“We just don’t know why”

Gold has yet to get into gear, and in fact suffered another bout of “forced liquidations” today. But I believe it has more to do with being caught on the books of some of these leveraged operators now being forced to sell whatever still has a bid. Gold can get a bid whereas much of their nearly worthless CLOs and CDOs essentially have no buyers. I fully expect gold bullion to extricate itself from the clutches of these forced sales as we progress, but it is likely to be turbulent for a while. Meanwhile, futures markets are pricing-in a near certainty of a Fed rate cut in September. As this date approaches, I expect this to buoy bullion given the message this would send to currency markets. A rate cut now or soon would be tantamount to the bailing-out of a loose money crisis with even more loose money (Read: Crank-up the printing presses). On its face, that would only move gold up another wrung of the “real money” ladder….Of course, the sell-off in gold bullion today stemmed from another subprime blow-up that continues to “not spread.” The world’s sixth largest banking concern and France’s largest, BNP Paribas, said that it had frozen redemption's from three of its funds due to exposure to the U.S. credit markets. The company issued a press release that said it had become impossible to value mortgage related securities in its portfolios due to "the complete evaporation of liquidity." CEO, Michel Papiasse said that since last Friday “liquidity in some parts of the U.S. credit markets has dried up..... To be honest, I don't know why,” Certainly four words you normally would rather not hear from the CEO of world’s sixth largest banking concern. Of course, being a Paris-based company elicited all kinds of xenophobic jokes and gaffes on CNBC America. I find it amusing that so many Americans get worked-up over French culture. I’ve spent a considerable amount of time in both countries and I can attest that this learned muscle reaction among some American’s is strictly out of ignorance and the U.S. media-educated repetition. I digress. The ECB injected $1.3-billion liquidity into money markets to help cushion the blow caused by the BNP Paribas news….. U.S. stock futures got progressively worse as news of PNB’s problems spread in the morning. For what its worth, the last time I recall S&P futures down nearly 30-points in the morning was on a few occasions between 2000 and 2003 as the excess from the tech bubble was being unwound. And I remind readers that it took nearly 3-years for that to unwind. I simply find it amusing that so many folks in this business believe that an excess probably multiples in size relative to what the tech bubble was, can exorcise itself in a matter of weeks. Lost in the shuffle to some degree was news that U.S. retail sales were predominantly on the weak side. Being that many analysts and strategists in my business seem incapable of deductive abilities when in fact that is a trait that should almost be innately inherent in a good economist or portfolio manager is baffling. You simply can’t drag the earnings or performance from the previous 12-months and use these same numbers for your models going forward given what we now know about the housing, mortgage and financial sectors of the world economy. There is no way that these issues do not have a sizable impact on consumer behavior going forward. Again, with my ear glued to CNBC America here in London, which acts as probably the world’s best proxy for the level of unabashed cockeyed optimism, I heard more declarations of “bottoms” and “buying opportunities” than “hmmm, this might be serious stuff.” Years from now, so many folks are just going to shake their heads in disbelief and wonder to themselves what the hell they were thinking. Again, to see markets take seriously KLA-Tencor’s (KLAC) well-timed announcement this morning of an increased buyback making it among one of the few green trading stocks in the early going and all day along with an assortment of other semiconductor related issues is tantamount to markets still being incapable of connecting dots. Throw in Altera (ALTR) as being yet another semiconductor touching new 52-week high today amidst a backdrop of very seriously deteriorating fundamentals.

I believe I can explain this affinity for semiconductors stocks in this way:

These names have arrived on the radar screens of technicians due to an initial false premise that these can be bought on the merits of NOT BEING HOUSING or MORTAGE related. This false premise got legs among the investment community pushing prices higher even as earnings and revenue growth have been largely dull, to say the least. Now, seeing these names popping-up on screens of quants and technicians based on the fore mentioned false premise has made them attractive to yet another brand of “investor,” technicians and quants. Now they’re on the screens of technical traders due to their “relative outperformance” and nothing more. Technicians do nothing but try to divine the meaning of pictures of stock charts without any regard for the company’s product, customers or financial situation. This is quite literally how “fertile fallacies” form as described by George Soros in his writings. Technicians live in the fool hardy world that presupposes that markets are an efficient voting or discounting mechanism whose price is an amalgamate of all knowable information on the company, both public and private. They don’t care how a stock or a group of stocks finds their way on their radar screens, they just know they’re there and they are programmed mentally to view the event favorably. Unfortunately, when money is being moved lighting speed predominantly in a world consisting of so many “like-minded” picture watchers, I believe “fertile fallacies” are capable of propagating and perpetuating like wildfire. They’ve been fooled into taking the baton and pushing them even higher, yet this was all based from fallacious origins to begin with. I see this migration from the housing-mortgage-structured credit complex and into semiconductors as being akin to one dislodging himself from the tightly-gripped jaws of one hungry alligator and into the wide-open mouth of another. Back to the events of the day, even as the Dow was still well over 100-points lower before noon in New York, the Nasdaq actually went positive for a brief moment. The notion that tech and especially semiconductor stocks offers some kind of shelter from reverberating worldwide credit problems, that are quite serious mind you, is again simply the height of folly. Also noteworthy, the Shanghai Composite Index is also up 22-percent over the last month hitting a new all-time high last night. This bubble in Chinese shares compares favorably with both the Nasdaq tech bubble and the U.S. real estate bubble as measured by the Amex Homebuilding Index. The prior two, now popped, had been three standard deviation moves. Chinese shares have now duplicated these prior bubbles in proportional moves which makes all three the most extreme advances of entire asset classes in recent history. The prior two crashed in dramatic fashion. Taking shelter in Chinese shares is also like hiding out in the mouth of a hungry alligator—or dragon. My opinion.