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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

Oil Rally Finally Takes a Day Off

Overnight, there was a reasonable amount of activity to comment on. Firstly, InterActive Corp. (IACI:NASD) disappointed fans with its future projections, and that pulled the rug out from under the Internet sector, to some degree. InterActive now joins the list of eBay (EBAY:NASD), Amazon (AMZN:NASD), Yahoo (PCLN:NASD), and Priceline (PCLN:NASD), where the numbers weren't quite good enough, given folks' wild expectations.

Next, Japan was at one point a couple percent weaker, before closing down 1%, and the rest of the globe was weaker as well. That pressured our stock-index futures, and as we strolled into the opening today, the S&Ps were indicating an opening of about 0.5% lower. Of course, from there we bounced into the 10 o'clock junior economic data, that being factory orders and the ISM non-manufacturing survey. Both were slightly better than expected, but that news was quickly ignored.

Breaking Out the Bubbly at Sox 400

Meanwhile, we had a handful of dead fish defending a few chip-oriented stocks, and others discussing the fact that the 400 level on the Sox was deemed to be meaningful. I don't quite get why -- considering that it was 200 on the October 2002 lows, and the recent highs were 500. In any case, there was a certain amount of fixation on the 400 level, and that had chip stocks initially green. Otherwise, I saw nothing worth mentioning about the early going. It was just a mixed bag of red and green, with Internet stocks clearly the worst.

The market saw modest pressure until early afternoon, when the price of oil came off about 3%. That precipitated a bit of a rally that had us green across the board. But in the last half hour, it kind of fizzled and we closed with the small changes you see in the box scores. Housing/chips were mildly sought after, and Internet/retail were mildly dissed. Other than that, it was a pretty boring day.

For Euro, a Roadblock to Rt. 120 South

Away from stocks, there was a good deal of motion overnight in the foreign-exchange market. The dollar was strong again, as both the yen and euro were smacked pretty hard. Supposedly, the yen was weaker because oil was up, and the euro was weaker because of poor economic data from Germany. Interestingly, though the euro made a new low for the move, it again managed to pop up above the $1.20 level. For whatever reason thus far, the euro seems unable to spend any time under $1.20. In any event, the currencies closed lower, but well off their session lows.

As for the metals, they were initially pressured by the dollar's strength, with silver down 1.5% at one point, and gold down 1%. By day's end, silver closed up 1% and gold closed down 0.5%. Fixed income was more or less a nonevent. Oil traded on both sides of unchanged, before closing down $1.30 to $42.80. It's interesting that when oil is up, it's "irrelevant," since we look at inflation ex energy. But when oil is down, it's a positive development. Just another example of stock bulls wanting to have things both ways.

'Back-to-School' Now in Session

Turning to a popular theme during the mania, and which folks still tend to cling to, I'd like to spend a minute on the "back-to-school" season, where PCs are rumored to fly off the shelves. I've always been somewhat amused by this concept. Anyhow, this year it appears that not much is happening. Activity in the motherboard market has been weak, and DRAM prices have been going down pretty steadily almost every day for a month. I doubt we'd be seeing this if a wave of orders was being placed to build PCs.

Now it's possible that we may not be seeing the orders because there is currently enough inventory around. On the other hand, it could also be a function of an end-demand problem. I just don't know yet. But given the inventory situation we saw at virtually every chip company through the reporting season, and given yesterday's announcement of weakness from Vishay Intertechnology (VSH:NYSE), I continue to think that the problems out there are more than just inventory-related. (VSH is a company that I don't normally talk about, but its comments are interesting, due to its broad line of products that go into nearly everything.)

In the Den of a Dollar Bear

Shifting to the dollar, I'd like to answer an email from a reader who asked why the dollar is rallying, and would I please reprise my dollar-bearish viewpoint. In brief, it revolves around my belief that the stock market, the economy, and the housing market are all on borrowed time, that they are tied together, and in some sense, are one giant speculation. The speculation in stocks and housing has helped the economy, and as readers know, now that we're in the post-stimulus period, I expect to see weakness at some point.

Why does this matter so much? Easy Al has thrown his weight behind the June-weakness-was-just a-blip thesis, and if it turns out he's wrong, folks will start to question his credibility (which they should have long ago). Once they do, it will be clearer that the interlude we've had in the last 15 months after the initial post-equity-bubble stock-market collapse was just that, an interlude. We will be heading into a period of weakness for which neither the Fed nor the rest of the government has any answers.

Simultaneously, we will have ratcheted inflation up, such that the Fed will be hard-pressed to cut rates -- though I don't believe that cutting rates now would have much of an impact, since all we got out of those 13 rate cuts, two tax cuts, etc., was about 15 months of speculation, notably by using one's house as an ATM.

The Market as Grand Dame of All Data

Importantly, while the foreign-exchange market continues to be fixated on junior economic data, it appears not to be fixated on the most important statistic of all -- the stock market. Stock-market weakness will create economic weakness. It's far more bearish and far more of a leading indicator than the jobs number we're going to get on Friday. (That said, if the jobs number is what folks have "agreed" to speculate on, speculate they will. If I had to guess, I would expect the number to be slightly disappointing, though I do know who's doing the counting, so we'll just have to see.) In any case, I am bearish on the dollar primarily because I am very bearish on the stock market, and what that means for the economy and the housing market.

Which one will actually lead the other is hard to say. They're all kind of wrapped together, like two intertwined Mobius Strips, if you will. But the bottom line to me is very dollar-bearish. When folks realize that the economy, the stock market, and the housing market are all "on their own," and that the Fed has done nothing but make matters worse, I can only imagine the damage that will ultimately be done.

A Bear Cupboard, Bared

My "defensive" position for this scenario: I am short tech stocks, and long foreign currencies, gold, Newmont Mining (NEM;NYSE), and Pan American Silver (PAAS:NASD), of which I am a director. I recently sold all my silver bullion, just because I have so much exposure to these other areas (not to mention plenty of PAAS exposure), and it's the most volatile of all the things that I am long. If I didn't have such large positions in everything else, I would probably stay with my silver position. But you can't always kiss all the pretty girls. On the other hand, I am looking to re-establish my silver bullion position at some point, either on silver price weakness or dollar weakness.

Lastly, as a sign of how out of favor gold continues to be, today an operator from the Paris Bourse, a company called Euronext, said it's closing France's official gold market until further notice because there aren't enough operators to make it worthwhile. I suspect that before the gold bull market is over, folks will be opening dealer centers all over the planet.

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