Note: Professor Fleckenstein provides his commentary for educational purposes - his insights are not intended as investment advice. You can find his daily comments at www.fleckensteincapital.com
Please note that this is Prof. Fleckenstein's Rap that was published yesterday afternoon, however given Fleck's focus/expertise in the area, we still find it helpful.
Drinking the Bad News Pretty
Overnight markets were quiet, as were our equity futures. Preopening, initial jobless claims were a little better than expected, and inflation, ex the things that have gone up in price, is -- surprise, surprise -- nowhere to be seen. Also preopening, Nortel (NT:NYSE)issued yet another preannouncement. The market opened on the green side, in a quick burst higher of about 0.5%. Chip stocks were back in vogue, with the Sox up a couple percent, and Internet stocks were on fire.
Speculation Trumps Contemplation
Can someone please explain to me: What lessons have been learned since the last bubble? Obviously, almost none. In fact, whatever minor lessons were learned have been quickly forgotten. People have partied on in real estate, and they're beginning to take leave of their senses once again in certain areas of the stock market. In any case, the early going also saw retailers and financials doing better, in what was pretty much a sea of green.
After the early-morning surge, the market fizzled about the same time that the Philadelphia Fed said their index (which purports to show whatever it purports to show) came in at 13.4, versus estimates of 25. We basically drifted off the rest of the day in rather quiet trading, to finish closer to the lows than the highs and, as a check of the box scores will reveal, modestly green. By day's end, the Sox had surrendered much of its rally, with a handful of chip stocks closing red, though many were still green. Internet stocks gave up much of their rally as well, while housing/financials kept their bid for the most part. If I was to sum up the day, I would do it this way: really quite dull.
Away from stocks, the dollar was lower across the board. Precious metals traded on both sides of unchanged, before settling essentially flat. Fixed income was quite strong, with the 10-year up three-quarters of a point. Oil was about 1% higher.
Software Downloads a Soft Patch
Turning to the preannouncement department, last night we saw our first contribution from software world, that being Lawson Software (LWSN:NASD). It's a small company, though a not-insignificant participant in the ERP software arena. What they had to say, I think, may be a harbinger of what we hear from other software companies. And, lest people forget, right around the end of last quarter and the early part of the third quarter, nearly every software company preannounced, due to problems associated with Sarbanes-Oxley.
I'd initially dismissed those problems, as I didn't understand the ramifications of the audit requirements precipitated by this legislation. It appears that these have caused a lot of IT-spending plans to be put on hold. In any case, here's what Lawson had to say:
"In our first quarter [the quarter that just ended on August 31], Lawson experienced what many other enterprise software companies have recently announced -- lower business activity, longer customer-decision cycles, and contract deferrals." They went on to note that "priorities such as Sarbanes-Oxley impacting customers' capital spending on software adversely impacted software-licensing activity." What Lawson may be signaling is that a lot more software companies will have to say something similar. That would be a wave of bad news which I'm sure the it's-the-bottom crowd has not quite factored in.
Bravado As Accelerant to the Downside
I don't think I've quite seen a period in the last five or six years where there's been this much bad news upon us -- with the probability of it getting worse, not better, on both a micro and macro front -- combined with the degree of brazenness and macho bullishness on display today. I don't know how long the bulls intend to drink the fundamentals pretty and party on. But when whatever they're drinking starts to turn sour, things are liable to get ugly, rather violently.
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