Why Bill Fleckenstein Thinks the Market Is ‘Un-investable’
On Tuesday, famous fund manager Bill Fleckenstein told CNBC that he believes that the market is “un-investable.” Fleckenstein became famous for calling the tech bubble in the late 1990s and making a lot of money for his clients by shorting stocks that traded at absurd valuations. Once the Federal Reserve began its quantitative easing program during the financial crisis, Fleckenstein closed his short fund because he believed that selling stocks short was too dangerous with the Federal Reserve increasing the money supply so rapidly.
His instinct turned out to be correct, as the market has hit a new all-time high despite a sluggish economic environment. Now, however, he is considering reopening his short fund, and he told CNBC that the market is un-investable. In short this means that, on the one hand, stocks are overvalued because the Federal Reserve has pumped their prices higher through its quantitative easing program, and on the other hand, shorting stocks is too dangerous for precisely the same reason.
The correlation between quantitative easing and the stock market has been very strong. Note that there have been three rounds of quantitative easing. The first began in 2009 and ended in mid-2010. When it began the market began to rise, and when it stopped the market fell, and it had its first significant correction since the bottom was hit in March 2009. The second round of quantitative easing began shortly thereafter, and it ended a year later.
During the program stocks rose, but once it stopped stocks fell, and we had a mini-bear market in the summer of 2011. Then the Federal Reserve started its next program, “operation twist,” and the market began to rise again. Finally it added the monthly bond buying program, QE3, in 2012, and the market had a stellar 2013. But now with the Fed tapering, the market appears to be topping out.
With such a strong correlation between stock prices and the Federal Reserve’s policy, it is no wonder that Fleckenstein is calling the market un-investable. After all, it appears that a bet on the stock market is a bet on the Fed continuing its quantitative easing policy – it has little to do with fundamental valuation.
Of course within the broad stock market averages there are stocks that offer good value even now, and there are stocks that offer terrible value. Thus, avoiding stocks — either from the long side or the short side – is an overly simplistic strategy. You need to be a stock picker. You need to isolate individual names that are going to generate strong, consistent cash flow even in a weak market environment.
The fact that stock prices have risen means that there are far fewer attractive opportunities out there, and in part I think that this is what Fleckenstein means when he says that the market is un-investable. Still, I think that the opportunities do exist, and I think investors should take advantage of these opportunities.
One concern, of course, is that the Federal Reserve continues its tapering program and the stock market remains range-bound, or even falls. If that should happen, then you want to make sure that the stocks you do own offer good value. They need to generate cash flow, and while it isn’t necessary, they should pay dividends to shareholders, as this will cushion the downside. If this happens and you own momentum stocks, or “story” stocks – three of which I point out here – you could see substantial declines that will be difficult to recover from.
With these points in mind, make sure you watch the Fed’s actions, make sure you invest prudently, and make sure you have some safe haven assets such as cash and gold.
Disclosure: Ben Kramer-Miller owns gold coins.