Symbols of the Times

The word "crisis" in Chinese is composed of two characters: the first a symbol of danger, the second of opportunity. We're dealing with both today. There's a crisis in business, a crisis on Wall Street. Both situations present us with opportunities.

Of course, we have to acknowledge that there is nothing more dangerous on the battlefield than a crowded bunker, except perhaps a guy with the wrong map.

Last month I said I was going to tell jokes in this column. No need to tell jokes — the market is doing it for me. Here, in the third week of October, the bulls are playing jokes on the bears. We've got a rip-roaring stock market that is pushing shares higher. The news supporting this rally is pretty thin.

The bear market has gone on for almost 900 days. The bulls have been chomping at the bit for a while. They want to buy. They want to catch the next wave. They remember what it was like in the late '90s. They remember that the market thinks ahead. They remember that ramps in capital equipment spending and semiconductor consumption are violent, cyclical affairs.

I too want to catch the next wave, but I think we need the support of earnings and revenue growth to support higher stock prices. These spasms of bullishness in the face of deteriorating fundamentals do not really interest me.

I find it unfortunate that momentum investing was not completely abandoned during the bear market. It is unfortunate that analysis by many is still quite superficial. It is sad that stocks in the semiconductor sector can run to higher prices on the basis of hope.

Contrary to what you may believe, I try very hard not to lean too far toward bull or bear camps when it comes to the stock market. I've said before in this column that the best strategy is to apply the Samurai Trader's maxim: "Expect nothing. Be prepared for everything." This rally in the face of deteriorating fundamentals really puts this strategy in perspective.

I'm a hooked-on-fundamentals guy. Right now I am not sure if investors understand (maybe they are simply not willing to acknowledge) what is going on in the industry. Some of the elements are visible. Earnings and guidance this quarter show that future business will be down anywhere between 20 and 30%. We'll see a little bounce in the first quarter of next year, but it remains to be seen if that will turn into something more lasting. As the weeks pass, we see weak reports from players outside or indirectly related to the chip business — Cisco, for one, and probably the contract manufacturers. The holiday selling season does not look as though it is going to be very robust. Corporate IT spending for the last quarter of this year, and probably into next year, is predicted to grow by a low-single-digit percentage.

If you can't tell, the current financial performance of the semiconductor industry is not prompting me to rush out and invest a lot of money, even though prices appear to be low. Low prices do not necessarily mean that businesses are priced appropriately. In a perfect world, stock prices and the value of the underlying business would line up like a flock of geese flying south. If it were only that simple . . .

I believe the rally will start from levels that are lower than where we are today. I believe the industry has to face more turmoil and dislocation in the next few quarters. Some might say that I am being overly cautious. Labeling me with a caution sign is just fine.