At the end of an absolutely wild trading week, today King World News is pleased to share Bill Fleckenstein’s fantastic wrap, plus a bonus Q&A!
By Bill Fleckenstein President Of Fleckenstein Capital
January 22 (King World News) – Overnight markets threw a party, led by Japan, which gained about 6% on the promise of more easing, with most every equity market of any consequence adding at least 3%. Naturally, the SPOOs followed suit, as they climbed about 1.5% preopening, and through midday the indices were a bit higher, with the Nasdaq doing even better…
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To Every Action, a Reaction – The Launch of QE4
On the subject of money printing, I’ve had recent discussions with smart friends who think that whenever the Fed pulls out QE4 it won’t work and the markets will barely bounce. I have no doubt QE4 won’t work, because QE1, QE2, and QE3 didn’t. But I think markets will bounce.
The key piece of that analysis will be how much confidence has the Fed retained from the immense amount it perversely managed to garner by launching QE3. I say “perversely” because these are failed policies, and after doing more of them every time, one would think that would cause people to become skeptical, but QE3 did exactly the opposite, as hard as that is to believe.
“Free Market” = Buy All the Stocks As You Want
My big question is how will investors interpret QE4, and the difference is a big deal, because after the latest round you basically had to own either stocks or bonds and couldn’t make money betting against either, or doing anything else, until the last six to twelve months when selective short selling of various flavors has actually worked pretty well.
On the other hand, if you contrast that with when the Fed turned easy in the wake of the prior two bubbles, the fact that it eased didn’t trump the loss of confidence and the damage, such that from 2000 to about 2002 and all of 2008, short sellers (and metals bulls) could make money. Admittedly, those are pretty small windows, but the point I am making is that what we have to determine is not just what the Fed will do, but how the markets and investors perceive it.
However, I am getting ahead of myself, because for right now most people probably think the bounce that is underway is probably going to take us back to new highs. That is not going to happen.
Put Your Guesses to Work
I always try to have an idea in my head of what I think markets are likely to do, knowing full well that I am just guessing and I might be right or I might be wrong. I had held the strong view that if the August lows were broken we would immediately see acceleration to the downside.
Thus, on Wednesday morning I was less inclined to rip off puts or cover shorts than I would have been at any time in the past six years. I took some positions down when it became clear that the acceleration into a waterfall decline was not going to happen, and now we will just have to see how far this rally goes, and how it sets up, to find a juncture to get short again.
I still believe at some point we are going to see acceleration to the downside (perhaps the next time the lows are violated), but right now I don’t have a good guess as to when, where, or why, just that it will happen.
With those “thoughts” out of the way, turning back to the action, the market made some more progress to the upside in the afternoon, with the Nasdaq the leader, gaining 2.5% compared to about 2% for the S&P and 1.5% for the Dow.
Away from stocks, green paper saw plenty of crosscurrents — strong against the euro and yen, weaker against other currencies. Oil came to life, gaining about 7%. Recently I discussed the volatility we are
likely to see in oil because of people using it to hedge various credit structures. So the break from the low $30s down to about $26 and back in the course of six or seven sessions is not a surprise, I am just happy not to have to deal with it. Fixed income was weaker and the metals were slightly lower. The miners behaved better today.
Metals Go From Solid To Liquid Under Pressure
A longtime reader and former hedge fund manager and I had an exchange regarding the fact that the recent break in the miners could have been related to a decent-sized organization with positions in those names losing accounts or a fund having been liquidated. In other words, it might have been because somebody was forced to sell a bunch of miners, not because the miners have sniffed out a huge break in gold, as many have assumed.
It is true that throughout this bear market in the metals the miners have often led the charge to the downside, and back in the bull market days they actually led to the upside some of the time. Thus, the recent weakness had a lot of people scratching their heads and worrying that something terrible was about to happen when in fact it may have just been indiscriminate selling on the part of someone who had to liquidate.
I make that distinction because people are fond of saying that we had a worldwide illiquidity event and people were selling miners. I don’t believe that is correct, as the people who had problems, i.e., overextended equity bulls, were unlikely to have owned miners in the first place. In any case, it should be possible to tell more when we see how they trade next week.
Included below are three questions and answers from today’s Q&A with Bill Fleckenstein.
Bonus Q&A
Question: Hi Bill, thanks for the opportunity. I am heavily leveraged short. Seems that the possibility of a steep decline has brought out the CB’s in force. What is the probability that we have already started a countertrend rally of significance based on yesterdays’ monetary action by Draghi, comments from China’s V.P. that they will not devalue, and quite likely today to add Kuroda with some easing activity and then a dovish Yellen next week? In other words what is the probability in your opinion that we are in a several weeks countertrend rally compared to a few days? By the way was the no devaluation of the renminbi comments because that is what they are about to do over the Chinese New Year holiday in two weeks? All the best.
Answer from Fleck: “We have a bounce underway. I don’t think it will last all that long, but my expectation that a breach of the August lows would lead to an immediate slide was incorrect. (When you are guessing about market moves, that happens often). The Chinese could pull that maneuver for sure, that would not shock me at all.”
Question: Dear Bill, semi-retired fund manager. I sent you a question last night concerning bear markets and how brutal it could be. I have been of the opinion that the Central Bank madness had reached its zenith. Imagine my surprise this morning waking up to global markets exploding on optimism for more money printing. I read the following quote from Deutsche Bank’s strategist, Jim Reid with total disbelief:
“We continue to think central bank money printing globally remains in the early stages. Such policies could go on for several years yet even if there are periodic pauses…For now with inflation so low it would be strange if central banks didn’t do more in the face of such market turmoil, low inflation and elevated risk factors… so it’s too early to say the central bank era of elevating asset prices is over even if it’s becoming more difficult to get the same response.”
Bill, do you think that Mr. Reid could be right that central bank money printing is only in the early stages? I don’t think I can take several more years of this!
Answer from Fleck: “My belief has always been that the break that is underway in equity markets would be met with more QE. I have said that many, many times. We haven’t tanked enough yet for the Fed, butwe will. The real question is, when QE4 starts will markets believe them or not. The knee jerk response will almost certainly be higher at first, but then we will have to see how we want to respond with our positions.”
Question: Best advice you gave me was to shut off the volume on cnbc. From a suffering businessman in California. Thanks for all you do.
Answer from Fleck: Turning off Bubblevision is always a great idea. 🙂
***To subscribe to Bill Fleckenstein’s fascinating Daily Thoughts CLICK HERE.
IMPORTANT: Tune in today because Gerald Celente will be interviewed by KWN to provide action plans and strategies. Celente will also update how deep the panic will strike, who will suffer the most, who will be hurt the most, how to avoid the economic catastrophe and turbulence, what actions to take, and how to prepare and survive what lies ahead.
***ALSO JUST RELEASED: ALERT: Major Countertrend Rally Looms As Public Makes Record Short Bets Against Stocks! CLICK HERE.
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