Fleck: Wall Street Journal -- or Daily Racing Form?
By Bill Fleckenstein
03/11/2003 18:30
Hot Mulled Sake: In overnight news, Japan was down another 2.5%, cracking the 8,000 barrier. The Nikkei now stands at 7,852, in stark contrast to its near 39,000 level at the end of 1989. This descent, as I have noted in the past, is a lesson in how low markets can drop and how long they can continue dropping. That said, with the approach of Japan's fiscal year-end on March 30, we may perhaps find the opportunity to invest in Japan, or to make a trade. I have been mulling this idea for a couple of years, though as regular readers know, I have not yet pulled the trigger. (Last year when I thought about it, Japan briefly traded up to 12,000, following a bounce from just under the 10,000 level.) Meantime, please do not email me about my plans. If I do make an investment in Japan, I will be sure and state this clearly in the Rap.
Turning to our market, the stock index futures opened up somewhat flat and immediately bolted higher. That rally was then sold, and we were back to sort of unchanged a couple of hours into the day. As the day wore on, the market made one attempt at a rally, but that totally fell apart in the last couple of hours, and we closed on the lows. As happened yesterday, financials were the weak spot, and tech was the place to be, witness the fact that the bank stock index was down almost 2% and the SOX was flat. Today was a continuation of the same financial train wreck that has been occurring over the last few weeks. It's hard to see how we can have any kind of meaningful rally until we get some more clarification on when the war will begin.
18-Karat Clarity: Away from stocks, fixed income was slightly lower, as was the dollar, but the metals saw some interesting action. At one point in the early going, gold was down about $6, and silver was down about 4 cents. Though silver closed 1 cent higher, gold closed $4 lower. I am not sure if this is the perfect moment in time, but today I bought gold and silver futures as a trade/investment, and I will buy more if prices go lower. I did not add to my positions in Newmont Mining NEM or Pan American Silver PAAS but still plan on doing so.
I'd just like to add that an important consideration in making an investment, besides the price, is how you pace your buying. Generally, on the first go-round, it's not a good idea to buy the entire amount you want, and I often plan in terms of three or four purchases. Sometimes you get them all, sometimes you don't. In any case, given all the geopolitical noise and motion, this trade may be briefer than usual, though, on the other hand, I may sit on the position for some time. I just have to see how things go.
Index Close Change
Dow 7524.06 -44.12
S&P 500 800.72 -6.76
Nasdaq Composite 1271.47 -6.90
Nasdaq 100 958.82 -5.47
Russell 2000 346.88 -1.13
Semiconductor Index (SOX) 278.94 -0.14
Bank Index 675.79 -10.99
Amex Gold Bugs Index 116.65 -2.88
Dow Transports 1941.97 -40.59
Dow Utilities 195.82 -0.44
NYSE advance-decline -704 -954
Nikkei 225 7862.43 -179.83
10-year Treasury Bond 3.59% -0.012
Dow Jones Ups and Downs: Turning to the news, The Wall Street Journal continued in its split-screen ways, printing an excellent story on the problems in tech land on its front page, and a completely clueless apology for derivatives on its editorial page. "For Clues to Why Tech Is Still Down, See Mr. Kheradpir" illuminates how tough things are out there, via extensive comments from Shaygan Kheradpir, the chief information officer of Verizon VZ . But the story neglects to mention the cause: massive excess capacity created by the bubble, which businesses are still trying to work their way through. Of course, this was confirmed by a Rap reader who is in charge of IT spending at a major Fortune 100 company, whose observations I shared last Nov. 25 and Dec. 3 .
In any case, the Journal story notes the impact of Verizon's cuts on the IT food chain: "Mr. Kheradpir's attitude is bad news for International Business Machines Corp. IBM , Hewlett-Packard HPQ , Sun Microsystems Corp. SUNW and other big technology sellers. Unfortunately for them, it is a widespread attitude not expected to change soon." Moreover, the story cites how the price transparency afforded by eBay EBAY -- to which busted dot-coms turned to sell their hardware -- has squeezed tech suppliers further. Commenting on all the excess capacity now being auctioned off, Mr. Kheradpir says, "It's as if you now have a stock market for servers."
Programmable Gladiators: From there, the story offers another interesting nugget about the competitive atmosphere: As Verizon's licenses with various vendors expire, Mr. Kheradpir plays one off against the other in a cost-cutting campaign called "Offware" -- in effect, who can lowball the other out of the running for Verizon's business. Similarly, he points to programmers working in India, who have saved the company money even as they "test code and fix bugs while we sleep."
While not exclusive to technology, these problems are most severe there, because technology is where the greatest excess was seen. This makes it particularly odd that tech stocks, which have the worst business prospects, are doing the best right now (in the stock market), while more mundane names have inspired such fear and loathing. Which, of course, just goes to show the denial and speculation in the tape, though we continue to sink.
Windfall from an Ill Wind: Now for some thoughts on the Journal editorial, "Derivatives Thinking." In essence, this embarrassing effort says that Warren Buffett's got it all wrong and that derivatives are wonderful because Alan Greenspan says so: "According to the ultimate nanny, Fed Chairman Alan Greenspan, derivatives have strengthened global financial markets by reducing the emphasis is mine the possibility of failure at one or more major institutions." And just how is this little feat carried off? "These instruments are little miracles of financial engineering, permitting investors to take a position, or make a bet the emphasis is mine , without having to actually hold the physical asset." As an example, the editorial cites "weather derivatives, which allow investors to make a bet the emphasis is mine about future weather conditions, take their value from a temperature index, for example."
So, if derivatives are this good, then off-track betting and lotteries and casinos must also be wonders of modern finance, and America is indebted to them for its success. The sheer lunacy of this shows that uninformed denial is alive and well and packaged as truth on the editorial page of a financial daily that seems not to have been embarrassed to capitalize the "n" and "e" in "new economy." I firmly believe that we will need to see sanity restored and an end to all the incessant bottom-calling before this bear market can end. It should be unequivocally clear that we had the biggest bubble in history, and that we are now experiencing a bust commensurate with that bubble. At the end of a bearish cycle, all the bad news (and then some) has to be discounted, just as at the end of the mania, all the good news (and then some, to the nth power) was discounted.
Beneath Contempt Breeds the Bull: Somewhere down the road, we should expect stocks to become cheap. But also, we should expect people like myself, Jim Grant, Fred Hickey and Marc Faber -- who were bearish because of the bubble and have remained steadfastly bearish because of what we thought the bubble meant -- to become bullish, to be laughed at for being bullish, and to be beaten up with our own arguments. That's how it normally works. A mania like we had is not going to end with expensive stock prices and people still being in denial and buying tech stocks and catching the next rally and all that sort of thing. A mania like we had is not going to end with The Wall Street Journal defending Alan Greenspan over Warren Buffett on the subject of derivatives. (I guess time will tell whether Buffett is getting it right or Greenspan and The Wall Street Journal are getting it right. But if anybody wants to make any bets , please see me first.)
However, though conditions favorable for an end to our bear market are absent, that doesn't mean we can't have an epic rally around the war, as I stated the other day. But people should not confuse today's price level, psychology, or anything like that with what things look like at a real bottom. As I said at the beginning of the Rap, take a look at Tokyo if you want to get some idea of what can occur. |
