Fleck's Market Rap from 10/09/01...What a rant!
New issue from Bill Fleckenstein:
The Market Rap
William A. Fleckenstein
05:15 PM 10|09|2001
Back to Bubblesville?
Buckle up, ladies and gentlemen, this is going to be a long one. There is really no point in reprising the market activity that took place while I was away. I would like to say, however, that I was somewhat surprised to see the market trade as poorly as it did yesterday following the start of retaliation in Afghanistan. The fact that our response was not perceived bullishly, as was my expectation, suggests that the idea of the market going up on the back of the war was already pretty well discounted. Yesterday the market did rather poorly, save for rabid speculation in the Sox. Apparently, the same group of clueless dead fish got former Bubbleonians all stirred up to go play with chip stocks again, causing a flurry of buying.
Bank Stocks Survive Blitzkrieg After the market opened unchanged, we had a straight-down move that lasted for about 15 minutes. Then the rally caps came out as we began more strikes in Afghanistan. If you looked at the S&P, the rally brought it back to the opening level. The Nasdaq didn't quite cooperate. After a few hours of action, the Dow and the S&P were down slightly and the Nasdaq Composite was down 1%. Of course, those indices had been weaker earlier. This morning, the leader to the downside was the Sox. The bank stock index was getting a bounce after its blitzing over the past few days.
As Clear As The Okeefenokee After the first few hours, the market in essence flopped and chopped for the duration around the lower levels for the day. As you can see from the box scores, the S&P and the Dow did better than the Nasdaq, which was down over 2%. Of course, it was tugged lower by a combination of the Sox getting whacked for 6% and Microsoft (MSFT) being down about 8%. Other than that, I did not detect any particular theme. Tonight, the earnings confession season will get under way for a handful of tech companies, with a heavier stream as we approach next week. An important development will be what the companies have to say and how their remarks are perceived. That may give us some idea of how to handicap the trading going forward. At the moment, there are big forces pushing and pulling in opposite directions, and for that reason the near-term direction is decidedly murky.
Defiant Dollar Away from stocks, fixed income and precious metals were taking on water, with the 10-year down half a buck, silver down just under 3%, and gold down a little over 1%. The dollar was up against the yen and the euro.
Pitiful Panacea Now, turning to the editorial portion of the Rap, I would like to make a handful of observations. The title of today's piece salutes, as it were, the "financial policy" of "the powers that be." It seems to me, and this is just my observation, that those people -- namely, the Fed, Wall Street, the media, corporate America, and quite possibly the Treasury Department -- would like to revive the mania. As I intuit it, their collective wisdom runs along the faulty line of "Geez, if we can get the mania going again, we can get the economy going again, and then everything will be as it was." They do not seem to understand that the bubble has burst, and thus there are no good policy options.
An Ounce Of Prudence Is Worth A Pound Of Bubble Gas Masks While the mania was in full swing, I discussed this ad nauseam. That is the reason why, historically, prudent central bankers have been careful not to create bubbles. We have had two big ones prior to this bubble, and the central bankers are 0 for 2 in trying to make things better in the aftermath. They will be 0 for 3 after this one as well. It's important to understand this because going forward, there will be many twists and turns in the road. Lots of really poor advice will be forthcoming from many people. I believe the world should be divided into two categories -- those individuals who understood the bubble and therefore might have some clue about what comes next, and those who had no understanding of the bubble and remain clueless in its wake. People will have questions about what they should do next, and they ought to be very careful about who they listen to.
The Road Not Taken This whole policy of trying to talk the market up and make it the focus of economic activity is a very sad, dangerous development. We started down the path of too-big-to-fail a long, long time ago. The litany of the late 1990s was of ever-increasingly large risks to moral hazard. We bailed out Mexico. We bailed out the Southeast Asia crisis. We bailed out the Long-Term Capital crisis. We bailed out the year 2000 (which didn't need bailing out), etc. People can follow that bouncing ball.
Misallocation Of Capital Letters Now the Fed and company seem to be hell-bent on trying to get things going again. But they do not understand that the bubble produced a gargantuan misallocation of capital. That misallocation of capital explains why we have excess capacity and why job losses began well in advance of the terrorist attack on September 11. Beforehand, most people did not understand what was going on in the economy and in the market. All that's done is to give them an excuse for our problems. To see this, just pick up a newspaper. I am struck by a couple of articles in The New York Times about the employment situation. Today, one was entitled "Jobs Are Scarce in the New Economy." You can tell by the headline that they still think there is some variation of a "new economy" theme, because the n and e are capitalized. The point is, there are numerous stories about how much more difficult it is to get jobs, about the change in psychology, about the erosion of workers' confidence. Granted, the terrorist attack has mattered disproportionately to New York, the travel industry, etc., but the problems we are facing financially and economically are a function of the mania's demise, not the events of September 11.
Ka-Bull-Ish While on the subject of this big geopolitical problem, let me say that I, for one, am quite bullish about our prospects for putting terrorism in its place. Whether that takes a year, less time or more time, I don't know. But I have complete confidence that we will win this battle. That said, let me repeat again, the problems with the stock market and the economy were pre-existing.
Surface-To-Air Bubbles Remarkably, the level of confidence that people have in the same individuals who got us into this financial mess remains intact. In a poll done by Investor's Business Daily, it was reported that "American bullishness on the economy hit a new high for the year in early October, despite the September 11 terrorist attack. Consumers were cheered by the quick response of the government to the tragedy." For those who didn't see the story, this confidence measures 57.6, up from 52.1 in September and 52.4 in April. The previous lows were of course also low points for the stock market. Also, Ed Hyman's survey of institutional equity managers shows bullishness to be at near record levels. I find it interesting that so many people have complete confidence in the government regarding the financial markets and the economy. Whatever happened to the old joke, "I'm from the government, I'm here to help you"? That used to make people laugh. For government to wage a war and win is one thing, but for it to know what to do in the economy and the stock market is something completely different.
Sliced, Smoked Spiel So, I hope this long-winded spiel helps clarify my view on the situation. That does not mean we can't have rallies along the way, and that does not mean the rallies can't be big from time to time. However, stocks are very, very expensive. This notion of undervalued and overvalued is just smoke and mirrors. Any way you slice it, stocks are supremely expensive. They can go up when they're extremely expensive, just as they can go down when they're dirt-cheap. One thing we know is that when stocks are very expensive, the risks are much, much higher.
Tomahawks For Terrorists, Insight For Investors So, right now the battle is between the powers that be -- led by the Fed, which has flooded the system with money and tried to foment speculation again -- and the fact that stocks are ridiculously expensive and economic prospects are not good. I say this not because I want bad things to happen, but because they were predestined to occur once we went down the path of the bubble. People can choose to be prepared or not. In my opinion, forewarned is better.
Will Cohen Please Approach The Bubble This week, Michael Belkin had some fine comments in his piece, which I would like to share with readers of the Rap. Rather than trying to paraphrase them, I am just going to include a large portion of what he had to say, beginning with two quotations: "'We continue to be quite cautious about the near term and especially the fourth quarter. We expect the slowdown in the U.S. economy to continue and last longer than previously expected,' said David Viniar, chief financial officer of Goldman Sachs (Financial Times, September 27). 'Take a stand. Stand up! Time to buy stocks. . . . What should matter most to equity investors is the vigor of the subsequent recovery in 2002 and the long-term U.S. growth trends,' said Abby Joseph Cohen, chief investment strategist of Goldman Sachs (Reuters, October 5). Note the difference in tone and substance of these quotations. Viniar is decidedly cautious about economic conditions and Goldman's prospects for the foreseeable future. The CFO of a public company is accountable for making spurious forecasts that don't pan out. Meanwhile, Cohen is spouting the same old garbage about economic recovery and market undervaluation that has been erroneous for almost two years. No accountability. She even contradicts Goldman's own CFO."
'The Battle To Revive The Bubble' Now for his thoughts on the above: "While U.S. forces are waging war against Taliban and al Qaeda positions in Afghanistan, another battlefront is opening up at home -- the battle to revive the bubble. While we hope U.S. and Allied Forces in the Middle East nail the culprits who planned the cowardly attacks on the World Trade Center, we believe those in the U.S. now equating patriotism with rising equity prices are delusional. Investors should examine the economy and financial markets without biased preconceptions. Two issues to evaluate are (1) the likely course of the economic cycle and corporate profits, and (2) the ratio of aggregate equity prices to profits."
Squish Go The Strategists Next, his commentary on accountability: "Wall Street strategists (Cohen, Galvin, Kerschner, Applegate, etc.) crawled out of the woodwork like cockroaches two weeks ago, proclaiming how cheap stock prices are and how great are the prospects for the market, economy and profits once this 'little recession' passes. Their enthusiasm and shrill proclamations are only matched by their inaccuracy. These jokers have been dead wrong about the market and economy for 18 months. There appears to be no code of ethics or accountability for Wall Street strategists -- anything goes. Forward earnings estimates? Dream them up. Current earnings results don't match your previous forecasts? Raise the future ones further. Recession arrived while you forecast a continued boom? Forecast a recovery next year. Recovery doesn't arrive then? So what, everyone else was wrong, too."
Get Your Bubble Pierced Here Next, he addresses the aforementioned issues that are important to investors: "(1) The U.S. economic cycle is headed lower. Government fiscal expansion and Fed money pumping probably won't materially affect the downturn. Entrepreneurs and corporate executives who took their signals from Greenspan's speculative bubble and new economy productivity blather are now buried in excess capacity. Business conditions are terrible, and many more layoffs and bankruptcies will surface. (2) S&P 500 earnings are coming in about one half the level of consensus forecasts (annualizing at about $26 for fiscal 2001). That puts the S&P 500 at 41 times earnings -- an all-time record. The U.S. equity market is still hopelessly overvalued, and earnings will decline further for the next several quarters. The bubble is gone, and caution is warranted. The current equity market decline probably hasn't yet hit bottom. We look for a deeper collapse prior to year-end before any sustainable bear market rally develops." Amen, Michael! |
