It's back to the waiting game

With the euro still in crisis and the US economy stalling, we're simply stuck. Deteriorating fundamentals make it hard to bet that stocks will move up, and money printing makes it tough to predict they'll fall.

By Bill_Fleckenstein Jul 6, 2012 2:24PM

Image: Money © Russell Illig/Photodisc, Getty ImagesJune ended with a flurry of news and volatile market action driven by corporate earnings and fallout from the European summit. On the earnings front, in a harbinger of the upcoming earnings season, both Nike (NKE) and Ford Motor (F) reported disappointing results from a lack of strength in the world economy. Research In Motion (RIMM) also blew up, but that was more of a company-specific problem, though the sorry state of the world didn't help it any.

 

Once again, RIM demonstrated the danger of bottom-fishing for companies to short in what appear to be cheap tech stocks. There is a lot more to it than just looking at the financial statements.

 

As for the European summit that ended June 29, it would appear -- though once again the devil is in the details -- that banks are now going to be allowed to borrow directly from the European Stability Mechanism. That may not start until December, after bank supervision structures are put in place.

 

In addition, loans from the ESM will no longer have a higher status than regular loans -- i.e., outstanding loans will no longer be subordinated to ESM loans in terms of which gets repaid first if there's not enough money to repay them all.

 

Other than that, the net-net of the summit did not change the world much. You might want to note that Germany may have been muscled to do more than it wanted to do. But to my mind, that is just an evolution of the process.

 

Germany tends to say no to everything (and rightfully so) until the situation becomes so dire it feels it must say yes. When it does, we get a rally in debt and equity markets, as we saw on June 29. But the new changes are never enough to kick the can down the road for long.

 

Back to the waiting game

So once again all eyes were on the European Central Bank to see whether ECB head Mario Draghi had anything up his sleeve. In fact, as announced on Thursday, the ECB did the bare minimum of what had been expected by cutting interest rates just 25 basis points. As a consequence, debt markets in Europe were roughed up, with Spain and Italy both hit pretty hard. European equity markets were also on the weak side, though the FTSE 100 ($GB:UKX) did better than the others because the Bank of England increased the size of its quantitative easing stimulus effort once again.

 

Also, China cut rates for the second time in a month, while various other central banks trimmed rates as well.

 

The fact that Draghi didn't do more means that in the coming weeks we will see a replay of the movie we have watched again and again for the past couple of years. This will change only when things finally get bad enough that the ECB will completely mimic the Federal Reserve. Either that or there won't be a euro as we know it -- and we know the powers that be don't want to let that happen.

 

So in the end, all roads lead to European money printing, though only after lots of pain.

 

Waiting for the Fed

We saw more macro data that would tend to build the case for more action from the Fed, as the key reading in the latest Institute for Supply Management report dropped below 50 to 49.7, versus expectations of 52 and last month's reading of 53.5.

 

I don't know how many more data points Federal Reserve Chairman Ben Bernanke is going to need before he commences QE3, the next round of quantitative easing. But a weak employment report, like the one we got Friday, might just do it.

 

'Into the blue again (after the money's gone)'

 That is sort of the way "financial life" is in this messed-up money-printing world. Stock fundamentals are deteriorating rapidly -- witness the news from Ford and Nike noted above -- yet if you short anything, betting any stock will go down, you can lose a chunk in no time.

 

So even if the ultimate path for equities is going to continue to be down, it still seems virtually impossible to make any money on the short side. And, of course, the long side is uninvestable because it is hard to maintain a position, except for the occasional blast to the upside. Nor do the fundamentals warrant taking a position in most companies.

 

So that's where we are: same as it ever was, or at least has been for the past few years.

At the time of publication, Bill Fleckenstein did not own or control shares of any company mentioned in this column.
28Comments
Jul 9, 2012 1:51AM
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We have fixed low wages and high unemployment. Printing more money will only increase inflation and decrease buying power. What we need is lower prices giving consumers more buying power. All printing more money is going to do is increase unemployment. The Fed needs to reduce the money supply.
Jul 9, 2012 8:06AM
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Let me be contrarian against economic doctrine and suggest that raising interest rates may actually HELP the economy.

 

If interest rates go up, it may cause banks to lend more, and people who could afford a house (compared to rising rents) but couldn't get credit because of the overcompensated tight credit could buy houses, boosting the housing market.

 

I'm willing to bet this could help the housing market recover and the rising economic tide would more than offset the usual decline in growth caused by raising interest rates. The middle and lower classes would benefit from lower inflation.

Jul 9, 2012 2:17AM
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Good article Fleckie, can't disagree with any of your points. While we're all waiting, go get a haircut - or maybe a real job.

Oh that's right , never mind. No one is hiring.

Jul 9, 2012 4:11AM
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Hi,

America has  too many  illegal immigrants and too much of outsourcing .Only policy measures  by congress  can reduce the outsourcing as well as  immigration.  Offcourse  congress would not do anything that would displease its masters , the  corporate moneybags. 
Jul 9, 2012 2:24AM
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The market will go up.

Or, it will go down.

 

Thanks, Bill.  Very helpful

 

Jul 9, 2012 1:38AM
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I think I'm turning Japanese, I think I'm turning Japanese , I really think so !
Jul 9, 2012 11:06AM
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Bill, in a world where everybody on the street is paid to pretend the sky will never fall, at least you're open to the possibility.
Jul 6, 2012 9:01PM
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Markets these days seem to be pricing not just the future cash flows of companies but that multiplied by the probability of another QE. When one goes up the other goes down and vice versa. The product of the two does not change much and so does the market...
Jul 8, 2012 11:10PM
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Makes you wonder when the printing presses stop. I has to happen and the market will not be pleased. There is a report of a China recession in 2015. You talk about the economy hitting a brick wall!

Jul 9, 2012 11:07AM
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Connect the dots: "The Big Squeeze".  Corporate America has driven employees (except the top brass) in a huge hole on earnings/wages/commissions, health Insurance, and pensions so "Corporate America" can drop ever increasing profits to the bottom line. This is "all to please Wall Street". What's your next quarter and quidance look like???? This prolonged war by Corporate America on employees wages etc. for profits has killed the goose that laid the golden egg. Have you ever heard: "a chain is only as strong as it's weakest link" ?

 

 So, with no or very little disposable income for most people, maybe as much as 75-85%, we can only have an anemic recovery at best after "W" almost drove the US over the financial cliff with tax breaks for the zillionaires they did not need while fighting two wars! 

 

 However, corporations are piling up trillions in retained earnings and the fat cats at the very top are getting wealthier. So how does this make our country stronger and a better place for all??? Freedom can only carry you so far. There needs to be opportunity/substance behind it for all people not just a very small lucky few, and not just for those at the top and corporations which seem to control everything along with Wall Street. This is what needs to be turned around. After all it is the people that make companies thrive and grow, not the products on the shelves etc.

Jul 9, 2012 9:36AM
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the market will go down today due to cloudy conditions on Mars........more logical than the dribble thats printed here.....
Jul 11, 2012 12:47AM
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Central and Government Banks are starting to issue negative interest rates on loan transactions.  Taking a loss to loan currencies by Banks?????  When do we bailout the finance system again, if that is even possible?  Yikes!
Jul 9, 2012 1:52PM
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The only way the stock market will go up by any significant factor in the next few years is if inflation really takes off and in that case the stock market should track inflation.
Jul 9, 2012 2:39PM
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The title "the waiting game" reminds me of a Family Guy episode.  LOL!
Jul 9, 2012 2:53AM
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Bill, invest in Walt Disney (DIS), up nearly 30 percent year-to-date!!!

New park in China will be bigger than Orlando. Easy money.

Jul 9, 2012 2:58AM
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HUGE baby boomer divorce rate will help keep illegal immigrants out as millions of old men vie for employment in our new service industry economy caused by Bush, Sr. and Bush, Jr. sending all the real jobs to China and India. Of course, none of these boomers - devastated financially by Bush, Jr. and by the divorce settlements- will ever be able to afford retirement. So, where does the money come from to boost the market? The Federal Government or from Wall Street. I wonder if all the cigarrette makers and beer brewers are on overtime?
Jul 9, 2012 2:51AM
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OMG, Bill just admitted that it is "virtually impossible to make any money on the short side." Sorry buddy, but your dirty way of life is virtually almost over. When you are at a global rock bottom, there is nowhere to go but straight up or civil war. This market will drift upwards for years to come as federal spending drifts slowly down. The Romney method would result in chaos and nobody wants that. Sorry you have to actually invest in something for a change like the rest of us. Obama 2012 !!!

 

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ABOUT BILL FLECKENSTEIN

Image: Bill Fleckenstein, MSN money

This column is a synopsis of Bill Fleckenstein's daily column on his website, FleckensteinCapital.com, which he's been writing on the Internet since 1996. Click here to find Fleckenstein's most recent articles.

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