Fleck: Don't Want to Be Short, Don't Want to Be Long
By Bill Fleckenstein
02/19/2003 17:06
Index Close Change
Dow 8000.60 -40.55
S&P 500 845.13 -6.04
Nasdaq Composite 1334.32 -12.22
Nasdaq 100 1005.88 -9.03
Russell 2000 360.28 -4.25
Semiconductor Index (SOX) 288.99 -2.64
Bank Index 722.95 -4.06
Amex Gold Bugs Index 136.64 +2.86
Dow Transports 2105.39 -35.26
Dow Utilities 196.77 -1.52
NYSE advance-decline -759 -2,124
Nikkei 225 8678.44 -14.53
10-year Treasury Bond 3.88% -0.067
Overnight, the foreign markets snoozed and our stock-index futures shed ever so slightly. There was some excitement preopening when the economic number du jour, namely housing starts, printed better than expected, and when a dead fish upped his opinion of Intel INTC , Xilinx XLNX , and Texas Instruments TXN . (More about that below.) But the initial excitement was quickly sold, and the market proceeded to leak about 1% in the first couple hours, though the Dow was holding up the best, down about half that. There was no particular theme that I could detect in the early going.
After the early-morning weakness, the market flopped around for a while, and then we had another sinking spell later in the day. That was followed by a brisk rally into the close, which brought us back to about where we were in the first couple of hours. People can check the box scores to see which index did what, but all in all, the day was kind of a nonevent, with little worth commenting on, other than that the dead-fish tout in the morning didn't do much good.
Away from stocks, fixed income was firmer. The dollar was weaker against the yen and the euro. The metals popped, with silver and gold up roughly 2%.
Price-Target Practice Makes Imperfect : Turning to the dead-fish community, I would like to share an email that I received this morning from a knowledgeable reader. In chronicling the poor track record of the aforementioned dead fish, he makes a very good point: Why would anybody listen to any of these people who have been so consistently wrong, who have demonstrated over and over that they don't have a clue about the business they follow? By and large, I see that happening in technology because I follow it more closely than other areas. This is not to say, as I've noted before, that there aren't any good analysts, generically. It just seems that they are pretty few and far between (especially in technology).
In any case, our reader writes: "Morgan Stanley has placed target prices on XLNX five times since April 24, 2000, prior to today. I looked at the closing stock price at the time of each date they issued a new target price. Four of those times, their target was too high by an average of 64%, and one time it was 2% too low. Overall, their target price averaged too high by 50%. They never had a 'sell' in the 10 recommendations since the stock peaked in June 2000, even though it has lost 78% of its value. Also during that period, their target price dropped from $120 to $30 today. So, why would any rational person consider their $30 stock price as an obtainable target? Based solely on Morgan Stanley's target price history, one should divide their current target price in half and use that quotient as the target. But perhaps they are right this time."
Navigating the Short Shoals : As I touched on yesterday, this behavior by the dead-fish community tends to occur when we are in the "no-news" period during the middle of the quarter. This has been one of my reasons for expecting a rally, and more precisely, for not wanting to be short. Some people ask, if I don't want to be short, why don't I want to get long and try to catch the rally? To that I would answer, even if I think that the next move is up, I think that the overall trend is down. I believe that a lot of people sold stocks for the wrong reason, i.e., their fear of the impending war. And as I have said before, people will buy them for the wrong reason, out of some belief that the economy is getting better, or that the stock market is now destined to go higher -- neither of which I expect.
But more importantly, what keeps me from buying stocks is my conviction that prices continue to be too high. I am not going to make an investment that I believe is priced wrong, even if I think the next move is up, because I won't have the courage of my conviction. If I were to ignore this just for the sake of going long, I would be whipsawed when the inevitable shakeout came. That said, for the time being, I believe that the path of least resistance is up, and it will be very difficult to make money on the short side. However, I expect that down the road, there will be a wonderful opportunity to re-establish shorts, and for people who still own more stocks than they would like to sell them at better prices.
'Fan & Fred' (Rated 'R' for 'Risk') : Lastly, on the editorial page of today's Wall Street Journal , there is a must-read dissection of Fannie Mae FNM and Freddie Mac FRE called "Fan and Fred Get the Business." Whether or not you own these companies, you need to understand that they are a gargantuan part of our country's financial system, and that their activities can affect the entire economy. For anyone who might not have access to the editorial, I would like to share a couple of quotes:
"Fan and Fred's debt is everywhere -- held by U.S. banks, big and small, by foreign banks, by institutional investors like pension funds, and by individuals. The editorial quantifies that mountain of leverage as "somewhere between 29 to 1 and 31 to 1 -- far higher than the 12.5 to 1 required maximum by regulators for banks. Trouble at Fan and Fred could provoke a financial contagion that would spread rather quickly.
Moreover, Fan and Fred are among the largest users of derivative contracts that are concentrated among a handful of counterparties who are, of course, both vulnerable to systemic risk and purveyors of it." (One of my big complaints about financial institutions in general is that they want to run all geared up and use derivatives. I suppose that would be OK if we had real accounting and real disclosure, instead of the "grade yourself" system that presently exists.)
In any case, that potentially lethal combination of variables is the problem. I don't know for certain if something bad will emerge, but it's important for people to keep this complicated enigma on their radar screens. |
