Monday, September 11, 2006

party like its august 2000 / fleckenstein

momentan scheint es wirklich fast so als wenn der aktienmarkt die realitätä noch nicht wahrhaben will. er hält sich trotz schlchetr daten erstaunlich gut. denke der hier aufgeführte vergleich könnte stimmen.

Tech-crash summer all over again

The rally that erupted in August looks like the rally of the late summer of 2000, when chip stocks rose even as their customers imploded.

As I watched stocks levitate for two weeks heading into Labor Day -- in a continuation of the Fed-is-done/no-news-period rally of about the last month -- I was struck by the rather large disconnect between the stock market and the economy.

The more I reflected, the more it occurred to me that we are seeing a replay of August 2000.

I shared my observation with my good buddy Fred Hickey of the High-Tech Strategist, who agreed. In fact, he offered a data-filled comparison of the two periods in a recent issue of his "High-Tech Strategist." (As I've said in the past, any investor who doesn't subscribe to Hickey's newsletter is making a serious mistake).

A real-estate white knight

Taking a step back, those of us who were bearish in the years leading up to the March 2000 peak believed we were experiencing the biggest bubble of all time. We knew from history that, after the bubble burst, there would be a vicious recession, with all kinds of financial pain and suffering. Though that was partially the case, much of the post-bubble impact that one would have expected was ameliorated by the housing bubble.

For perspective on these bubbles: In the run-up to its March 2000 peak, the stock market sported a valuation of roughly $18 trillion to $20 trillion, versus a U.S. gross domestic product of $10 trillion to $11 trillion. That ratio for that period, peaking at roughly 180% to 200%, was the highest ever seen. By contrast, the previous high occurred back in 1929, when stocks topped out at 80% of GDP.

By the lows of 2002, we lost roughly $8 trillion to $10 trillion worth of equity valuation. That loss was in the process of causing pain, which wasn't really eased by the 13 rate cuts that the Fed threw at the economy/stock market between January 2001 and June 2003.

But in 2003, a combination of home refinancings, tax cuts and the rate cuts finally lifted home prices, which got the housing bubble rolling. It then peaked during the spring/summer of 2005. As of December 2005, the value of residential housing in this country stood at $21 trillion, up $10 trillion or so from 2000, according to Yale University economics professor Robert Shiller. Obviously, those real-estate gains helped offset (and then some) the wipeout from the stock bubble, and of course, stocks have since rallied.

In sum, the housing bubble enabled folks to have their cake and eat it, too (i.e., keep their house and take money out of it). Not only did the housing bubble help them to get by, it also helped the economy grow -- with the real-estate industry having created roughly one out of every four jobs in the last five years or so -- which, in turn, helped the economy and stock market.

Flameout of a bailout

Now that's all behind us. There are early signs of stress in the real-estate market, with some locales decaying faster than others. Existing homes for sale stood at a record 3.9 million at the end of July, compared to 1.6 million at the end of 2000. Inventories of new homes are also at a record of 568,000. Hardly a day goes by without there being some sort of real-estate horror story in The New York Times, The Wall Street Journal and presumably many local papers.

Since this bubble was created with leverage and so many people have extracted so much equity out of their homes (as the unwinding of the real-estate bubble gathers speed), it will be an extremely difficult problem to deal with. That's especially true given the fact that, according to the Journal, about a third of the banking system's $9.3 trillion of assets is in some form of real-estate loans. And, that doesn't begin to touch on the financial dark matter in the collateralized-debt and credit-default-swap markets.

Thus, as the economy succumbs to the unwinding of the real-estate bubble, we are going to face a severe set of problems. Of course, those will prompt more easy money on the part of the Fed, which will ultimately lead to a weakening dollar. At some point, that will complicate the picture as well. But I'm getting a little ahead of myself.

That the housing market is unwinding -- and that it has been the engine of the economy -- is not a theory. In 2004, when I called the housing market an ATM, that was a radical thought. Now it's common knowledge. The engine that's been powering the economy is clearly sputtering. It's also no theory that a consumer slowdown has begun -- witness the recent data from retailers that I've noted in my daily column over the past three weeks.

Meanwhile, the Fed-is-done/no-news-period rally continued until last Wednesday -- in a far greater fashion than even I assumed back in July (when I was looking for this rally, before I changed my mind, incorrectly, and thought we wouldn't see it).

T.M.T. versus R.E.

Therein lies the stark comparison to 2000, when in the spring and early summer, Internet stocks cracked, as well as all forms of T.M.T. stocks (technology, media and telecommunications), which were the driving force behind the supposed "New Economy." With those stocks cracking badly at the time, and knowing that their businesses were the big drivers of tech buying (and the engine of the economy), it was rather staggering to see chip stocks soar in August 2000. Yet, that's exactly what occurred until they peaked in the last week of August 2000.

Similarly, to see tech stocks rally so hard in the last three weeks -- with even the data from the no-news period being weak on a bottoms-up (micro) level and ugly on a top-down (macro) level -- I can only conclude that the buying had been by beta chasers (and perhaps uncomfortable shorts), as the risk/reward for stocks in general and tech in particular hasn't been this poor since the fall of 2000. Yes, valuations were much higher then, but the economic risks are much greater today, given the leverage.

What we have is a recipe for enormous financial losses. I believe the countdown into when we start to see more data points in the form of bombs should be measured in days, not weeks

kann dem nur zustimmen



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