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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

Discount Rides on a Search Engine

Overnight activity was uneventful, though our stock-index futures leaked a bit as the casino opened for business. The big news, while definitely company-specific, was that surprise, surprise, demand wasn't there for Google at its hoped-for price, so they cut it 40%. As I say, I don't think Google matters to anything but Google, and perhaps a couple other Internet stocks bought under the assumption they'll be cheap compared to wherever the hell Google is priced. But I do find it rather fascinating to watch this prime example of wonton speculation.

Turning to the early action, the market basically bolted straight out of the starting gate, such that in about an hour's time, the S&P was up 0.75% and the Nasdaq was up about 1%. Today chip stocks were leading the charge, up a couple percent in the early going, though everything else was only modestly green, in rather uneventful trading.

Oil: No Impediment to the Firmament

After the early-morning surge, the market basically traded sideways until a little after lunch Eastern time. It then surged again all afternoon and in essence went out on the high tick. The Sox was today's upside champ, up about 4%, but virtually everything was green, and the more speculative, the better. It looked a bit like a beta-chasing fest, perhaps exacerbated by Friday's option expiration. Who knows? But one thing is clear: It did not take a decline in oil to get our present rally under way.

Away from stocks, the dollar was mixed, down against the yen but fairly firm against the euro, which closed down fractionally after having been 0.75% lower. The metals were mixed, with silver up 2% and gold unchanged, in another demonstration of de-linkage from the euro. Oil traded on both sides of unchanged again, before closing up 9 cents. Fixed income was marginally lower, and I heard that today saw some mechanical asset allocation programs, whereby money was moving out of fixed income into equities. Though I'm no fan of the fixed-income market (longer than three to five years), that's not exactly a trade I'd be happy to make.

Taking an Ax to Market Axioms

Seeing as how today was rather quiet, I thought I might touch on another bit of market lore, as I did the other day, this one illustrated by an article in Monday's Wall Street Journal titled "Tech Shares Approach Bear-Market Status." The article furthers the absolutely spurious notion that a change of 20% indicates we have been in a bear market, or we have been in a bull market.

There's no set percent change that dictates whether you've been in a bear market or a bull market. In the last decade, with the advent of personal computers and Bubblevision, folks have determined that there are rules about markets that simply do not exist. Markets are not math. They're not physics. Investing in them is more akin to art than science, though there is math that matters, in the form of the price you pay for a stock, earnings, dividends, and barriers to entry, etc.

Too many people today know the price of everything and the value of nothing. With the push of a button, they can run a spreadsheet out 20 years on a company. In the good old days, as you worked your way through spreadsheets that you had to do by hand, you would realize that some of the assumptions you were in the process of making made no sense.

A Mound of Data, A Molehill of Insight

Today's PCs can give everyone mountains of technical information and trading data, regarding momentum and other things. While most of that information is not totally useless, it's also not helpful most of the time. Lots of folks are seduced by the notion that these data can impose logic on markets that aren't necessarily logical, and that more data automatically mean more information. I believe all this modern technology is part of the reason why there are so many market participants who look principally at charts, moving averages, and stochastics, etc. -- instead of understanding the valuation and dynamics of the business they own.

As if on cue, Bloomberg today carried a story about the recent topic du jour, namely, oil, that nicely illustrates folks' infatuation with charts and pictures. (To be fair, it could be argued that technical analysis has more merit with respect to commodities, since generally they're more about price discovery than about fundamentals, though fundamentals do matter.) You could actually take out the word "oil," substitute any Internet darling, and the article would read like many stock recommendations I see people make.

It begins: "The price of a barrel of crude oil may climb to $67 in 'months to years,' with historical pricing patterns suggesting a 'multiyear lift-off is in place,' said Louise Yamada, portfolio manager at New York-based Citigroup. Yamada said on July 21 that oil may be 'in a nearly 20-year up-trending channel. She said today that 'we have no negative divergences at this time' from that trend."

Off-Color Humor

With that recommendation in mind, the folks at Bloomberg supplied a chart that showed the pertinent information, and also provided the following "analysis":

"Today's chart shows a resistance line in blue and, more importantly, two support lines. The long-term red-lined support pivots elegantly with a more recent green-lined support near the aftermath of the Sept. 11 terrorist attacks. Note the white circles that define the linear support levels. The purple fitted-trend is measured off the 1999-to-present data and coincides with the green support line." Got that? Meanwhile, what they didn't say is that if the green line and the purple line start heading straight down, run for the hills.

In any case, I think that all these modern-day conveniences are also one reason why the noise level is so high in the markets, and why we sometimes see utter nonsense pass for accepted wisdom -- i.e., in the case of the Journal example, 20% down for the Nasdaq 100 since January 26 indicates we just might be in a bear market. I would make the argument that we've been in a bear market since March 2000, and that the rally from Spring 2003 to early 2004 was just a rally in a bear market. But no one knows for sure until years after the fact.

Fundamentals, vs. Fibonacci

I believe that folks would be far more successful if they spent greater time thinking about the businesses of the companies they own, what they might be worth, and what the future looks like for those businesses (case in point: Toys "R" Us (TOY:NYSE), as I discussed on Monday), rather than spending so much time focusing on stock charts and other mechanical data. For investors, charts are just a tool (I look at them, too), as are macro data. But there is no substitute for buying (and selling) at a good price. The difference between a great company and a great investment is the price you pay to own it.

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