How many upgrades can you fit on the pinhead of a dead fish?
The Market Rap
William A. Fleckenstein
05:30 PM 08|27|2001
Last Friday's big rally came and went, failing to ignite any moon shots around the globe. Yes, there were rallies, but they looked to be rather muted. Overnight, our futures were doing basically nothing. When the casino opened for business, the market had a little flurry to the upside. Then we had a sell-off that lasted a couple of hours. In the early going, the action was pretty unremarkable. Once again, the lead sled dog to the upside was the Sox, which isn't all that stunning given the fact it's the number-one speculative plaything of momentum-types and former Bubbleonians.
Where Shall We Stick This Barometer? After the early-morning lows, we had a bounce and then another sell-off that took us back to those lows. We then had a rally that made new highs for the day in all the indices, but that rally fell apart in the last half hour. The S&P and the Dow finished on the lows, while the Nasdaq managed to do a little better, closing at about the middle of its range. All the major averages finished in the red today. The mighty, mighty Sox was the only source of green, up 2%. It was led by none other than our favorite canary in the coal mine, Micron Technology (MU), as rumors flew that its head of investor relations was out spewing bullish nonsense, as per usual. Micron was one of the first stocks to go green, proving its worth as a barometer of speculative sentiment.
What Part Of 'No Good News In PC Land' Don't They Understand? It is remarkable to see Micron and, to some degree, Intel pushed higher, considering that the PC business is awful. A story that passed on Bloomberg today said that PC executives weren't all that bullish. It reprised a quote by Michael Dell in which he reiterated his expectation that things would improve in the spring of 2002. A friend of mine, previously described as an anonymous live fish, passed on details concerning the PC market in China, which until recently had held up pretty well. Even that "bastion of strength" has begun to slow down, and I am told that inventory is beginning to pile up there, too. To repeat, there is no good news to be had in PC land. Back-to-school came and went. XP is going to be a non-event. One of these days, people will realize that the same outcome will befall the component suppliers to the PC business that has happened to the PC makers themselves. It is the height of fantasy to think that business might be bad for every PC vendor but that the guys who supply components like Micron and Intel will do well. It just goes to show that there is not a lot of thinking going on out there.
Away from stocks, the dollar was a little stronger, the metals were a little higher, and fixed income was off a freckle. Basically, things were pretty quiet.
Dead Fish Debunked Turning to the news, there are a few things worth pointing out. Today's Wall Street Journal has an interesting article by Gregory Zuckerman called "Investors Turn a Cold Shoulder to Strategists." (Registration required for a two-week trial.) Apparently, people are no longer so keen to listen to Wall Street strategists, most of whom have thoroughly discredited themselves. I say "most" because there are still some out there who try to do their job, but they are the exception to the rule. This segues to another fine story in today's Journal, "Analysts' Upgrade on Chip Stocks Raises Questions," by Cassell Bryan-Low and Ken Brown. None other than our good friend Fred Hickey made the best comment in the piece: "These semiconductor analysts are making the same mistake that the now badly disparaged Internet analysts made -- not considering valuation, dreaming too hard, and playing to momentum investors who are piled into the semiconductor sector because it's the last area of strength in technology." By "strength," Fred means strength on the tape, not strength in the business. As readers of this column know, the semiconductor business stinks.
Bigger Than A Breadbox There is also a stench emanating from the mounting pile of debt in the corporate and consumer sectors. On that subject, Gretchen Morgenson wrote a wonderful piece entitled "Rate Cuts Won't Spur an Economy Choked by Debt" in yesterday's New York Times. (Registration required.) I encourage you to read her chronicle of the problem that never gets talked about: all the debt that's in the system right now. Her article will be especially illuminating for anyone not already familiar with those facts.
Justin Timely Another source of wisdom comes via Justin Mamis, who today waxed eloquently on several subjects in his morning letter. I would like to share three of his compelling insights with readers of the Rap. The first concerns the technical bull case constructed on the advance-decline line, which has been polluted by the bulls and quoted as one of their favorite statistics. (Richard Russell has also been on to this). Read all about it:
Bad Breadth Line "Let us also interject here one of the several 'non-senses' floating around: The continuously rising NYSE cumulative breadth line has become the banner of the bulls despite its major flaw of being based primarily -- indeed, almost entirely -- on the 48% non-operating equities: REITs, preferreds, muni-bond funds, foreign banks, and the like, plus those tertiary common stocks you've never heard of. (Just take a look at a daily new-high list and see if you recognize more than a dozen names, and care about more than a handful -- SAM, perhaps, instead of BUD; or HUG, for the romance of it.) Flawed as it is (and thus is also affecting the other favorite bullish 'technical' indicator, the ARMS index), as soon as it is declared the reason for bullishness, the audience rushes off to buy tech stocks. 'Technology shall lead the way' is the next sentence after 'The bullish cumulative advance/decline line' . . . despite the fact that the OTC cumulative breadth line (which is, after all, where their darling manias reside) is making lower and lower lows. What's more, the first upward leg of that same rising NYSE cumulative breadth line peaked in early February, coincident with the Dow, as the market was peaking prior to the major collapse into the late March low. Nonsense, we say, and non-sense it is."
Eat Your Porridge, Swallow The 'Good' News And now for Justin's commentary on the pervasive denial of bad news: "In that same vein, but over in the fundamentalist world, a naive -- one might even call it ignorant -- article in The New York Times last week chastised 'the market' for being 'distracted,' while ignoring 'signs of an economic bottom.' Wall Streeters were accused of 'mourning the bubble' (although the percentage of advisory service bulls suggests a shrugging, instead), while ignoring such 'good' news as housing starts (with the home builders now making secondary failing 'exhaustion' tops); and the flattening unemployment rates (as statistically flawed and tinkered with as pro forma earnings reports). The 'market' is dismissed as not knowing what it is doing, when in fact it is the one entity that does know -- witness how F [Ford] never joined in while GM was rising from 54 to 67. And, we might add, if it is supposed to be an anticipator of better economic news, why can't it be said that the Dow's 25% rise from its late March low, and the Nasdaq's 40% rise from early April, have already been the anticipation of whatever 'improvement' is currently being seen? Yet the writer of this article discussed and dismissed as not going to happen the fall in consumer spending, falling tax collections, and a disappearing budget surplus, even as they are taking place. Those of us who were sitting in Fort Lee [New Jersey] gas lines in October 1973, reading the financial pages about the Dow still rising (with the same negatively diverging fewer new highs as Friday's, we should add), might well wonder if the current Washingtonian denial of the disappearing surplus is going to turn out to be this bear cycle's OPEC."
See Granny Darn SOX, See Granny Steal Cat Food Finally, here is Justin's thoughtful take on the shape of future bad news: "The ongoing consensus optimism -- the widespread shrugging at the price declines and wealth loss -- can be seen in the continuing eagerness to let individuals individually invest some of their Social Security money in equities. No one in Washington is worried about any old geezer losing his retirement funds. So our question is: If worse happens instead, if the market stays down for the next eight years (as Warren B. is said to have suggested, and which is a 'good' number, because that's how long the Dow stayed down under 1000 after the 1974 low), who would care for the resultant middle class poor? Can't let our boomer neighbors starve just because they blew their retirement funds on a tech mania. So, the answer is, it would be like Argentina, denying a bail-out on principle until the last minute, and then doling out charity via taxes on those who behaved themselves. If one wants an overall explanation of why and how this entire end-of-bull cycle, early-in-a-bear cycle, pushing-on-a-string cycle, could go on and on and on -- the surplus just about gone, except for accounting gimmicks; similar gimmicks to account for the absence of a rise in unemployment, etc. -- hindsight will describe it as 'the politicians did it.' Andrew Mellon will have some company in the history books." |
