My postings have dwindled to a mere trickle in recent months. Its just not as enjoyable discussing things that have become obvious to even the most delusional market participants among us in stark contrast to the environemnt of last summer and through year-end 2007. But I believe this 1000+ rally in the Dow Industrials, and an even more stout rally in the Nasdaq on a percentage basis, has helped to again move fiction and fantasy to the forefront pushing logic, diligence and facts again to the backseat. Not good.
There was no more clear evidence of this evolving theme when Intel (INTC) released earnings on Tuesday after markets closed in the U.S. It's "better than expected" report and its usual cheerleading by management was quickly construed as being indicative of the worst being behind us and that a shallow drop in asset values from last year's highs to recent lows is all that is required to cure the most obscene, out-of-control, credit bubble in history. To that, I say, not so fast my friends.
Below, I've sliced and diced the total hoodwink pulled off by Intel this week, the most obvious of all misinterpreted earnings reports of the week, that combined with others, gave apparent cover for the delusional bulls to throw a party not seen since last fall when the fumes of the LBO bubble were still fueling markets. But before I concentrate on Intel's disingenuous report and cheerleading, Google and JP Morgan deserve at least some credit for last week's manic ramp job in stocks. Google's (GOOG) revenues beat analyst estimates by $110-million in its latest quarter and said that "paid clicks" grew 9-percent versus just 2-percent expected. They also beat earnings estimates. Fine. Just as Intel did (see below), the company successfully lowered the bar just enough to easily leap over it. However, the company's quarterly tax rate, which had ranged from 25 percent to 27 percent last year magically dropped to a just 24-percent accounting for a good portion of the bottom line beat. Clearly, Google's growth in coming quarters is banking on its international business, which now totals 55-percent of revenues. International business, in my opinion, is going to just lag the massive problems being encountered by the U.S. economy and banking on the rest of the world being unaffected by the severity of the prolonged problems in the U.S. (decouple) will be a losing wager. Furthermore, testament to how quickly rampant speculation seems to have been revived thanks partly to the Fed's recent largess, based on this single report, whether it was there slowing, but not as bad as expected growth rate; its better-than-expected bottom-line, gratis partly due to an unusually low tax-rate; or its $110-million beat on its top-line, thanks entirely to currency translation, Google's was rewarded with an increase in its market-cap with an additional $28-billion--253-times the $110-billion that revenues surpassed expectations!?!?!
So Google played a part last week in getting the bulls unduly lathered-up, but so did JP Morgan (JPM), after its bad number was simply not as bad as expected and new financier, extraordinaire, Jamie Dimon, said the credit-market crisis is nearing an end. Of course, anyone that gets a $29-billion "stop-gap" from the U.S. Federal Reserve must be pretty smart, right. Let me just say that anyone that has used the self-serving talking-points of Wall Street titans in recent years as an investment guide has also suffered pretty catastrophic losses. Remember Bear Stearns' CEO Alan Schwartz' protestations of a liquidity problem days before essentially needing to be bailed out by the Federal Reserve? I would expect nothing different from Mr. Jamie Dimon, business partner of Ben Bernanke and the U.S. Federal Reserve. Needless to say, markets are still pretty gullible as you can see.
But back to Intel-- Intel leapt over its lowered bar on Tuesday and markets went on a pretty wild ride along with the shares of Intel. Before recounting what the company said this most recent Tuesday night, April, 17th, 2008, let's recap what the company revealed to us roughly five weeks prior on March 4th, which had obviously been long forgotten:
Intel lowered its profit forecast on March 4th, "blaming a steep drop in prices for memory chips for the shortfall." It said, "Slumping prices for NAND flash memory had depressed profits more than anticipated. " The company also warned in its March 4th press release that its gross profit margins would come in at 54 percent instead of the previously forecast of 56-percent. The company said its other guidance had not changed, including its expectation of $9.4 billion to $10 billion in revenue for the quarter.
That was March 4th. On Tuesday, April 15th, Intel essentially matched what they had warned us about 42-days prior. The world's largest maker of microprocessors posted a 12% drop in its first-quarter profit, year-over year, as warned. Earnings per share came in at 25-cents per share versus last year's 28-cents per share, as warned. Originally, in February, Intel estimated earnings of 34 cents for this quarter before its March 4th warning. Margins came in even lower than what they previously had warned at 53.8% versus 54% expected. Okay, close enough.
But again, perception is more important than reality on the Street of Dreams. The company predicted that margins would recover to 56%, plus or minus a couple of points, in the second quarter. Intel also projected second-quarter revenue between $9 billion and $9.6 billion. The $9.3 billion midpoint of that range compares with average analyst estimates of $9.23 billion. Also, as CEO Paul Otellini exemplifies how hope springs eternal and trumps reality, when he said that his company was seeing "absolutely no impact from economic headwinds." Apparently by warning on March 4th that earnings and margins had deteriorated was just his way of not showing-off, given how humbled his buddies in the financial sector must be feeling.
So the 25-cents per share number reported on Tuesday, April 15th, was 35% lower that what folks expected as recently as March 3rd (pre-warning) when the stock closed at $20/share. For his masterful handling of what appears to be a deteriorating business situation, Otelli and shares of Intel were rewarded with a 10% gain in his stock's price since before its March warning.
Given Intel's record of mis-forecating, and half-truths, it's amazing to me to see how markets still give any credence whatsoever on their forward guidance and Otelli's predictions. Again, the reaction this week in shares of Intel and by extension the entire market is further evidence that what we really have is a bull market in selective perceptions and an inclination to want to believe in fairytales, such as Goldilocks while simultaneously crowding-out logic and diligence.
There was no more clear evidence of this evolving theme when Intel (INTC) released earnings on Tuesday after markets closed in the U.S. It's "better than expected" report and its usual cheerleading by management was quickly construed as being indicative of the worst being behind us and that a shallow drop in asset values from last year's highs to recent lows is all that is required to cure the most obscene, out-of-control, credit bubble in history. To that, I say, not so fast my friends.
Below, I've sliced and diced the total hoodwink pulled off by Intel this week, the most obvious of all misinterpreted earnings reports of the week, that combined with others, gave apparent cover for the delusional bulls to throw a party not seen since last fall when the fumes of the LBO bubble were still fueling markets. But before I concentrate on Intel's disingenuous report and cheerleading, Google and JP Morgan deserve at least some credit for last week's manic ramp job in stocks. Google's (GOOG) revenues beat analyst estimates by $110-million in its latest quarter and said that "paid clicks" grew 9-percent versus just 2-percent expected. They also beat earnings estimates. Fine. Just as Intel did (see below), the company successfully lowered the bar just enough to easily leap over it. However, the company's quarterly tax rate, which had ranged from 25 percent to 27 percent last year magically dropped to a just 24-percent accounting for a good portion of the bottom line beat. Clearly, Google's growth in coming quarters is banking on its international business, which now totals 55-percent of revenues. International business, in my opinion, is going to just lag the massive problems being encountered by the U.S. economy and banking on the rest of the world being unaffected by the severity of the prolonged problems in the U.S. (decouple) will be a losing wager. Furthermore, testament to how quickly rampant speculation seems to have been revived thanks partly to the Fed's recent largess, based on this single report, whether it was there slowing, but not as bad as expected growth rate; its better-than-expected bottom-line, gratis partly due to an unusually low tax-rate; or its $110-million beat on its top-line, thanks entirely to currency translation, Google's was rewarded with an increase in its market-cap with an additional $28-billion--253-times the $110-billion that revenues surpassed expectations!?!?!
So Google played a part last week in getting the bulls unduly lathered-up, but so did JP Morgan (JPM), after its bad number was simply not as bad as expected and new financier, extraordinaire, Jamie Dimon, said the credit-market crisis is nearing an end. Of course, anyone that gets a $29-billion "stop-gap" from the U.S. Federal Reserve must be pretty smart, right. Let me just say that anyone that has used the self-serving talking-points of Wall Street titans in recent years as an investment guide has also suffered pretty catastrophic losses. Remember Bear Stearns' CEO Alan Schwartz' protestations of a liquidity problem days before essentially needing to be bailed out by the Federal Reserve? I would expect nothing different from Mr. Jamie Dimon, business partner of Ben Bernanke and the U.S. Federal Reserve. Needless to say, markets are still pretty gullible as you can see.
But back to Intel-- Intel leapt over its lowered bar on Tuesday and markets went on a pretty wild ride along with the shares of Intel. Before recounting what the company said this most recent Tuesday night, April, 17th, 2008, let's recap what the company revealed to us roughly five weeks prior on March 4th, which had obviously been long forgotten:
Intel lowered its profit forecast on March 4th, "blaming a steep drop in prices for memory chips for the shortfall." It said, "Slumping prices for NAND flash memory had depressed profits more than anticipated. " The company also warned in its March 4th press release that its gross profit margins would come in at 54 percent instead of the previously forecast of 56-percent. The company said its other guidance had not changed, including its expectation of $9.4 billion to $10 billion in revenue for the quarter.
That was March 4th. On Tuesday, April 15th, Intel essentially matched what they had warned us about 42-days prior. The world's largest maker of microprocessors posted a 12% drop in its first-quarter profit, year-over year, as warned. Earnings per share came in at 25-cents per share versus last year's 28-cents per share, as warned. Originally, in February, Intel estimated earnings of 34 cents for this quarter before its March 4th warning. Margins came in even lower than what they previously had warned at 53.8% versus 54% expected. Okay, close enough.
But again, perception is more important than reality on the Street of Dreams. The company predicted that margins would recover to 56%, plus or minus a couple of points, in the second quarter. Intel also projected second-quarter revenue between $9 billion and $9.6 billion. The $9.3 billion midpoint of that range compares with average analyst estimates of $9.23 billion. Also, as CEO Paul Otellini exemplifies how hope springs eternal and trumps reality, when he said that his company was seeing "absolutely no impact from economic headwinds." Apparently by warning on March 4th that earnings and margins had deteriorated was just his way of not showing-off, given how humbled his buddies in the financial sector must be feeling.
So the 25-cents per share number reported on Tuesday, April 15th, was 35% lower that what folks expected as recently as March 3rd (pre-warning) when the stock closed at $20/share. For his masterful handling of what appears to be a deteriorating business situation, Otelli and shares of Intel were rewarded with a 10% gain in his stock's price since before its March warning.
Moreover, it appears that Intel is back at its balance sheet shell game: Cash, Cash Equivalents & Short-term Investments have dropped from $15.36-billion to $13.69-billion; Receivables increased from $2.57-billion in December to $2.722, even as Revenues dropped from $10.7-billion to $9.67-billion, sequentially. Inventories had been coming down for most of last year but were essentially flat since its last quarter. Also, mysteriously, it's balance sheet item, called Other Long-term Assets, perhaps some of which includes factored receivables, are now going Chernobyl, mushrooming from $3.75-billion a year ago to $5.7-billion last quarter.
Given Intel's record of mis-forecating, and half-truths, it's amazing to me to see how markets still give any credence whatsoever on their forward guidance and Otelli's predictions. Again, the reaction this week in shares of Intel and by extension the entire market is further evidence that what we really have is a bull market in selective perceptions and an inclination to want to believe in fairytales, such as Goldilocks while simultaneously crowding-out logic and diligence.
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