Bill Fleckenstein

As many readers no doubt know by now, Hewlett-Packard (HPQ) recently reported a massive write-off on its acquisition of Autonomy. I bring that up as a way to talk about what has happened to a great many of the tech leaders that flew so high in the stock mania that ended in March of 2000.

 

A lot of the pretend stocks of the dot-com variety have, of course, evaporated, but plenty of "real" companies also have declined in the 12-plus years since the peak of that insanity, HP being just one example. (Its price is now back to where it was in 1995.)

 

What often happens to good companies that get really expensive is that when valuations start to decline (usually due to some fundamental deterioration), people are attracted to them because of their "value." We have seen a bit of that with Apple (AAPL) and will probably see more prospectively (more about Apple below). In any case, Hewlett-Packard, Dell (DELL), Intel (INTC) and Microsoft (MSFT) are all examples of that, but there are hundreds more. (Microsoft publishes MSN Money.)

 

Now that the election is past, I am looking for the market, the media, and (if we're lucky) even politicians to focus on different -- if not more important -- things.

 

More likely, however, is that the news will now become dominated by the political posturing, bickering, leaks, brokering of agreements, accusations and brinkmanship surrounding the upcoming automatic tax hikes and spending cuts otherwise -- and inaccurately -- known as the fiscal cliff.

 

The logrolling should certainly get interesting. But it is nearly impossible to see how the twists and turns in this process will work out, other than to say it will probably result in a last-minute kick of the proverbial can down the road, with most of the tax hikes sticking but few of the recommended spending cuts taking effect.

 

Though President Barack Obama had been reported leading in virtually all the polls for some time, it would seem that the stock market had not been handicapping him as the winner, given that the market gapped aggressively lower on Wednesday in the wake of his victory. In fact, it took less than two hours for the market to shed just under 3%.

 

For those folks who had correctly expected this election outcome, you might have been scratching your head at how the market managed to hold together leading up to an election that was likely to result in dividend and capital-gains tax rate hikes, in addition to the fiscal cliff.

 

Of course, we don't know for sure that we will go over the cliff, as the can may get kicked down the road. But certainly from an economic perspective, there is not much chance that the next couple of years are going to be very different from the last four, i.e., pretty subpar from a gross-domestic-produ​ct and job-generation standpoint.

 

Thus, it will be up to low interest rates to keep some sort of a bid in the equity market.

 

I know that the hypnotized never lie

Now that the election is over and the market faces the reality of discounting those outcomes, the near-term direction of the market may be clearer and lower.

 

My recent strategy has been to short S&P futures, which I have done a couple of times for some brief trades. (Given that we have so many crosscurrents, holding any speculative position for very long is difficult and potentially dangerous, and not an advisable strategy for amateur investors to employ. And for the record, for me precious metals are not a speculative position, as that is a sector I have been involved in -- and expect to be involved in -- for some time.)

 

As regular readers know, I expect at some point the bond market will revolt, and though it is hard to say when, I was somewhat intrigued to hear on Tuesday night that a decent chunk of respondents to exit polls thought rising prices were our No. 1 problem. This is decidedly not what one would expect in the midst of a supposed deflationary period.

 

I have noted many times that declining prices in certain asset classes (such as real estate, which has stabilized for various price points and locales) is not deflation, so there is no point in rehashing all of that. And in the meantime, now that we have gotten our election out of the way, we can turn our attention to what the new leadership in China looks like, and what sort of stimulus programs its new leaders might have up their sleeves.

 

And from our à la carte menu, Apple turnover surprise

Speaking of tricks up one's sleeve, I am probably going to shock a few folks, but I decided to buy some near-dated Apple (AAPL) calls early this week (even though, as I said in a recent column, I think Apple's stock price has most likely peaked) after talking to Fred Hickey and reading his newsletter last weekend. (As an aside, if you have not subscribed to The High-Tech Strategist, I cannot recommend it more highly.)

 

As anyone who has read Hickey's most recent report knows, it is very likely that Apple will have an extremely strong quarter, yet, meanwhile, the stock has been in the penalty box. Thus, this is a bit of a contrary trade, and again, it is not a recommended course for most individual investors. But it will give me a bit of exposure to Apple's upside if the market decides it wants to rally in the wake of the election. The reason I chose to buy the calls, which expire before this column will be posted, is that I can limit my risk to a few dollars while Apple itself can swing wildly.

 

While it is very important to have conviction in your investment strategies, it is sometimes even more important to be flexible in your thinking. This trade on my part is certainly an example of that, as well as being contrary, given the recent performance of Apple's stock price.

 

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I was curious to see how the 1,400 level would hold on the Standard & Poor's 500 Index ($INX) following the election, as that appeared to be a floor recently. But the first time the Spooz (S&P futures market) traded down to that level during Wednesday's session, it punched through it to 1,385 before bouncing. Meanwhile, the chart of the Nasdaq ($COMPX) looks even worse, as that index is now not only below its 200-day moving average, but gapped through it on Wednesday.

 

This sort of action is precisely the reason I was willing to squander only a few dollars on my Apple calls, which were basically a way to participate on the upside should the market have decided to rally in the wake of a victory for Mitt Romney. 

 

At the time of publication, Bill Fleckenstein did not own or control shares of any company mentioned in this column.

 

So much for a scary October. While the major indices gave up some ground this month, for the most part they were fairly stable in the face of a couple of nasty sell-offs and fears of an October stock collapse.

 

Even Hurricane Sandy, which, as we all know, hammered a huge chunk of the East Coast, didn't do any lasting damage to the stock market, despite the two-day closure.

 

As the market goes digital, sound quality declines

I don't know about anyone else, but I for one enjoyed the two-day market shutdown. We would probably all be better off if it was open less often, without an accompanying natural disaster, since so much of what happens on a daily basis is noise. And the noise seems to be getting worse.

 

I have noticed a great deal of chatter recently about the prospects of how different the Fed might look if Mitt Romney prevails over President Barack Obama. This, to me, seems not well thought out at all, but there is no doubt it is adding to the crosscurrents and uncertainty precipitated by the election and the coming federal budget crunch known as the "fiscal cliff."

 

The thinking seems to be that since Romney doesn't like quantitative easing -- the Fed's efforts to inject money into the economy -- Chairman Ben Bernanke won't be able to take the heat of being easy if the Republican wins.

 

However, I submit that if former Fed Chairman Paul Volcker could take the intense political heat precipitated by his aggressive fiscal tightening in 1980 to '82, then Bernanke could withstand the infinitely easier-to-deal-with flack that being "too easy" (in terms of low interest rates and monetary policy in general) might cause.

 

Understanding markets is a constant battle between what you think should happen and what you think will. Not only are they quite often not the same, they can switch places out from under you, and the more you lose sight of the distinction, the more likely you are to lose money.

 

As a result, in order to be "right" (whatever that means), it is not enough to analyze a company correctly. You must also be correct in your analysis of how the market may react to what you find.

 

For example, you may spot what you deem to be a sign of positive growth tucked away in a company's financial statements, and you may conclude that the stock is undervalued. The market may view the exact same information in a negative light and punish the stock price accordingly.

 

Thus, you can be right about the company's prospects, but if you are wrong about how (or when) the market will respond, it may do you no good.

 

The employment data released on Oct. 5 certainly raised some eyebrows. First off, the number of jobs created in September was almost exactly as expected, at 114,000, while the August number was revised up by better than 40,000 jobs.

 

But the big news was that somehow the unemployment rate dropped from 8.1% to 7.8% (expectations had been that it might tick up to 8.2%).

 

There appears to have been some sort of, shall we say, aberration in the data, as the household survey suggests that 873,000 jobs were added last month, an annualized rate of 10.5 million.

 

(That survey is used to calculate the unemployment rate, while the number of jobs created that gets focused on every month is a function of the establishment survey. So if you're scratching your head at how headline job growth of 114,000 generated a sizable drop in the headline unemployment rate, now you know.)

 

Let's talk about cash for a bit. Last week, the friend I refer to in my columns as the Lord of the Dark Matter pointed me toward the following comments by Alice Schroeder, a former insurance analyst and the author of the Warren Buffett biography "The Snowball." As reported in the Globe and Mail:

 

"Ms. Schroeder argues that to Mr. Buffett, cash is not just an asset class that is returning next to nothing. It is a call option that can be priced. When he thinks that option is cheap, relative to the ability of cash to buy assets, he is willing to put up with super-low interest rates, said Ms. Schroeder, who followed Mr. Buffett for years before she became his biographer . . . .

 

"'He thinks of cash differently than conventional investors,' Ms. Schroeder says. 'This is one of the most important things I learned from him: the opportunity of cash. He thinks of cash as a call option with no expiration date, an option on every asset class, with no strike price.'"