November 29, 2000 Saving the worst for last

Lo and behold, the stock index futures were not up radically last night for once, falling instead an infinitesimally small amount. By the time the casino opened this morning, they were roaring to the upside. However, that rally only lasted a couple of heartbeats and then they sold them pretty hard. The Nasdaq futures were taken down a couple percent or so and the Nasdaq composite was down about a percent. At same time, the Dow was enjoying a straight up move -- after all, the Dow is now separate from everything else.

Maybe the circus is in town. . . We saw some pretty whippy action with some pretty good-sized ranges in the early going. Certainly more than our usual share of dipsters appeared to snatch up the bargains that they perceived were there to be had.

I think the best way to sum up the morning's action was that they were ramping the market and puking at the same time. Many high multiple, high flying stocks were being sold while the big Dow "safe" names were ramped higher. It was a masterfully schizophrenic performance in the early part of the day.

Reservations confirmed. . . There are a number of things to discuss in the news. First of all, we had a preannouncement from Fairchild Semiconductor (FCS). It blamed some of its "slower sequential growth" problems on "inventory adjustments in segments of the communications and computer markets" -- which happen to be two markets we have been warning are headed for trouble.

We also had the guidance lowered for the chip equipment company Credence (CMOSS) last night. More importantly, a small company that just came public in August at $12, ChipPac (CHPC), coughed up some disturbing results. Many of you may not know this company, but the significance of what it had to say was that its problems have been "the short-term weakness we are seeing in the wireless and computing end markets when combined with end-of-the-year inventory adjustments by several of our customers."

While they didn't disclosure specifically who those customers were that troubled them, we do know that Intel (INTC) is ChipPac's biggest customer and represents about 35 percent of its business.

Follow your no's. . . Meanwhile, a dead fish from a very large dead-fish house thought that maybe Gateway (GTW) was not quite on track. Since this particular fellow has not been especially astute in the past, it would appear that he feels he stumbled on to something. The companies can't guide the analysts in the new "FD" era (can they?), but folks concluded he must have known something and Gateway and all of the PC stocks were down while Intel and Nokia (NOK) were being bought.

The reason I go into this detail is to illuminate an instance where we are beginning to see preannouncements a bit earlier than usual. So far, they are largely pertaining to PCs and cell phones -- areas whose problems we have chronicled for some time -- and yet there is still this sense of denial on the tape that as long as we buy big companies we will be OK.

We can buy Intel because it doesn't really sell parts to Compaq (CPQ), Dell (DELL), Gateway (GTW) and E-Machines (EEEE), all of which have problems. Now we find out that a company which represents a huge chunk of their business is having problems. These are the kinds of disconnects that would not be going on if we were really nearing the end of the slide and fear was starting to take hold. And yes, Virginia, there are a lot of margin-call problems, but no real capitulation yet.

Lessons from the avant gored. . . Speaking of those, there was an eye-opening vignette on page C1 of The Wall Street Journal entitled "Insiders, Like Small Investors, Suffer Margin Calls." It details how a handful of the heretofore rich people we mentioned yesterday are now upside down. It is definitely worth reading, if only to learn the lessons of what can happen so it doesn't happen to you. Unfortunately, I think there are many more stories like this lurking below the surface and they will tend to come out over time.

You may notice that the Rap flows a bit differently today -- that's because there were some significant late developments and I wanted to try to capture the mood first as best I could. I've tried to describe here the almost surreal atmosphere I witnessed all day long as PC stocks were sold, Microsoft (MSFT) was sold hard, and yet Intel, Micron (MU) and IBM (IBM) were blithely bought. There was this flight to anything big or to anything that was "acting well."

Since the tape has been all about stock action for the longest time, the fact that certain stocks "act" well in the face of bad news is deemed to be a reason to buy, so all day long Intel was bought, which encouraged speculators that don't do any research. In fact, even Gateway came back from being down $4 to close down only a couple. And the Sox, which had been under a bunch of pressure, closed down just fractionally. Away from tech, there was a complete party as financials were up about 3 percent. But the important thing to know is how completely complacent the tape was today because certain stocks were acting well.

The reason I've gone into all this is because right after the close a couple of big bombs were dropped on Wall Street. The first, and closest to my heart, was that Gateway preannounced that it was going to have a rather enormous shortfall in its revenues, to the tune of about $500 million. And, just as important to those with inquiring minds, it said it was going to take a $200 million charge from write-downs.

Bland faith. . . Regular readers will know that I've harped about this for some time, and we made a specific point after Gateway's last conference when the company stated it would no longer be giving out much information about unit sales to go along with the lack of information on other important items, such as same-store sales. It was the ultimate in "just trust us, we'll get it right."

On October 23, I wrote a rather long analysis about what I believed to be Gateway's balance sheet shenanigans, entitled "Fudgement Day." One of the points I made at the time was that Gateway dropped all these important data points from its guidance, yet not one analyst complained about it on the conference call. I'm sure tomorrow any number of dead fish will jump off the train here. Either that or they are going to have to defend this thing. It is utterly mind-boggling that Gateway was able to get away for as long as it has without divulging any information.

In any case, the preannouncement precipitated a hellacious sell-off during the runoff in the S&P futures. On the real close, the S&P was up 8 points, but by the time the futures closed 15 minutes later, they were down 3 points. The Nasdaq 100 futures went from being down 22 to down about 107.

In further trading on Instinet, Gateway was trading around $20, down $9, Compaq was down about $3 to $20 and Dell was down about $3 to $19 and change. They even decided to pin the tail on the donkey with Intel, which was trading down about $4 to the mid-$38s. So it would appear, at least initially, that the dots were finally being connected.

Altera-tions. . . Also adding to the turmoil was the fact that Altera (ALTR) preannounced and was trading down $7 after hours, or about 30 percent. I mentioned a couple days ago that there were rumors this would happen. This will help take down Xilinx (XLNX) and probably put some pressure on Maxim (MXIM) and Linear Technologies (LLTC). Even though they are not in the same business, they are supremely expensive.

In my opinion, this is the kickoff to the avalanche of earnings warnings that I suggested would be coming. Business is poor for PCs, cell phones and Internet build-out infrastructure (which is why the vendors are all financing the hardware) and one should expect to see more problems as we go forward.

We will know when this leg of the bear market is over in a couple of ways. Dots will get connected and people will anticipate even worse problems to come, and folks will stop proclaiming every day to be a bottom and will be far more focused on selling rather than buying.

Seeing how late in the day this all transpired, we'll have more comments on the ramifications of Altera's and Gateway's announcements tomorrow. But my suspicion is that people are finally starting to get the picture and maybe a little more sanity will return to the investment landscape.

Last and sometimes least. . . Away from stocks, the euro continued its recent winning ways, up fractionally. Oil was up 41 cents, with fixed income up ¼ point. The metals definitely couldn't stand prosperity -- silver was down about 2 percent with gold down about 1 percent.

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Please be sure you've read "What is the Market Rap?" before you send me e-mail. As highlighted in this outline, there are certain questions to which I am unable to respond.

William A. Fleckenstein, special to Silicon Investor.

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-- Carl Jenkins (somewherepress@aol.com), November 29, 2000