Print-friendly version
Send this to a friend
Posted 10/11/2004
Contrarian Chronicles
About Contrarian Chronicles
Learn the Contrarian Chronicles lingo
Subscribe to Market Rap on Fleckenstein Capital
Related Articles
The housing bubble doesn't add up
Related Sites
Oleg Mozhaiskov's speech to the London Bullion Marketing Association
Bill Gross/Steve Roach
e-mail exchange
Contrarian Chronicles
Recent articles:
• The government's inflation con job, 10/4/2004
• Watch out for the hurricane named Fannie, 9/27/2004
• Under techs hood, things dont look so good, 9/20/2004
More...
| | Contrarian Chronicles
The frantic search for a silver lining
Weak micro- and macroeconomic data continue to pile up, yet contorted rationalizations regarding oil, stocks and real estate continue unabated.
By Bill Fleckenstein
Over the past several months, we have witnessed an unanticipated stretch (or "blip," in Fed parlance) of disappointing micro and macro news. But no matter. Each and every data point has been deemed to be the very last one -- even as the disappointing news continues to pile up.
And, in a variation of the good-news-is-just-around-the-corner bet, some equity speculators are afraid that other people will think things are going to get better, so they're buying stocks now because the other people who also might think that are buying stocks -- and everyone is afraid of "getting left behind."
You can chalk it up to the noise of 8,000 mutual funds and 8,000 hedge funds operating with other people's money -- and all voting for the same thing at the same time, based on recent motion rather than reasonable expectations. In any case, one of these days, and sooner, rather than later, I believe that folks' ability to rationalize all this is going to snap.
Dude, no $30 crude
To see this contorted exercise at work, take a look at oil. Almost no one anticipated $50 crude, yet every time crude goes up, folks appear convinced that this must be the last day of its rally. And we see transportation stocks surging along with oil. (Last June, oil was $35ish and the transportation index was 2800ish. The former has rallied 43% and the latter 20%.) Even if crude were to be done going up, it appears unlikely that it will get to the promised land of the low $30s (that most bulls envision) any time soon.
Shifting to the precious metals -- a sector where participants in the reality camp, not the rationalization camp, have had to exercise patience -- I note that metal stocks are now approaching the highs that they saw last winter. (That was followed by a nasty washout.) As a lesson in how perverse markets can be, I would like to reprise the closing paragraph from the April 28, 2004, edition of my daily column, written when gold was $385 and silver was $5.85:
"Nonetheless, I believe that when the dust settles, we'll look back and say, wow, can you believe those metals got puked up so hard (on a China 'play' washout) at that moment in time? It was exactly the time you were supposed to have bought them. Unfortunately, Mr. Market has a way of twisting things around, such that when opportunity arrives, you're so glad just to have the pain end that you often don't feel like doing anything about the 'opportunity.'" That's what markets do -- try to get you bullish at the top, bearish at the bottom, and confused in between.
Reprimand for a reserve currency
Further on the subject of gold, and adding in the dollar, I'd like to share a few noteworthy observations from a speech (read the full text here) given last June to the London Bullion Marketing Association by Oleg Mozhaiskov, a former deputy chairman of Russia's central bank:
"Although there are several reserve currencies, the blatant lack of discipline is demonstrated by the U.S. dollar. . . . Given the actual behavior of the dollar on the forex markets, the problem could be more accurately termed the irresponsibility of the U.S. government in relation to the market valuation of its currency in international circulation. . . . The world has come to a paradoxical situation in which the creditor countries are more concerned with the fate of the dollar than the U.S. authorities themselves are."
As I have often stated, the clock is ticking for the dollar and the repercussions of a dollar collapse. Obviously, when that view is more widely shared, it will have an impact on the dollar and, by extension, the gold and silver markets.
Red carpet for the yellow dog
Continuing, Mozhaiskov says: "One conclusion, at least, is clear: Gold is predominantly a financial asset, not merely a precious metal." That, of course, is a point which many of us who believe in gold as a store of value also happen to believe. Likewise, we agree with his summation: "Under these conditions, the growing interest of investors in real assets, gold in particular, is more than justified." As I said, if that becomes a more prevalent view among investors at large, and among central banks (particularly Asian central banks), the price of gold is going to be much, much higher.
(For another perspective on the "blatant lack of discipline" referred to above, look here to read an e-mail/letter exchange between Bill Gross and Steve Roach regarding the dollar and macro imbalances. With these two gentlemen airing their thoughts in public, others will likely follow, i.e., the story will get "legs" and gather converts.)
Extrapolation, extrapolation, extrapolation
Finally, I'd like to spend a minute on the real estate sector, otherwise known as the housing ATM. Last week, the shares of Pulte Homes (PHM, news, msgs) took a major hit after the builder announced price cuts in the Las Vegas market, on the back of weak demand.
As I have discussed here in the Contrarian and as well as in my daily column, the housing market has seen wild speculation for some time. Las Vegas appears to be cracking, and Pulte is not going to be the only company affected by that. We have seen real estate inventory backing up in California and other places as well. I would guess that real estate might not be quite so red-hot in Florida after all the hurricane-related problems they've had.
I think the housing bubble is on borrowed time. If so, and when those dots are connected, it will be bad not just for housing but everything else. There will also be problems in the credit sector, since the housing ATM has been what's kept the credit cycle going. Though I am not short housing stocks, and I'm sure most other readers aren't either, this is a bouncing ball that will need to be followed closely, due to all its important ramifications.
Bill Fleckenstein is president of Fleckenstein Capital, which manages a hedge fund based in Seattle. He also writes a daily Market Rap column on his Fleckensteincapital.com site. His investment positions can change at any time. At the time of publication, Bill Fleckenstein did not hold positions in any equities mentioned in this column. Under no circumstances does the information in this column represent a recommendation to buy, sell or hold any security. The views and opinions expressed in Bill Fleckenstein's columns are his own and not necessarily those of MSN Money.
|
