I don't normally post complete pieces from paid sites, but fleck tonight is an important read. his source thinks china is preparing to unpeg the yuan, and may be unloading its treasuries by buying gold. if so, this is huge
fleckensteincapital.com
Shhhh! Dead Fish Working
Trichet to Euro: Don't Get Too Uppity
Overnight markets were quiet, though Trichet was on the tape again, jawboning the euro pretty aggressively. He said that recent euro/dollar moves "tend to be brutal," and that "brutal moves [are] not welcome." A handful of others appeared to back his view, as exemplified by the Bloomberg headline: "EU Says Commission Backs Trichet Position on Exchange Rates."
That doesn't jibe with comments from the finance ministers I quoted a couple weeks ago, so perhaps I overplayed my hand a bit in suggesting that the ECB saw the benefits of a higher euro. My hunch is that because of those benefits, they don't mind a high euro. It's just that they don't want the euro to go nuts to the upside, which is why Trichet is trying to put the brakes on it. For a while this morning, he did succeed in denting the euro's rise by 30 to 40 ticks (helped boxscoreby a rather negative reading of the German ZEW index). But it didn't take long for the euro to turn green in New York trading, before closing slightly lower. The point being, he didn't dent it much.
That early roundup of the FX market was the only news I thought worth passing along. As for the equity market, the early action was dull, though beneath the surface, chips were leaking (more about that below) and the homeboys were sizzling for 3% to 4%. So, folks trying to short those stocks continue to see their patience tested.
Booby-Trapped Banks and Homebuilders
Along that line, I'd like to answer a question I often get: Why, given my views, don't I short housing or financial stocks? To help explain that, let me first make a comment about semiconductor stocks. I think any reader of the last year would agree that my analysis of what would happen was actually about as right as you can get. (This is not an attempt to brag, just a statement of fact.) From a profit standpoint, it was only so-so, and only worked as well as it did because I was able to get the timing of when the disappointments might occur approximately correct.
However, with respect to housing, the bursting of the bubble that many of us tend to expect is at this point just a theory, i.e., it has not yet occurred. Similarly, the potential accidents that many of us see for financials remain just a theory, as not much has occurred. Because of all the lunatic operators in the market, when you're short a theory in the absence of a catalyst, it can be very dangerous.
This is why I've been very reticent to short financials or housing. When you can be as successful in analyzing what will happen in semiconductors and not have much to show for it -- compared to taking the pain of being slightly off on your timing in financials/housing -- you can see that short-selling is a tricky, dangerous way to make money.
40 Winks for Wall St.
Back to the action, we traversed both sides of the day's range a couple times, finishing in the middle of that range. A check of the box scores will reveal that the averages in essence went nowhere. The early trends continued all day long, with the Sox slightly weak and housing stocks quite strong.
Tonight we'll hear from Cisco. I think the numbers will turn out to be as expected. It will be interesting to see what their balance sheet looks like, and how wild John Chambers gets with the pom-poms. Then of course, it will be important to see how the market responds to all that hoopla. We'll also get the trade-deficit number, which I expect will probably be pretty ugly. Oh, and the FOMC will raise interest rates 25 basis points and toss around some verbiage. So, tomorrow promises to be volatile, which may explain why today was rather quiet.
Away from stocks, by day's end, the euro was down slightly. The dollar itself was mixed. The precious metals were quite resilient all day, managing to close over 0.5% higher. Oil was down about 4% to $47.37. Fixed income was back to being extremely dull.
In China, the Pitter-Patter of Change Afoot
Returning to the foreign-exchange markets, I'd like to discuss what appears to be occurring in China. A friend who's been my best source on this subject all year long, and has tended to be accurate in his assessment, said that indeed, a fundamental change has occurred in China's approach to the dollar and yuan. The old game plan for the Chinese was to introduce a basket of currencies to peg against, then widen the band, and eventually float the currency. Now it appears that the Chinese may widen the band first, as soon as early 2005. Should this occur, it will be the start of them obviously moving away from the peg. Ultimately, it will reduce their demand for Treasurys and also, as I was saying yesterday, cause similar actions across Asia.
However, the merest hint of China officially heading in this direction is liable to see the market take matters into its own hands -- and attempt to move events along a lot further and a lot faster. The Chinese can control the movement of the dollar vs. the yuan in China. But they may not be able to control the movement in the Treasury market, as folks front-run what they expect to happen next.
There also seem to be many stories about the Chinese beginning to liquidate dollar positions in advance of this eventual change. Whether they have done that or not, I do not know, but I could see why they might. My guess is, if they were to try to extinguish dollar positions, they would do this vis-a-vis something like gold, so as not to put more upward pressure on the yuan. (And, after all, they can only take the euro so far, because as we saw today, Europeans like Trichet are beginning to squawk.) To repeat what I said yesterday, gold doesn't have a central banker out whining about a price increase. In any case, a change does appear afoot in China. Ultimately, that will be dollar- and fixed-income bearish. Said differently, there will be upward pressure on interest rates.
A Dead Fish Gets a PC Epiphany
Lastly, I'd like to turn to the dead-fish department. This morning Richard Gardner, Smith Barney Citigroup's PC analyst, decided to reduce his worldwide PC unit growth in 2006 from 10% to 5%. (For 2005, he had been projecting 7%, and that stays the same.) His main reason: "Growth in any saturated upgrade market behaves like a sine curve around trend line, and corporate markets in the U.S. and Europe are about to exit a six-quarter period of above-trend growth."
Further, he said that the recent deceleration they've seen in corporate PC upgrades is not unique to the corporate market, but in fact is also occurring in the consumer market. His report basically says that it's a saturated market, and therefore PCs are just sold on a replacement basis.
What he didn't cite was that this year will see the end to the depreciation benefits created by the Bush administration over the last couple years to get folks to buy capital equipment, a plan that helped PC sales. All in all, I think he's on the right track. In fact, there's nothing good that's going to happen in the PC market in the next couple years.
The Yeung and the Restless and the Bullish
Meanwhile, what makes his downgrade noteworthy -- other than it's nice to see the dead-fish community at least get the facts right -- is that the semiconductor analyst from his firm, Glen Yeung, thinks it is bullish: "We see the downgrades as neutral to complimentary to our recent semiconductor-stock upgrades."
So, here's a person paid to analyze semiconductors who's concluded that this news is consistent with upgrading semiconductor stocks, when we know we've got a massive inventory problem and we know that the PC/cell-phone markets are saturated, and those two markets are where 65% to 70% of chip sales go. Between that sort of nonsense and charlatans like Mary Meeker recently declaring "the Internet boom is at hand," if I didn't know better, I'd think it was 1999 all over again. But it isn't, and everyone who wants to think it is will soon be in for an expensive lesson.
Positions in stocks mentioned: Short Cisco. Long Cisco puts. |
