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Fleck Rap



Note: Look for a weekly installment of Bill Fleckenstein's market rap to appear on Minyanville and further commentary once we launch Buzz & Banter.

The Really Big Statement: From Tanigaki, Not Greenspan

Overnight markets were a nonevent, though preopening our futures were higher, and able to shrug off drops in both mortgage applications and, unexpectedly, new-home sales. Though the market went down yesterday, I guess that in their giddy frame of mind, the bulls figured it should not go down two days in a row, especially on a day when they assumed Easy Al, the kiddies' pal, would tell them he'll stay easy forever. So, the early going saw a bounce of about 0.5% for the major indices. Tech was leading the charge, with the Sox up a couple percent, while housing stocks were taking it on the chin.

Of Rhetoric & Downtick

The market flopped and chopped as it awaited the Fed's communique. Then, folks collectively gasped when Al and the boys uttered the dirty words that in fact someday, they just might, maybe raise rates. The exact panic-inspiring phrase was not a phrase at all but the omission of "a considerable period" -- thereby implying that rates would go up at some point. I guess this rattled folks because the Fed has always suggested it will always tell you what it's going to tell you before it actually tells you, if you follow all that.

The stock bulls tossed stocks over the side, and we went out on the low tick. A check of the box scores shows that the market was down pretty much 1.5% across the board. Beneath the surface, however, the story was a little bit different. Tech stocks, as represented by the Sox, did well, with Micron the flying pig higher on the day. But housing stocks were absolutely destroyed, down 5%, plus or minus. Of course, they were already in trouble before we heard what the Fed had to say. Some cyclical stocks were also roughed up, as were the financials. Precious-metal stocks were lower, too, for reasons that will be clear in a minute.

Just Graze Marks from Raised Rates?

Meanwhile, the Fed news does not strike me as tumultuous as some seem to think. I'm not so sure the Fed is going to raise rates very much. With rates ridiculously low, slightly higher than here is not very big of a deal in the greater scheme of things. But my sanguineness on that score does nothing to alter my view that the economy is in trouble and the dollar is in trouble, etc. The markets over-reacted to this silly statement out of the Fed, while totally disregarding a lot of other problems that exist.

At this juncture, it's not clear how much damage today's Fed news will precipitate, but one thing I can guarantee: If the markets insist on taking this news negatively, we'll hear lovey-dovey damage-control statements out of the Fed. I continue to believe that a bigger event will be next week's employment data, as I described the other day. However, when a market is as speculative as this, one always needs to pay attention to any potential weakness. I'll have a chance to talk more about what the Fed's actions mean for equities going forward.

Turning to outside markets, currencies were also whacked on the Fed's news. The euro, which had been weaker in the morning and clawed its way back to almost unchanged, wound up closing down 1.5%. The Canadian dollar was down about the same, and the yen/Aussie dollar down about 0.75%. Precious metals closed before the Fed's statement, with gold up $4.50 to $414.60, and silver up about 1% to $6.63. In after-hours trading, however, gold and silver surrendered their gains (albeit in thin trading). That's what produced the selloff in precious-metals stocks, which had been higher on the day before the Fed news.

Japan Ponders on Golden Pond

All the Fed-engendered commotion overshadowed what to me was the really big news in the longer term, both for currencies, metals, and perhaps even fixed income -- a potentially tectonic statement made by Japanese Finance Minister Sadakazu Tanigaki. To quote a Bloomberg story: "Japan needs to 'carefully' consider diversifying its official reserves to include more holdings of gold. 'That would be necessary for the purposes of diversifying assets,' Tanigaki said at the fiscal and finance committee of the lower house of parliament in Tokyo. He was responding to a question by Jin Matsubara of the opposition Democratic Party of Japan, regarding why most of Japan's official reserves are in foreign currencies and U.S. Treasuries, rather than other assets, including gold. . . . 'There is debate among international monetary authorities about gold's role in foreign reserves,' Tanigaki said. 'Boosting holdings of gold would affect the gold market and so should be carefully considered.'"

This story made the rounds, as one might imagine, and folks were quick to do calculations about Japan's tiny sliver of reserves held in gold. If Japan were to do something along the lines of what Germany has and pro-rated it the size of their population, it would have to buy about 4,500 tons. This is of course wild conjecture. According to my sources in the metals market, the Japanese have not been doing anything yet. But if they do, a trickle will soon become the functional equivalent of the biblical flood that required Noah to build an ark, including not just the BOJ but also Japanese citizens, the Bank of China, and Chinese citizens.

Those of us who've long held Alan Greenspan's actions in disdain have continually scratched our heads as to why the Bank of Japan, the Bank of China, and others persist in lapping up dollars and mispriced Treasuries, rather than exchanging their surplus dollars for gold, which would not put pressure on the foreign exchange rate. Apparently, some brighter lights in Asia have begun to figure it out. Should this get going, the implications for precious metals would be wildly bullish. Folks would want to scoop up as much gold as they thought they could stomach, then close their eyes and not check on the price except for maybe once a month for a couple years, because that would be one powerful trend in place.

Finally, a few words regarding the tremendous amount of motion in all markets. The important thing going forward is to determine how much was noise and knee-jerk reactions, and how much of the action may possibly be the start of a new trend. My plan is to watch the dust settle in all these markets before determining what I wish to do. Today's pronouncement out of the Fed does nothing to change my view of the dollar or the metals. I am assuming there will be some weakness in those markets that I can use to add to my positions. The only question is whether to do that in the next 48 hours or the next two weeks. Bottom line: The next week or so should be a very interesting and potentially profitable time to take some action in all these markets.

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No positions in stocks mentioned.

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