Market Rap: Overpay Now, Repent Later
By Bill Fleckenstein
03/04/2002 17:59
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This marks the inaugural column for William Fleckenstein, the president of Fleckenstein Capital, a Seattle-based hedge fund. Let us know what you think by sending an email to comment@thestreet.com .
Our blistering rally from Friday continued around the globe last night, with Japan the self-anointed torch bearer, up about 6% after its recent rebound of about 15% from the lows. Europe was up a couple percent, plus or minus, across the board, and our futures were up mildly. After a brief stutter-start, the market exploded, such that in a couple of hours the S&P and the Dow were up respectively 1% and 1.5% apiece, and the Nasdaq was up 2%. The real action, however, was in the sub-indices, with the mighty, mighty SOX again the leader, up a quick 5.5%, and the bank stock index up 3% in the same couple of hours. (To put the latter number into perspective, the biotech index was only up 2%.)
Coney Island Cone Heads
It's interesting to note that from Thursday afternoon to a couple of hours into this morning, the SOX had popped 17% -- not bad for about eight hours' worth of work. Now you can see why all the people who run other people's money blindly buy SOX-oriented stocks, because they yield the biggest bang for the buck. They're a barometer for how most of the hot money and speculative money gambles with other people's money, and that is why I continually talk about this particular playground.
Sandbox Ex-Bull
However, in the early going today, it should be noted that on the back of their late-Friday-afternoon preannouncement, Oracle ORCL was sidelined at the sandbox, down about 20% while virtually every other stock in America was green. This is the second time in the last three or four quarters they've pulled this "late-Friday-afternoon" maneuver, so I guess there is some justice in the world.
SOX Plays Tic-Tac-Dough
The first couple of hours saw the bulk of the gains, though the fun did not stop there. After going sideways for a while, the market had a couple of surges and declines but nevertheless finished on the high tick, once again, so the prices you see in the box scores are pretty much the highs of the day. It was just another day reminiscent of mania days, with the Dow and the S&P up a couple percent and the Nasdaq up a little over 3%. And of course, the king of the hill was the SOX, which managed to tack on some more gains in the afternoon, finishing up just about 6%.
Play Now, Pay Later
I don't think there is much to point out about today's action. Suffice to say, there was an unslakable thirst for volatile stocks, and as was the case Friday, stocks where shorts may have been operating were up the most violently. The only real question is how long this party will continue. I don't find it terribly surprising that we are witness to an economic-fantasy reality, though I was caught a little off-guard as to when it erupted. In December, I had thought that there would be a point in time this spring when people would get two pieces of data that they would string together and decide that everything was wonderful. And this appears to be the moment. But, I don't believe that things are wonderful, and I don't think they're going to get wonderful. I think that when this rally ends, whether it's two days from now or two weeks from now, the mood will really turn sour. Butfor the moment, people just want to believe.
Yentl Giant
Away from stocks, as you might imagine, fixed income was taking a hit again, but only mildly, with the 10-year down six ticks. The metals were mixed, with silver up a little bit and gold down a little bit in front of tomorrow's final gold sale by the Bank of England. In currency land, the dollar was down against the euro and the yen, as the yen caught a bid on the back of the fireworks in Japan. On that subject, let's take a minute to reprise some thoughts. As regular readers know, I have been carefully watching the Japanese market as a potential place to get long heading into their fiscal year end on March 31. However, I have been rather disappointed that the rally was engendered by attempts to prohibit short selling, and so I'm less than thrilled with what appears to be the cause of the rally. Whether I'm actually going to do something about buying that market or not remains to be seen.
Zulauf's Zaftig Zeitgeist
Turning to the news, there was a very good article in Sunday's New York Times entitled "A Pessimist Sees a Dark but Profitable Decade." In a terrific encapsulation of our current economic problems, the pessimist in question, Felix Zulauf, articulates my views, and so I'd like to share some of his comments: "There are a number of crosscurrents at play. It is true that globalization has lowered some prices. So we have deflation in tradable manufactured goods. But the local service sector is inflationary. (That is an absolutely brilliant description of the dynamics we have between inflationary and deflationary forces.) And credit creation has grown at an extremely high rate in the last decade and has produced inflation there. That is where we see a huge excess in our system."
Genealogy Of A Boom
Zulauf continues: "The U.S. economic boom was created by a consumer spending boom interlinked with a financial asset boom. The financial asset boom was made possible by an aggressive easing of money, the accounting gimmicks we are beginning to see, and a lot of hype by the investment community. It came from the belief by the central bank that we were in a new age of productivity and innovation.
For instance, when they measured the price of computers, they saw that $1,000 bought a certain amount of computing power in 1998 and twice as much in 1999. But is that computer really half the price? There's a quick little summation of hedonic pricing for those who are not sure how it works. At the end, it all has created the weakest balance sheets in U.S. corporate history. Weaker even than in 1929, and now the boom is over."
Fertile Prelude To A Fall
Ladies and gentlemen, economic celebrations of the last 72 hours not withstanding, that boom is over. Most people do not know how weak the balance sheets in corporate America are, or that the aggregate debt levels in this country areat extreme readings. Of course they were at extreme readings before this recession started, and they are going to pose problems going forward. I don't believe the recession is over. Owing to a combination of factors, we've merely had a little respite from bad economic news. Orders reached a low enough level to enjoy a little bounce. Then, we've benefited from the aforementioned hedonics. Also, seasonal adjustments in all the data have worked their magic because this has been an incredibly warm winter. Going forward, expectations are now being set very high, and the potential for disappointment will only grow, especially as stock prices continue to be completely and totally ridiculous in the aggregate.
Cliff Notes
Along that subject, Jim Grant wrote a tremendous editorial in The New York Times today entitled "Bargains Everywhere but On Wall Street." I strongly urge everyone to read this brilliant discussion of life on Wall Street today, which is so dominated by the muscle of other people's money. What's changed dramatically in the last 20 years is that not too many people actually manage their own money. Now, most of the money is run by "professionals" who are speculating on other people's money, and that creates some very interesting biases. To quote Jim: "To compete successfully, a contestant he means a money manager must run with the market wherever it goes, even over a cliff. ... On Wall Street, simply avoiding loss is not success."
Bound And Gagged In The Keeping Room
He goes on: "As a successful investor once told me, the primary objective of most money managers is not to make money for the client. It is to keep the client." His example of how clueless people have been is to note a comment made last December by Alfred Harrison, the vice chairman of Alliance Capital Management, who last fall owned 43 million shares of Enron : "Nobody really dug into Enron's footnotes." And Jim's follow-up point: "If a 43-million share investment wasn't enough to command the attention of our leading fiduciaries, what would have been?"
I Love You At A Price
Jim, who can be found at www.grantspub.com , articulates what has been a longstanding hobbyhorse of mine -- the thing that's most wrong with the stock market is price. He says it this way: "The mantra that common stocks are the best investment is neither true nor false. Unless modified by three little words -- 'at a price' -- it is meaningless." He then sums up: "And that is a key distinction." As I have stated many times over the last few years, the key to successful investment is the price you pay to get into that investment, and the difference between a great company and a great investment is the price you pay. Jim winds up by saying, "There is one way to succeed on Wall Street. It is, in fact, the way Warren Buffett got rich. Pay low prices for the shares of good businesses. Buy them when the rest of the world wants to sell them. Keep your wits about you. Have the courage of your conviction. Sound easy?" Let me answer that for him. No, it's not, especially in this hyped up, circus-like atmosphere that still exists in the stock market.
Of Sirens & Lemmings
In any case, just because people around you are losing their heads, it doesn't mean you have to. That is a lesson that ought to have been learned from the dot-com craze, as everybody was completely and totally captivated by the Internet. We hear daily cries that this is the bottom, and of course so far that has not been the case. What we have had are many stupendous rallies since the market peaked in the fall of 2000. In fact, in the first year after the market topped out, the Nasdaq had four of its largest two-week gains in history. And in fact, almost all of the largest-percentage rallies ever have occurred since the Nasdaq peaked. So, there are a lot of these seductive-looking rallies that wind up not really going anywhere. They're great for the nimble traders, but people who aren't nimble traders, and most aren't -- are going to get hurt by mistaking motion for value.
Deflation Initiation
In the public-service-announcement department, I would like to pass along news of a free piece of software that I have been using for a while now, called Pop-Up Killer. It's just tremendous. If you go to this site and load it, you will find that navigating the Net will soon become pop-up free. This is the greatest piece of software since the browser. For those of you who hate pop-ups, I encourage you to get this. Now if we could only find a similar piece of software for spam, our lives on line would be much more enjoyable.
Wine-Cellar Tour Departs Tomorrow
Finally, space prevents a proper discussion of T.J. Rogers's whiny editorial on stock options in today's Wall Street Journal . We plan to cover that in some detail tomorrow. |
