2/18/2011 12:09 PM ET|
Even Cisco can't cool a giddy market
The company took a beating over earnings, but investors still bid up its rivals. Such disconnects illustrate the effects of too much free money.
One characteristic of markets is that, in the short run, they do not need to make sense, no matter how badly we may want them to. Thus, as a rule, I am careful not to make too much out of one day's activity, let alone the action in individual stocks.
However, from time to time, the behavior of certain stocks catches my attention, because I think it might provide some useful information. This happened again after Cisco Systems (CSCO, news) reported its earnings results and outlook Feb. 9. The company lost at the game of "beat the number" and its stock price was punished with a loss of about 15%.
Company-specific selling and herd-specific buying
No surprises so far. But what was surprising was that, at the same time, buyers came out of the woodwork to chase the stock of Cisco's competitors higher, apparently deciding that Cisco's shortcomings were specific to the company. (Cisco does have its own problems, but some issues -- like weak government orders -- definitely are not unique to it.)
Folks were rabidly buying F5 Networks (FFIV, news) even though it fell off about a 26% cliff in mid-January (it too lost at "beat the number," although it has recovered about half of those losses since). Meanwhile, Juniper Networks (JNPR, news) saw its stock bid up 10% as Cisco was being sold.
It was almost as if the market had heard Cisco say, "Hey, we would have done better except that Juniper stole market share from us." Obviously, that was not Cisco CEO John Chambers' statement, and state and local government financial problems (which should be obvious to all) are affecting not just Cisco, but Juniper and others as well. But for now, both companies' shares are just pieces of paper whose prices happen to be headed in opposite directions.
Research in commotion
I don't believe there was much intelligent thought behind the action in either of those two names. Nor did I when Research In Motion (RIMM, news) came alive and popped 5% on Feb. 10, the very day that Microsoft (MSFT, news) and Nokia (NOK, news) announced their partnership agreement (RIMM has since climbed even more). Now those two juggernauts, who have little of the market share for smart phones in the U.S., will join the fray to make the life of BlackBerry maker Research In Motion even more difficult, on top of what Apple (AAPL, news) has already done. But that seemed to cause people to want to buy RIMM more aggressively, even though it will now face even more intense competition. (Microsoft is the publisher of MSN Money.)
As mentioned above, I normally don't dwell on such small snapshots, but these sorts of disconnects show -- albeit in a way that might fall below the radar of the average Main Street investor -- how maniacal the Wall Street mindset is starting to become. Again.
Playtime with play money
There are plenty of wilder examples, especially if we look at what is taking place in cloud computing ideas or some of the zanier small-cap stocks. But to me, the companies cited above are a good illustration of the sort of drunkenness that has once again taken hold in the financial markets, thanks to Federal Reserve Chairman Ben Bernanke's $2 trillion worth of money-conjuring. What we are currently witnessing is a miniature version of the lunacy we saw in the late 1990s. It is not nearly as broad or quite as insane (although the macro risks are enormously larger), but the pockets of sheer craziness are a sight to behold.
What's more, the bulls are (once again) trying to have it both ways. They want to party on the back of the financial asset levitation inspired by Bernanke's printing press, while at the same time convincing themselves that he is a responsible guy whose monetary largesse won't lead to problems (like inflation and higher interest rates), because he will be able to stop the presses just in time.
Given the fact that the Fed's liquidity spigot is supposed to be turned off in June, we are heading toward a moment of truth, when there will be no more free money. (At least for a while -- obviously, if the market throws a temper tantrum and collapses, Bernanke will probably commence yet another round of stimulus and pour even more money into the system.)
Perhaps sometime around the end of the first quarter there may be an opportunity, for the first time in two years, to take a shot at trading the other side of this insanity by getting short. As to the timing, we will have to wait to discover how things develop, but I would certainly think that by April or so, rabid stock bulls could be on borrowed time, as they begin to deal with the reality that getting drunk is always followed by a hangover.
I really can't believe that, after getting crushed by two big bubbles in a decade, so many have learned so little.
At the time of publication, Bill Fleckenstein owned or controlled shares of the following companies mentioned in this column: Microsoft.
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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I agree with Mr. Fleckenstein ... the market is way, way, way overextended ... as the bull sprint from late summer 2010 till now has been one for the history books. But will the bulls unload in April ? .... a couple of months before QE 2 ends in June ????
Three 'things' are keeping this market 'running on air'. First, is quantitative easing ... which, as we all know is how the Bank of Japan keeps their economy 'afloat'. Second is 'mark to myth' ... which allows banks to ignore bad loans still sitting on their balance sheet. The third is ZIRP ... which is just ... if not more ... important than the first two. ZIRP allows banks to borrow money 'almost free' ... and to use leverage in the stock market by borrowing as such ... like never before.
I don't think the market cracks until the Fed raises rates. And I think it will take out of control gasoline prices for the Fed to even hint at ending ZIRP. The way this game is being played ... the Fed is throwing money in the air ... like there was no tomorrow ... and exporting inflation in the process. There are reports of 'depositors standing in bank lines in South Korea' ... as well as food inflation problems in India ... not to mention the unrest in the Middle East is linked to rising food costs. If any nation 'over there' cracks ... a redo of the Asian Financial Crisis of 1998 may occur. If so ... hot money from overseas might run for American shores ... just like in 1999. You could almost say the USA stock market has turned into a 'financial weapon' ... and has the ability to destroy foreign economies just like tanks and guns. Bears should keep that in mind.
So when will gasoline really pop? To above $4 in the midwest? The EIA reports both USA crude oil and gasoline stockpiles are ample for this time of year. Also, USA gasoline demand has been lackluster ... below 9.25 MB/D ... so I think, while gasoline prices will heat up this summer ... they won't push above $4 a gallon in the midwest provided demand stays below 9.25 MB/D. Thus, I don't see the Fed raising rates to even 2% until early next year at the earliest. Provided Congress continues to approve Executive Branch fiscal deficits on the order of $1 to $2 trillion dollars ... I don't think the stock market will roll over ... not until the Fall of 2011 at the earliest.
Wouldn't it be a wild ride if the S&P 500 could nip at retesting the Fall 2007 highs in November 2011 ... and retest the March 2009 lows just in time for the November 2012 presidential election? By making this 'off the wall' remark ... I'm trying to point out the stock market is now just as much a 'political indicator' as it is an economic one ... and hasn't traded on the 'economic fundamentals for well over a year. Invest accordingly ... and note SLW is on the rise ... as are the refiners TSO and VLO. Tech will eventually fade in this 'high cost of energy' environment ... and when the 'shakeout' occurs all that will be left are IBM, CSCO, ORCL, and AAPL. Dell, Autodesk, Packard, Microsoft, and many others will ... merge or fold.
Enjoy the ride!
Gosh, Bill, no mention of HFT and POMO ??
When this ponzi finally unravels, the effect will be epic. Centrally planned markets always return to Earth at warp speed, so the playerz better keep their running shoes on even while asleep.
No way, Gamerk316. Sure, those of us who kept our jobs have saved more, but many others have been out of work for months--if not years. Even with the working class having more spending power, an unemployment rate above 9% (and probably closer to 15%) drastically diminishes the spending power of the entire population. Also, many savers have already invested their money again. What do you think drove the DOW to 12,000 or gold to 1400?
I fully agree with Fleck, a second crash is coming. It's inevitable. I, for one, can't wait. You can make money much faster going short than you can on the long side.
Isn't it more likely that some one (or many) investing firms set their stock purchasing program to buy Cisco competitors when Cisco prices fall? Or to buy any stock that has popped a certain amount in a day - increasing the size of the pop? (RIMM)
I swear, computer-aided trading will kill the market yet.
I disagree again.
What some people still don't get, is that INDIVIDUAL COMPANIES are doing great. And the reason for that is simple: The people who did NOT lose their jobs in the recession have more spending power then ever [due to a lack of inflation and stable prices across the board]. As such, I do not expect a sudden slowdown when QE ends, and thus I do not expect a simmilar decline in overall stock value. I am willing to conceed the market is slightly overblown, but only by about 5% [or around DOW 11,500 or so].
Then again, Fred seems to be one of those people who still thinks the Stock Market is any reflection on the broader economy, WHICH IS NOT THE CASE. The stock market is a reading of individual companies. While the greater economy can have a factor on their performance, if they do well, even if the economy is in shambles, their stock price rises.
I will tell you why. Printed money is one thing, and one thing only; a sales job for a store of value. If the sales job fails, the store of value is removed. News of the obvious - - and what will be in retrospect the gravestone of our currently oblivious culture - - is that the sales job on the dollar is failing, and failing faster than you think. And any asset you have denominated in dollars is at risk. People WILL find another "reserve currency" of some sort sooner or later.
I would pay attention to Bill if I were you.
stay with oil..
no doubt, this will have a HUGE impact on this economy and the market will give in to this...
Bill Fleckenstein never has anything useful to say---unless you are the person (I wanted to say investor here but that doesn't fit) who can't sleep without his money under the mattress. Yes, a few of his eternally dire warnings have come true--if you say that Hell is going to freeze over enough times and you live long enough it might happen. Jubak on the other hand is always worth a read because he usually has some good, original ideas.
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