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January Rally Fading Fast
By Brady Willett
The bad news is beginning to pile-up, and since we are entering
the thick of earnings season investors may not be able to shovel themselves out of the sludge until the closing comments are heard from Cisco (CSCO typically reports near the end of each earnings season).
This
is not to say that earnings are going to be significantly 'worse' than expected this season. They don't have to be. With the markets priced to perfection all that is required is for earnings and forward looking
statements to be less than perfect. Case in point, Intel says they will reduce capital spending in 2002 – this is not 'perfect'. Next, JP Morgan Chase misses earnings estimates and the CEO states, "our
economic scenario for 2002 is not a rosy one" – this is anything but perfect.
As for JPM, S&P lowered the companies outlook yesterday to negative, but refused to lower the companies rating (a lower credit
rating would trigger higher debt payments and could cripple JPM). Rumor has it that Greenspan personally called up S&P directly and pleaded with them not to downgrade the 1907 'lender of the last
resort'. S&P obliged, and now everyone is working feverously to figure out how to hide the billions of dollars in exposure JPM still carries in Enron, Argentina, K-Mart and others. If you think this story is
far fetched read what has been going on with Enron.
So how does JPM plan to get out their current mess? Buy more debt --
literally...
Suffice it say, INTC, and JPM played an important role in
yesterday's drop, and there will certainly be many more similar bombshells before e-season ends. By contrast, there have already been a handful of prominent companies (CPQ, AMD, AAPL) that have beaten
expectations, and/or provided cautiously optimistic forecasts for 2002. Considering none of these companies results we that exceptional (AMD lost less money than expected) lets just say that isolated optimism in
corporate expectations are still playing catch-up to already priced in investor expectations: as we are all well aware, for the last three months stocks have not been rallying because of the numbers. As such,
optimistic expectations should be expected, should they not?
K-Mart
Amidst heavy speculation of bankruptcy K-Mart has not commented on its plans. Why? No one knows. All that is known is that yesterday K-Mart's 9.375 percent
notes maturing in 2006 and 9.875 percent notes maturing in 2008 were both being bid below 50 cents on the dollar. Furthermore, yesterday K-Mart's stock dropped by more than 35% as fund managers were forced to sell
because of its S&P 500 delisting, and every ratings house on the planet cut its debt to junk.
The problem with K-Mart is simple: price! Wall-Mart has averaged net profit margins of 3.26%
over the last decade, Target has pulled in 2.35%, and K-Mart has scrapped out 0.93%. Furthermore, Wal-Mart and Target have not posted any annual losses in the last decade while K-Mart has lost money in 4 out of
the last 8 years. Suffice it to say, K-Mart sells products for more money, and earns less. Tick, tock, tick, tock…
This is why Martha Stewart is about to discover a harsh reality: Wal-Mart and Target
do not need her. Rather, she needs one of them…
Ford
In contrast to K-Mart, Ford was quick to respond to yesterdays Moody's downgrade:
"We're disappointed they took the action. We have a revitalization plan that we expect
will help us improve our business and strengthen our underlying fundamentals."
Ford spokesman Todd Nissen said
Now may not be the best time for Ford to be looking to dump its 'non-core' holdings.
Furthermore, if the U.S. auto market remains tight through 2002, and/or if "huge numbers of Ford employees continue running like chickens with their heads cut off trying to patch up the latest problem" (from CEO), Ford
could become one the oldest U.S. companies ever to go under. Enron was the biggest, can it happen to one of the oldest?
Granted, Ford is not knocking on deaths door just yet. But give the
company some time: Ford's real problems could arrive once the costs of managements knee jerk reactions to market conditions are tabulated, and another awful year (2002) ends. It is worth remembering that during
the last 12 months (ended Sept 01) while Ford erased over $5 billion in shareholders equity, they didn't lose a dime in total debt. If this trend continues into 2002 the rating cuts will keep coming, as will the
restructurings.
The debt number for Ford stands at $264 billion. With $277 billion in total assets, many of which are booked well above market price today, Ford needs to be both lucky and good in the
coming years. Being the weakest link in a three-link chain is not a good spot for Ford to be in.
-- GM registered a $97 million charge because of the Argentina devaluation, but still managed to earn $255
million in 4Q01. GM trucks stole marketshare from Ford in 2001, and the company is optimistic heading into 2002 (expects $3 a share in earnings).
The Not So Perfect Season
The final rush to catch the 'rebound rally' occurred in the
first two weeks of 2002. This rush is now a memory. Sure, the markets may bounce around, and maybe even squeak out a miraculous 2-day rally before it is all said and done. However, with perfection being
unattainable this e-season, lower prices remain. No statistics to fret over, no sky-high valuations to point out --- just lower prices dead ahead.
Brady Willett
BWillett@fallstreet.com
www.wallstreetwishlist.com
January 21, 2002
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