Print-friendly version
Send this to a friend
Posted 9/26/2005
Contrarian Chronicles
About Contrarian Chronicles
Learn the Contrarian Chronicles lingo
Subscribe to Market Rap on Fleckenstein Capital
Contrarian Chronicles
Recent articles:
• Best Buy's message: The consumer is spent, 9/19/2005
• Katrina's fallout: good for gold, OK for stocks, 9/12/2005
• It's RIP for the housing boom, 8/29/2005
More...
| | Contrarian Chronicles
The stock market: All risk and no reward
A number of big economic problems are coming together -- from the tapped-out consumer and the effects of Katrina and Rita to the fizzling of the housing ATM. They all add up to trouble.
By Bill Fleckenstein
I think the stock market -- as well as the economy and housing market -- is on the verge of very serious trouble. In fact, I chose to do a fair amount of short-selling last week because I have a hard time seeing how the market can mount any sort of serious rally (though, of course, that doesn't mean I won't be wrong).
The consumer is in terrible shape. We all know that the savings rate in this country is essentially negative, and we know that folks have been living off the housing ATM. (As I put it in my April 16, 2004, daily column: "Many folks think they have found free money as their house becomes an ATM every time they refinance.") Meantime, as I have been saying, a cogent argument could be made that the housing ATM is in the process of conking out.
Furthermore, the consumer faces some serious headwinds this fall: Not only are gasoline prices up a ton, but so are prices for heating oil and natural gas. Combine that with the prospective rise in 1) minimum credit-card payments and 2) the adjustable rate on credit cards and many mortgages, and you have the recipe for a decent-sized squeeze.
In addition, there is the matter of consumer confidence, which, based on multiple surveys, is plunging at a pretty rapid rate. Further undermining confidence, I believe, is the war in Iraq and the deteriorating situation in Iran, which have helped cause President Bush's low approval rating. (Low approval ratings are historically bearish.) In any case, with all these factors going against consumers, they can easily decide to pull in their horns -- thereby precipitating and reinforcing a decline in economic activity.
Pining for the 'P' word from the Fed
Heading into last week's Federal Reserve's Federal Open Market Committee meeting, I'd thought that the Fed would hike rates and take out its "measured" language, which might have allowed the market to bounce for a limited amount of time. But apparently, the Fed thinks the economy is in better shape than I do. (I believe that this Fed will be wrong at every inflection point, which bolsters my view that the economy is headed for trouble soon.)
Related news and commentary on MSN Money
Nevertheless, it will be hard for ignore-the-bad-news bulls to decide that weakness is now good when the Fed has yet to float the trial balloon about how it might be ready to pause. So, weakness will be bad, and strength may not really help.
Yonder lies yield-curve blunder
Not long ago, I suggested that we might see problems in the financial arena, due in part to the flat yield curve. I think that the recent disappointing earnings reports from a raft of financial companies like Marshall & Ilsley (MI, news, msgs), Fifth Third Bancorp (FITB, news, msgs), Commerce Bancorp (CBH, news, msgs) and Annaly Mortgage (NLY, news, msgs) show that the flat yield curve is biting. Of course, many financial companies have the ability to be clever with their accounting, so perhaps they'll be able to postpone the day of reckoning for a bit longer.
But I think the chance for serious disappointment in the financial sector is quite possible. In addition I think that any companies with back-end-loaded quarters (i.e., companies that do most of their business toward the end of the quarter, as often applies to many of them) will be affected by the disruptions caused by Hurricane Katrina and now Hurricane Rita.
Unrefined Rita
Lastly, there is the total amount of damage from the hurricanes. At the time of this writing, Rita was heading for the heart of the Texas refinery region -- home to about 25% of the petroleum products refined in the United States. When one considers that 30% of U.S. oil production and 24% of natural-gas production come from offshore platforms in the Gulf of Mexico, the tag team of Katrina and Rita could indeed cause massive devastation. Meanwhile, bulls are all excited about the rebuilding process, but that will take a long time to unfold. In the short run, I think many folks will wind up substantially worse off.
Dancing at the precipice
When I look at the situation, it seems to me that the stock market is all risk and no reward. We've got a tremendously lopsided environment, where, despite the litany of problems just discussed, confidence among the other-people's-money contingent (fund managers, etc.) still reigns supreme, as measured by the Chicago Board Options Exchange Volatility Index ($VIX.X, news, msgs), aka the VIX, and the low cash levels of mutual funds. (For more on the VIX, check here.)
It's no secret that hedge funds have been selling volatility. It's also no secret that we've got a huge derivatives structure built up in the financial system. Inherent in that combination is a ticking time bomb, such that when the market and the financial system begin to have problems, they could grow and spread rapidly. Basically, via all this volatility-selling, we've created the same sort of environment that preceded the 1987 stock-market crash.
To sum up: It seems extraordinarily unlikely that the market can make any material progress to the upside. Yet, there are lots of reasons to believe that the downside could turn nasty -- and quickly -- once "it" starts.
Bill Fleckenstein is president of Fleckenstein Capital, which manages a hedge fund based in Seattle. He also writes a daily Market Rap column on his Fleckenstein Capital Web site. His investment positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy, sell or hold any security. The views and opinions expressed in Bill Fleckenstein's columns are his own and not necessarily those of CNBC or MSN Money. At the time of publication, Fleckenstein did not own or control shares of companies mentioned in this column.
|
