With gold and silver continuing to surge, today one of the greats in the business sent King World News a fantastic piece where he discussed the major markets and billionaire Paul Singer’s advice to buy gold, plus a bonus Q&A that includes a note regarding a huge upside bet that was just made in the silver market, also the large speculative short interest that is still present in gold as well as how the gold market is shaping up technically.
By Bill Fleckenstein President Of Fleckenstein Capital
October 14 (King World News) – Overnight markets were mostly weaker and the SPOOs flopped around unchanged doing not much. However, in the first hour of trading the market made an attempt to climb higher, as bad news was pretty much treated as company-specific and/or ignored, at least in the tech sector…
In Volatile Markets, Is Wealth Preservation King?
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Another Smattering of Bad News Mattering
Having said that, people who only read headlines were probably surprised that Intel was initially 3% lower in an otherwise sea of green in the semiconductor arena, since it supposedly “won” at beat-the-number. In Intel’s case, however, the devil was in the details.
The basic problem for Intel is that the PC business is essentially antiquated and no one feels the need to update their machine on anything like a regular basis, as that business has fractured into other products. You can get enormous computing power with a screen the size of anywhere from a postage stamp to a wall, and the difference between devices has blurred pretty drastically, with “mobile” being the predominant trend.
Intel’s plight can be summed up simply as the big part of their business is slowing down drastically and the smaller part, which is supposed to be growing rapidly, isn’t. On a year-over-year basis its chip business has declined from $9.2 billion to $8.5 billion, while its “datacenter” business only grew from $3.7 billion to $4.1 billion.
Circuit Training Not Getting Results
That’s an oversimplification, but the issue is that Intel continues to produce chips as though all of its businesses are going to keep humming along, which is why inventories have grown in the last year from about $4 billion to $5 billion, even though there is no sign of any acceleration in any category. For that matter, revenue and earnings have been roughly the same for the last five years. Thus, for those people who keep expecting something big to happen at Intel, there is no “there” there.
Regarding said inventories, the fact that products that have been built go into inventory instead of being sold helps keep the cost of goods sold down and the margins up. (And when those products come out of inventory it goes the other way.) Fred Hickey noted that customers of Intel were incented late in the quarter to take on chips, which is a nice way of saying the channel was stuffed.
Intel’s businesses are shrinking (in the case of PCs and everything else), and the growth is slowing down in the case of datacenters. The big question is will it slow more. Fred and I expect that it will, though bulls expect that it won’t. Intel has a problem on its hands because it has too much capacity and it needs to cut production, which will cause havoc with earnings and margins. The fact that the company has finally realized that is indicated by the fact that capex for 2015 was projected to be $10 billion in January and is now down to $7.3 billion, and is probably headed lower still if end markets don’t recover and in fact become weaker.
Mo-Mo Monkey Business
The fact that Intel’s stock price slid early on shows how much hot money must have piled into it simply because it acted well and was guaranteed to make the number. (There were other clever maneuvers in the EPS report as well, such as a $175 million charge Intel said it would take this quarter but didn’t, which accounts for about half of the margin by which it eclipsed the target in the game of beat-the-number. They’ll likely bury that charge into the huge one they will take after they complete the Altera acquisition.)
On a related note, ASML, which makes high-end equipment that companies like Intel buy, had to lower its guidance, though it didn’t lower it far enough (orders were down 41% sequentially, 35% year-over-year), and the stock was initially weak, but other equipment suppliers managed to shrug off Intel’s capex cut and ASML’s guidance. Thus, on the one hand, in Intel’s case it looked as though bad news, even if it was dressed up as good news, wasn’t enough to boost the stock price, whereas for ASML and its competitors it seemed like bad news didn’t matter — assuming of course that you want to view the market through the prism of technology. Chip stocks were also helped by the fact that Linear Technology guided flat to higher and they tend to be honest.
In sum, in the early going I graded the action as a slight victory for the bulls, who seem to think nothing should ever matter to disrupt the market and send it lower. With a nod to the “Old Economy,” CSX, which is a very well-managed railroad, was sort of a nonevent, though the results were a little less than expected.
However, about midday the SOX blasted higher on a wave of mindless takeover speculation, as every chip stock romped, regardless of whether they would be an acquirer or a target. It was absolute madness, as though the entire industry was about to be bought by some giant magical chip conglomerate from outer space.
Meanwhile, the rest of the tape was heavy, led lower by Walmart, which was clubbed for 10% after it reduced its forecast for fiscal 2017 to a decline of 6% to 12%, thanks mostly to wage hikes. (It looks like stagflation has officially taken hold in the retail sector.) In the aggregate, the reality of Walmart and other companies that are struggling trumped the lunacy in chip land and by day’s end the market was about 0.4% lower (though the Dow fell 1%).
As an aside, the craziness in the chip sector today was one of the most ridiculous spectacles I have witnessed in the last 25 years, and that is saying something. Then again, buying EMC with $40 billion of debt is plenty nutty as well.
Away from stocks, green paper was pretty weak, oil was flat, fixed income was aggressively higher, and the metals came to life to some degree with silver and gold gaining over 1.5% (and both taking out the 200-day moving average, which many people use as an indication of a trend change).
Protection Against the “Prints of Thieves”
I have known for some time and noted that Paul Singer — who is the founder and CEO of Elliott Management, has a tremendous track record, and is a very smart guy — has been a gold bull. Today in comments he made at a conference in Israel he stated that, “I like gold. I believe it is under-owned. It should be a part of every investment portfolio. Maybe 5% to 10%.” He also noted that gold had been “treated unfairly” and he sees the world exactly as most Rap readers do: people need protection against what the central banks are doing to degrade paper money, as well as the failure of governments to do anything resembling the enactment of pro-growth policies and dealing with giant debt overhangs.
Perhaps his comments will be enough to spark a few more people to consider buying central bank protection. As I have noted, as the price action improves and the charts look better, more and more people will discover the reasons to own gold. It is rather amazing how many people only want to buy it when the price is increasing and hate it when the price is decreasing.
Included below are three questions and answers from today’s Q&A with Bill Fleckenstein. The questions are from his subscribers and they get to read Fleckenstein’s answers every day.
The “Big Wager” In The Silver Market
Question: Bill, are you able to offer any explanation for the huge volume of January expiry open options in the SLV etf? Regards
Answer from Fleck: “Nope, someone obviously placed a big wager I guess.“
Question: Hi Fleck, I haven’t seen or heard much of the “Shorts” data on the precious metals complex. Are we still elevated?
Answer from Fleck: “Yes.“