The Market Rap
William A. Fleckenstein
07:00 PM 11|21|2001
Excess capacity only looks good on the Thanksgiving table.
[If you missed Fleck on Neil Cavuto this afternoon, try to catch the rerun on Fox News Network at 1am ET]
Overnight, the markets were quiet save for the rustle of our futures fluctuating back and forth. Pre-opening, there was an attempt at a bounce on the back of unemployment claims. This is a ridiculous thing to speculate on, if ever there was one, but that didn't stop anyone from trying. The market opened under a little bit of pressure and was immediately bought. Initially, people were being brave as they tried to buy semiconductor stocks after yesterday's drubbing, even though the news from Analog Devices (ADI) and TriQuint (TQNT) was anything but reassuring, and in fact quite negative. In any case, we ran up into the University of Michigan consumer confidence numbers, which came out slightly better than expected, and then the market was sold. We had a nice little dip, followed by a straight-up jam job that took us to the morning's highs. This was good for maybe a nanosecond before a straight-down swoon dropped the Nasdaq about 1.5% and the S&P about 1%. The Dow hung on a little bit better, only down about 0.5%. So, a couple of hours into the day, that's where we found ourselves.
Don't Buy The Dip. Buy The Dipstick and Baste The Turkey With It After the early-morning action, things got rather quiet. We flopped and chopped for a couple of hours. We had a sell-off to minor new lows in the S&P, followed by a big up move, and then a slide and more flopping and chopping. But the net of it all was that with about half an hour to go, the moves in the averages were pretty well contained to half a percent to a percent. All in all, it was pretty quiet. I won't be seeing the last half hour of the action because I have to leave early for my TV appearance, but however the market closes won't be that germane to what happened. Basically, today was kind of a non-event as people tried to shrug off some bad news and pretend that the dip was to be bought and there would be good news forthcoming. I guess that's what they must have been thinking.
Two, Four, Six, Eight, Who Do We Love To Eviscerate? Away from stocks, the metals were barely moving and were off fractionally. Fixed income, on the other hand, was getting eviscerated once again, with the 10-year down three quarters of a buck. The dollar had decent-sized moves of about 0.5%, up against the euro and the yen.
Confidence Disappears In The TriQuinkling Of An Eye In its conference call last night, Analog Devices lowered guidance for next quarter, only allowing as how it appeared that a bottom might be approaching when pushed, "Gee, wasn't this the bottom?" The company specifically cited industrial-type customers as an area of weakness, and said broadband/infrastructure was not a whole lot better. So, no bottom declaration on its part. And then along came TriQuint, whose CEO opined, "I'm not as confident as I was a month ago." A month ago, with 90% of the orders required to make the quarter in hand, he was quite confident. One month later, and even with 90% of the orders "made" going into the quarter, he feels it necessary to lower the guidance right here and now about this quarter and about next quarter. Interestingly, he said the company had not received a new order in a month, and it does not think any of its customers who make wireless products will be buying any new parts unless things fly off the shelves at Christmastime. For those who haven't been paying close attention, the phone sector was reputed to be the spark of life that the tech sector needed during last quarter's earnings release. Many bottoms were supposedly spotted, and it helped to start the battle cry that things were improving in technology.
Heart Of Darkness These calls are important because they give the first look at an area that was supposed to be doing better, and clearly this is not the case. In fact, if you think about the guidance given on the last group of important tech calls -- Dell, Applied Materials, the two I just mentioned, Qualcomm, and Autodesk -- it's all been worse than I might have anticipated, and I was looking for things not to be good in the first place. So, I think as we head deeper into the quarter, people should expect that we will be getting more bad news, the kind that will be harder and harder to shrug off. This does not mean that people who are filling the pipeline, such as some of the PC guys, might not be able to chirp for a little while, until they find out that nothing is going out of it. But basically, the news should be on the negative side.
Your Currency Appreciating Against The Pumpkin Pie In today's Wall Street Journal, there was an article worth commenting on called "Squeeze Play: As Debate on Deflation Simmers, Auto Makers Live the Experience," by Norihiko Shirouzu and Jon Hilsenrath. (Registration required for a two-week trial.) I agreed with some parts of this very interesting piece, and I disagreed pretty violently with others. It is a rather good example of the confusion surrounding what deflation is, what a recession does, what a bear market does, and all of those things. People's ideas about deflation are a little bit off base, like their ideas about bull markets and bear markets. They've fixated on the 20% rule and they call it a bull market or a bear market. This is nonsense, as we have discussed. To cite declining stock or home prices as evidence of deflation is also nonsense. Deflation is your currency appreciating against a broad basket of goods and services.
The Thug Behind The Pricing Tug The Journal story points out that while we have seen pricing pressure in certain areas, the price of services is rising. The point that I keep making is that we've got declining price pressures as a result of the bubble and cyclical phenomenon, and we've got all of the liquidity being spewed out by the Fed's pushing prices up in other ways. This is illuminated by the following quote: "Meanwhile, the prices for many services automakers buy keep moving up," even as the automakers themselves are facing falling prices. Autos are cyclical. That's what happens in recessions (and bear markets).
Your Currency Appreciating Against The Red Herring But the following quote will show how confused people are, even the authors of the article, when referring to price declines: "To become a real worry, economists say price declines would have to extend to assets that are the underpinnings of family wealth, such as homes and stocks." No, that would not signal deflation. That would signal a bear market/recession. That's what happens in recessions and bear markets. Deflation would be when everything goes down in price against the dollar. That's deflation. Chip prices going down, tech prices going down -- that's not deflation. I think people should try to understand what it really is, instead of throwing around these words without regard for what they really mean.
Hedonic Houdini Kicks The Tires The writers also try to make the point about deflationary booms. There are no such things as deflationary booms. Deflation goes with busts. Booms that don't see rising prices, such as we had, say, in the late 1940s or early 1950s, are a thing of the past since we went off the gold standard. What passes for booms that don't have prices going up is the nonsense we had in the late 1990s, where the actual price increase was held back as we "deflated" the price of everything for the quality improvements. Remember the hedonic price adjustments that we talked about in the mania? A good example of that is the chart in this very article. It shows that the consumer price index for new vehicles in the last five years has dropped about 4% or 5%, when in reality everyone knows that the price of cars in the last five years has gone up a ton. Because you supposedly get more car for less money, they call that a price collapse. That's how the CPI was held in check in the late 1990s, even as the price of everything (except tech) was going up.
Would You Buy A Used Hedonic Price Adjustment From This Man? The wonders of technology are such that prices decline, and as we put more technology in automobiles, we had more features. But, that does not translate into lower prices. You have to pay the high price for a car whether you want to or not. Maybe you don't want all those features but, guess what, you've got them. Greenspan & Company used that and the overstatement that the hedonic pricing adjustments caused in the productivity numbers to pretend that they weren't precipitating the biggest mania of all time. They were, they did, and now we're dealing with it. And that's the real problem.
Pernicious Lineage From The Mayflower Bubble I delve into all of this because it's important to understand that we do not have a garden-variety recession induced by the Fed's restricting credit and slowing down demand. This recession is the result of the bubble and the excess capacity created, the satiation of demand, and the reckless spending. Those forces are going to combine together to give us a vicious recession, and people need to understand that. It means things will be worse longer, and there is not going to be any V-shaped recovery, at least not anytime soon, for whatever my opinion on the subject is worth. |
