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Fleck Rap



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

Don't Worry, Be Happy . . . Beware

Not surprisingly, world markets were firm after yesterday's mini-moonshot here, though our equity futures did little of anything last night. The early going was a bit of a seesaw affair, with the market alternating in a small range between slightly positive and slightly negative.

Flickering of the Refi Fires

Though the action lacked for a theme, I found one in the news preopening of a 3% sequential drop in mortgage applications: The ATM is slowly running out of cash, even as the frenzy in certain markets continues. (If you check the data at the Mortgage Bankers Association Web site, you can see that applications are down 59% year-over-year.) Speaking of housing, new-home sales were less than expected, and in fact showed the largest drop, month-to-month, in a decade. (Thanks to my buddy Lance Lewis for that nugget.)

In any case, the data were modestly negative for housing stocks, which were a bit red after their recent two-day ramp job. Given what's gone on, it's beyond me how anyone can deem housing stocks a buy, though that doesn't mean they're a short. I just don't understand why folks would rationalize the insanity into something close to normal. Of course, that won't come as a surprise to any Rap readers.

A Well-Stocked Sox Drawer

The early morning flop-and-chop continued all day, though with a tiny upward bias that saw the market finish on its highs. A quick check of the box scores will reveal that today was a bit of a mixed bag. About the only area of concerted strength was the Sox, and that was pretty small, though following on the heels of yesterday's big move. Likewise, the only area of any real weakness was housing, as previously mentioned. All in all, today was somewhat uneventful, with volume again on the lackluster side. But I'm sure bulls will point out that we gave back next to nothing from yesterday's rally, and they'll be happy about that.

Away from stocks, the major foreign currencies traded back and forth across unchanged, with nothing remarkable to report. Oil was volatile once again, trading on both sides of unchanged before closing down 1%. Precious metals traded on both sides of unchanged as well, before closing slightly lower.

The Ramp Jobs Report

Turning to the most recent stock market rally, maybe I can put this little bounce into perspective. I did not expect to see a ramp job quite like yesterday. I guess folks were emboldened by the fact that the S&P 500 didn't break the 200-day moving average, there's been literally no corporate news, and we have a three-day weekend coming up. (Obviously, the folks who believe in Santa Clause rallies, summer rallies, holiday rallies, etc. have their window here.) Also bolstering their courage: the fact that $42 oil didn't matter, and higher rates haven't mattered too much (yet).

Maybe they'll continue to pile in for a while, as we're probably not going to get any really negative corporate news for at least a couple of weeks. However, I think the macro news is slowly turning sour, a la the data I referenced in housing, and of course I believe the dollar has turned. I therefore expect the second half to be filled with negative surprises, and I feel fairly confident that whatever rally we see is not going to get us to new highs.

A Little Ningbo Bird Told Him

For my money, if we could have a decent rally and the VIX stays nice and low, it will set up a tremendous opportunity to buy puts on names in which there are problems, or potential problems. And no, I'm not going to provide a list, because I don't have a list yet. A lot depends on what happens next. But it would not come as any shock if I told folks that there are going to be problems in the chip sector. In fact, my friend Fred Hickey informs me (via what he was told by an attendee at a recent wireless conference) that the CEO from Ningbo Bird, the number-one cellphone distributor in China, with around 50,000 outlets, said its inventory rose 50% sequentially in Q1.

As we know, China is the Wild, Wild West, and the data are suspect, at best. But that data point, when combined with (1) the fact that cellphone production ramped up to meet the LNP demand that never materialized, and (2) the inventories at chipmakers and contract manufacturers, suggests to me that things associated with cell phones and PCs might see some rough sledding in the second half. For now, though, the bulls' motto again appears to be: Don't worry, be happy.

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