This Is a Rally Built On Fairy Tales

Bill Fleckenstein MSN Money March 19, 2012

3/16/2012 7:27 PM ET

By Bill Fleckenstein, MSN Money

As stock bulls hold out for 'happily ever after,' the setup for precious metals and miners could lead them into promising 'just right' trading territory.

We appear to have finally reached the end of the latest chapter of the Greek debt-restructuring saga. The news on March 9 was that Greece had managed to reduce its obligations and extend its term structure via the proposed debt exchange, which obviously reduces short-term pressures and fears of a "messy" default.

That news, however, was sort of a nonevent for European debt and equity markets, while our stock market was boosted by the March 9 jobs number, which, at 227,000 jobs added, was about 17,000 higher than expected. In addition, January's total was revised upward by about 41,000 jobs.

I continue to believe that the employment data look better than the underlying reality, thanks to the fact that the seasonal adjustments can't possibly capture this winter's weird (and warmer) weather. That is in addition, of course, to the usual questionable assumptions that the Bureau of Labor Statistics uses in its calculations.

Some of that "underlying reality" came to light the night before (March 8), when Texas Instruments (TXN, news) lowered its guidance, although the market completely ignored that. It is just one company, but I bring it up because I think it demonstrates that expectations are too high. I would not be surprised to see other companies forced down the same path, and I have a hard time believing that stocks have discounted that eventuality.

Bill Fleckenstein

This week brought more optimism, with a liquidity-fueled, momentum-driven romp in the U.S. stock market on Tuesday. The only skunk at the garden party was China, as its equities were clipped for 3% or so on Wednesday after Premier Wen Jiabao offered comments following the annual National People's Congress. Wen made it sound like there would be no additional easing anytime soon -- which is preposterous. As soon as we see any material weakness in China, there will be plenty of money printing and reserve requirement cuts, but the day's focus was on the lack of Chinese liquidity.

However, commodity markets bore the brunt of the reaction during Wednesday's session, as equities are in "see no evil" mode. That is quite a contrast to August, when folks were terrified. I remember at the time trying to figure out some way to actually get long the Standard & Poor's 500 Index ($INX) for a trade, because I felt folks thought the world would end in Europe, while I believed the European Central Bank's long-term refinancing operations were the functional equivalent of money printing. I never could find a way to capture that idea, even though it turned out that LTROs obviously are money printing.

Latest news on the Greek crisis

I bring that up to show just how fast (i.e., six months) sentiment can swing, and how far, because I don't think we are past the point of seeing people panic about the problems we all know still exist. Those who find themselves superbullish on the U.S. need to consider what the economy and bonds are going to look like when interest rates start to rise as the bond market takes the printing press away from the Federal Reserve (i.e., we experience a funding crisis and have trouble financing U.S. deficits).

Granted, that is not today's business. Even though the bond market is acting like it actually may have made a peak, stock bulls are clearly focused on "Goldilocks" once again -- the idea of a "not too strong, not too weak" economy -- as they seem not to have learned that that story is a child's fairy tale, not economic reality.

Looking for a moment to be shortsighted

In a column about a month ago, I noted my concerns regarding the bond market. In the intervening weeks I have wanted to add to my small-bond short position, but I was afraid the stock market was ready for a tumble and wanted to see how bonds behaved in the wake of that. Obviously, stocks have not tumbled, so by being wrong about the near-term direction of equities, I not only cost myself a modest amount of money (with a failed S&P short), but I missed adding to my bond short.

At some point, the stock market will be under pressure and it will be important to see how far bonds can rally. I am really looking to press my bond short now. As a resident of this country with young adult daughters, I can't root for the funding crisis hard enough, since it will finally put the idiot central bankers in a straitjacket and force us to deal with our problems like grownups .

Gonna take a sentimental journey

The metals markets were tagged again this week, and gold stocks were even weaker. I believe we are near a moment in time where the metals and the miners will set up for a decent upside trade, just as we saw in December. Sentiment is back to about those levels, and I suspect the futures market liquidations have been of a similar size (though we won't have those data for some time). Ideally, we would like to see some sort of reversal in the metals and miners where they move up in unison.

In talking with my friend, the always insightful Fred Hickey, on Wednesday, I learned that he had recently sold a bunch of mining stocks. But based on the sentiment and data currently available, he felt he couldn't afford not to add back a chunk of what he had sold, which he did. He plans to buy more into any further weakness.

His feeling is that we have seen a large degree of giving up, leaving sentiment near where it needs to be to replace his holdings.

As for me, I haven't added to my positions just yet, but I am likely to do so shortly. Certainly, days like Tuesday and Wednesday are frustrating for gold bulls, when the world seems to say, "Who needs gold? We have Goldilocks." Even though believing in fairy tales is an absurd and failed investment strategy.

At the time of publication, Bill Fleckenstein owned gold.

This column is a synopsis of Bill Fleckenstein's daily column on his website, FleckensteinCapital.com, which he's been writing on the Internet since 1996. Click here to find Fleckenstein's most recent articles.

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Actually the bond market won't take away the printing press from the Fed. It will take away the ability of the Treasury to continue financing Federal deficits using borrowed money, by increasing the interest rate of Treasury debt. This will cause the same problem as in Italy now--higher rates make it impossible to keep financing more deficits.

However, that won't stop the Fed from printing money, even printing money to finance the Treasury. Only hope they get some sense down at the Fed (and some of the Fed governors do have some), and stop before they replicate the Weimar Republic's descent into hyperinflation. They probably will, but not before causing some good ole' "regular" inflation, enough to choke a horse or two.

2 0ReportSpamD Trader36 minutes agoThe idea that statistics, not the raw numbers, are telling of any truth is a joke! A surplus with Clinton? Really, look at the borrowing for C's term; every month, of every year he was in office the budget deficits were added to the national debt. Where was the surplus? For fifty years I've heard every President, liberal or conservative, herald His budget as the first "surplus" budget. The devil is in the details, all budget surpluses are projected, statistacally, usualy 8 or 10 years after current president leaves office. The fairy tale of economies are the pundents like this one trying to make a very simple idea complex, allowing for a story line in "statistics", with the most common story line that of the other guys statistics are wrong, mine are right! I told my boss the other day he owed me for overtime i worked each week this year since I decided to remove 3 of the 7 days in a week available for work, and projected the additional days I worked for the 5th and 6th days over the remaining 4 days of work, considering California State Law for rest, meal and work hours per day allowed at regular time and then considered the statistically allowed rate of our economy growing this year, so the additional hours required to work over the remaining year, I would take my check for the 40,000 he legally owed me. Mark Twain said it best, there are lies, damn lies and statistics! 3 2ReportSpamboo toad46 minutes ago

Now don't forget, we've got all the paper you need, paper gold and silver too. Conflict free diamonds made of paper for you, that we can print up in an instant or two.

Peace

0 0ReportSpamboo toad1 hour ago

The realigned algorithms again are perfectly adjusted. Going great isn't it?

Peace

0 0ReportSpamthe leprechaun1 hour ago

Who cares as all this 'propped' and 'fictitious'. What markets? No one here invests anyways as they cannot 'afford' to.. Sure, you are going to buy Apple @ 600 a share, Get outta here! It will remain like this as the obvious deflation of the dollar and the looming inflation crisis has been here albeit 'disgusied' by the same 'cronies' in 'concert'. Lord have mercy, get a clue!

3 1ReportSpamMnsurfer1 hour ago

The facts are we haven't addressed any of our financial problems in the US and so the entire system is a fairy tale, based on lies and deception. The solution so far has been to flood the stock market and banks with money from the local printing press and after this money is in circulation for a while causes inflation. You can only do this so long before people begin to riot when they can't afford to put food on the table.

Any realist who states the facts are called doom and gloomsters by short-term investors who don't care one whit about the long-term implications of anything. All they worry about is today and making a quick buck. But there is a cost to everything and we will have to pay it eventually. Unfortunately, the ones who profit from the abuses of the system won't be the ones bearing the brunt of the losses that will visit the rest of us later on.

8 0ReportSpamRich6765656556541 hour agoI like how everyone is so quick to blame Obama for the debt /state of the country. When "W" took over for Clinton the country was operating in a surplus (imagine that), which W quickly turned into a deficit within year 1. Then W jumped into an unwarranted war which compiled the amount of debt. Plus, add-on the VERY bi-partisan, "me first" attitude of both Dems and Republicans and it is hard to believe we aren't worse off. I'm not a big fan of Obama, but to blame our current mess solely on him in unfair. Politicians need to do their job, fight for a better country and NOT for themselves and their own party. 9 9ReportSpamFree Rad-i-cal1 hour agoA rally built on fairy tales

No Sh** Sherlock! I mean Fleckenstein. This isn't a presidential race by two individuals anymore.

It's a presidential race by Rich Republican investors and Rich Democrat investors.

Everything else is just for show.

The truth will come out eventually. It always does.

7 0ReportSpamTired of Bashing1 hour ago

Investing in the stock market is like playing the lottery, only the lottery is a game of chance where everyone theoretically can win while the stock market is a rigged game where everyone can lose.

The stock market runs on wishes and dreams and seldom reflects reality. People invest to make money from people they think are dumber than them. Buy low and sell high is great if people could figure out which is what.

The market is high and I guarantee that it will go low again, historically that what happens to markets. Everyone hopes that they get out at the right time.

I guess that things are going too well and now we must expect bad to happen and then spend years figuring out who to blame. Pogo said a long time ago "We have met the enemy and it is us".

2 0ReportSpamrobert8131 hour agolike the man said, the system is'nt broken, its fixed 1 0ReportSpamMarlin Pals (dayphilosopher)2 hours agoThe stock market is fairyt tale. 2 2ReportSpamâ?¥â?¥ RichLuv.Com--- Date rich men and beautiful women. â?¥â?¥2 hours ago We have become an entitleemnt society where everyone who dosen't work is supported by the few, that do and even fewer of us, that pay taxes!Whatever you do,don't but Mexifornia bonds! Happy trails! I wish I could leave but family issues force me to stay! I hope I survive! Keynesian economic sucks! ---BTW, if you are rich, here to meet women who aren't so much attracted to ur money, but to the man who makes it. 1 4ReportSpamSomeone2 hours agoCould the sp500 break the 2007 high @ 1576.09 before the end of the summer? 0 3ReportSpamAJB1153 hours agoYes and no. The stock market is about earnings, but not current or past earnings. It is about the expectation of future earnings.You're missing my point. For the past few years, there have been rampant expectations of another slowdown. It hasn't come to fruition. Accordingly, investors are beginning to ignore the doom & gloom and buy the earnings growth. The coiled spring has popped back. It's a great sign. 7 4ReportSpamSomeone (dumbgmworkers)3 hours ago

KOO IS KOOKOO the dow at 16000 get real not with OBUMMER at the helm.

ITS 16 Trillion in DEBT and GROWING every day.

NOBAMA 2012

ANYONE BUT Obummer 2012

30 26ReportSpamAgemingle. com3 hours agoThere is a saying like this "Only one himself knows if the shoes match his feet or not “。If u really love her /him, age ain't nothing but a number for these loved-up A-Listers. My BF and I both think so! He is almost 10 years older than I .We met via MY NAME, a nice place for younger women and oldermen, or older women and younger men, to interact with each other! ,Ever feel that you would best enjoy someone who is not in your age group? If u are really interested in it, maybe u wanna check it out or tell your friends.w, there are a lot of kool aid drinkers posting today. Those who think the current P/E of the market is a buying opportunity did not live through the 70's when the P/E of the S&P was as low a 6. Real inflation which incidently includes energy and food is probably at about 8%. This is only the beginning. When inflation and interest rates spike when the market finally recognizes the degree that the Fed is monetizing the debt, we will see the P/E's of the stock market drop like a rock as investors will demand a higher return. Batten down the hatches folks. This is going to be a scary ride. Some companies will be able to maintain their return on equity in a galloping inflationary environment, but their P/E will still drop as investors will demand much higher returns on investment. 0 3ReportSpamRLG093 hours agoOkay, so you guessed wrong on equities. And the gold bubble is looking for a place to collapse, but you are convinced gold will keep going up. And your friend is going in and out of investments based on a whim. And of course all central bankers are idiots. Thanks Bill. 7 1ReportSpamrousseauSC3 hours ago

AJB115,

Yes and no. The stock market is about earnings, but not current or past earnings. It is about the expectation of future earnings. Accordingly, the perfect time for a stock market rally is when:

1 -unemployment is rampant (so workers cannot demand higher wages);

2 -the cost of doing business (interest rates and business equipment) is stable or even decreasing;

3 -govt is on a spending spree; and,

4 - prices are inflating.

All four are working to boost the stock market now and to cause misery for the American people.

5 5ReportSpamDelmar Fairchild (DelofBarron)5 hours ago

" I can't root for the funding crisis hard enough, since it will finally put the idiot central bankers in a straitjacket and force us to deal with our problems like grownups" .

I was under the impression Mr. Bill was a dyed in the wool Democrat from his past articles. Today he turned Republican and wants the Gov't to actually grow up and start doing something about our debt.

We are so far in debt, I doubt if we can get out from under this past Administration's folly. We might be carrying suitcases of money down to the local bread shop to purchase a loaf of whole wheat.

31 11ReportSpamAJB1155 hours agoI am very skeptical of this market. What is really fueling a 13k dow?

Earnings. I don't understand why people don't get it. It's all about earnings. They have been fantastic for companies for years, now. The valuation multiples were held back for the past two years due to EU fears, Japanese earthquake, double dip recession, etc. But now, the market is fatigued by the same rehashed stories of "Greek debt" and are focusing on corporate earnings again. And corporate earnings have only been getting stronger. THIS IS WHAT STOCK PRICES ARE FUNDAMENTALLY BASED ON.

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His feeling is that we have seen a large degree of giving up, leaving sentiment near where it needs to be to replace his holdings.

At the time of publication, Bill Fleckenstein owned gold.

Now don't forget, we've got all the paper you need, paper gold and silver too. Conflict free diamonds made of paper for you, that we can print up in an instant or two.

Peace

The realigned algorithms again are perfectly adjusted. Going great isn't it?

Peace

No Sh** Sherlock! I mean Fleckenstein. This isn't a presidential race by two individuals anymore.

It's a presidential race by Rich Republican investors and Rich Democrat investors.

Everything else is just for show.

The truth will come out eventually. It always does.

Investing in the stock market is like playing the lottery, only the lottery is a game of chance where everyone theoretically can win while the stock market is a rigged game where everyone can lose.

The market is high and I guarantee that it will go low again, historically that what happens to markets. Everyone hopes that they get out at the right time.

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This Is a Rally Built On Fairy Tales

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