will hold off selling new semiconductor equipment until the end of 2008. To quote Chairman K.Y. Lee: "The peak is over. . . . We don't want to invest in a money-losing business."

Virtually every maker of LCDs has excess capacity and has announced cutbacks in capital expenditures. Nevertheless, Lee's words had no impact that day on Applied Materials -- just as the losses at memory-chip makers have had no impact on the related equipment vendors.

Meanwhile, it was mere assumption that rallied Texas Instruments (TXN, news, msgs) (ditto the chip sector) last Wednesday as the company's CEO expressed the hope that gross margins would rise from 50% to 55% in a few years -- as though voicing that goal was tantamount to a fait accompli.

The real macro tale, as told by retail

Now to turn to retail-style rationalization. Regular readers know I am firmly in the minority camp that expects the consumer to lead us into recession for the first time since 1991. And I certainly anticipate that this one will be far longer and far worse than in '91. Consequently, I am always on the alert for data points that either corroborate my view or cause me to rethink it. That being the case, I was particularly interested in seeing last Thursday's retail-sales data.

In a word, they were horrendous, as virtually every retailer reported results much worse than expected. Some outfits, such as AnnTaylor Stores (ANN, news, msgs), Dillard's (DDS, news, msgs), American Eagle Outfitters (AEO, news, msgs) and The Gap (GPS, news, msgs), saw declines in the double digits, with unexpected weakness also reported by two giant chains, Wal-Mart Stores (WMT, news, msgs) (down 3.5%) and J.C. Penney (JCP, news, msgs).

Blame it on the Nor'easter Bunny

It was Wal-Mart's biggest decline since the world's largest retailer began reporting same-store sales results in 1979. Further, that negative 3.5% headline is even worse than it appears: The area of strength (i.e., groceries) benefited from inflation-fueled higher prices, whereas areas that really indicate weakness (apparel, home, etc.) were weak. Bulls, of course, immediately attributed the weakness to bad weather in April and the early arrival of Easter -- which is bogus, as those facts were known when the estimates were created.

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This is yet another example of the bulls trying to drink the bad news pretty. And, a variation on that theme saw Best Buy (BBY, news, msgs) initially up that day. One would assume that Best Buy has also been negatively impacted by the consumer-spending weakness seen everywhere else. But, since Best Buy doesn't report monthly comparisons, it wasn't in a position of having to report bad news. Ergo, it was free to rally.

One wonderful description of these zany times was provided by market analyst Justin Mamis (subscription required): "It seems to us that there are more people concerned (and deeply so) at this moment than we can ever recall -- more worried than in the [momentum investor] Jerry Tsai environment; more annoyed than during the 'Nifty 50' period; more alarmed than when confronted with the '87 crash; more bewildered than during the late [1999-2000] bubble; more fearful [than ever before], that as previously reliable indicators fizzle, a primary bear market will come out of the blue."

That's a pretty good assessment of where we find ourselves. Most anyone with any experience, myself included, has considerable angst, and yet the market bolts nearly every day, seemingly without a care in the world.

At the time of publication, Bill Fleckenstein held puts of Intel, Dell and Applied Materials.