pretty darn sharp lewis tonite.. and with a new turn for his inflation case. folks, this is a line of thought worth watching.
Print Version November 20, 2002
Rewind To April Of 2000
Buckle up, this is going to be another long one… Asia was a little higher last night, with Japan bouncing a percent. Europe was off a hair this morning, and the US futures were off a touch ahead of the October new housing data. October housing starts came in a little weaker than expected, but permits, which is what really matters for the future, were a little better than expected. So, the housing data was pretty positive when taken as a whole. The S&Ps didn’t seem to agree though and slid a little on the news. After the jam in futures during the runoff yesterday though, the cash market was still set to open virtually flat. We made a quick stutter step at the open, and then we were off to see the wizard, as the rest of the day was a nonstop meltup. We finally paused for breath in the last hour and had a small slide, but it didn’t last long and a jam into the close sent us out at a new high for the day and right on the very best levels of the session. Volume was chunky (1.5 bil on the NYSE and 1.8 bil on the NASDAQ). Breadth was more than 2 to 1 positive on both exchanges.
Chipmaker ADI reported its fiscal Q4 last night and said that orders had picked up a bit in October over September’s levels and that November was tracking similar to October thus far. The company then proceeded to guide Q1 revenue down to only flat sequentially and earnings down to 16 cents from 17 cents. Huh? So, business is supposedly picking up and yet the company guides down? Anyway, the market was still in a bullish mood, so the company’s encouraging comments about orders were what people focused on. That was all it took launch the stock 7 percent. I guess at 7x sales, people thought it was a steal here maybe? They’ll probably love it even more once it moves above its early November high and “breaks out” on the charts because that’s all that matters during these bear market rallies. That’s just the way it is.
The rest of the semis had on the afterburners as well thanks to some touts coming out of one house that slapped some new and improved price targets on many of the semis and the equips. MXIM, for example, was deemed to now be worth $58 (as opposed to the $36 it closed at yesterday). That was enough to spike MXIM 9 percent and to a new high for the move. Why was the price target now $58? Well, because it’s “the bottom” and that’s a mere 44x the analyst’s 2004 earnings guess. And here I thought MXIM’s 12x sales that it is trading at today was a bit on the high side? Silly me. Over in the equips, TER led the pack with an 18 percent launch to a new high for the move on the back of its tout. The SOX put in another barnburner and rose 8 percent to a marginal new high for the move.
Other than some very slight weakness in some of the PC stocks ahead of HPQ’s earnings tonight, tech was once again pretty much higher across the board. I haven’t had a chance to take a look at what HPQ has said after the close, but it won’t be anything to write home about. Yet, that doesn’t matter. HPQ could say that it doesn’t think IT spending will pick up for another 50 years, and the stock would no doubt open higher tomorrow because somebody would say, “Well, that’s as bad as it can get then! It’s a buy!” We’re at that point now where literally nothing matters. Nobody cares about anything but motion, and it’s getting feverish. We have shorts in a panic, relative performance pressure for long side managers, and the “Soros Trade” being put on by the nuts. It reminds me of early April 2000. No price is too much to pay, and no outlandish story is too silly to believe. It’s a virtual orgy of speculation. My basket of garbage stocks that is made up of single digit midget “junk” was absolutely flying today. For example, PUMA rose 86 percent, INKT 38 percent, AKAM 24 percent, and that’s just a small taste. What does it all mean? Well, it means we’ve apparently gone into a blowoff in tech, and there’s no telling where it ends. But when it does, there’s going to be hell to pay, just like there was when it ended in April of 2000. And it can end at anytime. It seems like a given that the NASDAQ will break out to a new high for the move tomorrow, which will no doubt encourage even more speculation and motion chasing that could go on for who knows how long. But you just don’t know. That’s the trouble with chasing motion in the face of poor fundamentals during these bear market rallies. Stocks act "good" until suddenly they don’t.
Financials were also higher but tame by comparison to tech. The BKX and XBD both rose 3 percent. The derivative king was up 8 percent to a new high for the move. GE rose 4 percent ahead of its analyst meeting tomorrow morning, which will no doubt be greeted with more buying since “all of the bad news is already out.” Subprimes were up a touch here and there (it was much more fun to play in tech). Credit insurers were also a touch higher here and there. FRE and FNM were both up a percent or so.
Retailers were mostly higher although another slide of a percent in HD and a few other scattered retailers had the RTH index off over a percent. The homebuilders were mostly higher by a percent or two on the back of the positive housing data. HOV guided the full year a little higher, but the guidance was still below consensus estimates. However, HOV managed to tack on 2 percent anyway.
Investor’s Intelligence revealed that as of last Friday, newsletter writers had become even more bullish, and this was despite the fact that all the indexes closed that week lower than the previous week. Bulls fell to 49.4 percent from 50.6 percent, but bears fell from 28.1 percent to 24.7 percent, more than making up for the slight drop in bulls to give us a new net high in bullish sentiment for the move and back to the best levels of the year. So, we have net sentiment once again even more bullish than it was at the August peak, which we’re still not back to in any of the indexes including the NASDAQ, and the reading in bears is back to the lowest level of the year and virtually the lowest levels we have seen for the past 5 years. Blowoff-type sentiment? It certainly appears that way to me.
Oil rose 56 cents. The XOI rose a percent, and the OSX rose 5 percent. The CRB rose half a percent and appears to be on the verge of breaking out to a 4-year high (more on this below). Gold opened up a touch in NY, tried to briefly rally, and then spent the rest of the day sliding lower to end down $1.20 to $317.70. The HUI fell a percent.
The US dollar index rose a touch to another new high for the move off its November low. The yen fell a touch. The euro fell over a penny and back to parity once again ahead of tomorrow’s ECB meeting. Treasuries were smacked back to their November lows, as the yield on the 10-yr rose to 4.07%.
I’ve said before that although I thought the bond market was putting in a major top here (due to rising Federal deficits in the future, a falling dollar, etc) but that I thought there was the possibility of one last rally in the bond market as stocks cratered. Unfortunately, it appears that window has passed, and the bond market appears to be setting up for a serious rout that could begin at any time (many of the closed-end muni bond funds have already begun to collapse badly). When you put together the top put in place in the bond market with a CRB set to break out to a multiyear high and the dollar sitting near its lows set to break down to multiyear lows, it appears we have a very inflationary setup in place. And contrary to how I know many bulls will interrupt this, it’s not due to a coming pickup in US demand. It’s due to a depreciation in the dollar.
I’ve touched on this before, but it was always difficult to tell the exact order that things would unfold in. And it’s still pretty cloudy. If the dollar can hold together by some miracle, money will continue to no doubt gyrate back and forth between stocks and bonds, but the CRB’s continued rally seems to suggest that is not going to happen. But one way or another, the current big-picture path that we are on (courtesy of Uncle Al and the Fed) is likely going to lead to a big drop in the dollar, lower stock prices, higher interest rates, higher basic commodity prices, and higher gold prices. That is in fact what occurred all at once in a very violent manner in most of Asia back in 1997 if you’ll recall. During the Asian crisis, commodity prices fell in dollars due to the demand shock brought on by the economic crisis in Asia, but commodity prices actually rose in terms of Asian currencies. Their bond and stock markets fell along with their currencies as the countries were in essence “liquidated.”
As is often the case, the herd has it wrong and is still talking about “deflation,” just as the market is going in the opposite direction and has been for some time, as we have discussed numerous times here before. If the Fed wants to destroy the dollar and create inflation, they can. They’re just not going to be very happy with the results once they do, because it won’t do a damn thing for the economy. Sure, over the long haul a lower dollar will stimulate exports and rebalance the US economy and be beneficial, but it won’t happen overnight. The entire planet is structured to build goods for the US in exchange for paper dollars (which are then reinvested back in our financial markets). It’s a virtual perpetual motion machine while it lasts. You don’t just change that overnight. That’s why bubbles are dangerous. They misallocate capital, just as the tech bubble misallocated capital. The process of getting back to a balanced state takes time, and that intervening period is going involve economic hardship.
But in the meantime, the question is whether stocks will care about a falling dollar and rising interest rates initially, and that I’m just not sure of. Never mind what rising long-term interest rates will do to an economy that is dependent on a consumer that is dependent on refi crack and a housing boom. Let’s even forget that these silly valuation models that bulls are using to justify today’s ludicrous valuations would collapse under the weight of higher long-term interest rates. Stock bulls will see (and have since October) a falling bond market as bullish initially, because in their world you either own stocks or bonds. If one falls then the other must rise because the only reason you don’t own US stocks is due to sluggish economic activity that drives you into bonds, and vice versa. Therefore a rise in long-term interest rates will be (and has been thus far) perceived as bullish by stock hopers. But in reality, it’s far from it.
Foreigners still haven’t sold their US equities (or bonds). And the Fed’s 50 bp cut didn’t exactly give anybody an additional reason to hold dollars. Whenever the US dollar index finally takes out its July low (the dollar vs. the euro, pound, and Swiss franc already has), there is going to be an avalanche of foreign liquidation. And that’s why I’ve been saying that I think the dollar is going to be the catalyst for the next move down in stocks.
But we’ll just have to put all of that in the back of our minds for the moment because the blowoff in stocks continues unabated, and that is all that matters right now. It seems hard to imagine that with bullish sentiment already so high a cratering in the bond and dollar would be perceived as even more bullish, but I don’t put anything past the crackheads buying stocks today. Maybe the dollar can even bounce for a bit more? It’s still difficult to say how exactly everything is going to coalesce, but something has to give… and soon in my opinion.
While I cannot provide personalized investment advice or recommendations, I welcome feedback and observations by subscribers. You can email me at Lance Lewis.
Disclaimer: Lance Lewis periodically publishes columns expressing his personal views regarding particular securities, securities market conditions, and personal and institutional investing in general, as well as related subjects.
Mr. Lewis is the president of Lewis Capital, which manages a hedge fund in Dallas, Texas. This fund regularly buys, sells, or holds securities that are the subject of his columns, or options with respect to those securities, and regularly holds positions in such securities or options as of the date those columns are published. The views and opinions expressed in Mr. Lewis' columns are not intended to constitute a description of the securities bought, sold, or held by the fund. The views and opinions expressed in Mr. Lewis' columns are also not an indication of any intention to buy, sell, or hold any security on behalf of the fund, and investment decisions made on behalf of the fund may change at any time and for any reason. Mr. Lewis' columns are not intended to constitute investment advice or a recommendation to buy, sell, or hold any security.
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