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Fleck Rap



Note: Professor Fleckenstein provides his commentary for educational purposes - his insights are not intended as investment advice. You can find his daily comments at

Shortly after the close Tuesday, Microsoft (MSFT:NASD) announced their special dividend and that put quite a bid in the futures during the runoff. We had a whole host of companies report last night, and again this morning, and the net of it mostly resulted in higher prices in the early going for the Dow as Eastman Kodak (EK:NYSE), United Technologies (UTX:NYSE), and Microsoft were all higher.

Techland was a different story, however. The net of the reports we saw Tuesday night and that we have seen leading up to last night continue to show inventory building pretty much across the board. Texas Instruments (TXN:NYSE) inventories were up and they took their guidance down slightly. Initially last night that stock was up, making it look as though it could go up on increased inventories and slightly lower guidance, so maybe there was going to be a real party in tech land.

That theme appeared to help rally overnight markets, but by the time the casino opened for business yesterday, the market was only up fractionally, something I found slightly surprising. There was one decent attempt at the upside, but a couple of hours into the day, while the S&P and the Dow managed to hold fractional gains, the Nasdaq turned red, led by technology, which was pretty much all red. Though we initially weren't down that much in absolute terms, relative to what I had expected it seemed like a whole lot.

In any case, as the bulls and bears battled over the course of the day the market basically slipped and slid lower while Al was babbling. Although his babbling impacted outside markets (more about that below), he was unable to save the day for equities. We slid all day long with nary a bounce and went through the mighty, mighty 200-day moving average like a hot knife through butter. After that we fell sharply in the last half hour of the day to close on the dead lows. A quick check of the box scores will show that there was hardly anything green, although the worst of the selling was in techland, for reasons I muse about below. All in all, it was a very ugly day as the believers in the 200-day didn't get bailed out.

Away from stocks, the fear and the fact of yesterday's Congressional testimony by the mighty Wizard of Ahhs, a.k.a. Alan Greenspan, struck fear into the hearts of foreign exchange traders and precious metals traders. Silver was down 3% and gold was down about 1.5%. Foreign currencies were down 1% across the board.

I've been at this a long time, but I'm continually struck by the fact that so many people continue to react so violently when the most incompetent Fed chairman in history tells you exactly what you know he's going to say, none of which is good for financial assets or our currency. Having said that, the current foreign currencies had enjoyed a nice rally, and were perhaps due for a setback.

Memo to Al: You're On Borrowed Time, Pal

Greenspan's proclamations will trap him, as he's busy telling everyone whatever they want to hear, especially that the recent slowdown we've seen was a blip and inflation is going away. Two, three, four months from now, whatever it takes to find out the economy has slowed down for real, and inflation hasn't, he'll finally -- finally -- be exposed as the charlatan that he is and the ramifications that I've talked about for so long will come into play.

Once again, I'm not going to bother to reprise some of his incoherent babbling, nor any of his proclamations that I found personally inflammatory. Suffice it to say though, that I saw a couple of e-mails from market observers (who in the past have been less shrill than me about Greenspan), both questioning various aspects of his statements. I was also recently quite pleased to see Morgan Stanley's Stephen Roach, himself a former researcher for the Federal Reserve in DC, describe the Fed as follows: "By serving as cheerleader when financial markets are going to excess the Fed is losing credibility as an objective observer...By condoning excesses, the Fed, in effect, has become a stakeholder in the carry trades it spawns...that has turned the world into one gigantic hedge fund." My once radical views about these central planners are slowly but surely becoming more common.

The Gorilla in the Coal Mine

As I saw tech come for sale, I couldn't help but wonder if maybe folks had come to the conclusion that if Microsoft, as well-managed as it is, and as potent a force as it is, has in essence become a no-growth company, perhaps they needed to revalue their opinion and the valuations they have placed on other tech companies. Don't get me wrong, I think Microsoft has managed its business brilliantly, and their move to distribute cash to shareholders is an intelligent one. But I think everything they have done would lead you to believe that they believe their business has evolved to more of a steady state. So for people to get excited and place premium growth valuations on companies like Intel (INTC:NASD), Micron (MU:NYSE), Dell (DELL:NASD), etc. that are involved in the same business as Microsoft, strikes me as poor logic on the part of the believers in those companies.

A Tale of Two Kitties

Along a similar line of thought, in the Wall Street Journal yesterday, Jesse Eisinger penned a brilliant column entitled "Microsoft Can Count. Intel Can't." He first describes Microsoft's recent action, then says, "And then there is the path of the irresponsible. It has been chosen by Intel Corp. and Cisco Systems Inc. (CSCO:NASD) and denizens of Silicon Valley. Nonetheless, these companies are celebrated by investors and accorded huge multiples. These are the companies that refuse to pay dividends, hoard cash and buy back stock merely to mask the massive dilution that comes from their shareholder-damaging stock-option programs.

He then describes how serious Congress is about reform. "As Microsoft was announcing its shareholder-friendly plan, Silicon Valley was sitting on the shoulders of members of Congress, whispering sweet nothings in their ears. As in, stock options cost nothing. And 312 members of the House listened.

"That was the number of congressmen who voted for the Baker Bill, a measure that damages efforts of the Financial Accounting Standards Board to enact rules mandating the expensing of stock options. The bill violates the FASB's independence and fights the inevitable. Hundreds of companies have moved to voluntarily expense stock options because compensation costs companies money -- no matter what Silicon Valley will have Congress believe."

His conclusion? "These delaying tactics won't succeed. The Senate is highly unlikely to let the Baker Bill become law. And investors are figuring out for themselves the pernicious dilutive effects of stock options. In the coming years, investors will gravitate to those tech companies that take the right path. And Microsoft will be at the top of that list."

I agree.

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