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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

Chip-Stock Clocks Set to Borrowed Time

Overnight markets were firmer, as were our stock-index futures. But the green hue did not last long, as the major equity indices turned red across the board a couple of hours into the day. Tugging them lower was the Sox, the one area of concerted weakness, to the tune of down 3% in the early going. (More about that below.)

Pox Hits Philly Sox

The day's small selloff ended around noon, when we began a turnaround that seemed to be precipitated by oil cracking $40. Once again, the price of oil didn't seem to matter until it hit a certain spot, today's being about the aforementioned level. In any case, the market backed off a little from its highs, but went out not far from there. The box scores indicate a bit of bifurcation, with the S&P and Dow higher, and the Nasdaq lower, as the Sox continued to labor into the close. I was unable to draw any conclusions about the near-term direction from today's action, but maybe the information we get in the next couple of days will help clarify that.

Away from stocks, fixed income was a tad lower. The dollar was mixed: stronger against the euro and Aussie (which was down over 1.5% on weaker-than-expected GDP news), and weaker against the yen and Canadian. Oil gave up $2.40, though that drop was unable to really inspire stock bulls -- something that fooled me, considering yesterday's action.

Rumor Rusts Metals

Gold and silver were both weaker (ditto for copper/base metals), in part due to rumors that China would be raising rates imminently, blah blah blah. I myself am a little surprised that all these markets tend to fear the tiniest of rate hikes, given the amount of liquidity constantly spewing forth from central banks. But that appears to be the case at the moment, as gold closed down 0.5% and silver 4%.

Yellow-Dog Glint vs. Greenspan Print

Speaking of liquidity, a reader pointed out to me yesterday that the large surge in M3 has been more a result of assets shifting into institutional money funds than any overt action by the Fed. This can be determined by looking at the growth in the monetary base, M1 and M2. I think the reader is right: This last surge in M3 does not necessarily portend recent pumping by the Fed. The part of the argument that bulls rely on -- that of the Fed pumping hand-over-fist again -- may in fact be erroneous. However, there's been so much money printed for so long, and such gigantic amounts have accumulated, that the gold market is dwarfed by those amounts. Therefore, my point about the gold market being a pittance relative to the money created in the last handful of years survives.

A Fairchild Gifted in Language Arts

Turning back to the Sox, last night we had mid-quarter updates from Altera (ALTR:NASD), Xilinx XLNX:NASD), and Fairchild Semiconductor (FCS:NYSE). Altera and Xilinx were pretty much in line, though apparently that wasn't quite good enough, as those stocks were sold. The company I'd like to comment on further is Fairchild Semiconductor. I've followed all these chip stocks very carefully over the past nine years or so, but I don't remember ever seeing such a handful of weasel words in earnings news before.

Specifically, CEO Kirk Pond stated: "Demand for our products continues to be extremely strong and broad based. We also continue to see volatility [my emphasis] in our second quarter backlog, which could affect our ability to meet our forecast; however, booking activity has been consistently high all quarter, with particular strength in the display, television, white good, power supply, battery charger, and handset end markets."

A Pain in the Backlog

What I find interesting is that here's Mr. Pond talking about how great demand is, but he's also admitting to volatility in the backlog, sort of warning that they may have to "work" prospectively. To me, that can only mean Fairchild is starting to get rumblings that some of the double and triple ordering in its backlog, which it's now aware of, may fall away, because we have not seen any rapid drop-off in end demand for those markets.

Fairchild (which was down 7% today) is an interesting company to look at, because it has fairly broad exposure, and no one area is liable to affect it disproportionately. Regrettably, I recently covered the short I'd had since the stock was at $26 or $27. Interesting, it basically went straight down after the last quarter-end, when the company talked about how it was sold out on capacity, but wasn't really able to raise earnings guidance. I made note at the time that perhaps the market was realizing there was no "there" there -- in terms of earnings power, and the fact that the valuations of companies like this were too high.

Semi's Poised for Southern Exposure

Valuation may have accounted in part for what the market's been focusing on. But it may also be that the market is starting to figure out that some of this double and triple ordering is at risk (though I think for the moment, this is giving folks too much credit). It will be clear down the road that plenty of double and triple ordering went on, and it's a problem, even if end demand doesn't soften. If end demand softens, as I expect, there is really going to be a problem in chip land, and tech land generically, which is why I think Fairchild's news was a data point worth expanding on.

Obviously, the market's all excited about Intel's report Thursday night and the employment number on Friday. Those two back-to-back create a volatile mix, and it's hard to know exactly how it's going to sort out in the short run. But I continue to feel that chip stocks overall are on borrowed time (not advice).

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