Judge's Gavel Slams Down on 'Victimized' Speculators - TheStreet







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Editor's note: This column, which reflects market activity from the day before, originally appeared July 2 on RealMoney.com. To sign up for RealMoney, where you can read Bill Fleckenstein's commentary every day, please click here for a free trial.

Last night, Japan and much of Asia were up about 3%. Once again, Japanese government bonds traded lower, with the 10-year now up to about 91 basis points. As we strolled in for business this morning, Europe was up 1.5% to 2%, though interestingly, our futures were not much higher. Tech was the early-going leader, apparently on the back of a dead-fish upgrade of


(MSFT) - Get Report

. I didn't even bother to check out the rationalization for the recommendation, because who cares? I do note that there are a lot of people lathered up about Microsoft's chart formation, so for all I know, that's what really drove the recommendation.

Sunset for a Spending Heyday: Meanwhile, I would like to reprise some noteworthy comments by Bill Gates, from an interview yesterday in USA Today. In essence, they underscore the remarks by technology insiders that I have been sharing recently. He told the paper: "Capital spending on IT gear is unlikely in my lifetime to ever achieve the levels that it saw in the late 1990s. . . . We assume that future IT spending won't be all that different than it is today. . . . . We are not seeing any sort of substantial upturn at this stage."

So, the expectations for the second half are clearly enormous, given that nothing has really started to perk up just yet. And yet, the early going saw folks chasing tech and, to a lesser degree, biotech. Housing, however, was slightly under pressure. As the day wore on, it was just a steady grind upward, such that the market closed on the highs, for all intents and purposes. A glance at the box scores shows that we were basically back to the pattern of speculative darlings doing the best, with Internet stocks, biotech stocks, and SOX stocks all leading the charge. The housing stocks swung into gear, up firmly as well. In essence, a good time was had by all.

Away from stocks, fixed income was up a touch. The dollar was mixed, with the euro slightly lower, and both the yen and the Canadian dollar 1% higher. Silver gained 1.5%, while gold was flat.

Of Statistics and Smoking Guns

: Turning to the news, there are a handful of items to cover. First, a regular reader sent me a story by Mark Hulbert titled "Evidence of Market Manipulation," carried today by www.CBS.Marketwatch.com. In it, Hulbert cites a study called "Leaning for the Tape: Evidence of Gaming Behavior in Equity Mutual Funds," which appeared in the April 2002 issue of

The Journal of Finance

. He says, "Researchers found that on the last trading days of the calendar quarters between July 1993 and June 1999, some two-thirds of all domestic equity funds beat the

S&P 500

-- about three times higher than the percentage of them that beats this index on all other days."

So, there's a little statistical data to support the claims of those of us who've talked forever about tape-painting. Based on his observations, Hulbert believes the practice is still occurring. In fact, we saw it last Monday (what a shock). Maybe this compelling data, coupled with an


under new management, will put the spotlight on this kind of behavior and get it to stop. Tape-painting is basically a blatant abuse of one's fiduciary responsibility, and helps foster a culture that tolerates minor wrongdoing, which eventually leads us to Dennis Kozlowski- and Ken Lay-sized problems.

The Buck Stops with the Buy Order

: Speaking of outsized skullduggery, I'd like to shift gears for a moment. I have been severely critical of Wall Street's practices, corporate America's practices, and of course the


practices -- while spending little time on the blame rightfully shared by certain individual investors. But folks need to understand that they must assume responsibility for themselves. That's why I happen to agree with yesterday's decision by Judge Pollack, in which he basically held certain folks accountable for their stock market losses. As he opined, via an account in today's

New York Times

: "The record clearly reveals that plaintiffs were among the high-risk speculators who now hope to twist securities laws into a scheme of cost-free speculators insurance." (Let the Rap record show that it was likely more a case of class-action lawyers eager for a buck than so many aggrieved investors seeking redress.)

Further, Judge Pollack said, "Seeking to lay the blame for the enormous Internet bubble solely at the feet of Merrill-Lynch, plaintiffs would have this court conclude that the federal securities laws were meant to underwrite, subsidize, and encourage their rash speculation in joining a freewheeling casino that lured thousands obsessed with the fantasy of Olympian riches."

The People vs. Greenspan

: However, if somebody wanted to start a class-action lawsuit against the Fed, I might be more sympathetic, since I believe the Fed is at the core of all our problems. While folks who speculated in Internet stocks were certainly not innocent bystanders, and the hunt for a scapegoat is best directed inward, a lot of innocent people who were not out speculating are genuine victims. Many, through no fault of their own, have lost their jobs as the aftermath of the bubble has persisted. Folks who abstained from the mania have been penalized for their prudence, in the form of minuscule yields. Those are the people who should be the most outraged. And the target of their outrage should be the incompetent management of monetary policy by the Fed.

Coughing Up for the State Coffers

: Meantime, for all the Fed's chatter about deflation, the position that state and local municipalities find themselves in is pushing up the cost of nearly everything. This is what happens when money gets printed willy-nilly. It leaks out and causes the price of things to go up, even if certain assets are deflating. (At the moment, of course, assets aren't deflating, but the point will survive when they do.) State and local municipalities are basically monopolies, so they can raise prices, which is what they are doing. Along that line, I'd like to share a couple of brilliant observations from Joanie, which she prefaces with a quote from today's

New York Times


"'Fees will rise on studded tires in Alaska, mobile-home inspections in Florida, traffic fines in Iowa, birth certificates in New York, and filing lawsuits in Vermont, according to the governors association. Illinois is increasing taxes on admission to riverboat casinos. Utah is raising fees on hazardous waste storage, and Virginia has imposed new fees for serving subpoenas. Smokers will pay higher taxes in a dozen states, and drinkers will pay more for liquor in a half-dozen. Fuel taxes will rise in Alaska and Michigan.'

"I cut and pasted that from an article in today's

New York Times

, to give y'all something to think about, noting that these are by no means the only increases in fees being levied, just a few examples. That's how the states are dealing with their respective budget crises, not to mention those that are also lookin' to slap surcharges on those earning over X amount per year. Then the county'll get you, and then the local municipality, as the purse strings are tightened goin' down the food chain. And as you ponder what the new cost of living is gonna' look like shortly, you can think about the stimulus that will be provided by the federal tax relief we are about to enjoy. Just try not to laugh."

States Take De Facto Delivery of Federal Tax Cuts

: She goes on to discuss the supposed stimulus, and how folks hope it will lead to a second-half recovery: "

So, just think how ridiculous the whole situation is

. The federal government is busted. They are giving the states less. At the same time, they are giving us so-called tax relief. This is causing the state and local governments to increase


(note that they don't call them 'taxes,' which could incite a riot; they're 'fees') on everything imaginable, short of the air that we breathe. How far do you think all that mortgage refi relief is gonna' carry this fiasco?

"Why not stop and think and do the math? If you do, you might not be as quick to blindly recite the latest mantra/propaganda which insists that 'federal tax relief, the advancing stock market, an upturn in consumer confidence' are providing a lock on an H2 economic recovery."

So, that should help allay the Fed's deflation fears, while the rest of us reach into our wallets, from coast to coast, to help bail out its bubble.

William Fleckenstein is the president of Fleckenstein Capital, which manages a hedge fund based in Seattle. Outside contributing columnists for TheStreet.com and RealMoney, including Mr. Fleckenstein, may, from time to time, write about securities in which they have a position. In such cases, appropriate disclosure is made. At time of publication, Fleckenstein Capital had no position in stocks mentioned, although positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy, sell or hold any security. The views and opinions expressed in Mr. Fleckenstein's columns are his own and not necessarily those of TheStreet.com. While Mr. Fleckenstein cannot provide personalized investment advice or recommendations, he invites you to send comments on his column to