In the coming financial wipeout, this will figure prominently, and not in a good way.
By Bill Fleckenstein President Of Fleckenstein Capital
October 27 (King World News) – Overnight bond markets were quite weak again and it is looking more and more like the bond blowoff that began last summer now clearly has ended (30-year Treasury yields having risen from 2.1% to 2.6%) — and perhaps the 35-year bond bull market along with it. (If so, it will be the top of a lifetime, and I will discuss it more prospectively as it starts to play out.)…
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There is no way to know that for sure without more time passing, so it will be very instructive to see how bonds respond to stock market weakness when we finally get some.
What Could Go Right?
The size of the changes, while not absolutely large, have been quite dramatic given the nonexistent coupons. However, thus far that development has been completely ignored by equity markets the world over. Apparently, folks who have deserted the bond market because of no yield somehow seem to think their foray into stocks — which may have been viewed as yield alternatives at the margin — won’t be impacted by declining bond prices. Which means that they are liable to be in for a very rude and large surprise…eventually, whenever it matters.
That angst, though, certainly wasn’t a feature of the early going today, as our market celebrated a variety of “wins” at beat-the-number in technology and the absolutely mindboggling takeover by Qualcomm of NXPI, whereby Qualcomm intends to add about $40 billion of debt onto a market cap of $100 billion. When the economic realities of all these policies that have been pursued eventually start to matter the chip sector, given all the debt that has been piled on, it is going to be a veritable financial black hole, but that is getting ahead of ourselves.
Tesla Says, “Just Charge It”
Naturally, fun and games were rewarded, as Tesla spiked after supposedly reporting “strong” cash flow, although it closed just slightly higher. A friend who is involved pointed out that nowhere in the press release was it disclosed that the company’s accounts payable exploded by $692 billion (although it was in the SEC filings), thereby creating the apparent improvement in cash flow.
Out of Sight, Out of Mine
However, winning at beat-the-number was not good enough for the miners, as for the most part they reported good results but went largely unrewarded. Both Agnico Eagle and Barrick reported strong results and continued improvement. Goldcorp was kind of “in line,” as its quarter was on the sluggish side, but that was pretty well known in advance and it looks like its operations are set to accelerate. The big clunker once again was Newmont, which is about par for the course for that company. Nevertheless, as noted, not being “normal” stocks, the results of the miners were ignored because the mood of the day is once again apathy toward mining and metals.
In the afternoon the indices slid a bit, led by the Nasdaq, which lost 0.6% while the Dow/S&P held up better. Away from stocks, green paper was higher, fixed income was hit pretty hard, with the long end especially weak. Oil rallied 1% and the metals were flattish.
Included below are three questions and answers from the Q&A’s with Bill Fleckenstein.
Question: A friend of mine came into some money(not a lot but a lot for her),and knowing I used to trade full time asked me if I could give her any investment ideas. Sadly thanks to the FED all I could say is that there are no investments,only speculation(gold volatility is not for her). In a normal time I would have told her if she didn’t need the money now buy a 1 year CD and pick up a little extra interest with no risk to principal-but what’s the point now,since it would pay nothing. All I could say is leave it in the bank and if something changes and there is an opportunity,I’ll tell her. The FED damage continues….
Answer from Fleck: “That will continue to be the case until the bond market finally breaks. And maybe, just maybe, that process has begun.”
Question: Hi Fleck – Hope all is well. I recently came across this article that is an excellent read and wanted to share with the community on Blackrock’s Alladin risk management platform. Excerpt: “But “Aladdin”, the risk-management platform that occupies all those computers in the orchards, is not just used to look after BlackRock’s $4 trillion. The firm makes its facilities available in whole or in part to managers looking after $11 trillion more, a tally that has recently been growing by about $1 trillion a year. All told, Aladdin keeps its eyes on almost 7% of the world’s $225 trillion of financial assets. This is unprecedented—and it means flaws in the system could matter to more than just BlackRock, its investors and its customers. If that much money is being managed by people who all think with the same tools, it may be managed by people all predisposed to the same mistakes.” The monolith and the markets IMO, technology is the Achilles’ heel of the financial system now as well as human psychology via greed and fear. One day the rubber band will stretch the other way …. and that time it will be an unprecedented reversion to the mean event.
Answer from Fleck: “In the next wipeout, computers will likely figure prominently, and not in a good way. 🙂
Question: Fleck: GLD and SLV dance along or just above their 200 DMA while, for the most part, miners stuck in ugly downtrend channel bumping their heads their and/or at 50DMA and getting concussed back into their channels. Would you buy any more miners if they broke up and out of this downtrend in meaningful way (e.g., high volume) along with some follow-through? Sounds like you have full position in miners but would you get fuller? Regards
Answer from Fleck: “If I saw the exact right setup, I’d probably add some exposure for a trade. “Concussed?” Geez, you take the price action kind of personally, I think.”
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