No logic in market madness

By Bill Fleckenstein

Chaos.

That's the best way I can describe the stock market over the past week. I use that term with respect to: (a) the wild, whippy motion in the indexes and (b) the seemingly schizophrenic behavior that has stocks in the same group moving in very different directions.

Take, for instance, the action Wednesday. That's when financial stocks were powering higher on the back of the supposedly OK news from JPMorgan Chase (JPM, news, msgs), just as Citigroup's (C, news, msgs) stock -- despite the best wishes of all the sovereign wealth funds and other folks throwing capital at it -- continued to leak.

In the Citi, potholes and black holes

The financial statements of both companies have no bearing on their underlying businesses. To repeat a point I've made many times over the past 10 years: The accounting as practiced by financial companies is a complete exercise in fantasy. These companies are just black holes, meaning that it's impossible to know what goes on beneath the surface.

There's no better example than Citigroup -- where Robert Rubin, supposedly the smartest guy in the room, was apparently caught flat-footed by all of Citi's structured investment vehicles (SIVs) and other problems. If he was unaware of what occurred inside a company that he was a director of, how could any outsider be expected to know anything?

Or, to suggest a different interpretation, it's possible he was aware but just didn't think it was a problem. But then you could no longer speak of him as the smartest guy in the room.

In any case, with JPMorgan probably carrying the largest derivatives exposure of anyone, it made no sense to see that stock's rally carry the financial sector higher, even as Citigroup was continuing to leak.

On ASML, logic gone AWOL

Turning to technology for other examples, I watched ASML Holding (ASML, news, msgs) -- probably the leading light in the semiconductor capital-equipment business -- being pummeled 5% on Wednesday because it lacked new-order visibility, while all other equipment stocks were chased higher 5% or more.

As for the indexes generically, there were many examples of the wild back-and-forth action last week.

When the crowd is singed, it changes things

But what's important is the significance of all the above, which is this: A tremendous amount of de-leveraging is taking place. Strategies that have worked for many years -- in essence because they were trend-following gambits of various stripes -- have ceased working. Thus the players that pursued them are now reducing their exposure.

That creates unbelievably bizarre responses on a daily basis. Those responses have no meaning, other than the negative developments that are part and parcel of money coming out of the market. Thus people should take extra caution to not draw too many conclusions based on short-term market action.

Also, I find it somewhat surprising that all the blame is being laid on men who inherited problems. Folks love to criticize Chuck Prince, who left Citigroup in November. Though he became CEO in 2003, he served as both chairman of the board and CEO for only about a year. I'm not saying he wasn't a problem. But he didn't create all the troubles that Citigroup is now dealing with.

Stuck with the hot potato

Similarly, although Ben Bernanke has been at the Fed for a while, the problems that he is facing and being blamed for were created by his predecessor, Alan Greenspan. By that I don't just mean Greenspan's monetary policy and propensity to blow bubbles. I mean his unbridled advocacy of financial deregulation. If folks want to get at the source of the problem, that's where they should look.

And, thanks to a New York Times story by Roger Lowenstein -- "The Education of Ben Bernanke" -- it will become increasingly challenging for Greenspan to profess his innocence. That's because he receives ample coverage, which is pivotal to the portrait of Bernanke. For instance, former Fed Chairman Paul Volcker correctly told Lowenstein: "Too many bubbles have been going on far too long. The Fed is not really in control of the situation."

I take that as more of a veiled shot at Greenspan, in that the environment Bernanke faces was created under his predecessor's watch. It is the former "maestro" who in fact blew the bubbles that have brought us to the point where there is not much that Bernanke or anyone else can do.

As I said all along during the housing bubble, it was preordained to end in a collapse, causing a brutal recession. (For more, read "How housing masked a weak economy.") What was not knowable was the timing of the collapse or how deep the ultimate damage would be. It appears now that others are starting to come to that conclusion, somewhat belatedly.

Of the bubbles he blew, written by you-know-who

Meanwhile, for anyone who may not have seen it, MSN posted an excerpt from my just-released book, "Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve." It's now moving through the distribution channels toward a bookstore near you, and I assume it will be on the shelves sometime soon.