Bill Fleckenstein

Contrarian Chronicles4/23/2007 12:01 AM ET

Danger! Market partying like it's March 2000

Accurate memories are in short supply in the marketplace, but greed never is. Look back seven years to the mania and note that history appears to be on the way to repeating itself.

By Bill Fleckenstein

Back in the 1999-2000 stock mania, my friend Jim Grant would on occasion call me while away from his office, asking: "What goes on?" To which I'd reply: "The market is open," meaning that by virtue of the market being open, it was up a ton, because that is in essence what was happening every day.

For those who don't recall, the reason that was the case was because we were supposedly in a new era, where productivity had trumped all of our problems, we were experiencing world peace and we would never, ever again feel the pain of the downside of the business cycle. Of course, what was really going on was that we had a bubble that was inspired by money printing.

Folks know how that ended, though the pain from the fallout of that bubble was never as extreme as it might have been, since the Federal Reserve successfully created a real estate bubble to bail out its burst equity bubble.

Ipso facto, stocks go-go-go

Fast-forward to today. The real estate market is unwinding, and substantial macro problems are at our doorstep. But folks party every day because stocks are going up. And, if stocks went down, leveraged-buyout kings would buy every one of them in the land, or something like that.

The current mood feels a lot like March 2000. For example, last Monday, April 16, saw an enormous party in the entire financial-stock arena. With Sallie Mae (SLM, news, msgs) having agreed to be a leveraged buyout, perhaps folks concluded that everything is an LBO candidate. Fannie Mae (FNM, news, msgs) was up about 4% that day, I guess because, like Sallie, it's got "Mae" in the name. Let's remember that these are leveraged buyouts, meaning these are being done with borrowed money. This recent name change to "private equity" is just putting lipstick on a pig.

On a side note, operators in the LBO world seem keen to IPO themselves because they can see that valuations are so stupid. Thus, they're in the process of trying to have it both ways: getting paid huge fees to take companies private, while preparing to take themselves public based on their huge fee income. The more egregious of these schemes have the companies -- Apollo Management, to name one -- borrowing huge sums to dividend out to the insiders before going public. Nice work if you can get it.

Fannie Mae as Florence Nightingale

Moving right along, Tuesday too had the flavor of March 2000. Housing stocks rejoiced over the news that housing starts were a tad better than expected. Why a market that has too much supply rallies because more supply is coming on is beyond me -- though part of the feel-good attitude in housing (and housing finance, to some degree) was a function of Fannie Mae saying that it wants to "allow so-called subprime borrowers who are unable to meet payments to refinance out of some adjustable-rate mortgages."

I'm guessing that some of this is political, and a tiny bit of it may help certain folks. But most people who were able to afford homes due to teaser rates wouldn't have been able to had they paid the going rate. The balance they owe now has almost surely grown. Consequently, those folks may not be able to afford a mortgage at today's new rates.

And if they can, how keen will they be to take that on when it's become clear that housing prices aren't a one-way street?

In other words, this is more about headlines than it is about real help. Of course, given the environment I've described, that's sufficient to be considered good news for now. (It's a bit ironic that Fannie Mae, the company that has been unable to produce its financials for more than two years, is going to help the people who were somewhat creative with the truth about their own financials in order to obtain housing finance in the first place. But that's another story.)

As to when sobriety overtakes the current insanity, whether five minutes or five weeks from now, there's no way of telling. I thought earnings season might usher it in -- which it still might, given the deluge of earnings yet to come. Again, this is looking more and more like the complete madness seen in 1999-2000, though playing out across a different stage, with different themes and for different reasons. One day, folks will look back on this period and marvel at what passed for wisdom.

At the time of publication, Bill Fleckenstein did not own or control shares of companies mentioned in this column.

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