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Today's Market Rap w/ Bill Fleckenstein
While it deals with fundamentals (or lack thereof) in this mania marketplace, instead of technicals, I
thought it had enough tidbids of value (commitment of traders report data, borrowing money to gamble
on the bubble, money supply growth, etc...) that I just had to post it. Afterall, here is a man who agrees
with me that Al Greenspan is public enemy number one.
The article can be read daily at
http://www.siliconinvestor.com for those of you interested in fundamentals.
Regards,
James
TechTrading.com
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January 3, 2000
Dip buyers give Nasdaq a boost
Supreme speculation...
Obviously, the National Pastime, speculation, reigned supreme in
the last two weeks of the year when there was no Rap, highlighted probably by Commerce
One and Qualcomm. But just to show that you didn't have to be a high-flying Internet stock,
I happened to notice a tiny company in the oil patch named Castle Energy. Late last week,
the company announced a 3-for-1 split and the stock promptly ran from $18 to $29 in about
15 minutes.
The equity environment of the last two weeks continued to be speculation, speculation and
more speculation. On the back of that, we have been able to power the stock market to
about a $17-trillion market cap, about twice GDP. World equity markets now are at about
$35 trillion, bigger than world GDP, which is between $25-30 trillion.
Of course, the primary responsibility for that mania lies at the doorstep of the Fed - Easy
Al and the Merry Pranksters. And they did it by absolutely jamming the daylights out of the
financial system with liquidity injections over their fears about Y2K. The monetary base
expanded about 17 percent last year (thank you, Jim Grant.) and it went absolutely berserk
during the last three months of the year, with the last two weeks expanding at a 39-percent
annualized rate (thank you, Mike Belkin).
Fed no friend to bonds...
The group that took it in the chops the most over all of that liquidity was the fixed-income
folks. Last year the 30-year bond was down a little over 14 percent, which is the worst
performance ever. The second-worst performance was in 1994, when Greenspan was taking out
the liquidity that he'd put in at the beginning of the decade. Two of the worst bond years
in history have occurred in the last six years with Easy Al at the helm, so I can't see how
any fixed-income investors can be big friends of the Fed.
On the other hand, the Nasdaq loved the Fed, and why not? In the last nine weeks, the Nasdaq
exploded 33 percent, which is approximately a 200-percent annualized rate. Everyone knows
how much the indices were up last year, and the more speculative the index, the better it did.
Dot.com dad...
In a sense, Alan Greenspan, not Al Gore, is the father of the Internet (certainly the father
of Internet speculation). The family tree goes as follows: About this time last year, when
Internet speculation was just getting rolling, Greenspan was busy putting the liquidity we
just described into the system. As liquidity was jammed in all year, it had to go someplace
and went to the place where there were the fewest fundamentals and the most imagination -
a.k.a. Internet stocks. That's the way speculation always works; it seeks ideas with the
highest imagination potential and fewest hard facts. He succeeded in powering all sorts of
Internet ideas - money-losing, kooky, whatever - all year long, and then of course we hit
the afterburners late in the year. The fact that Internet stocks went so crazy and made
folks so much money, people concluded that, By God, there must be something to the Internet.
As a result, all the Internet entrepreneurs were deemed to be visionaries who had read the
Wall Street Journal for the year 2020 and were telling us what it was going to be.
So my somewhat heretical view is that Greenspan, through his irresponsible monetary policy,
has convinced folks that they know what the future is, when in fact no one knows how the
Internet madness will sort out. As wonderful as Internet communication is, it is no
greater than some of the technological advances we've seen in the past, not the least
of which were the telegraph, the telephone or the computer itself, to pick just a few
examples.
Liquid in, liquid out...
Now that we are intoY2K, holding our breath for Y3K, the Fed is going to be forced to drain
the liquidity that it put in because it is in the business of targeting the price of money.
Since the extraordinary demand by the banks, etc., going into yearend will be abating to some
degree, the Fed will be forced to draw it back out. Either that, or the Fed's intent is to
fuel the next great inflation, which in and of itself at some point won't be that great
for equities.
In the last couple of weeks we saw from the commitment of traders report that the commercials,
which trade S&Ps, have a large short position. And we have an unusual situation in that the primary
group responsible for powering the S&Ps has been "the small trader,"
which has its largest long position ever. We'll get another commitment of traders report tonight,
and it will be interesting to see how positions were impacted by the run in the market at year's end.
Obviously, sentiment is wildly bullish - you don't need me to tell you that. But it is interesting
that the S&P commercials have taken such a strong stand in the face of the big run-up. I'll let
you know tomorrow what has changed with the latest report.
On borrowed time?...
Last but not least, I want to share something that Dennis Gartman wrote late last week when I
was out. It is the perfect period piece to capture the mood of what is really going on. To any
sane person, it should be frightening; but then again, anyone who's frightened isn't having any fun.
And those who are not frightened are making gobs of money speculating their heads off. Here's
what Dennis said:
"As a final aside for the year, we went to our local branch bank yesterday to transact some
business [Ed. Note: we actually got some cash for the Y2K `turn'...just in case!], and spent some
time chatting with the branch manager. She does not know what business we are in, so when we asked
her if she'd seen any increase in personal loans she replied out of hand that indeed she had.
Indeed, the personal loan demand at her branch had escalated rather substantively.
"She then proffered that the sole reason for the sharp rise in personal loans was the investment
in the stock market. She said that local doctors, lawyers, farmers, auto dealers... all of the
leading figures of the local economy (and their wives) had been in recently to borrow
money to `put into the market.' We asked her how long this had been going on, and she said that
the branch had been making personal, signature loans like that for some while, but that the
demand had really escalated in the past several months and has really become `hot' in the past
several weeks. She wondered if it was too late for her to join in the market's enthusiasm! We said,
`We don't know,' and left bemused and afraid.
"It is perhaps not new news, but we find it odd that the public is borrowing money on signatures
without collateral (other than CDs and/or sizeable demand deposit accounts) that is then used to
buy stocks, very probably upon margin. The leverage is immeasurable, for the public is apparently
`Reg-T'ing' money that it has already borrowed with nothing down. She said that those who've been
borrowing the most indicated that they `could get more out of the market than the interest charge,'
and considered it unwise not to take advantage of the circumstance.
"Friends and clients, if this is not rampant, `tulip-bulb'-like speculation of the worst sort, we've
no idea what is. Of all of the things that we've read about, heard about and discussed at length
concerning the mania that is the U.S. stock market, this is the most manic of all.
When speculation comes to small-town southern Virginia, it is rampant and it is dangerous. We have
at this point said enough."
In market action...
Last night, the Nasdaq futures initially were down about 50 and the S&P futures started higher and
got weaker as well. The bonds wasted no time in going down about a buck. By the time we got around
to the early morning hours just before the market opened, the bonds were still down a buck, the S&Ps
were up a percent and the Nasdaq future was up about a percent.
In the first hour following the market opening, we had a huge flurry. The Nasdaq 100 future was up a
couple percent, the S&P was up about a percent and various stocks were trying to perform their version
of Icarus. And some of them had the same result as Icarus - they flew too high and turned around.
Following the first hour, when we had good volume but a negative advance-decline line, real selling
began. We saw some pretty good-sized drops in stocks that had been very strong late last year and also
had been strong this morning.
After about the first hour and a half, the S&P was down about 11/2 percent, as was the Nasdaq 100. The
bonds were unable to respond to the leg down in stocks and maintained their posture, down about a
percent. Bonds closed on their low for the day and a new low for the move. That wasn't good for the
bank stock index, which was down almost 5 percent, nor was it good for utilities, which were down a
couple of percent.
Dollar decked...
The dollar was smacked 11/2 percent against the yen and crushed versus the euro to the tune of 2 percent.
The precious metals had the good sense to take the day off and they won't begin trading until tomorrow.
The motto for fixed income this year will continue to be "Bonds tank until stocks do." And as far as
stocks go, when people ask me what's going to take them down, my answer is the same as the one I used
late last year. That is, nothing will take them down until anything can, meaning they are going to be
bulletproof until they get exhausted. And once they get exhausted, anything will be a decent-enough
excuse.
Dip buyers boost tech...
After the big early setback, at about 11:30 Eastern Standard Time, the dipsters arrived and focused their
attention on the Internets. Many of the Internet stocks went wild today, shaking off some earlier selling.
The Internet index, as measured by the HHH, was up 10 percent - not bad for a day's work - and we had
quite a list of leapers. At least seven stocks were up over $40, with CMGI and Yahoo leading that charge.
Another handful was up $30 and a whole host of them were up 20-25 points.
The speculation taking place in Internet nonsense spilled over into technology in general. The chip
stocks had a pretty good day, with the Sox up about a percent and a half, despite some of the PC-oriented
stocks being heavy. There was a big move in IBM, Apple, Intel and Oracle. So there was a lot of fun and
games scattered among the selling.
In a bit of a dichotomy, the Dow was down about a percent and a half while the Nasdaq 100 did its usual
thing, closing up about 2 percent. The Nasdaq itself was up about 2 percent while the Morgan Stanley high
tech index was up about 3 percent - so I guess you get the picture.
Just another day...
Not much can be said the for advance-decline line - it was roughly 2-to-1 to the downside on the New
York Stock Exchange and negative over the counter. So the wondrous effects of broadening out were
certainly not felt today; maybe they will be later. But if things were going to get great in a
hurry, you would think we would have seen broader participation. Today looked like every
other day of the past couple of months.
Naturally, today's dip-related buying really got legs once the bonds closed because everybody knows that
once the bonds close in Chicago, the last hour of the day is free from the bad news of bonds getting
in the way.
What we may be seeing is that the mutual fund and hedge fund operators who did well last year owning
all the hot stuff, got a whole bunch of money and are plotting to do the same thing - who knows? Today
still looked the same as any other recent day, other than the fact the bonds and dollar both got
spanked pretty hard.
Fading fast...
Today's Wall Street Journal carried a headline on page A2 that said, "Economists are Euphoric about
the Prospects for 2000." If you didn't know anything else, the only thing you need to know is you've got
to fade that headline. I don't know exactly how it's going to work, but anytime nearly all of the economists
surveyed are euphoric about something, you've got to go the other way. And conversely, if they are
unanimously depressed about something, you have to move the opposite direction.
So for those of you who have given up listening to the bears, now you have an ironclad consensus to fade.
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