3/11/2011 11:43 AM ET|
Whither Wall Street without the Fed?
As the market struggles while ignoring bad news, the easy-money days are coming to an end. The Street's best hope for more liquidity to help it climb higher is to go lower first.
For the moment, the massive debts (and associated ramifications) of the PIIGS (Portugal, Ireland, Italy, Greece and Spain) appear to have been essentially forgotten, at least by the U.S. stock market. Similarly, the unrest in the Arab world has been more or less disregarded, except when an event has grabbed headlines in a huge way.
There is no question in my mind that the risks of dangerous outcomes in the short run are quite high for Arab countries, as well as for the European banking system. Yet it does not appear that stock prices in the aggregate have adjusted for that.
As if that weren't enough, we have our own domestic issues: inflation, interest rates that are too low (yet can't be raised), and huge budget deficits. (We'll leave out the worthlessness of our currency for the moment.) Those problems also do not seem to be priced in, and when I put a summation sign under everything, it is easy to see that equity prices have not built in any margin of safety.
Do we need to stay for the credits?
People seem to think that the absence of bad news means all is well, but that is not necessarily the case. Over the last 10 to 15 years, we have seen this denial "movie" many times, and now it is playing once again. But at this particular moment, the easy money from the Federal Reserve -- which has kited stock prices higher over the last six months and helped keep the market aloft for the last two years -- is slated to end pretty soon.
At the market-action level, however, recently there has been some divergence from past behavior. For example, on March 9, optical fiber company Finisar (FNSR, news) did a 4-for-3 stock split the old-fashioned way (i.e., its stock price declined 25%) on the back of losing at beat-the-number (its quarterly earnings were below analyst estimates and/or company guidance). That, in turn, saw a number of what I call "high-flying" speculative stocks severely punished by the market.
Part of Finisar's problem appeared to be weakness stemming from double ordering by customers in China, which made demand look higher than it actually was. So issues are not entirely company-specific, but on that day, Finisar's results were treated as far more applicable to Wall Street than they probably were, which is a shift in the pattern.
My point in mentioning Finisar is that the market reacted differently. The last couple of times Cisco Systems (CSCO, news) reported, its problems were always treated as company-specific, and thus there was no collateral damage to related companies. Therefore, the small list of "things that are different" regarding market action is building. Further, it is pretty clear that in the last few weeks there has been a slight change in tone, as the extremely expensive/concept stocks have not only lost their place as upside leaders, but actually become the leaders to the downside.
Are we there yet?
It is too early to tell exactly where we are, but the market has just experienced a modest failing rally. However, for my purposes I would not count that as a "trend change" just yet. Still, we might be seeing the very early indications of a top being put in place.
When I have made comments in the past about wanting to see a failing rally before I felt comfortable getting short, I meant something more pronounced -- both in terms of percentage change and time -- than what we have experienced so far.
Whatever damage has been done in the last couple of weeks could be easily undone (at least temporarily) by a single euphoric, two-day rally, something that could erupt simply because the price of oil dropped as the unrest in one Arab country or another temporarily subsided.
Nonetheless, it is time to be extremely cautious about stocks generically, though I have not really favored them throughout this rally, preferring to focus on beneficiaries of federal money-printing. I continue to suspect that short-selling will become profitable at some point in 2011 (as well as less risky) when we get further down the road.
The biggest problem that equity bulls face is that the single most important factor in catapulting equity prices higher in the last couple of years has been easy money (in the form of QE1 and QE2 from the Federal Reserve), and that is ending in June.
Thus, perversely, for the stock market to see more of the liquidity it craves, it needs to tank first. Liquidity matters as much as it does because the economy itself is not likely to get all that much better relative to expectations. I think it will improve for a while, but I don't think it will grow at the rate the wild-eyed stock bulls are hoping for. Bottom line: The easy money in the stock market has already been made. Now life will be much more difficult.
It's a great time to 'bye' bonds
On a final note (and speaking of being cautious), last week Zero Hedge reported that Bill Gross, who runs the world's largest bond fund for Pimco, has cut his Treasury exposure to zero. For a while now that market has been sinking and has looked like it needed new buyers. Now, apparently, it needs even more, which will be another issue the stock market must deal with.
At the time of publication, Bill Fleckenstein did not own or control shares of any company mentioned in this column. He does own gold.
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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You are so right. Fleckenstein is one of the finest contra-indicators I know. I have gone counter to his advise consistently and have a string of great overall market choices to my (his credit I guess) portfolio.
And if he thinks the dollar is so worthless, here's my deal for him. I'll give him 10 cents in sold gold for every worthless $1.00 bill he cares to send my way.
I agree with you. In reality the government action -monetary, fiscal- did little for the common folk.
But to the Fed's way of thinking the stock market is pretty much the economy. Bernanke made this pretty clear in Nov-Dec while defending/explaining QE2. He indicated that the purpose of QE2 is to boost assets prices which would in turn boost confidence which would lead to increased consumption which would eventually grow the economy. In the US a large part of consumption is done by high-income individuals. So to follow up on your example if IBM's stock went from the 70s in 2009 to the 150s in 2011 then yes maybe some IBM shareholders felt better about life and went out and bought a vacation home or a new car and that might have, at the margin, helped the economy grow.
Do I agree with this policy? In the big scheme of things what I think is largely irrelevant. I basically have two big problems with the govt response to the crisis: it encourages recklessness in the financial industry (moral hazard, too big to fail), and that by keeping credit artificially cheap it distorts the normal economic signals that are needed for rational investment decisions thus leading to excesses, inefficient allocation of resources and malinvestments.
I'm wondering how much the real economy was really helped by the govt action and how much was the natural recovery of the business cycle- rebuilding of inventories and such.
But I think that the impressive stock market recovery was helped by the suspension of mark-to-market accounting (which made financial institutions' balance sheets and profits to look better virtually overnight), cheap credit from the Fed that encouraged speculation in assets prices, and the business cycle recovery. Cheers,
Could you have dendl and superstud ghost write your articles from now on? At least they have some insightful information to share.
It's not fair to say Fleckenstein has dissed stocks completely, he has been pimping crappy, go nowhere msft
Saltguy, I second that.
I tried just once more to hold out that MSN could come up with information that actually HELPS people, but I'm done now. After today, I won't be reading anymore.
I haven't done well with Cisco and will probably sell it tomorrow Monday March 14, 2011
Edited-------I sold 400 Cisco today Monday Mar. 14 2011.
Not that I disagree with what you're saying in the *** Hey Readers *** posting but how do you see the cheap money policy in the US ending? If it'll be "on a dime" as you suggest the catalyst might be some unforseen event, maybe a credit shock, like a large US debt holder dumping their holdings. Or a big inflation flare-up that would cause large institutional investors to sell US (debt) instruments. But I doubt even that would panic the Fed into tightening. Other than that, one can be reasonably confident that the Fed will keep buying Treasuries and the US financial institutions will do the same with the free money they get from the Fed. Honestly, I can't see them stopping playing this game even though it's probably the right thing to do. Everybody is too invested in this: the politicians, the financial industry even the common Joe who has a house and a 401-k. And the US financial system and consequently the US economy are too dependent on larger and larger amounts of cheap money in order to keep it together. Surely, whatever is unsustainable will eventually stop but gosh, I'm having a hard time seeing how that could come about in the near future based on the current circumstances. I'd be curious to hear your comments. Cheers!
Nope, they didn;t drop us 300 but wasnt for lack of trying.....Unbelievable....These guys are leaving the floor with silly grins on their faces....And tomorrow, if they once again dominate on and off the floor, the results will be very similar as they were today. Once again people, remember, news do not move markets, people do and when crooks, manipulators and cheaters are in charge, we will have more days like today...Oh well, we will see what happens tomorrow.
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Asian markets ended the Thursday session on a mixed note after the release of several economic data points. Japan's Corporate Services Price Index rose 0.7% year-over-year (expected 0.8%, previous 0.7%), while the Foreign Bonds Buying report indicated net sales in the amount of JPY463.90 billion (previous purchases of JPY114.60 ... More
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