Below is a new interview with high-tech strategist Fred Hickey, published in today’s issue of the Swiss Business newspaper Finanz und Wirtschaft by editor Christoph Gisiger. Excerpts from the interview re-printed with permission.

Fred Hickey, editor of the widely read investment newsletter «The High-Tech Strategist», warns of more trouble to come for stocks and spots bright investment opportunities in the gold sector.

 

Around the globe financial markets are in turmoil. For Fred Hickey that doesn’t come as a surprise. Fred Hickey  outspoken editor of the investment newsletter “The High-Tech Strategist” predicted towards the end of 2014 that the US stock market would fall when the Fed stops its stimulus program QE3. Since January, especially equities in the Nasdaq Composite index are getting clubbed. For the contrarian investor with a longtime experience in the IT industry this fits the classical behavior of a bear market. Fred Hickey warns that stocks will fall further and recommends to buy gold and shares of gold miners.

Fred Hickey – Christoph Gisiger

How will this boxing fight go on?
As the bear market process continues fewer and fewer stocks remain aloft. One by one they fall and investors crowd into a smaller and smaller number of favorites which look like they’re invincible. This classic herding behavior has happened as long as I have been watching markets. At the beginning of the bear market in 1973, for example, investors crowded into tech stocks like Polaroid, Kodak and IBM. The same thing happened with Microsoft, Intel and Compaq in the early bear market of 1990. The next time we saw the market break in 2000 investors crowded into Cisco Systems, Sun Microsystems and EMC. Similarly, as the market started breaking down in October 2007 we had Apple, Research in Motion, Amazon and Google. They were even called the “four horsemen” and were still holding up months later after the market had already started to weaken. But finally, the knockout blow comes and even those stocks aren’t immune. In fact, they fall harder and faster than the rest of the market because they’ve held up before.

Last year, we’ve seen that very same pattern with the so called FANG stocks Facebock, Amazon, Netflix and Google. Some of those shares are now under heavy pressure. Does that mean we’re already near the knockout round?
Some of those stocks like Amazon and Netflix more than doubled last year in an overall market that was down. What’s interesting now is that some of these FANG stocks like Amazon and Netflix are even leading the market down. Also, biotech stocks are getting killed. These equities were all ridiculously overpriced and now the confidence is being lost. It’s hard to know when exactly the knockout blow comes. But we’re certainly well into the bear market when such stocks start to break down like this.

How can you be sure about that? Maybe this is just another temporary setback like the one at the end of August.
There are always rallies in bear markets. For instance, back in 2008 I counted six rallies over 1000 points in the Dow Jones Industrial. They are typically very sharp. Most of them are short but some can last for a while. We had several rebounds that lasted one month. But I also do know that in the later stages of a bear market these rallies begin to last only a day or two. It gets very violent before the bottom. This bear market will continue which means we’re headed lower with rallies in between until the Federal Reserve is forced to come in and start QE4.

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So what does China’s slowdown mean for the tech sector?
It’s going to have an effect on the technology markets. That’s a problem. And then there are bad news from other parts of the world as well, like Latin America. Brazil is in recession. Also, Japan, despite all of the money printing attempts, is back in recession. Japan is one of the top economies in the world and we’ve seen that PC sales have absolutely collapsed there. Europe is muddling through but that’s only because they have the benefit of a lower Euro right now. The US is a little better but clearly weakening. All that doesn’t make for a good outlook for the technology world and there doesn’t seem to be anything that could turn it around.

What’s the impact on earnings? As of now, most big tech companies have reported their results for the fourth quarter.
I’m not surprised that there have been a lot of warnings from the Apple world. You have to understand, Apple is a giant with $235 bn. in revenue last year and the tentacles are wide. It’s mostly a hardware company and two times the size of Hewlett-Packard, the largest computer company in the world. So when Apple is in trouble, it’s a huge drag on all of the suppliers. I call them the “Apple Dumplings” and there are many of them.

In fact, Apple’s numbers were one of the big disappointments in this earnings season.
The bad news has only just begun. People wanted iPhones with a bigger screen and Apple was very slow to bring those out. But when they did, there was a great hunger in their customer base for the iPhone 6 and the iPhone 6 Plus. At the same time Apple was rolling out those phones, it brought in the last major carrier that hadn’t been carrying iPhones. That was China Mobile with 800 to 900 million subscribers. So that led to the mother of all upgrade cycles and Apple’s numbers were enormously inflated. Now, here we are a year later and Apple is going to have extremely difficult comparisons. The fourth quarter numbers were disappointing, but the first quarter numbers are going to fall apart.

And what about the long term outlook?
Apple hasn’t brought out a really new product in years. They had some failures: Apple TV hasn’t gone anywhere and Apple Pay has been very slow. The Apple Watch has been a huge disappointment. There is tremendous amount of competition and they have overpriced the product. They want to bring out an Apple car in 2019 but there is no chance of that happening. Maybe they can bring it out many years later at best. The company has become primarily a smart phone company and that even more so over the past few years. That’s a problem because the smartphone market has matured. Even in China, the market has grown only 1% last year. And when a market in technology products gets saturated, prices start to drop and margins contract. That’s a permanent slowdown which the analysts haven’t really accounted for yet. The smartphone market becomes essentially another PC market – and that’s not a good thing as we have witnessed over the last ten years or more.

What does that mean for Apple shares. The stock has already lost more than 20% in the past twelve months.
I think Apple will fall, but it has the support of its dividend. So its decline will be limited. It’s the suppliers that are going to get killed. Stocks like Skyworks Solutions, Cirrus Logic, Qorvo, Avago and NXP Semiconductors that  doubled, tripled or quadrupled in the prior year leading up to the introduction of the iPhone 6. Those stocks have all broken down and they will continue to fall since I think that even when the iPhone 7 is introduced, it won’t be a leap in technology. There won’t be the kind of pent up demand like there was for the iPhone 6.

The full interview can be found here

 

Fred Hickey: We’re certainly well into a bear market; Tech To Be Hard Hit By Slowing Economy