Maybe you should explain the
difference in risk between cash and short?
Larry, thanks for worrying about us, but most of us who've been doing this awhile understand the risk. Actually, at these levels, I think there's much more risk in being long. On that vein, here's an excellent Market Rap by Fleck tonight.
The Market Rap
William A. Fleckenstein
06:00 PM 11|07|2001
grantsinvestor.com
subscribers only
Behold the wretch, the miserable monster that Alan created.
Buckle up, this is going to be a long one. Hopefully I can do an adequate job of covering all the things that need to be discussed today. Overnight, the bloom came off the rose, in part because of Qualcomm's warning, and that created a little pressure in the futures market. We opened down roughly plus or minus 0.50% across the board before shooting straight up. Next, the market backed off and then went up again. All in all, there was a tremendous amount of motion. Using Qualcomm as a barometer of the early-going action, at one point it was down maybe $0.60. Maxim also kind of warned that things were not looking so rosy, though that stock enjoyed a green if ephemeral hue. So, bad news had some trouble sticking, and I think that caused a fair amount of buying/short covering.
Speculating Without A Net At the peak of the early-morning frenzy to buy stocks, the Dow managed to better the 9605 level where it was before September 11, although the averages were not up much percentage-wise. I assume, therefore, the bulls took that to be some sign of a major victory. But they shouldn't, as I have maintained, because the terrorist acts have nothing to do with our real problem. It is rather stunning to me that market psychology is potentially even loonier now than it was at the top, when the Nasdaq was 5000. I say that because even though prices were more absurd, there did not appear to be any flies in the ointment, at least on the surface. One had to have some knowledge of how dangerous bubbles could be in order to see some of the trouble. But now, even though all the problems are everywhere, people still try to play silly games and pretend everything is okay. To me, this psychological disconnect is truly, truly breathtaking.
Cure For Panic Disorder: Slather Your Neighborhood Bull With Fly's Ointment In any case, that was the mood this morning, at least that's how it struck me. I think readers know I have not been overly bearish in the short run (since about the third week in September), as I believed some sort of a rally would commence. I never really expected it to get this maniacal, but here it is. Yesterday and this morning, there was a tremendous amount of panic among short sellers. That said, I think we are probably into the endgame of this rally, although that does not mean it cannot go on for a while still.
Princess Little Rally Small Swoon The morning's little rally was met with a small swoon and then a bigger rally, whose surge had the look of a real scramble. Qualcomm was actually positive in that surge by a couple of dollars. (I don't have any axe to grind with the company. I am just using it as a litmus test of whether bad news matters.) That took us to the highs around midday, with the Nasdaq up just under 2%, and the S&P and the Dow up about 0.50%. From there we kind of fell apart into the close, at which point we saw a small bounce right on the close. The prices that you see in the box scores are about the middle of the day's range.
Last Bull & Testament I don't think there's too much to read into any particular area, other than to say that the bank stock index had a nice bid to it as people were trying to buy the beneficiaries of the upcoming carry trade. Volume was a little heavier than yesterday, so it appears that some churning is under way, indicating that maybe our bear-market rally is nearing exhaustion. On the other hand, the action of Qualcomm and Cisco indicate that maybe things are okay. So the jury is still out in terms of potentially how much longer this can last. But as I have been saying, my gut feeling is that even though it may get violent, and there may be a quick burst to the upside, I have to believe that this rally is on borrowed time.
Away from stocks, fixed income was firm. The metals were fractionally higher. The dollar was down a touch.
Alan, Permission Granted To Drop Shipments Of Cat Food On Florida Turning to the news, there is a lot to discuss. First, let me just make a comment about the Fed's latest rate cut. Does anybody really think the fact that the Fed had to take rates from 6.5% to 2% is actually bullish? The Fed obviously just doesn't get it, which is a point I made yesterday. Today, I would like to share some fine comments from a reader about the Fed's motives and what effect they are actually having: "The Fed is becoming even more dangerous than ever. Not only is it determined to defend the stock market through a vicious variety of fiscal blackmail (eliminating 30-year bonds in order to lower the rate on the long end), the Fed is aiding and abetting an attempt to force the most vulnerable members of this society -- retirees and people on fixed incomes -- to enter these terribly crooked and distorted stock markets. Shame, shame, shame, I say."
Plant A Bubble, Grow A Debacle Continuing the Fed section of the Rap, in today's New York Times, there was an excellent story by Louis Uchitelle called "Fed Reduces Rates a Half Point, Lowest Level Since 1961." (Registration required.) Since before the mania ended, I have been talking about what would happen when the bubble burst, that we would be hit with (for lack of a better term) "post-bubble disorder syndrome," and the Fed's usual medicine wouldn't work. That's what happened in the 1930s, that's what happened in Tokyo, and that's what's happening now. At last, at least a few people are coming to understand this. And now to reprise a quote from the Times' story that does a very good job of describing the bubble's origins: "The problem is that this recession is different than others since World War II. In the past, the Fed has usually brought on recessions by a deliberate campaign to raise interest rates to counteract inflation from too much demand. Once inflation has been tamed, lowering rates has typically revived the economy within a relatively short time. This time, however, business provoked the downturn by sharply cutting back on investment once it became clear that companies had poured too much money into new technology and building capacity to meet a level of demand that failed to materialize. The sell-off in the stock market only added to the alarm."
Down The Breadcrumb Trail In today's Wall Street Journal, there was also a rather fine article by Jacob Schlesinger and Peter Landers called "Is the U.S. Economy at Risk of Emulating Japan's Long Swoon?" (Registration required for a two-week trial.) So, the same organization that capitalized the specious entity "new economy" has finally woken up to the potential problem. As previously stated, it's nice to see that some of these mainstream publications are starting to understand what's really wrong. That said, though I would quarrel with some things in the article, it is basically a very good primer of what happened in Japan and the similarities here at home now.
Only The 22nd Letter Of The Chocolate Alphabet Is Short, Sweet, And V-Shaped In the lead paragraph, the writers ponder, "Could the U.S. be going down the same dismal economic path trod by Japan a decade ago? With each passing week, the similarities increase." Rather than try to go through the lengthy story point by point, I would just like to make one point that they didn't address: Our bubble is bigger than the Japanese bubble. True, the Japanese bubble was financed by debt, and there was a lot of leverage in that system when the market cracked in 1989. However, we have a much bigger-percentage participation in the mania than they did. So, there are points you can make to say that their problem should be worse and points you can make to say that our problem should be worse. They have a large pool of savings, and we have squat. In any case, the big picture is this: There was a bubble in 1929, and at least 10 years of economic damage occurred. There was a bubble in Tokyo and at least 10 years of economic damage occurred. There was a bubble in America again in the late 1990s, and yet people seem to think that the recession is going to be short, sweet and V-shaped. That just doesn't make any sense. So, please read these articles.
Holy Bonsai, Alan! In more up-to-the-minute economic news, a report today by the Meyers Group suggests that new-home sales in California plunged 30% in the recent quarter. The point here is that the housing market in what amounts to about the world's fifth largest economy, i.e., California, is starting to come unstuck. On the subject of housing, this is what the aforementioned Journal article had to say about the possibility of a bubble in that market: "The sharp rise in home prices over the past four years -- nearly 20% nationally, when adjusted for inflation, and more than 60% in hot markets such as Silicon Valley, according to the Office of Federal Housing Enterprise Oversight in Washington -- could turn into a miniature version of Japan's real-estate bubble."
Toshiba Chips Away At Its Payroll Yesterday, Toshiba announced a layoff of 12,000 people "temporarily," this on top of the 19,000 already laid off permanently. Toshiba is worth noting because it's the number-two chipmaker on the planet, right behind Intel. According to a CNN story that was e-mailed to me, a company spokesperson gave these reasons: "Basically, the demand for chips is very weak at the moment. The current situation is very tough for semiconductors." So, I guess this kind of puts a little damper on the idea that we are having a post-September pick-up in chip demand. The debacle that is in store for the stocks of chips and PC-oriented companies is just going to be breathtaking, again.
Start Imagining This brings us to Colin's blunt morning e-mail, which succinctly wraps up what it all means and where we're headed: "Fed funds at 2%. People figure rates this low just have to stimulate the economy. They are wrong. They just can't imagine the alternative -- because it is too awful to imagine. When they realize the monetary and fiscal stimulus will not remedy the economic and financial problems of the U.S., stocks will fall 65%. Soon enough. You can't fault people for hoping that at some point, what worked in the past will work again. You can fault them, however, for not choosing the right analogy for the current context, which is not a standard inventory-correction cyclical slowdown but rather a post-bubble [collapse] disorder. There will be widespread shock when those now thinking they are being clever by buying when there is 'blood in the streets' see the amputation to follow the nosebleed at hand."
Any Day Now Next, I had another interesting e-mail about what a dog XP is: "I have a useless copy of Windows XP. After I installed the XP upgrade, I lost my Internet access. My local ISP uses a Cisco wireless system. After talking with my ISP, they recommended that I 'downgrade' back to my old Windows ME. I'm still waiting for Cisco to get around to updating the driver so that I can reinstall Windows XP."
Richard's Almanac Lastly, for those of you who read Richard Russell, he had a very good description of gold and paper money in his remarks yesterday. For those of you who don't know Richard Russell and don't read his stuff, you should. (Click here to go to the site.) To be involved in the market and not read what Richard Russell has to say on a daily basis is a mistake, in my opinion. He has been writing about the market since the mid-1950s. He, like all of us, is wrong from time to time, but that's not the point. He's just a very sensible fellow to listen to. I particularly liked his discussion about the difference between currency and money: "The paper dollar is a medium of exchange. It's an unsatisfactory measure of value, and it's a total failure as a store of value." He then says, "Gold is not perfect money. One obvious reason is it's too heavy. I can't carry $1,000 worth of gold around in my pocket." (I would say, parenthetically, "Well, if the price got high enough, you sure could.")
You Can Always Paper Your Parrot's Cage With It But the most important thing to remember is that all paper currencies go to zero, always. That we know for sure. He says, "The future isn't knowable, but we do know that the history of all paper money is that it ends up as museum pieces." In any case, I thought it was a good discussion, which also touches on the inflation/deflation issue. That is a subject I get a lot of questions about. I don't know how this is going to end, in inflation or deflation, but in a social democracy with a fiat currency, I know that all roads lead to inflation, recessions and bear markets notwithstanding. So, I think we will see a collapse in asset prices, but I do not believe that we will ever see the dollar appreciate against a basket of goods and services, i.e., deflation. My motto for 20 years has been this: In a social democracy, all roads lead to inflation.
The Conundrum Play As how best to play that, I wish I knew. We have these twin forces of excess capacity and totally worthless dollars butting up against each other, and we have these bear markets in asset prices, and yet the true cost of living continues to go up. People love to cite technology as an example of deflation, but that's just crap. The price of technology always declines. That's the beautiful thing about it. In any case, the issue to try to get your arms around prospectively is: inflation or deflation, which will it be? Right now, I don't think it's knowable how it will all play out, at least by me. I know what my biases are, but we will just have to be alert for clues about when and how to best position ourselves. One thing's for sure. It seems hard to believe that people could go too wrong owning some gold. Maybe it doesn't make you rich, but it won't make you poor from these price levels. |
