Caution: Fed Liquidity Flammable. Don Protective Bubble Gear
By Bill Fleckenstein
06/20/2002 18:38
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Index Close Change
Dow 9431.77 -129.80
S&P 500 1006.29 -13.70
Nasdaq Composite 1464.75 -32.08
Nasdaq 100 1062.45 -35.09
Russell 2000 460.25 -2.67
Semiconductor Index (SOX) 392.22 -19.97
Bank Index 839.78 -17.94
Amex Gold Bugs Index 135.52 +6.89
Dow Transports 2747.36 -7.74
Dow Utilities 277.08 -4.51
NYSE advance-decline -319 -1,896
Nikkei 225 10,612.98 +136.80
10-year Treasury Bond 4.83% +0.10
Deficit of Interest : Overnight, the futures were unable to mount any sort of bounce, and they were weaker preopening. In terms of economic numbers, the trade deficit "beat" the number by a mile, coming in at $35.9 billion, vs. expectations of $32.2 billion. That news was not good for the dollar, although I don't think it had too much bearing on the stock market, because most people don't follow this number closely -- yet.
Surplus of Whispers : The market opened under a little bit of pressure, and then of course we had a rally, which actually saw the S&P up about 0.5%, and the Dow green as well. But after a pretty good selloff, everything was red a couple of hours into the day. (A pall was cast on the tape by rumors, which could not be confirmed in the early going, about a potential terrorist problem in New York, and about the SEC investigating something possibly related to Dell DELL .)
The big indices were down about 0.5%, the Nasdaq was down 1%, led by the SOX, which was down 3%, and the bank stock index joined the party, down 1%. Things were looking better in the housing group, as has been the case lately. This was the only area of green, aside from the metals stocks, which were rebounding nicely on the back of firmer metals prices.
White-Knuckle Sandwich, Hold the Bread : After the initial selloff, the market flopped and chopped, and then had a spike at midday, when the Philadelphia Fed released better-than-expected statistics. That little Roman candle rally was sold down back to the lows. Then we flopped and chopped some more until about two hours before the end of the day, when the market sold off again, to close pretty near its lows, at the prices you see in the box scores.
Late in the day, Dell commented that to the best of its knowledge, the SEC was not investigating Michael Dell, but that stock saw only a small bounce from its lows. Obviously, it was another ugly day. It looks like we are potentially building to capitulation. If we have a big down day in the Dow and the housing stocks, a real rout on big volume, potentially that might signal that we would have discounted the worst for now . Perhaps then there could be a meaningful bounce (that would set up the fall wipeout I have long been expecting). The volatility indices are starting to ratchet up, so we might finally be getting close to a crescendo. However, a puke of that magnitude could encompass a good deal of points. So, while the end of this particular slide could occur in a handful of days, it might be a real white-knuckle event.
Engender Equity : Away from stocks, as previously mentioned, the metals were higher, with gold up $3.40 and silver up $0.03. The dollar was under pressure again, with the euro making yet another new high, trading up to $0.96 and change. It's amazing that so little discussion has been engendered thus far by such a significant move as we have seen. Fixed income gave back all of yesterday's rally. Today gave us an ugly trifecta of stocks, bond, and the dollar all lower. That's something you don't see very often, and it is a very negative development.
Porous Wessel : Turning to the news, I encourage everyone to read an important article in today's Wall Street Journal titled "Why the Bad Guys of the Boardroom Emerged en Masse," by David Wessel. It's pretty worthwhile in the sense that it raises a lot of significant issues, and it also asks many questions. However, I would like to point out the irony of the Journal -- a publication that once capitalized the "n" and the "e" in "new economy" -- beginning a series called "What's Wrong?" Notably, in an article last summer, the author referred to Alan Greenspan as King Alan. Wessel totally misses what's at the root of the problem, which is the bubble created by Greenspan. (More about that in a minute.)
SS Impunity Now Corporate-Boarding : Wessel does note that during the mania, society was most accepting of all the reckless corporate behavior and related sleazy things taking place. During that time, two notorious corporate scoundrels, Al Dunlap from Sunbeam and Walter Forbes from CUC International (that helped blow up Cendant CD ) had basically perpetrated fraud and were walking around free men for the longest time, with no consequences.
The Private Securities Litigation Reform Act of 1995 (often referred to as the "safe harbor" law) let corporate chieftains gun their stock prices and not have to worry about lying, because it eliminated the consequences to this behavior. The public was in an accepting mood, because everything worked to the upside.
Sleaze, on Bended Knees : To the question that Wessel asks, why is so much corporate skullduggery surfacing now?, the answer is that it's a bear market, stocks are going down, things are being uncovered, and people are starting to demand explanations. All this corporate skullduggery is just human nature run amok. It's really not surprising. It happens in all bubbles. Journalists are digging, because that's what is selling. So now we are finding out about all the things that went on that people didn't know about, and didn't want to know about. Many of us speculated that there was a lot of this going on in the mania, but without a subpoena it was impossible to ever know for sure.
Pass/Fail ? Fail : To repeat, the socioeconomic mood of the country was to let all things pass, as long as they ended in higher stock prices. After all, we had a president, whether you liked him or didn't like him, who could say on national TV that it all depends on what the definition of "is" is. Nothing encapsulated the mood of the country better than that. (This isn't a partisan comment.) In any case, people were willing to look the other way as long as they thought they were getting rich in the process. Then, the sins get exposed, and no matter how bad you think things were, you always find out that they were worse than you thought. This always happens in bear markets.
Prix Fixe Crappy Meal : Now, for readers who email me to ask why I blame Greenspan, the quick and dirty is this. Alan Greenspan has conditioned the investing public to believe he's a miracle worker. In all but name, he's a price fixer. And the price he fixes is not just any price, but the fulcrum interest rate of the global dollar economy. Sometimes, of course, he sets the right price -- how could he not? But at critical junctures, he has set the wrong price -- again, how could he not? But his failures haven't been random ones. They've been the failures of a man who seems to believe that there was never a bad bull market and never a necessary bear market.
In the early 1990s, he cut the rate to rehabilitate an ailing economy (and, of course, the sick banks). In 1998, he cut the rate to rehabilitate the financial markets (Long-Term Capital Management had fallen to pieces). In 1999, he cut the rate to forestall the crisis of the computer clocks (which he seemed to have prevented). People couldn't help but notice that, as he cut the rate, the market went up. They loved him for it. And he did not discourage this adulation. Truth to tell, he seemed to like it. By the time the March 2000 peak rolled around, the chairman of the Federal Reserve Board was giving speeches that might have been written by Mary Meeker.
Anatomy of a Keg Party : The reason why we are in this mess had absolutely nothing to do with the minuscule amount of Fed tightening that went on in the year 2000. (Readers can learn more about the specious arguments surrounding this from a column that I wrote last December. Click here and go to the paragraph titled "Earth to Larry: Please Call Home.") The mania simply exhausted itself. Our current problems are the result of profligate monetary creation and zero attempts to try to rein in stock speculation.
Greenspan was so drunk with his own abilities that he believed he could make the market and the economy do anything. He allowed things to go on in a reckless manner, never once learning anything from his previous bailouts, nor ever attempting to curtail speculation. In fact, he did the opposite by making people believe there was a Greenspan "put." This is a subject that requires (and I'll endeavor to do so) more in-depth discussion than what I can give here. I have covered this so many times in the past that I don't want to bore longtime readers, yet I think it's important for newer readers to understand my perspective. In any case, it should be a useful starting point for those unfamiliar with the history of the problem.
Monday Morning Bubble-Backs : I am continually struck by the fact that people who never believed there was a bubble or a mania now say things like "in the mania" or "in the bubble." Then, while finally acknowledging that we had one, they think everything's going to be O.K. shortly. This is not what history suggests about bubbles. Though rare, the consequence of them is long-lived.
Second-Half Epiphany : That is why I continue to say that we are going to be in for a long, painful adjustment -- because we are dealing with the ramifications of the bubble. It's why, again, the second half of this year is going to be so studded with trouble. When people finally begin to realize that the Fed is fallible, and that their faith in Greenspan, which up to this point remains intact, has been horribly misplaced, they will really pull in their horns and run from the equity market. |
