Overnight markets were mixed, with China losing about 7%. The Shanghai Composite Index has now lost about 20% in the last nine sessions, though it is still 30% higher on the year (some of the other indices there are up even more). The reason I bring this up is because people think that sort of thing couldn't happen here. It not only can, but it will (more about that below).
In addition, Greece was back in the news, and apparently the latest final, final, final deadline will be Saturday, in which case either the Greeks are going to accept the new proposal or some other deadline will be concocted. Or not. It is impossible to say, as I have noted before. In any event, that helped boost European equities and caused a setback in bond markets there.
[Hear: Update on Greece With Frances Coppola]
Pork and Not Enough Beans
However, the important news was right here in America and it relates to the price action of one of my favorite litmus tests, Micron Technology (a.k.a., the Flying Pig), which declined just shy of 20% today in the wake of its earnings report last night. (In related news, Synnex, a big-time computer distributor, declined 10%.)
As to why these data points might matter, as I have been saying, expectations are extremely high for the second half and I don't think they can be met. If you were to try to win on that idea by being short you would need two things: disappointment, and (almost more importantly) people of the bullish persuasion actually caring. A lot of bad news has been laughed off in the last few years, but as I noted yesterday, I feel that the situation is more pregnant right now than it has been since probably late 2007, given the discrepancy between expectations and what the fundamentals can possibly deliver.
Both Micron and Synnex had to reduce their guidance last night in a way that made people question the vaunted second-half recovery for their specific companies. Their guidance also has ramifications for others in the PC and computer food chain, such as Intel, Seagate, Western Digital, etc. I noted this several weeks ago, when I bought Intel puts (because I think they have huge problems on a number of fronts coming their way), but heretofore I had not purchased puts on Micron (until yesterday) because I felt it was such a battleground stock. Why? Because folks had been so confident that the memory business was "different this time" (which is difficult to disprove), that I didn't want any part of that fight.
Change You Can't Believe In
In 1999, and to some degree even in 2007, and certainly now, people believed that the memory business had changed and that at the bottom of the cycle things won't be so bad. Thus, Micron won't lose money, or some variation of that idea, and therefore it deserved a higher valuation than in the past.
However, it isn't different. The memory business is such that, even though the number of competitors has dwindled, the ones that are left — most importantly, Samsung — have plenty of muscle and know how to swarm over anything with margins. Thus, I like to use Micron as a litmus test, because when people believe that the past won't repeat itself regarding the memory cycle (which is just a commodity), then anything is possible and it is a warning to skeptics and short sellers to be careful.
Thanks for the Memory
I have known MU was a ticking time bomb for a while now, but I didn't know how long or how well folks would be able to laugh off a "second-half recovery" disappointment, so I have been reluctant to step into the fray. Having said that, yesterday afternoon I bought some MU puts that expire today because Fred Hickey gave me some additional information about the shocking state of channel inventories (thank you, Fred!). I decided that if we were still in a macho period, regardless of what the company said, the stock would be flat to higher, but if we weren't, the stock could get smacked into the high teens (that was just my guess looking at the chart). So I decided to make a modest "bet" on that outcome.
Well, in fact, MU was smacked and now that we have seen that Oracle was punished (though modestly compared to Micron and Synnex), I believe that action collectively is telling us that bad news will matter, and that is an important new development, because I think we are going to get plenty more disappointments.
Second-Half Litmus Test Gets an "F"
Perhaps it will not really matter until we get an official Greek can-kick or default, or something worse out of China, but there are plenty of grenades rolling around, and I think the tech sector — at least as it pertains to chips and hardware — is pretty vulnerable, as weak-to-mediocre news has pushed stocks higher due to the belief in the "second-half rebound." The dislocation we saw in last night's examples are a harbinger of more to come, and as the Chinese have demonstrated, it can happen for the entire market.
[Read: Has Asia Entered Into a Currency War?]
It is really beginning to feel like the market is on borrowed time, and we just need to see what the catalyst is going to be to send it tumbling. In summary, the fact that the first few "second-half rebound" disappointments have mattered in a big way is quite an important development.
Turning back to the action, the indices were a bit higher early on, led by the Dow. The Nasdaq was a considerable laggard, for reasons that should be pretty obvious, though I must say that the damage in the chip sector was pretty well contained. I am assuming people have rationalized it as contained to just the PC sector, which of course it isn't. Over the course of the day, the Nasdaq kept leaking and closed 0.75% lower, while the Dow rose a bit and the S&P was flat. Away from stocks, green paper was stronger and fixed income was heavy, while oil and the metals were flattish.
A Gold Watch: the Perfect Bear Market Retirement Gift
For the same reasons that the stock market is on borrowed time, I believe that the amount of time left for gold to collapse (as all the haters expect) is about up. Because as stocks get roughed up, and people look at the economy differently in terms of what the Fed has "accomplished," the whole bear case — which has been fraying for some time — will completely disintegrate, and as we see with MU, the psychology can change quickly and the ensuing moves can be very big. I know that self-loathing among gold bulls is extremely intense because this has been such a debilitating, nonstop, death-by-a-thousand-(if not more)-cuts, and folks are demoralized, but we are nearing the end of the unanimity that central banks can solve all problems painlessly.
I can't say when the gold market is going to shift gears, but in some ways it is the flip side of the bullish stock case. To be sure, being long gold is not like being short stocks. However, central bank incompetence is the reason to own gold, and the belief in central bank competence is why the SPOOs are where they are. So as the SPOOs slide, the entire bull case for central banks will be reexamined.
Positions in stocks mentioned: long INTC puts, long MU puts, long STX puts.
