Goldilocks vs. a few bears

By Bill Fleckenstein

I'm sure many readers of this column assume that I enjoy being the bearer of bad news. Let me assure you, that is not the case. However, with Bubblevision and most major media outlets spewing nothing but happy endings, I feel it's important for folks to understand that all roads do not lead to nirvana.

In fact, the Goldilocks scenario that most bulls are relying on is an extraordinarily low-probability event; the high-probability event being that the economy is slipping into recession and will face the attendant consequences.

Take a step back. In the summer of 2005, I suggested that the housing boom was finished. At the time, that observation was ridiculed. But in fact, it was reasonably accurate. The reason I bring that up is because anyone with a pulse ought to know that the housing mania (which created the "housing ATM") is what powered the economy for the past couple of years.

That mania ended a year and a half ago, and noticeable problems have arisen in the forms of inventory and prices that no longer go up like clockwork. It's the reason I have been expecting the economic weakness I've discussed in my column.

Deck the malls with retail jolly?

I don't think anyone can say that, economically speaking, Christmas was a success, as sales grew roughly 1.6% to 2.5%, depending on what you want to use as a reliable estimate. (Wal-Mart Stores' (WMT, news, msgs) December sales grew only 1.6%, while the International Council of Shopping Centers thinks that Christmas sales in general were up 2.5%.) No matter what the exact percentage growth, it was in all likelihood lower than the rate of inflation -- meaning that real retail sales contracted slightly in December.

The bullish interpretation that this will magically morph into a pickup sometime soon is not supported by any facts.

News from the housing sector continues to get worse. Every time a home builder reports results, they are on the weak side, yet at the same time, folks decide that it's the bottom. As readers know, I don't believe that, and if I'm correct, 2007 is liable to be a very nasty year.

Empty shelving in the tax-coffer cupboards

To pass along current information, according to last week's Liscio Report, "in December, just 43% of the states in our survey met or exceeded their budget and withholding-tax collections, down from 80% in November." They go on to note that December can be a tricky month, but when they analyze the trickiness, they do not think that that number is an inaccurate indication of the trend. Further, they point out that "our contacts were concerned about the weakness, especially in states with previously hot housing markets."

The housing market has unambiguously slowed, and the economy has been affected by that. (I would even argue that the November election was more of a referendum on the economy than on Iraq or other policies of the Bush administration, given that it was pretty clear Iraq was a problem when Bush was re-elected in 2004.)

Panglossing over the facts

Nonetheless, bulls want to have it both ways: reacceleration and lower interest rates. What they want, and the incongruence of that, was nicely summed up, also in last week's Liscio Report: "While we're not convinced that the worst is behind us in housing, a belief supported by our tax contacts, or that the economy has enough internal juice to mount a reacceleration later this year, if you believe it does, you can't also believe that the Fed is likely to ease any time soon."

The current optimism is unbridled. Witness last week's USA Today story that cited the uniform bullishness of 10 stock market "gurus." Their reasons, as recounted by my favorite technician, Justin Mamis, sounded mostly like fluff and hot air. Meanwhile, the bulls pretend that the inflation rate is some tiny number -- when anyone who has to write checks to pay bills knows that inflation is a real problem, even if the government is incapable of measuring it accurately.

So, visions of sugarplums danced in folks' heads as the year began. The market action in the first day was pretty dodgy, (and it didn't get all that much better as the week wore on). It wasn't just me who thought that the action was unusual. Dennis Gartman described it thusly:

"Yesterday's (Wednesday's) action was amongst the worst we have seen in equities in our three decades of watching markets."

I'm not going to enter into all the details that made him feel that way, or that make me feel that way. But suffice to say, the action that day ought to have been a warning sign to those of a bullish persuasion, though they will likely ignore it.

Nardelli cleans up in aisle two

Turning, finally, from unbridled optimism to unbridled greed, I note that Robert Nardelli -- formerly the self-appointed imperial potentate of Home Depot -- will walk away with about $210 million, on top of however much he's already carved out. Home Depot is a perfect example of the lunacy in corporate pay packages, but there are many others -- with one of the more egregious being former Pfizer CEO Hank McKinnell, who gutted that treasury for several hundred million dollars after costing shareholders a bundle. Sadly, modern pharmacology has yet to come up with an antidote to rampant greed.

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