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Posted 3/20/2006
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• Confessions of a short-seller, 3/13/2006
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Fed is ready to stop -- too soon
Want some proof? Look at how Fed officials are worrying about raising rates too high. That helped feed last weeks stock market run-up. Its a good time to be cautious.
By Bill Fleckenstein
Last Tuesday, the "tough Fed" strategy/trade that I described in my Feb. 27 column (If theres no inflation, why do we fight it?) was called into question. The unraveling began to shape up the day before, when Janet Yellen, the president of the San Francisco Federal Reserve Bank, was on the tape, suggesting that wage pressure was not "threatening to price stability."
Fed's lovey-dovey talk
Yellen made other dovish-sounding comments, such as saying that policy is now "a matter of judgment," while also noting that the Fed needs to be sensitive to possible overshooting. (The Fed, I would guess, could interpret "overshooting" as taking interest rates too high or as too much strength in the economy.) Net-net, her comments put the Fed-as-dove-not-hawk idea into people's heads for the first time in a little while.
Meanwhile, rumors were circulating last Tuesday that a plugged-in Washington, D.C., consulting firm, Medley Advisors, had suggested the Fed would either be done tightening with the widely expected 25-basis-point rate hike at the upcoming Federal Open Market Committee meeting on March 28, or that it would be very close to being done. And, the story said, the Fed would be much more focused than in the past on the data.
Whether that's true or not, I can't say for sure, but it jibes with my thinking and plays to my prejudices. (Therefore, human nature being what it is, I'm inclined to believe it.)
Certainly, my parsing of what Bennie himself -- thats Ben Bernanke, the new Fed boss -- had to say Tuesday afternoon did nothing to disabuse me of that notion. Neither did Thursday's weak housing-starts data. Though our Fed chairman didn't comment directly about monetary policy, he certainly didn't sound to me like a guy who was very concerned with the economy overheating. That reinforces my view that he's liable to make Easy Al Greenspan -- his predecessor -- look like a serious tough guy.
Related news and commentary on MSN Money
A blissfully ignorant stock market
"Easier Fed" talk notwithstanding, our fixed-income, foreign-currency and (to some degree) metals markets all seem to fear the opposite (with some of them apparently fearing tightness on the part of the European Central Bank and Bank of Japan). At the same time, our stock market continues to embody the Alfred E. Neuman motto, "What, Me Worry?," as the rally that I had been anticipating (and fearing) in my Jan. 9 and Feb. 6 columns continues.
In a display of ongoing obliviousness to macro-deterioration, bulls shrugged off the news last Tuesday that our current-account deficit for the fourth quarter was a staggering $224 billion. (That annualizes to about $1 trillion and is roughly 7% of GDP.) In the face of that disturbing news, the bullish contingent "registered" its concern by rallying across the board.
Clueless in Seattle
I must admit that the odd-man-out behavior of the stock market leaves me as confused as I've been in some time. My best explanation is a rather tortured argument: As the most forward-looking of markets, stocks are discounting the moment in time when the Fed stops tightening -- whereas the other markets are inclined to just react to that eventuality. Once the Fed finally does stop tightening, the stock market will have discounted most of it, such that whatever rally remains after the Fed actually stops will be rather small.
Miner's mother lode of credits
Now to shift gears from the money-printing Fed to the currency that can't be printed -- gold. I'm told that a noteworthy TV stock-picking personality has singled out Goldcorp (GG, news, msgs) as the stock to own, while dissing Newmont Mining (NEM, news, msgs). He says that Goldcorp's cash costs for mining gold are low, while Newmont's are high. To gain perspective on that, potential gold-stock owners need to understand the cost-lowering impact of "byproduct credits." It's a topic that I covered in my daily column last week and was recently echoed by John Doody, who writes "The Gold Stock Analyst."
Doody noted that Goldcorp (a company he likes -- but more for its production profile) was able to show cash costs of $22 an ounce, due to a $307 million credit for copper and silver byproducts. The reason? Mining entities are allowed to take other mineral revenues as byproduct credits. Thus, the stated price to produce their main metal ends up being lower. Without Goldcorp's credit, Doody points out, the company's cash costs would have been "a very ordinary $292 an ounce."
There's nothing dishonest about this, though it can be misleading. For instance, silver producers get to take their revenues from lead and zinc as byproduct credits. The rationale: It's not what they're trying to mine, and there is a cost associated with removing these metals from the ground and stripping them out to get at the silver. So, silver producers take the revenues from them as credits to offset their costs. (John will have more to say in his April issue, he says, "including how Newmont and Barrick Gold (ABX, news, msgs) would look if they stopped reporting on the Gold Institute standard and took their big copper production as a byproduct credit in the manner of Goldcorp.")
The need for statistical picks and shovels
In any case, I bring this up to show how the comparisons of miners could easily be misleading -- unless one knows the exact production mix at every mine that one wants to compare. There are a lot more moving parts in analyzing mining companies than many folks realize, and, for the unscrupulous, there are always opportunities to paint a picture rosier than reality.
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 was long Newmont Mining.
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