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The Market Rap
William A. Fleckenstein
06:00 PM 11|14|2001
For frightful distortions, skip the fun-house mirrors and proceed directly to the bubble.
Last night, Japan was in no mood to ride the coattails of our party, but the rest of Asia joined in. This morning, "fun" was no four-letter word either in Europe, which was higher, or in our futures, which were going berserk pre-opening. As if they needed further provocation, it came via release of the retail sales number -- up a staggering 7% on a gain of just under 30% in automobile sales -- which struck people as proof positive that the economic turn is at hand, or soon to be at hand, or however you want to say it. I myself find it surprising that people are so thrilled. Because the auto companies have borrowed from sales for next year by offering zero-percent financing, everyone now thinks that things will be great going forward. In any case, the opening was in essence the high of the day. The Nasdaq Composite got to 1920, up about 2%, and the S&P and the Dow were up just under 1% apiece. Then the market traded straight down into negative territory before staging a bit of a bounce. After a couple of hours, the indices were all trading plus or minus a small amount.
Don't Jump, Lou! In a role for which it is so beloved, the Sox was a poster boy for the fair amount of volatility seen in the early going. After having been up almost 3%, Mr. Mighty, Mighty was down a quick couple percent. The catalyst, if there was one, remains unclear. Some could point the finger at KLA-Tencor, which apparently indicated lower guidance at a dead fish conference. But a meeting with potentially greater impact is the one that IBM is holding with analysts after the close. Maybe people are becoming concerned that Big Lou is finally going to step down, which obviously wouldn't be bullish. (Whoever has to command that ship after he leaves is going to be left with one completely and totally hollowed-out company.) In any case, that's the way it looked in the early going, with IBM's stock down a couple of bucks after having been quite a stalwart to the upside.
Bulls Bring Home Bacon In A Small Sack After our mid-morning bounce, we spent the better part of the day flopping and chopping. We had one late-day surge that couldn't quite get back to the highs. Then we had a small sell-off that took us to the prices you see in the box scores. Besides the previously mentioned weakness in IBM, there is nothing too interesting to point out other than that there was some scattered short covering. For instance, Amazon was up over 20%. Volume was again pretty chunky, maybe just a tad better than yesterday. So though today may have looked like a draw, I think we'd have to put a small w in the column for the bulls. That is the category where you will find Sunny Jim of Applied Materials, from whom we will hear tonight. My expectation is that he will envision a future so bright that he will need protective shades, though these should be in ample supply given the consistent rosiness of his predictions. Tomorrow night, we will hear what Dell has to say.
When Golden Muscles Pump And Flex Away from stocks, the dollar was down fractionally against the euro and unchanged against the yen. Fixed income was getting drilled again on the back of stronger economic perceptions, with the 10-year down about five eighths of a buck. Though the metals were quiet overnight, there was a development in gold that I would like to point out. Newmont Mining (NEM) is going to buy Franco-Nevada and Normandy, making it the world's largest gold producer. Of late, there have been a number of acquisitions in the gold industry, and what has now emerged are three juggernauts: AngloGold (AU), Barrick Gold (ABX), and the latest entrant, Newmont. If together they decide to change their hedging policies, this may have some ramifications down the road for the price of gold. I am not saying that they will, but it could happen.
Yellow Bull In Yellow Dog's Clothing Long-time readers know that I have been friendly toward Franco-Nevada and in fact own some of its warrants that expire in November 2003. While I have not owned Newmont in the past, I think that if people own Franco-Nevada, it's worth rolling their shares into Newmont. For whatever my opinion is worth on the subject, I intend to keep my warrants that will be converted into Newmont warrants. A few weeks back, when gold was trading up around $290, I mentioned that I thought there would be a dip that should be bought. I still do, but I don't think we've quite gotten there yet. Maybe I'm being too clever by half, but I still think there will be an opportunity here in the not-too-distant future to buy gold once again. I've received many questions on the subject, so I hope that makes my position clear.
Nonsensical Consensus In his weekend piece, Doug Noland took apart the fallacy that we are in a V-recovery, coming out of a garden-variety recession and bear market. (Here is a link to his Prudent Bear column. prudentbear.com ) I include it herewith because I thought it was very well done: "From the financial networks to my readings, it appears the economic consensus expects a typical recession, of the shallow variety, with recovery coming probably mid-next year. It seems rather silly, and surely unsuitable, to describe the current environment in terms of either 'typical' or 'normal.' Ponder this: October saw the most job losses since May of 1980, while vehicle sales posted their strongest month ever. We will easily set a new record for mortgage credit growth this year, and the U.S. economy is on track for one of the strongest years of sales for both autos and homes. At the same time, a panicked Fed aggressively cuts interest rates to the lowest level since the early 1960s. This environment is categorically atypical."
Mania 101, Lesson One: Bubbles And Black Holes So, as has been the case frequently in the last five years, the market continues to write the news. The stock market does better and people feel good. I remember in the spring of 2000, when people said they were going to look past the valley of weakness, I suggested that we were not looking at some little ditch but rather at a black hole. Well, ladies and gentlemen, we entered the black hole a while ago, but because of the terrorist attack, people took their eye off the ball in terms of the total picture of what we had to contend with. Once we get people more confident about the fact that we will conquer the terrorists -- which we are doing -- then they can turn back to the economy, where they will realize that (a) it hasn't been "fixed" and (b) it won't be "fixed."
Bubbles Disable Wings And Prayers For those of you who believe that the problems began with September 11, you might want to read Frank Lorenzo's editorial in today's Wall Street Journal: "Airlines' Woes Didn't Start on Sept. 11." (Registration required for a two-week trial.) With a long stint in the airline business, he is a man that some people love and a lot hate, but he nonetheless has a pretty good understanding of the business, which is why he sees "providing liquidity as the sole elixir" as the wrong way to bring about long-term financial viability. In any case, he notes that "airline results were in decline for over a year," and that the problem was that "revenues from these unrestricted fares dropped sharply starting in mid-2000, in concert with falling stock markets and bad business conditions." He also points out that the airline industry covered up the exploding costs for employees by raising the price charged to business travelers. Obviously, the stock market, which had been distorted by all the easy liquidity and "dot-com-ism," caused everyone to feel flush, so people were willing to pay those high prices. That stopped with the bursting of the bubble.
The Bubble -- An Equal-Opportunity Destroyer People think first of dot-coms and then sometimes of real estate prices, but every industry was impacted by the insanity that went on in the stock market -- even the airline industry. People should read this up-close-and-personal account to see how something as mundane as the airline business was dramatically impacted by the distortions and overcapacity induced by the bubble. That way, when they hear unknowing pundits on Wall Street conjuring up the reasons for our problems, they'll be able to screen out the noise that masks the source of our troubles: yes, the bubble. |
