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Posted 6/20/2005
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'Mr. Bubble' should (but won't) tackle the housing ATM
The Times rightly christened Greenspan Mr. Bubble. But it missed the fact that he could do a lot more to address the housing bubble.
By Bill Fleckenstein
Picking up where I left off last week: I had to do a double-take when I turned to the June 12 New York Times and found an editorial on Greenspan titled "Mr. Bubble." Unfortunately, because it was rather incoherent, I couldn't tell what the actual complaint was. The editorial had an inkling of insight about Greenspan being a bubblehead, but it didn't quite know why.
What the Times really wanted to do, as usual, was to take a shot at the Bush administration. (That's meant not as a political statement, but as a statement of how the paper feels.)
In any case, here is a comment that shows why the editorial was slightly misguided: "After all, the Federal Reserve chairman has been doing all the things people in his position normally do to push rates up -- warning about 'bubbles' in the housing market, assuring the business community that the economy is basically strong, and tripling the Fed's overnight lending rate, to 3%."
Among other inaccuracies, that statement ignores the fact that short-term rates are still less than the inflation rate, and that Greenspan not too long ago denied that a bubble in housing was even possible.
Rx: Regulation X
Greenspan is certainly not leading a charge to take any action to thwart the housing bubble. If he was serious, he could ask Congress to resuscitate Regulation X (part of the Defense Production Act, passed in September 1950), which empowered the Fed to set minimum downpayments and maximum mortgage-repayment periods for residential properties. (However, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (OCC) have come out against perceived abuses in mortgage lending, citing interest-only and negative-amortization mortgages.)
Since Greenspan was afraid to change Regulation T during the height of the equity bubble, you can be sure he will pretend not to know about Regulation X now. Therefore, while I'm happy that The New York Times is willing to call Greenspan "Mr. Bubble," I wish the paper could get its facts straight about why he deserves the name it gave him.
Related news and commentary on MSN Money
Of course, homeowners owe Mr. Bubble a "debt" of gratitude, as their heated refinancing and equity extraction have enabled them to live large. That's something we can surmise from last week's beat-the-number performance by Best Buy (BBY, news, msgs). If folks are going to take money out of their houses, they've got to have a big digital TV. Sales of same were part of what helped Best Buy do as well as it did.
But, even as the housing ATM has been working 24/7 to transform average homeowners into high-end consumers, the folks with no access to this cash machine have been struggling. That can be surmised by Wal-Mart's (WMT, news, msgs) account of lackluster sales. And enterprise and small-to-medium-sized businesses appear soft, based on what we heard recently from CDW Corp. (CDWC, news, msgs).
Handicapping the Achilles heels
Therefore, as we head into the preannouncement season, to the extent that we see preannouncements, they will likely come from companies with exposure not to the consumer but the corporate market.
That means we may see another round of puking from software companies, but probably little from chip companies, as many enjoy a good deal of consumer exposure. For this reason, National Semiconductor (NSM, news, msgs) and LSI Logic (LSI, news, msgs) were able to take their guidance up recently, whereas Xilinx (XLNX, news, msgs) (whose parts go into products that are almost exclusively sold to big business) had problems.
Of course, from where Intel (INTC, news, msgs) fits into that mosaic, macro-wise, you would think that the company would be seeing trouble. I still scratch my head when I try to figure out where all the Intel-produced parts are going, because there are no data suggesting that the PC business in the aggregate is all that great. Nor is Asia doing well enough to support what Intel would have us believe.
Oil-pipe dreams
Turning from tech confusion to crude reality, I would like to share the thoughts of a knowledgeable friend who's been quite bullish on copper and oil: As I wrote in my daily column on May 25:
"In his opinion, the fact that oil for delivery three years hence is trading around $50, and given the nature of the buyers who've been, in his words, 'inhaling it,' means it's unlikely that crude will go down in the short run in any meaningful way. He says the front end of the oil curve could get hit from time to time, but with serious demand that far out, he thinks oil is unlikely to witness material weakness from the price levels recently seen."
Just for grins last Wednesday, I checked and saw that as of the day before, oil for December 2011 delivery was approximately equal to oil priced for delivery next month. Historically, whenever oil prices have hit what was deemed to be a temporary peak or an absurdly high price, oil for future delivery has often been $10 or $20 cheaper. The fact that oil trades where it does is indicative of tightness -- meaning that stock bulls who think oil will soon return to the mid-$30s are liable to be disappointed. It will probably take a worldwide recession (and, certainly, a recession in China) to get oil back to those prices, if in fact it ever does.
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. 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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