Note: Professor Fleckenstein provides his commentary every Wednesday evening for educational purposes - his insights are not intended as investment advice. You can find his daily comments at www.fleckensteincapital.com.
Our stock-index futures were oddly quiet overnight, barely moving, even after the great arm-waving that I'd anticipated from John Chambers. To dive right in, folks had gotten mighty lathered up for the Cisco (CSCO:NASD) report. Yesterday, slightly out-of-the-money $22.50 calls ran about 5 to 1 vs. slightly in-the-money $22.50 puts -- an indication of speculative fervor. But bulls hoping to get bailed out by Chambers were sorely let down. At the open, the tape basically headed south, such that within an hour, the Sox was down about 4% and Cisco was down a dollar.
Cisco Hops Aboard the Buildup Bandwagon
As for the innards behind the arm-waving, they weren't all that spectacular. In fact, inventory grew 20% quarter-on-quarter, and was up about 47% year-on-year. That pushed inventory days, quarter-on-quarter, from 49 to 58. Of course, Cisco said it needed the inventory due to longer lead times, which to me buttresses the point about the double and triple ordering that's been occurring for some time now.
We already knew that Intel (INTC:NASD) and Texas Instruments (TXN:NASD) have inventory, as well as virtually every contract manufacturer. Now we can add Cisco to that list. For the past six months, I have talked about the inventory buildup, waiting for signs of a slowdown in end-market demand. While that hasn't been seen thus far (except maybe for Nokia (NOK:NYSE)), inventory has built to a point where disappointments are going to happen, even if end demand doesn't slow, which I expect it will.
Lotsa Stocks Eat Spinach for a Green Finish
Back to the action, the market slid all morning, then spent a few hours bouncing around the lows of down a couple percent for the Nasdaq and a freckle less for the Dow and S&P. Next, with about 90 minutes to go, we had a rally of 3%, plus or minus, which took the market out on the highs of the day. As a check of the box scores will reveal, that got many of the indices green.
Hear Biggs Crow, See Stocks Go
The turnaround was apparently sparked by Barton Biggs, who spouted on Bubblevision that we would have a huge rally. How fitting, given that the stock market has become a giant commodity, where 8,000 funds compete daily as day traders looking at pictures and moving averages. Speaking of which, bulls will of course claim that we successfully tested the 200-day moving average in the S&P, though the Nasdaq remains below its 200-day average. Suffice to say, today's action was about as wild and woolly as we've seen in some time.
Away from stocks, both gold and silver were 2% higher overnight, but gave up most of their gains, to close a bit higher. The euro wound up closing with an inconclusive gain of 0.3%. Most major currencies rose initially on the news that our trade deficit hit a record-breaking $46 billion, but then sold off modestly and were mixed. Interestingly, while stocks were under pressure, fixed income was unable to rally, and closed slightly lower. As for deflation, oil was up another 2%, at $40.77 a barrel.
I felt and stated yesterday that today was going to be very important, as I expected Cisco to give us exactly the kind of report that would be a litmus test for the market. Would the bulls be able to sustain the stabilization/rally attempt that began a couple days ago for stocks at large, or about five days ago for tech? Would they be able to produce a big bounce, or would weakness reassert itself?
Eerie Bows to Cheery
Today, in fact, brought both. Initially, the action was rather ominous, with the market averages already negative on the year, despite pretty decent company-specific news, and despite having received a wall of money (the latter reflecting folks' overconfident assumption that an election year has to yield positive returns). Meanwhile, the fact that the Fed is trapped -- unable to ease to "save the day," and pressed to tighten to stave off inflation (though the Fed will tighten too slowly) -- appears not to have dawned on folks yet.
On the other hand, just as it looked like the dam would burst, the market bounced. As I stated earlier, in light of this soybean-like environment, perhaps the bulls will attempt to build on today's bounce, fueling the rally for a little while. Though it's impossible to tell, I feel very confident in saying that we are not going to new highs, and that whatever rally we have after today's turnaround will fail.
Beware the Beguiling Bull
I expect that prices will once again move to the downside, and that at some point in time, we are going to see a massive dislocation or crash-like event. The stock market, prospectively, looks like an extraordinarily hostile place to be. Folks should proceed with maximum caution.
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