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Posted 1/9/2006
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Worried about the market? Be ready to act fast
The bulls are likely to whoop it up a bit longer with the easy money boys at the Fed, but lower prices lie ahead. Be prepared to get while the getting is good.
By Bill Fleckenstein
While on vacation, as I thought about what lay ahead in the new year, it seemed fairly certain to me that over the next 12 months, the stock market will bring disappointment and lower prices. However, I kept thinking that the one probable curveball for stock bears like me will be folks' belief in the Fed's omniscience and its ability to rescue the market.
Panting over Fed 'pantomime'
Last Tuesday's rally lent credence to my concern. That day, the bullish contingent had reason to celebrate, as the easy-money boys at the Federal Reserve made clear they were as close as they possibly could be to being done hiking interest rates without actually being done.
The source of these glad tidings? The just-released minutes of the Fed's Dec. 13 meeting. Though "Fed communiqu" and "comedy" don't typically come up in the same breath, that particular document was almost comical in its focus on adjectives. The Fed governors went so far as to say they didn't want to remove the word "measured" because -- get this -- they feared some people might construe that to mean rates might be raised more than the 25 basis points (0.25 percentage points) we've been getting at each Fed meeting for the last year and a half.
Related news and commentary on MSN Money
Consistent with their silly focus on the adjective/jawboning standard, the Fed wouldn't want to let anybody think for five seconds that they might actually raise rates 50 basis points. Of course, anyone with a brain who's watched these folks operate would know they weren't going to do anything aggressive in the first place.
Bear sees fly in the ointment
The Fed's Federal Open Market Committee meets again on Jan. 31. Whether its members will say "we're done hiking" or "we're pretty sure we're done but not quite certain," I have no idea. But again, for all intents and purposes, they are as close to being done without being done as they can be. (One thing with no end in sight -- the torturing of the English language by these clowns.)
Thus, I've concluded that it probably won't be safe to have maximum short exposure until after the bulls have seen their "the Fed's gonna save us/it's the end of the tightening cycle" rally -- ergo, something like the rally that erupted in 1995 all over again -- or some variation on that theme.
That said, if we have enough of a little party right away, it could set the stage for a decent-sized break in a few weeks, as I don't think expectations will be met as we go through the first-quarter earnings season. Of course, once weakness in stocks, the economy or the real-estate market shows its hand, folks will be back to thinking the Fed will ride to the rescue.
In any case, the "easy" money on the short side (though "easy money on the short side" is really an oxymoron) will probably be made sometime later in the year -- after folks realize that, although the Fed has backed off, the end of rate hikes won't suffice to resurrect the housing ATM, the economy or the stock market. Until then, we'll likely see one hell of an "intellectual" taffy pull between the notion of weakness across those three fronts and the hope the Fed will be able to save the day.
Google though rose-colored goggles
Shifting to "easy" money on the search side, Google (GOOG, news, msgs) was up 12% last week as more dead-fish houses (taking a page from the 1999-2000 playbook) -- raised their price targets and "opinions." I've been wrong on how high Google could go. Fortunately, however, it hasn't cost me any money as I have avoided tangling with the stock for about a year now.
Having said that, the hoopla over Google strikes me as enormously overdone. I rarely use it as a search engine because, essentially, all you get are ads. I think that clusty.com is far cleaner. It gives the actual results of a search, rather than results from the businesses that paid the most to have users see what they have on offer. I find it ironic that virtually every living room has a remote-control device that people use to skip commercials, yet when using Google, it's as though you do the opposite, using the clicker to find commercials.
One reason Google has been able to do as well as it has is because Microsoft (MSFT, news, msgs) has done as poorly as it has with search. I still believe that, at some point, Microsoft will be able to wreck the pricing structure on keyword searches and it will be game over for Google (as a stock). (Editor's note: Microsoft is the publisher of MSN Money.)
Of course, everyone is gaga over Google not so much because they love the product but because they love the price action of the stock. Last Wednesday, Google's market cap touched north of $130 billion on revenues that are running at an annualized rate of about $6 billion. However, Thursday's valuation means no more than did the valuation of $100 billion (equally stupendous), which Google achieved on its way to here. In other words, valuation worries alone are not likely to make the stock go down. (Editor's note: To see how Google's market cap compares, check here.)
Keyword: Lower-share-price
I don't know exactly what will make the stock go down. But I believe that lots of people who think they've done very well owning Google will wind up with losses, rather than gains (even if Google continues higher in the short run), just as happened to so many with temporary "home runs" during the 1995-2000 stock bubble.
Finally, on another topic, I would like to thank everyone who contributed to Shepherd's Counseling Services for being so generous. (For more on Shepherd's, see Despite what you hear, inflation is growing.")
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 Fleckenstein Capital 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 CNBC or MSN Money. At the time of publication, Bill Fleckenstein did not own or control shares of any of the equities mentioned in this column. He does not own short positions in any stock mentioned in this column.
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