High-Tech Strategist

Thursday, December 07, 2006 | 07:53 AM

Doug Kass channels Fred Hickey's macro concerns, in Fun With Fred:

• Hickey points out another fallacy with the 1995 market meltup and 2006-07. Eleven years ago, the Republican Revolution ushered in lower tax rates on income, capital gains, dividends and estate taxes. By contrast, the Democratic tsunami in the YouTube Election of 2006 should be worrisome to corporate executives, bankers, consumers and investors. Instead, they are partying like it was 1995 and oblivious to what is happening on Main Street and, importantly, in Washington.

• The collapse in housing is spilling over and has begun to impact the general economy. Hickey highlights many of our concerns -- the durable goods drop, rising subprime mortgage delinquencies and property foreclosures, a steep contraction in truck tonnage, a surprising decline in the Institute for Supply Management's manufacturing index and reports (Lazard Capital Markets) that 60% of retailers missed their November same-store estimates.

• As the limited quantities of special deals were gone, retail spending came to a halt after consumers were baited with "doorbuster" deals on Black Friday. At every store he visited after Thanksgiving weekend, Hickey found empty stores and excess inventory. Circuit City (CC) was swimming in iPod inventory ("the new toasters") and at mobile phone stores (Hickey smells an emerging glut) it was the same story with Cingular awash in the new Blackjacks from Samsung, Verizon (VZ) with a plethora of "Qs" from Motorola (MOT) and T-Mobile with xcess Blackberry Pearls.


• Hickey scoffs at the reason (a fashion miss) given by Wall Street analysts for Wal-Mart's (WMT) awful November miss. Other retailers, like Target (TGT), Costco (COST), BJ's (BJ) and Kohl's (KSS) failed to make up for the slack at the world's largest store.

• Lower forward guidance at Home Depot (HD) and Lowe's (LOW) are symptomatic of the trickle down affect of lower housing activity - even despite lower prices of energy products. So is the production cuts at Ford (F) (1Q2007 reduced by 14%) and General Motors (GM) (lowered by 9%) - which reflect large inventories of unsold automobiles (eerily similar to that of the home market!).

• Though Wall Street still urges investors to buy stocks as market strategists are almost universally bullish, CNBC parades out one optimist after another, and the Wall Street Journal reports that almost 70% believe the housing downturn is over. Having lived through a few downturns, all the aforementioned economic indicators coupled with an inverted yield curve "sure looks like a recession to me," writes Hickey.

• Using massive amounts of debt, private equity has frenetically announced a series of massive takeovers, levered hedge funds (Citadel Investment Group has $13 billion of equity but holds $166 billion of assets -- 12.5x leverage), are loading up with high-octane stocks, put writers have greedily sold naked put option contracts (supposedly a riskless strategy as it has been backtested, but by only five years!), and the Barron's Big Money Poll found investors to be almost universally bullish (as the Investors Intelligence, Consensus, Market Vane and most other sentiment polls show "a lopsided number of bulls over bears." Despite a stream of forward fundamental datapoints, the financial media all but shouted, "Remain calm! All is well! Ignore the data" as in their fantasy world, the business cycle is dead.

• Hickey's newest letter is filled with wonderful anecdotes like his conversation with his traditionally upbeat local Federal Express (FDX) route driver who relates that business is so bad that the company is not making seasonal hires (for the first time in his 18 years with Federal Express). Indeed, the driver's hours have been cut back. He and other drivers have begun to miss delivery schedules but he was told by management that "with the economy softening a conscious decision has been made to let customer service levels slip." The same description of dour business conditions came from a United Parcel Service (UPS) store owner that he spoke to in California.

• Hickey's specialty is technology, as the name of his newsletter suggests. He chronicles the vast inventory buildup through the tech food chain at Hewlett-Packard (HPQ), Dell (DELL), Sanmina-SCI (SANM), etc.

• Hickey pooh-poohs the Microsoft Vista launch. Vista will not lead to a large PC upgrade cycle (I read Cowen's Arnie Berman piece last night which agrees) and is not a reason to buy Dell, Nvidia (NVDA), semiconductors and technology. The personal computer market is mature and the last change in Microsoft's operating system that had a real impact was the 1991-92 release of Windows 3.1. Hickey reminds us all that while Windows 95 was hyped (like Vista), it was a great disappointment. Hickey wrote back in September 1995, "Before the launch, the channel expected that five million copies of Win 95 would sell in retail in the first two weeks. Through four weeks just 2.5 million were sold." There will be no corporate push. Worse yet, some corporations were holding out until the first 'bug release' (officially known as a "service pack")." Ultimately stores were left with pallets of unsold inventory of copies of Windows 95 and panic followed as Dram vendors unloaded excess parts which were manufactured in anticipation of a successful launch. Dram prices dropped precipitously as it became clear that Win 95 sellthrough would be a bomb, e.g., Micron's (MU) stock fell from $94 to $30 in four months' time, Intel's (INTC) shares dropped by nearly 30% and Mister Softee's fell by 20%.

Fun With Fred
Doug Kass
Street Insight, 12/5/2006 8:54 AM EST

Thursday, December 07, 2006 | 07:53 AM | Permalink | Comments (20) | TrackBack (0)
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I trust Fred Hickey's opinions more than anybody else's but, wow, he's getting murdered on his put positions. He's persistent, though, and will stick with what he believes, regardless of how much time it takes to play out.

Posted by: winjr | Dec 7, 2006 8:49:26 AM

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