Excellent article by Fleck today. It's worth feeding Cramer just to read him
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Declining Dollar Defense: Gold, Silver and Euros
By Bill Fleckenstein
Special to TheStreet.com
05/17/2002 06:16 PM EDT
Deaf to the Deficit: Overnight, our futures markets were higher, basking in the glow of Dell's (DELL:Nasdaq - news - commentary - research - analysis) supposed wonderful news. This morning, they hardly blinked when our monthly mammoth trade deficit printed at "only" $31.6 billion, vs. fears of $32.5 billion. But the complacency shown in that response will change going forward, as people start to understand the implications of the problem. (More about that below.) In any case, the little party that we saw preopening extended to casino time, when the University of Michigan also beat the number (96 vs. 93). But no sooner had the survey been released than the tape started to slide, which again underscores what we have been pointing out for the last couple of days: Good news doesn't seem to matter, but neither does bad news (though I expect it will in the not-too-distant future).
Book-to-Bill Matters Nil: That has certainly been the case in semiconductor land, where in the early going today, those stocks were never really able to turn green, despite last night's release of an improved book-to-bill ratio from the Semiconductor Equipment Association. To look at a few of the darlings, Applied Materials (AMAT:Nasdaq - news - commentary - research - analysis) was unable to rally net/net since it reported results on Tuesday. And this morning, Dell never really went up very well after making its number, mouthing that things are going to be getting better, and raising expectations for next quarter. Nor did Analog Devices (ADI:NYSE - news - commentary - research - analysis), another preposterously priced stock, even though it reported a good quarter and gave favorable guidance.
Stocks' Slumber Party: After the early morning selloff, the market kind of flopped around for a few hours until, with about an hour and a half to go, we started a steady march higher that in essence took us to the highs of the day in the S&P and the Dow, whereas basically back to the opening levels in the Nasdaq. As you can see from the box scores, all the gains were again fractional in nature. Tech stocks were rather subdued; the SOX was slightly red for the day. All in all, the last two days were a very quiet end to what started as a tumultuous week. That's not to say we didn't have a fair amount of volatility. But it is interesting that the past couple of days have been rather subdued, in terms of net-percentage change on the day (especially in light of the fact that today was an option expiration). I didn't see anything really too earth-shaking to note.
Not-Cheap Sheepskin: Yesterday, when I mentioned that WorldCom (WCOM:Nasdaq - news - commentary - research - analysis) was delisted from the S&P 500, I failed to note that it was replaced by Apollo Group (APOL:Nasdaq - news - commentary - research - analysis). In the indicator-of-the-times department, a regular reader who called this to my attention opined: "That a major telecom company is replaced by a night school 'degree mill' is too funny for words. I don't know which company is worse." He went on to note that Apollo also bought the College for Financial Planning a few years ago, which hands out the CFP designations that all financial planners must have. In any case, what I think this illustrates is how absurd an index the S&P 500 has become, especially when one considers that whether one likes the idea of Apollo or not, it sells at about eight times revenues and about 48 times next year's estimates. The S&P 500 is certainly not an index that I'd want any of my money tied to for the next few years.
De-Value Investing: Away from stocks, this is where the real action is taking place. Most of the time, nothing too earth-shaking is coalescing, but now seems to be the exception to the rule, and that's why it's important to redirect our focus here. As frequently described in the Rap, I have long been of the opinion that at some point, the dollar was going to come under a great deal of pressure, and this reality doesn't seem to be debatable right now.
At the same time, the metals are going up, which in my opinion corroborates the view that we have a currency problem. I don't believe gold is rising because people fear inflation, although I do believe that inflation is always higher than the government reports. Parenthetically, I would say that long term, we will have an inflation problem in this country, but first we're going to have a problem with asset prices getting hammered.
Orion's Belt Corrals Bulls: In any case, the precious metals and other currencies are signaling, I believe, that the trend has changed for the dollar. When you couple this with the weak fixed-income market, you now have a very lethal mix that is a recipe for disaster in stock land. Those three stars, if you will, don't line up very often, but when they do, it is one of the things that could definitely precipitate a stock market crash. They converged in 1987, as well in 1998 and a few other times, though the meeting was very transitory. This, to me, feels like something far bigger and far more powerful.
As the dollar comes under pressure, the Fed could be forced to stabilize it by raising rates at a point in time when the economy is already weak. Obviously, that would spell real trouble. Now, I don't happen to think this particular group of lunatics at the Fed would take such action very quickly, which means the problem will only deepen and therefore become that much more intractable when they finally try to solve it.
Steel Shackles Raise Hackles: But make no mistake about it -- this is a very ominous situation that is brewing, and people should focus on things that can exacerbate the situation, not the least of which is the minor trade skirmish now under way. We took note that when the steel tariffs were first imposed in March, and we talked about some of the tit-for-tat taking place around the world. The recriminations are something that we also have to monitor, because if they intensify (and I don't know if they will), it may accelerate problems we already have.
That is suggested by a quote from D.C. trade lawyer Russell Smith, in a page-one story in today's Wall Street Journal called "Japan Joins Forces with the EU, Escalating Steel Spat with the U.S." Smith says, "This is the first shot in a real trade war. The risk is that the U.S. will say, 'You acted unilaterally,' and look to return fire." Yes, if that turns out to be the case, things will indeed get very complicated.
I also want to quote from a story that passed on Bloomberg today, because it's a graphic example of how protectionism is a de facto tax on steel consumers: "U.S. Steel Corp. plans to raise the price of its main steel product by 15% because of protection from imports and less competition from U.S. rivals, American Metal Market reported, citing unidentified sources."
Tune Out Opportunism: Lastly, I would like to point out that as people recognize the dollar's problem, there will soon be no shortage of strategists saying, "OK, buy this group of stocks and that group of stocks to participate in dollar weakness." While a weak dollar does help certain industries compete better on price, it won't be enough to offset the compression that's coming in P/E ratios. So, don't fall for that simple analysis. Perhaps if stocks were dirt cheap, it might work, but with multiples where they are, this strategy won't work.
Flash-in-the-Pan Protectionism: The only way to be safe and protect yourself from a declining dollar is to own the euro, or gold and silver bullion, or gold and silver equities. The other "plays" will be just that, merely momentary speculations. And to repeat what I have frequently stated in these pages, I believe that the second half of the year will prove to be very treacherous. During that time, I think it's going to be virtually impossible for anyone to make money being long stocks, unless one is extraordinarily selective. |
