Posted on 01/19/2004 7:02:01 PM PST by arete
This morning I thought I'd stumbled into Mr. Peabody's Wayback Machine and been transported to an earlier time. I have noted many of the signs of speculation seen recently, and I'm sure folks can come up with plenty of stories as well. But the example I'm about to share strikes me as the most vivid case of deja-vu thus far:
Potluck Price-Targeting:
A dead fish at Morgan Stanley downgraded Qualcomm (QCOM) this morning from equal weight to overweight, based on valuation, but raised his price target from $60 to $70. That disconnect of a stock downgrade and price-target upgrade was one of my favorite examples of dead-fish lunacy during the mania. Back then, dead fish would up their targets willy-nilly, and this ridiculous practice has been going on for a while now. Speculative fervor is also unmistakable in the action of Taser International (TASR), which, as I noted the other day, went wild on the back of a three-for-one stock split. At one point today, it was again up over 10%.
The frosting on the deja-vu cake came in the form of today's consumer confidence number, which weighed in at 103.2, versus expectations of 94 -- the highest sentiment poll reading since November 2000. (The stock-market animal spirits have gotten the blood racing of that population subset from Michigan.) I might also cite a story in today's Wall Street Journal titled "Rising Stocks, Home Values Are Restoring Wealth," which says that when you add stocks and bonds together, folks' net worth nearly matches levels seen back in 2000. That observation, of course, overlooks the tremendous damage suffered by lots of people. I would guess that now, the rich have gotten richer, while folks of lesser means haven't done as well. Though Easy Al has presided over yet another wealth transfer, this one will also be temporary, to some degree, and when the dislocations occur, you can be sure that for the most part, "littler guys" will get hurt worse than the bigger guys.
Kinky Trumps Frumpy:
Turning to the market action, we had a few wild swings in the early going, the net of which saw the Nasdaq up 1%. But the Dow and S&P basically spun their wheels, even given the sentiment data. And, despite some 50 headlines heralding GE's "good" news (in which each division was sliced and diced to enhance overall appearances), revenues rose just 4% year-over-year, and the stock was only up about 1% in the early going. Why buy GE, I guess, when you can buy RIMM or TASR?
In any case, for the first half of the day, the market basically flopped and chopped in a wide range and then started to grind higher, settling on the highs of a day that saw speculation spearhead the charge to the upside. On that score, I'd like to toss out another nugget: Looking at the combined most-active list for all the exchanges, provided by Bloomberg, I saw that of the 28 most active companies, 15 were under $10, of which 11 were under $7. So, speculation is alive and well, in every guise ever seen during the previous mania -- not to be confused with its younger sibling that we are experiencing today.
Anatomy of a Commodity Correction:
Away from stocks, the euro was taken to the woodshed today as more gurus at the ECB admonished their currency for appreciating too much. One grand poo-bah said the dollar will be discussed at the G7 shrimp fest a couple weeks from now. So, in the belaboring-the-obvious department, the currency correction continues apace. One point I might make about commodities (with currencies being in that category): After things have had an extended run in one direction -- to the upside, in this instance -- every day that they close poorly would tend to indicate more weakness yet ahead. These corrections continue until Mr. Market shakes out every weak-handed holder that there is. In any event, by the end of the day, all the currencies had been roughed up against the dollar, with the euro finishing down 1.5% and the Canadian/Aussie dollars down about 0.5% and 1%, respectively.
As for the metals, gold was surprisingly quiet overnight, but down 0.5% in New York trading, while at the same time silver was up 2%. So, the difference in fundamentals appears to be supporting silver right now, which is not to say it's immune to a white-knuckle ride of a few days. But I think silver's recent action reflects its superior supply/demand story, which of course is predicated on investment demand. The case for being bullish on gold rests on the same premise, but the supply/demand equation is not as strong.
Silver: A More Precocious Precious Metal?:
That doesn't mean folks should rush out and buy silver today. But it just may be that as this correction runs its course, silver will turn first, rather than gold. I'm happy to see folks champion silver, considering that as recently as six months ago, they dismissed the notion that when precious-metals investment came into its own, silver would go up the most.
Meanwhile, folks need to remember that the desire to own the precious metals expresses a state of mind, a no-confidence vote in paper currency. The ECB talking heads have helped clarify that issue by stating they don't want their currency to go up too much. That is the problem with all these currencies, as I noted the other day: When all is said and done, they are just paper. Further down the road, even holders of euros will decide that they'd better own some metals.
Wow! Bidding-War Wooing in Japan:
Before making a final point about rampant speculation, I would like to draw folks' attention to something potentially worthwhile occurring in a place where speculation has been for the most part stamped out. A story in today's Journal titled "For First Time, Japanese Firms Face Foreign Hostile Takeovers" says that in two cases where a hostile bid has been made, a second, higher, offer has been made.
Jim Grant, the extraordinarily fine writer of Grant's Interest Rate Observer and several books, also runs a small-cap value fund in Japan and has regaled me with stories of how cheap assets are there. I've noted in the past that a handful of buyout funds have headed to Japan, and as this story says, a few hostile bids have occurred. But the fact that hostile bids are now being topped is, I think, an important data point.
Last fall I mused that it might be time to invest in Japan. I almost, but did not, commit some money there. That has been a bad decision thus far, because not only has that market done better, but the yen has risen. In any case, were I not so bearish on the ability of our problems to affect the world, I would certainly be putting investment dollars in Japan, and I intend to pay closer attention to all things Japanese prospectively. Yes, I know there are plenty of problems in Japan, but what matters is that in many cases, the prices there reflect those problems. It's just the opposite of what's going on here, where the prices reflect perfection, and the underlying fundamentals are anything but perfect.
Before a Slide, How High the Upside?:
Lastly, I'd like to make a point about speculators' desire to find a party, wherever that takes them. If one steps back from the tape, one can see that housing and retail stocks have been dogging it, due to what looks to be an increasingly tired consumer. I think that consumer-oriented stocks, be they retail or housing, are exhibiting the same tiredness. Meanwhile, what's happening in the tape is that as folks are leaving those areas behind, they're moving into more and more speculative ideas, as I've described above.
That's all symptomatic of being very late in the game. It's not, however, possible to guess how much more speculative things can get before the upside is over. In the fall of 1999, every speculative thing you could ask for was happening, but there were a whole lot of points left on the upside in the last four months. Who would have ever thought that 2000 would get as crazy as it did? Who would have ever thought folks would forget just how a party like that ends?
Flecks site is open this month. Just enter Guest as both username and password.
Another interesting recent article from Fleckenstein here:
If 2004 goes bad, it will go really bad
During the second hour of Sunday's Roger Arnold show, Roger had Tom Barthelemy on as a guest. Roger and Tom discussed the prospects for the gold and silver markets. Barthelemy said to buy silver "every day". Arnold thinks gold could correct down to 350-380 in reaction to the dollar.
Finally, for anyone out there who missed the excellent FSO broadcast discussion:
Jim Puplava, Bill Murphy & Eric King - 3 Bulls on an Island of Worry
Richard W.
Comments and opinions welcome.
Richard W.
Several euphemisms for urination and deification, along with a few shocked and hyphenated quips with various New Testament names mixed in. To keep it short and cleaned up enough for kids to read..."They did this with a straight face?!"
They're definitely trying to get past something very near term, regardless of what it takes. This certainly does not bode well for the future.
That's a great image. Kinda makes me want to.....sing.....
Greenspan the old Fed chairman
Had a very massive debt.
And if you ever saw it,
Your pants would soon be quite wet.
All of the other countries
started ditching their greenbacks
they didn't want to own bonds
printed by financial hacks.
Then one triple witching day
John Law* came to say
Greenspan, could you use your press
to print us out of this mess?
Then all the people loved him,
until they were forced to see
that all their cash was good for
was to use as their T.P.
* John Law was a Scottish banker who emigrated to France and became financial adviser to Louis XV. He eventually gave King Louis ample reason to wish that the Scot had never left his native land. Law recommended the establishment of La Banque Royale which became commonly known as La Banque de Law. This bank received all of the King's revenues against which it issued notes in ever-increasing quantities. John Law also engineered the setting up of the Company of the West (later the Company of the Indies) which controlled the foreign trade of France, including Louisiana and New France. In 1719 John Law was given the sole right to coin the national currency. The value of the shares of the Company of the Indies rose rapidly from 500 livres per share to 20,000 livres. Complete collapse of his schemes came in 1720 with the bursting of the "Mississippi Bubble.'' Law left France in disgrace in 1720. The "John Law" coins were issued in copper, silver and gold and circulated to some extent in New France. The piece illustrated, from the National Currency Collection of the Bank of Canada, is a silver livre of about the same size and value as an English shilling. Source: http://collections.ic.gc.ca/bank/english/emar72.htm
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