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Posted 6/27/2005
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• 'Mr. Bubble' should (but won't) tackle the housing ATM, 6/20/2005
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Stocks are on borrowed time
Stocks have rallied since mid-April and may rally some more. But that just increases the risk once the next downturn gets under way.
By Bill Fleckenstein
A number of my daily readers have asked if I have changed my views about the stock market, in light of the fact that I haven't sounded very bearish lately.
In a word, no. I have "sounded" less bearish lately because since about mid-April, I have been expecting a rally. (The Standard & Poor's 500 ($INX) is up better than 5.5% since April 20.) The rally could possibly continue for a little while longer. As I said in my April 22 Rap:
"I am aware that the minute bad news stops (at least in the tech sector, where most of my shorts are), bulls come out in force and start conjuring up stories about how everything's going to get better. I also expected that as soon as the bad news stopped filtering in (i.e., when earnings season wound down), the tape generically would to some degree start beating the drum for the proverbial soft landing.
"Thus, when the market dug in earlier this week, when Intel (INTC, news, msgs) and Texas Instruments (TXN, news, msgs) wove the yarns that they did, and when it appeared that folks were gobbling up those stories, I thought it might be time to cover some shorts in anticipation of the rally I just described.
"It was the confluence of these factors that caused me to reduce my short exposure (even though the scenario didn't play out exactly as I envisioned it), with the expectation that I'll be able to re-short those stocks at a more advantageous point. . . .
Related news and commentary on MSN Money
"Obviously, much of this is guesswork on my part and has nothing to do with my long-term views. It's just that running a short portfolio mandates a lot of maneuvering from time to time. I'm not advocating that anyone do as I have done. I may get head-faked, probably more than once, trying to navigate this particular juncture. But I wanted to be clear as to why I've taken the action I have, so as not to confuse people."
Back to the present. The areas that I tend to short, i.e., tech stocks and chip-oriented companies, are not likely to announce bad news in the next month. Most of them look like they'll be able to win at the "meeting expectations" game. That game is ridiculous, but it's the one the bulls play right now.
A bear in protective gear
Just to give another illustration of why I am afraid to tangle with these stocks at the moment, let's take a look at last Tuesday's earnings release from Jabil Circuit (JBL, news, msgs) and how the stock fared the next day. Although Jabil basically made the number (ascribing its strength to new products), the company also noted that there has really been no change in the slow-growth environment that it sees. Not exactly a table-pounding news event, one would think. Nevertheless, the stock closed up about 10%. The news was good enough to get the tech bulls excited.
(While on the subject of "all news is good news," I am curious to see what stock bulls will do if oil drops a few dollars. As I have commented, they more or less ignore oil as it goes up $10, but they herald any drop as a great thing.)
The fear of that kind of action is what keeps me on the sidelines in the near term. However, it in no way changes my view regarding the ultimate outcome of this manic behavior that we've experienced in the last five to 10 years. Once the housing ATM is shut down, there will be a serious end-demand problem that's going to meet a serious oversupply problem. But, for the moment, that is not today's trade.
Easy money to fatten the metals
Turning to the precious metals, last week saw two hints of central-bank easing -- a prospect that should be conducive to higher prices for gold and silver. Wednesday's release of the Bank of England's minutes from its June 8-9 meeting showed two members having voted to cut rates (although the majority voted no change). Last Tuesday, Sweden's central bank cut rates by a greater-than-expected 50 basis points. I cannot believe that an easing is terribly far away in the European Union. And Bill Gross, who heads the Pimco Total Return A Fund (PTTAX), was on the tape Tuesday suggesting that the Fed might ease by year-end.
If that sounds like a potentially positive environment for gold and silver, it is. The global race to debase will really accelerate once the economy slows down here in America. Thus far, our economy has been in a steady state -- It's not slowing, but not picking up, either -- as the housing ATM continues to hold things together. But I do believe that the housing ATM is on borrowed time.
Even though the Fed might not talk dovishly as soon as the next FOMC meeting on Tuesday, as I'd expected it to do a couple months ago, I think the prospect of lower rates worldwide is increasing (since no one really worries about inflation, just nominal GDP growth). Again, that should be quite constructive for precious metals, violent corrections notwithstanding.
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 Web site (by subscription). His investment positions can change at any time. 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. At the time of publication, Fleckenstein was long Intel puts.
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