Fleck: Bad data + weak Fed = Buy gold
Bill Fleckenstein
Contrarian Chronicles6/26/2006 12:00 AM ET
Last week, when the Commerce Department released its monthly housing-starts data, it said May starts grew 5% from April. But that didn't jibe with other available data. This illuminates a point I've touched on in previous columns -- the sad reality that government data are nearly useless, misleading at best and just plain wrong at worst.
Government data: Keep back 200 feet
The agency's estimate of 5% housing starts growth made no sense to me, not when 1) virtually all publicly traded homebuilders have discussed the serious weakness in their orders, and 2) the May index of homebuilder confidence -- reported by the National Association of Homebuilders -- registered the lowest reading since January 1990, June 1991 and April 1995.
It is possible that the homebuilders have essentially said: Damn the torpedoes, full-speed ahead! And then continued to start new homes, even as orders drop (which would only make matters worse). On the other hand, the homebuilders might not have adopted that approach (though there is really no way to be sure). In either case, the housing-starts data do not accurately reflect the current condition of the homebuilding business.
Were it not for the fact that government data -- distorted as they are -- matter to those who trade markets that I care about, I would ignore these statistics altogether. So, for folks who are making any decisions based on government data, be forewarned.
The Fed has talked down markets
Turning to the subject of trading generically, I suspect we'll see lots of gyrations heading into the Federal Open Market Committee statement on Tuesday and Wednesday. I have no idea how far the tape may go in any one direction. What I can say, though, is that Fed-jawboning has pretty much worked its magic, because commodities have been smacked, and many markets now appear terrified of the Fed as an entity.
I find those fears to be more than slightly ironic -- given that the Fed is the engine of inflation and that the Fed has only recently awakened (since it started to be almost laughed at by the gold market) to the 5%-plus-or-minus rate of inflation we've been experiencing for a couple of years.
The Fed members' ability to still command credibility (after two bubbles in five years and various other blunders) continues to amaze me. But I suspect that, before this year is out, the Fed's credibility will be in short supply. The little rampage in gold about a month ago was just a taste of what things might look like when the Fed is finally understood to be trapped and not in charge.
ETF heft
Speaking of gold, I was pleasantly surprised to see two market developments:
* The gold ETF (StreetTracks Gold Trust (GLD, news, msgs)) took in more gold as prices plunged (with total ounces held now at a record).
* Although the silver ETF (the iShares Silver Trust (SLV, news, msgs)) saw its ounces drop a bit, they are now just shy of their previous high with silver $4 lower.
What this points out: The un-leveraged "cash-type" buyers are availing themselves of dips in price to get more exposure. Meanwhile, the leveraged futures traders are being forced to sell weakness. I recently beefed up my metals' exposure and will now be at full strength as we head into the upcoming week's data.
I think folks should keep that distinction in mind. Due to leverage, people who trade futures tend to chase strength and sell weakness, while cash buyers tend to do the opposite. That phenomenon is one reason why people who trade futures usually lose money.
Bill Fleckenstein is president of Fleckenstein Capital, which manages a hedge fund based in Seattle. He also writes a daily "Market Rap" column on his Fleckenstein Capital Web site. His investment positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy, sell or hold any security. The views and opinions expressed in Bill Fleckenstein's columns are his own and not necessarily those of CNBC or MSN Money. At the time of publication, Fleckenstein did not own or control shares of securities mentioned in this column.
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