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Fleck Rap


Thanks Bill!


Editor's Note: Professor Fleckenstein provides his commentary for educational purposes and his insights are not intended as investment advice.

You can find his always insightful vibe on his daily Rap.

Dell Propels Tech

The fact that Dell (DELL) made the number and guided to what was expected precipitated a rally in the stock Thursday night and carried into Friday. I've was struck last week that, as housing / cyclicals / financials have all come under pressure, tech held a bid. Friday, on the back of Dell's glad tidings, tech-related stocks were firm as the market took an early dip. Then, as tech exploded higher, it pulled up the entire tape. By midday, the Sox was up better than 3%, which had the Nasdaq up 1%, with the S&P and the Dow kind of dogging it, up about 0.5%.

I don't think Dell had anything that spectacular to say, but since I've been looking for a rally, as soon as I saw that there was no trouble there, I covered my small short. I also trimmed a couple of other shorts in the early going, as the path of least resistance, at least for tech-oriented names, appears to be higher.

It's not that they ought to go higher, but that the people doing the voting with other people's money seem inclined to vote that way for a while. And, since we'll be really deep into the no-news period, there's not much to upset the tech applecart. Whether the budding rally in tech can drag the whole tape higher, I do not know.

A Riddle That Resists Unraveling

In the past few years, whenever the broad tape was in trouble and tech was digging in, the market would resolve itself higher, with tech leading the way. Perhaps this is a head fake and tech will roll over, joining the rest of the tape, and we'll have a wipeout. That's possible. On the other hand, tech may indicate that the day is about to be saved. That's the "conundrum" I am wrestling with.

I notice that there are an awful lot of people around who have become experts on something very few know about -- the whole credit-derivatives scene. If that hand has been overplayed, to some degree that would also exacerbate any rally in the near term. However, if these credit problems and their associated dominoes are really starting to tip over, we could have a serious debacle right here and now.

One thing's for sure: With so many hedge funds apparently having problems, the noise-to-signal ratio is extraordinarily high. Therefore, it's dangerous to draw too many conclusions, as it will be extremely easy to draw the wrong conclusions. I myself am trying to take in all this wild action, without quickly leaping to connect all the available dots, because I don't want to be fooled by something that might be ephemeral.

Winners' and Sinners' Circle

Returning to the action, the morning melee ran out of gas about midday Friday, and from there, we spent the next several hours sliding to the day's lows (which were decidedly negative for the S&P/Dow, to the tune of 1% plus or minus). However, during that slide, the Nasdaq never went red, and the Sox only saw its gains cut to about 2% on the day. (At that moment, therefore, the bifurcation in sentiment was about as extreme as it's been in some time.) Next, we saw a rally in the last hour that halved the day's losses for the S&P/Dow, and left the Nasdaq about 0.5% higher. Housing went out modestly red, and financials / cyclicals were generically weak.

Away from stocks, oil traded both sides of unchanged before closing about flat. Fixed income was firmer. The foreign currencies were splattered yet again, as the euro continues in a state of mini-freefall. That spilled over into the metals, with gold and silver down 1% at one point, before trimming those losses and closing down about 0.25%.

Sweet and Sour Metals

As for the metals stocks, they were abused once more, with Newmont Mining (NEM) and Pan American Silver (PAAS) down about 3%. In checking back, I noted that on the way up, Newmont traded at this price in the summer of 2003 when gold was about $345 an ounce. Ditto for Pan American in the fall of 2003 when silver was about $5.40. So, these stocks are back to where they were when the metals prices were much lower.

That said, the explosion in mining costs has hampered them from making any serious money, even though bullion prices are higher. Rather than conclude the metals stocks are indicating much lower metals prices, I think the selling in metals stocks is getting overdone, so I bought a little more Newmont today. But obviously, that's a guess on my part.

Illogical Lust for Chips

I do find it interesting, though, that as the equity and derivatives markets were under pressure last week, the commodities that usually tend to benefit (as that pressure has signaled cries of folks wanting an easier Fed), i.e., silver and gold, have been hammered, while the commodity whose price always goes down gets chased higher, that being silicon chips.

Interestingly enough, Micron (MU), a very poor operator in a terrible part of the chip industry that's seen its chip prices go down nearly all year, was up 4% Friday as the precious-metals stocks were pounded. I don't want to make too much of that in light of my concern about the high noise-to-signal ratio. But it is rather striking that folks are so giddy about semiconductors while they're so worried about everything else.

Stigma of Debt Bites the Dust

Turning to the real-estate mania chronicles department, a reader who is knowledgeable in the mortgage arena forwarded a nice data-collection summary of the lunacy taking place in house financing. I would like to pass it along as is, and I encourage everyone to read this a couple of times.

"Here are some more stunning stats! (1) 2001: 2% of CA loans IO [interest-only]. 2004: 49% (people just stretching and stretching to get into a home). (2) 70% of refis are now 'cash-out refi' (draining savings). (3) Total equity takeout, meaning cash-out refi and HELOC [home-equity line of credit], on homes in 2004 accounted for 77% of total U.S. consumption. (4) 2004: 20% of payment option MTG's [mortgages] were NegAM'ing [negative amortization]. Currently, 40% are NegAM'ing. God help them when px's [prices] stabilize or GO DOWN! (5) WAMU's [Washington Mutual (WM)] new product, 40-yr. MTG, no biggie, but they are going to allow you to do 100% financing, 80/20 HELOC, and further allow you to do pay option on the 1st, i.e. NegAM/IO. Yikes! (6) Almost 30% of 2004 MTG's were second/vaca/investment property."

There is nothing that says that these lopsided figures cannot get more lopsided. They can. But the absolutely inescapable conclusion is that when this real-estate mania bursts, it will create problems that will be very large and not easily solved. This is going to be extraordinarily unpleasant when it unwinds.

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