On the heels of the Fed decision to keep rates unchanged, gold, silver and the miners ramped higher.
By Bill Fleckenstein President Of Fleckenstein Capital
July 27 (King World News) – There were plenty of fireworks overnight, as Japan leapt 1.75% after Prime Minister Abe proposed roughly $250 billion worth of fiscal stimulus, with the idea that the BOJ will fund that with some sort of creative piece of paper. We won’t know the details until Friday, but it looks like Japan is getting ever closer to so-called “cold fusion.”…
Continue reading the Bill Fleckenstein piece below…
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Most of Europe was up a similar amount, and though the Dow and S&P were only flattish through midday, the Nasdaq gained 0.5% thanks to Apple’s glorious success at the game — and I really do mean “game” — of beat-the-number.
Apple’s Bruises Heal Fast
The quarter was horrible for Apple, with declining revenue for the first time in 13 years and net income down about 27%. In addition, average sale prices fell from $670 or so to $500 and change for the vaunted iPhones. But none of that mattered because CEO Tim Cook said the future was so bright he needed a new pair of shades. Thus, the stock exploded for 7%. Obviously, I was wrong in my analysis that there would be enough margin pressure to rattle folks’ cages, but in hindsight the real mistake was thinking that any kind of sanity could break out given the environment we are currently in, which of course is why I chose to use puts instead of shorting the stock.
There was further heavy breathing over the semiconductor world as late yesterday Analog Devices announced it would acquire Linear Technologies, which sparked intense speculation in that sector once again. The bottom line, to belabor the obvious, is that we are in another crazy, manic period where folks will believe literally anything and the poor state of the fundamentals here and in the rest of the world makes absolutely no difference. People are completely blinded by the action precipitated by insane central bank policies.
All Dressed Up and Nowhere To Go
I don’t know that the stock market can actually make much more progress to the upside, as I have said, but it continues to be utterly impossible to make any money on the short side. That will change, probably this fall, but for now that is the way it is.
Turning back to the action, the market was slightly lower as we idled up to the uneventful proclamation by the FOMC. From there the indices gained ground, led by the Nasdaq, which was up 0.75% with an hour to go, when I had to leave. Away from stocks, prior to “Fed time,” green paper was stronger, as was fixed income, oil was off 2%, and the metals were higher, with silver gaining 1.5% to gold’s 0.5%. After the Fed’s intentions were digested green paper flatlined, bonds rallied more, and the metals popped (after an FOMC-inspired head-fake lower). Gold added 1.5% to silver’s 3% and the miners ramped up hard as well.
Included below is one question and answer from the Q&A’s with Bill Fleckenstein.
Bonus Q&A
Question: Hi Bill, I know some readers ask you about whether it feels like 1999 exuberance or not when it comes to stocks as a possible gauge as to when things may begin to deteriorate generically for stocks. I think this is may be a false premise to begin with.
The reason I think this is that if you look at the time period that the stock market hit its highs before the last financial crisis, October of 2007, it felt nothing like the end of 1999 or early 2000. Yet that was the moment stocks began their substantial decline that lasted through 2008.
However, the bubble in real estate in 2006 and early 2007 I think could almost equate to the bubble we saw in stocks in 1999. My point is that it was the bubble popping in real estate, not the stock market, that ultimately brought stocks lower in the 2008 great recession.
Instead of looking at the exuberance of the stock market today as a gauge as to when stocks may begin their ultimate decline, I think we have to look at where the exuberance exists today, bonds of course, and be alert as to when that bubble may eventually pop.
Before the great financial crisis, the bubble in real estate popped. I think that before we begin the next big financial crisis, which I think will be worse than the 2008/2009 recession, the bubble in bonds will have to pop. So instead of asking whether the exuberance in stocks matches that of 1999, I think people should be asking whether the exuberance in bonds today matches that of stocks in 1999 or real estate in 2006? My inclination would be we’re getting close and that a blow off top is somewhere in the near future. Hopefully by year-end (as you think might be a possibility) to finally end this madness.
And though I think the stock market could easily decline by 15% to 20% between now and year-end (before the Fed comes in and saves it again with their printing press), I’m not sure the stock market will begin its ultimate decline until the bubble in bonds pops. Thanks for all you do.
Answer from Fleck: “I agree in general with your thesis, and I plan to devote more time to discussing the bond market as worthwhile developments take place. Stocks can break without bonds doing so, BUT then we will have QE4.However, when the bond bubble bursts, the party will be totally over.”
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