Fleck: Speculation Goes Into Reruns
By Bill Fleckenstein
02/05/2003 18:08
Index Close Change
Dow 7985.18 -28.11
S&P 500 843.59 -4.61
Nasdaq Composite 1301.48 -4.67
Nasdaq 100 968.92 -2.81
Russell 2000 366.99 -1.73
Semiconductor Index (SOX) 269.76 +0.03
Bank Index 720.68 -6.56
Amex Gold Bugs Index 143.87 -6.26
Dow Transports 2156.42 +11.04
Dow Utilities 204.35 -2.53
NYSE advance-decline -405 -61
Nikkei 225 8549.85 +64.95
10-year Treasury Bond 4.00% +0.070
Overnight, the world equity markets were rather quiet, and likewise our stock index futures. However, there was some sizzle in the gold market. At one point last night, gold was up $10 to $390 an ounce, though it settled down to up only a couple dollars by the time our equity markets opened. Stocks, meanwhile, opened slightly firm and then sold off in advance of Colin Powell's speech. But amid a war angst that saw most stocks selling off, speculative juices powered the SOX up 2% in the early going.
Stark Conveyance and Stocks in Abeyance : As soon as Colin Powell's forceful speech started, the market got in gear to the upside. But the rally petered out just about when his speech wrapped up, at which time the S&P was up 1%-plus, the Dow was up almost 2%, and the Nasdaq was up 1%, led by the SOX, which was up 3%. But that was it for the day. The market sold off, to make new lows, though it saw a bit of a bounce going into the close that produced the prices you see in the box scores. Just another day when stocks couldn't go up well and they couldn't go down well.
Away from stocks, nearly all the outside markets had been up and down. Most were kind of unchanged as Colin Powell's speech began, except for gold, which was up $4. After the speech, the dollar put in an impressive move against the euro, up about 1%. Fixed income sold off, with the long bond down approximately 1%. The precious metals were walloped, with silver down about 4% and gold down about $3. In after-hours trading, i.e., after gold closed but before the stock market closed, gold dropped a further $6. On the day, gold traded as high as $390 and about as low as $370. So, there was a fair amount of action in that market.
Annaly Affirmative : I'm sure I'll receive emails on this next subject, so let me just frame it, from the outset, in the yes-we-still-like-it department. Longtime readers know that I am a shareholder of Annaly Mortgage NLY . Today that stock was down $1.21, or 7%, after reporting earnings of 60 cents last night. I guess the shares were down because earnings weren't quite what people had hoped they might be. I can't imagine that people would buy this stock and play the game of let's beat the number by a penny.
Obviously, if they made 60 cents, I'm sure the payout will be close to 55 cents, which equates to an annualized $2.20 a share, and a yield of almost 13%.
Now you can't extrapolate one quarter. But I am happy to take the dividend yield that the people at Annaly can produce. Anyone who has watched the stock for a while knows that as a yield vehicle, it does experience an unusual amount of volatility. Anyone who does not own the stock might use whatever weakness develops in the coming days as an opportunity to buy some more.
'Take as Directed' : Turning to the news, a handful of stories in today's Wall Street Journal underscore a theme I have been talking about: how not much has changed on Wall Street or in corporate America. "One Analyst Learns Candor Doesn't Pay" chronicles Christopher McFadden's declining access to executives from Cardinal Health CAH , AmerisourceBergen ABC , and McKesson MCK , after the Goldman drug analyst downgraded the companies' stock.
The writer says, "During conference calls in recent weeks to discuss quarterly earnings ... the companies' executives pointedly didn't take questions from Mr. McFadden." This harkens to the bubble, when conference-call questions were more or less scripted, with only friendly analysts getting to play along.
Another holdover from the mania is the dispensing of bad advice, this time by Jonathan Clements, in a story titled "Bubble? What Bubble? Housing Isn't That Pricey." During the mania, he was notorious for urging people to pour all they could into the stock market. Today he opines: "There's a lot of hot air in the real-estate market. But it seems to be coming from the pundits. I guess he means guys like me. Many home buyers have been unnerved by all the talk of a real-estate bubble. But the reality is, most homes aren't that pricey, and even if they were, it shouldn't necessarily deter you from buying."
Oh Say, Can You Foresee Foreclosure? : As a rationale to go ahead and buy, he then talks about how household income isn't very out of line with home prices. That said, he does refer to the risk "if interest rates climbed sharply, or the economy slipped back into recession." Also, he notes that your down payment could be wiped out if you put only 20% down and property values dropped the same amount. Further, he grants that certain cities have pretty expensive real estate markets. But he suggests that if one were to move to any of those cities, it would be too much of an inconvenience to rent: "Let's be honest. Can you really foresee going to the hassle of renting for two years while you wait for prices to decline?" Well, I guess if the option was losing all your money, renting seems to me like a pretty easy decision to make.
In any case, he goes on to cite the benefits of the tax deduction, and also points to "the forced savings that come from making these monthly mortgage payments." Of course, the forced savings only work if prices rise. Finally, he does sum up with something worthwhile: If you plan on living in your house for less than five years, it may not make sense to own it, because of the cost of buying and selling. I would agree that given the other risks, if you only plan on owning a house for a short period of time, you're asking for trouble, buying into today's crazy prices.
Wall Street Vs. Four Walls : However, despite the bubblelike rise in selected real estate markets, there is an important difference between real estate and stocks. In many parts of the country, supply is not infinite, and in fact is rather finite. Compare this with the bottomless pit of dot.com nonsense and other dubious ideas created by Wall Street during the recent bubble. As supply finally overwhelmed seemingly insatiable demand, the price of many securities declined 90%, plus or minus. In the case of real estate, new supply can be brought on, but supply is not infinite, nor the process nearly as easy. So, even if we have a real estate bubble, prices will not collapse as precipitously as they did in the stock market bubble.
Of Humble Dwelling and Humbled Selling : Of course, if people want to indulge a passion for speculating by turning to their homes rather than stocks, they can still lose all their money. And, judging by a Journal story called, "Lenders Revive Bull-Market Mortgage Strategy," there are plenty of people out there to heighten the risk. The story talks about how prospective homeowners can pledge securities instead of making mortgage payments. During the mania, a lot of people got hurt badly when they used their stock options as mortgage collateral. So, here is yet another example of how things have not changed very much, but in fact just morphed to suit the times. Speculating in stocks continues, enabling people to live beyond their means, even as it exposes them to further risk. Though muted for now, speculative behavior still holds sway, especially in the OPM crowd. But I expect that it will be dramatically reduced, along with stock prices, before the bear market has finally run its course. |
