Danger and High Prices vs. Danger and Low Prices
By Bill Fleckenstein
11/08/2002 17:50
Little Pig, Little Pig, Let Us Come In: Last night the foreign markets continued their inability to rally, with Tokyo the biggest loser, down 2.5%. But by the time the world's biggest casino opened here this morning, people were determined to get back into rally gear. We had a straight-up blast right into the U.N. Security Council vote, but as soon as the results were released (a clean sweep of 15 to 0), the market traded right back down to where it opened, just slightly above unchanged.
Shilly-Shally vs. Have a Rally: After the market took out its opening range, we made a beeline to the lows of the day, which were seen just before midday. We then spent the rest of the day flopping and chopping off those midday lows. But the market never got very far and in fact closed right back on what were ultimately the lows for the day. As you can see from the box scores, there was nothing too earthshaking to report, other than to say that today it was biotech's turn in the barrel on the downside, and that housing stocks continued to be under pressure.
Disconnect, From the Observation Deck: I would just point out that while my focus is on technology, I am struck by the fact that stocks elsewhere in corporate America -- be it retailing, finance, or others dubbed "blue-chips" -- just do not seem to want to hunt on the upside. Meanwhile, the OPM crowd continues to chase the companies that are dependent on corporate America or the consumer for their livelihood, because they think that's where they'll find the performance. Thus, the disconnect I have been talking about only becomes more dramatic.
Paying Up for Peril: That brings me to a comment about the subject of danger vs. price. Many times in markets, you find yourself in a situation where there is a lot of danger, but usually that danger is accompanied by lower prices. For instance, these days, people are all concerned about Japan, but the prices in Japan are in some areas downright cheap, even if the entire index isn't. Whereas right now, the danger we face commands a high price.
Index Close Change
Dow 8537.13 -49.11
S&P 500 894.74 -7.91
Nasdaq Composite 1359.29 -17.42
Nasdaq 100 1008.46 -17.33
Russell 2000 378.99 -4.16
Semiconductor Index (SOX) 299.91 -2.70
Bank Index 742.38 -4.97
Amex Gold Bugs Index 121.74 -0.94
Dow Transports 2346.88 -3.74
Dow Utilities 195.87 -6.41
NYSE advance-decline -600 +396
Nikkei 225 8690.77 -229.67
10-year Treasury Bond 3.85% -0.030
There is a lot of lip service to deflation, but the reality is that we have an economy that's been unresponsive to 11 rate cuts and that is, in my view, weighed down by the aftermath of the bubble. Meantime, we might be seeing the dollar start to come unstuck. This scenario is risky enough, even with a cushion of low valuations. But to enter a period of danger and pay high valuations is the height of lunacy.
Potomac-Sired Pariah: Away from stocks, gold was up a couple of bucks before closing up 80 cents and ounce. Silver was down 2 cents. Fixed income was fractionally higher, with the long bond now up nearly 4% in three days. The dollar was soundly drubbed once more, both against the yen and the euro. (If this is finally the start of the dollar's demise, big complications are in store for the central planners at the Fed .) Oil, meanwhile, continues to be the dog that doesn't bark. It's now down about $1.50 from where it was when the Republican victory made it pretty clear we'd be going after Iraq soon. Today, oil only rallied 40 cents a barrel on the Security Council vote.
What's-Cooking Oil: I don't know whether people have already placed their speculative bets about what war with Iraq would mean for oil. Maybe they've concluded that now, with the Republicans in complete control of the U.S. political system, and with the Security Council having voted unanimously, Hussein might come to his senses and let the inspectors back in, and therefore, we might not have a war. In any case, I continue to think that the response by the oil market is telling us something.
Subprime Prophesying: Turning to the news, there are a couple of interesting nuggets worth discussing. Apropos of my comments yesterday about how companies focus on their stock prices, Floyd Norris had an interesting expose on Household International HI in today's New York Times , titled "Did Bad Accounting Encourage This Fiasco?" Basically, he chronicles the company's attempt to get around its own capital ratio so as to buy more stock, a maneuver that wound up picking shareholders' pockets. My question is, would Household International have been doing this if it were privately held? Of course not. This is just one example of many, in which focusing on its stock price causes a company to make bad decisions. If we started compiling a list of such offenders, it would be enormous.
Hot Senior-Citizen Cells: Also in today's Times is an interesting story called "NTT DoCoMo Reports a Slight Profit." For everyone out there who is waiting for the "third generation" to drive the wireless market, the lesson here is, be patient. As the writer points out: "Subscriptions for the new phones are more than six months behind forecasts. ? The company has trimmed the amount it plans to invest in the service and will continue to rely on upgrading its older second-generation handsets." So, this is an example of a new-technology product that was just a bridge too far. I'm sure it will be incorporated someday, but until then, we'll just have to sit back and watch a whole lot of arm-waving about how it's going to be the next leg of the wireless market. From this juncture, that looks pretty unlikely to happen anytime soon.
Miss (Estimates) November: Shifting to speculation, something similar could be said of DRAM prices, which are starting to sag. As I noted a few weeks ago, they would start to weaken when the calendar turned to mid-November and Micron was near the end of its quarter. The previous rally was just a fiddle, which we see all the time. So, for all of you who follow the DRAM market as an indicator of what comes next, or who follow Micron as a speculative barometer, as I do, the slide is worth paying attention to. I don't happen to be short Micron at the moment, but I think it's worth knowing that this little fiddle appears to have run its course.
Of Debt and the Will to Bet: Finally, I would just point out that today, our casino welcomed the latest entrant in speculation: single-stock futures. For the life of me, I cannot understand why the world needs another speculative plaything that increases leverage. But nevertheless, single-stock futures started on a handful of large-cap issues, and the preponderance of them, surprise, surprise, were techs. As the rule now stands, futures operators can short with no uptick, but equity traders need one. How does that make any sense? It will be interesting to see how long before the equity people are forced to change that rule. |
