Bill Fleckenstein

Contrarian Chronicles11/6/2006 12:00 AM ET

Big, ugly bear lurks just around the corner

Bulls are partying like it's 1995, but you'd be foolhardy to join the stock speculators ensnared by the hoopla over Dow 12,000. A tailspin is almost certain.

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By Bill Fleckenstein

It's quite easy to be wrong in the investment business. The key to success is making sure that your losses do not impair you. The gains, obviously, can take care of themselves.

Though I've touched on the difference between being an investor and a speculator in the past, it's worth bringing up again. It's important to know which you are because if you don't, when your thesis -- and your nerves -- are tested by Mr. Market, he will exploit that weakness as he attempts to relieve you of winning positions.

The heart calls but the puts answer

At heart, I am an investor. I look for ideas I can believe in, at prices that seem appropriate. Then, after taking my positions, I sit with them as long as they make sense. The stocks I own are Pan American Silver (PAAS, news, msgs), Newmont Mining (NEM, news, msgs) and Nastech Pharmaceutical (NSTK, news, msgs), for reasons that will be familiar to regular readers.

However, given my expectations of the ramifications of the "next-time-down" scenario, I don't feel comfortable being long any other companies. Thus much of what I do these days is speculating, not investing.

Some ideas are inherently speculative: Precious metals, for example, have fundamentals like the cost of production, but trying to divine the direction of price is essentially guesswork. Likewise, owning currencies is speculative because you're comparing two pieces of basically worthless paper competing with each other. Certain equity sectors, such as biotech, are also speculative. (See "Biotech: Analyzing the unanalyzable," a June 5 column I wrote about Nastech.)

Lastly, the tactics required of a short-seller are themselves speculative. Because you're taking the other side of the madness of crowds, you have to employ techniques to dance around your positions. You often have to cut and run, re-establish positions, etc. The point being: It's often easy to be wrong on timing, which is why I caution folks at home not to short stocks.

A premise to serve as Polaris

I generally try to find individual ideas (whether long or short) that, in addition to being priced right, fit with theses I have. For example, a recent short-term thesis I had was to expect a "Fed is done" rally. A major long-term thesis is "the next time down."

The timing of that outcome has been elusive because of the complete abdication of responsibility on the part of lending institutions in America -- and worldwide, for that matter -- and the complete abdication of responsibility on the part of all central banks. We live in a purely fiat world, in which money is spewed out at the speed of light.

Again, trying to capture the timing of when that is going to matter has been rather difficult. But I believe the problems in the housing market, the dark-matter universe and consumers' pocketbooks are coalescing. And sometime soon-ish, we'll start to see obvious disappointment.

A mantra without merit

Will that start in December, January or February? I do not know, but I think I will recognize it when I see it. With these big, glacial forces, you can't predict exactly when it will hit. One thing I am certain of: The bull cry of "it's 1995 all over again" is wrong. The backdrop between then and now could not be more different. It's why I excerpted interviews with Robert Rubin and David Levy last week -- as the only way to understand where we're going is to understand the facts behind how we go there.

As I said, the next time down will be quite ugly. Given that the current environment is so dicey, I think it's foolhardy for folks to speculate in stocks just because Dow 12,000 has engendered lots of enthusiasm and just because the next-time-down timing cannot be predicted. In the perverse way of markets, it would be "perfect" if the investment community at large was rabidly bullish because of the market action, just as the first consumer recession in about 20 years was about to get under way.

I hope all of this discussion provides folks with useful food for thought, to which I would add one caveat: It's possible, though I don't see how, that some magic salvation lies in our future and everything will turn out as hunky-dory as the bulls think. I don't see any way possible, but in this business, you can never be 100% certain about anything. Though I'm as close to that as I could ever be about what I think is going to happen.

At the time of publication, Bill Fleckenstein was invested in Pan American Silver, Newmont Mining, Newmont Mining calls and Nastech Pharmaceutical.

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