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Posted 3/8/2004
Contrarian Chronicles
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Don't tell MAMA, but tech is misbehaving
Its time to update where I think the year is headed. Big-cap tech is tired; gold looks well-rested.
By Bill Fleckenstein
Tech continues to trade very poorly, by my reckoning. In fact, the tape at large seems to be struggling, though it doesn't appear to want to crack just yet. Away from the well-known names, the magnitude of speculation has been breathtaking. When I mentioned to a friend recently that the dogs and cats were running it, he said, Yeah, and so are the mice and fleas.
In the space of two days last week, Mamma.com (MAMA, news, msgs) rocketed from $4 to $16. During each of those two days, Mamma -- an Internet search engine and marketer whose previous average trading volume was about 100,000 shares -- traded just about 60 million shares.
Of course, if Mamma is doing well, baby ought to be doing well, too. And in fact, Natus Medical (BABY, news, msgs) has seen its shares run from $4.50 to $7 in a few days (though it has fallen back since that peak). It, too, was a stock that tended to trade "by appointment only," but last Wednesday, the maker of medical products for newborns traded about 10 million shares.
Once I saw what was happening with MAMA and BABY, I tried to check out PAPA. But lo and behold, that company has been acquired, so there is no more upside potential in PAPA and for that matter, no more stock named PAPA.
When I put a summation sign under tech's labored action, rampant speculation and the tug-of-war in the sound-bite averages, it suggests to me that we are very late in this game. However, that doesn't mean we can't have another blast to the upside.
A rap roadmap, refreshed
All the above is by way of updating my roadmap for 2004, which I started in the first Contrarian Chronicles of this year. Back then, I opined that the environment would be very binary, meaning that stocks might continue to go up and that, when they went down, it would be quite a wipeout. While the endgame is closer, it may not start for a while because we've got more stimulus coming to the economy: tax refunds that will hit mailboxes shortly.
When you're groping for the end of a move, it's difficult to catch the exact turning point. In this case, I think that getting close (if a little late) will be good enough, because the downside, once the stimulus has run its course, is likely to be quite severe.
Latter chapters of a correction
As for the currencies, I believe that we are pretty deep into the big correction I was fretting about at the beginning of the year. The current dollar rally changes nothing about the coming currency crisis. Rallies are, in fact, a necessary ingredient in that process. Maybe this dollar rally lasts for another month or six weeks. Maybe the euro is ultimately going to go to $1.17 or $1.18. Who knows?
The euro fell about 5% this year against the dollar before rallying Thursday and Friday.
The catalyst for the currency swoon has been the guys who run them trying to prevent them from going higher. Currencies rising against the dollar generally is bullish for gold, but isn't perceived that way right now.
In any case, I think we are well into a correction process. I say this not so much because I am so desirous of owning foreign currencies but because it's an important piece of the puzzle as to where we are with the metals.
It's a heavy-metal correction, too
Now, whether gold will trade down to $380 an ounce or whether its floor has been reached, I don't know. But we are getting pretty deep into a gold correction, down from a peak of about $425 an ounce to under $400, and the driving force behind it has been the tanking of currencies.
In addition, part of what's happened in the metals is that lots of people have chosen to trade around their positions because it looks so easy. It seems so stupid to sit there during a correction.
Judging from the people I talk to and some e-mail from readers of my daily column, I think a lot of folks have done this. A lot of people are questioning the viability of the bull market in gold. Theyre also wondering if the dollar bear market is over. To which I would say: That's what corrections do -- get everyone to modify his behavior or his view. And that is how bull markets leave people in the lurch.
While on the subject of gold, Pierre Lassonde, president of Newmont Mining (NEM, news, msgs), my favorite gold company, told a gold conference last week that the gold rally "hasn't even started." According to Bloomberg News, Lassonde said the dollar will be "manic depressive," meaning it will have good days and bad days, but will "continue to go down and be very volatile." Meanwhile, the Federal Reserve "doesn't have the room" to raise interest rates. If the Fed tries to move up short-term interest rates, it's going to kill housing, it's going to kill the automobile market, and send the U.S. economy into a deflationary spiral."
Well, I don't know about the deflationary spiral, but most of what he said I would agree with. Even though the correction has been a bit white-knuckle-ish at certain moments, we can't forget the reasons why we want to own gold in the first place. He has touched on a couple of them.
A street map paved with silver and gold
Back to my metals roadmap, my gold position is fairly chunky. I have room to add to it if gold grinds lower, or I see some other things that I like. My Newmont position is at full strength, and I have bought some calls, though I haven't added to my trading position there. My Pan American Silver (PAAS, news, msgs) position has been slightly modified. Regrettably, I own no position in silver bullion, because it just won't seem to let me in, though I do have a good-sized position in Pan American.
I would like to get bigger in gold and perhaps try to buy some gold calls. I'd also like to buy some more Newmont calls. I always try to have a plan (however wrong it may turn out to be), because when you are presented with moments in time when something that you like is plunging, it's best to be prepared and know what you want to do.
To sum up, I don't find myself in the crowd that's worrying about gold going back to $350 or $330. Or that the dollar will have some enormous run because the bear market in the dollar is over. Could I be wrong about all of this? Sure I could. All we can do is take our views and process the information as we get it, and modify them as best we can. Hopefully, that will provide folks with food for thought and provide some input on what markets might be worth trying to capitalize on.
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. Under no circumstances does the information in this column represent a recommendation to buy, sell or hold any security. At the time of publication, he was long Newmont Mining and Pan American Silver. The views and opinions expressed in Bill Fleckenstein's columns are his own and not necessarily those of MSN Money.
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