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in a word, HUGE short position beginning to get squeezed.
Read this article from www.siliconinvestor.com
by William Fleckenstein
June 6, 2000
Jump and grind
Index Close Change
Dow 10,735.57 -79.73
S & P 500 1,457.84 -9.79
Nasdaq Composite 3,756.39 -65.37
Nasdaq 100 3,646.32 -83.99
Russell 2000 511.65 -1.65
Morgan Stanley Index 529.24 +3.73
Sox Index 1,112.18 -40.78
Bank Index 847.70 -21.46
XAU Gold & Silver Index 62.08 +0.47
Dow Transports 2,766.54 -33.80
Dow Utilities 321.85 +7.02
30-year Treasury Bond 5.91% +2/32
We had a couple of pre-announcements in the news this morning. Last night
Electronics For Imaging pre-announced poor results and its stock was quickly
down by a third. More importantly, Radio Shack and Circuit City reported
their comps and they were quite a bit slower than this time last year. This
is going to come as a shock to a lot of people, but it is clear that the
rate of growth in wireless has slowed down pretty dramatically. This is
significant because we are in the midst of a tremendous buildup in wireless.
The expectation is that we are going from building roughly 250 million units
last year to 450 million units this year. Given the perceived tightness in
semiconductor components, there's been a lot of double and triple ordering
(you can pick a number); so we may have components on order (or planned to
be ordered) in the neighborhood of 700 million units.
If we get a slowing of cell phones, there could be a dramatic problem in the
chip sector in the second half of this year, reminiscent of what happened in
the second half of 1995. That's when we saw a big build-out of all things
related to PCs on the back of the Windows 95 launch. Windows was successful,
and we did sell lots of PCs, but there was also over-ordering of parts. Now
we have the same sort of setup, only sales may be slowing. So we want to
keep our eye on that. It's still early, but there's no question this could
have a dramatic impact on lots of portfolios.
That was then. . . A couple of government statistics were released this
morning and it turns out that the inventory-to-sales ratio has bumped up for
the first time in ages. Folks have been very eager to latch onto anything
related to a slowdown because they expect a "soft landing." When we had rate
hikes in 1994 things slowed down, and then we were off to the races a year
later, so a lot of folks are making the exact same bet again. They don't
recognize that the environment is dramatically different.
First of all, we've accumulated tremendous levels of debt since then.
Second, folks have consumed lots of goodies. You could make the argument
that consumers have been more or less sated by going on a tremendous buying
binge (which is one of the reasons that we have the debt levels that we do).
At some point, the slowdown will no longer be perceived to be bullish. But
for the time being, the bubbleonians are salivating for anything related to
a slowdown, because they're absolutely certain it will turn into a soft
landing.
What that implies -- which they won't say -- is that they think the Fed has
basically conquered the business cycle: Things get too hot, the Fed slows it
down, things get too cold, the Fed warms it up. It's as though they think
that communism -- i.e., central planning by a central agency (a bank, in
this case) -- actually works, as long as you call it capitalism.
Gold snap. . . Gold continued to move ahead today. There has been a fair
amount of short covering, and the reason we know that is because if you
examine the data released by the CFTC, you can see that there was a fairly
large short position by the speculative community in gold. Conversely, the
commercials had a decent long position. The word I hear from the floor also
points to a lot of short covering. Make no mistake about it, there are a lot
of shorts in gold that could get forced out.
Here's one bullish item that has not been discussed much (except by Dennis
Gartman, to whom I am indebted for pointing this out). Now that China is
close to being included in the WTO, it may be thinking about having gold
backing more along the norm of international trade-type countries. The
lowest reserves of the big countries (except Japan) are in Canada, at about
5 1/2 percent. For China to take its holdings merely to 5 percent would
require an enormous purchase of gold, large enough to offset the Bank of
England sales and possibly even the Swiss National Bank. If that's what is
afoot, it will materially alter the outlook for gold for the foreseeable
future.
Then again, gold could be responding to the continued breakdown of the
dollar against the euro. I describe it as the dollar against the euro
because nothing has really changed as far the euro goes -- it's still run by
the same people who believe, in my opinion, in benign neglect. Even as the
euro was plummeting and I made disparaging remarks about the ECB, I
continually noted that at some point the dollar was going to have a problem
against the euro. That's because we are so dependent on hot money due to our
macro statistics. The euro continues on its dead-cat bounce, and it may in
fact turn out to be more than that. We may have seen the low in the euro,
not because it's such a great currency, but because the speculative flows
that have underpinned the dollar may be reversing. That would be big news
potentially for gold, but also potentially in a bearish fashion for stock
prices.
They'll be with you shortly. . . As long as we're mentioning the Commitment
of Traders Report from the CFTC, it turns out that the commercials have
their largest S&P 500 short position ever. The folks on the other side of
the contracts are generally smaller traders who tend to be less
well-financed than the large speculators. This is a big statement being made
by the commercial community, who in my years of observing this particular
contract have tended to be bullish on the S&Ps and had long positions. Large
short positions like this have been quite rare -- and quite accurate. It
would seem that they think this bear market rally does not have much further
to go. Obviously, they're only human and not infallible, but it is worth
noting.
With that in mind. . . In the early going, it was completely business as
usual. The bad news out of the aforementioned pre-announcers was ignored.
Except for those stocks (Circuit City was quickly drubbed for 30 percent and
Radio Shack for 10), everything else that might be related was a mixed big.
Some stocks you would have expected to be affected were up and some were
down, without any particular rhyme or reason. The bank stocks had a rough
morning as another dead-fish house came out and lowered its rating.
After we got the early noise out of the way, a steady grind lasting about
half the day took us to the highs with a couple of hours to go. At that
point, the market stopped trading and some headlines hit the tape about the
CFO of Microsoft, John Connors, and his outlook for PC sales growth. The
guts of the story were these quotes from Connors: "In the last several weeks
we've seen reports and had discussions that consumer PC growth has slowed a
bit. . .We expect this quarter to be a tough one." The rest of the story,
which passed on Bloomberg News, said that Connors anticipates sales being
back on track by the December quarter and predicted that PC sales will
increase by 12 to 15 percent in fiscal 2001 (a June fiscal year).
This is important because it's a far lower growth rate than the bulls are
predicting. Recall that some in the cheerleading community think that the
next 12 months are going to be the best year for PC sales since Windows 95.
They're on record as saying that, and the lead cheerleader believes we'll
see something on the order of 30 to 40 percent PC growth. Obviously,
Microsoft doesn't see it that way.
To no one's surprise, one of the cheerleaders was out trying to twist
Microsoft's story into something bullish. You can't say those cheerleaders
don't look on the bright side.
On fumes. . . About the time this story hit the tape, the rally ran out of
gas. Today, for instance, the PC sector and its components had been sort of
the leaders, along with the Internet stocks (and as always, the Sox). We had
a pretty pronounced sell-off and from the highs the Nasdaq 100 dropped
probably 4 percent, while the S&P dropped about 1 1/2 percent, so it was a
decent sell-off. Volume was about the same as yesterday.
After being the winner earlier in the day, the Sox was the loser, down about
4 percent. On the other hand, some of the Internet indices got roughed up
pretty well and the bank stock index actually did a little bit better
relative to its moves in the early going, but still closed down about 3
percent.
Whether today was the end of the rally or not remains to be seen. But things
did fall apart the way one might expect.
Away from stocks, the fixed-income market was slightly heavy. When the
market was flying earlier in the day, fixed income was sluggish, but as the
stock market came under pressure, it rallied a bit. I suspect the weakness
was on the back of the weakness in the dollar, since the macro statistics we
saw were somewhat fixed-income-friendly. The dollar essentially declined
today against all major currencies. As mentioned earlier, gold continued its
rally and managed to close up $3.60. Silver was up just under 1 percent as
well.
Crude was a touch firmer at around $30 again today. There were some
rumblings that the Iraqi oil flow may stop for a couple of weeks. If so,
that could be a nasty shock to the upside in the crude market. Who knows?
There are so many rumors going around in the crude market every day.
So it was more psychotic action with a potential reversal in some of the
lead sled dogs. Whether that's meaningful or not, we should know in the next
couple of days.
----- Original Message -----
From: <Proffittak@xxxxxxx>
To: <realtraders@xxxxxxxxxxxxxxx>
Sent: Tuesday, June 06, 2000 4:39 PM
Subject: [RT] inflation?
> Hello
>
> just a follow up on yesterdays discussion
> today gold had a follow up day with another $3 up
>
> any ideas welcome
> Ben
>
>
>
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