Editor's note: This column, which reflects market activity from the day before, originally appeared June June 23 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.

Overnight, Europe was slightly soggy, and the rest of the world was a snooze. Our futures were doing next to nothing until the market opened, when they basically headed straight down. Two hours into the day, the


and the


were off a percent and change, and the


was down a deuce. The early going was in essence an equal opportunity to the downside, except for housing stocks, which hung in there pretty well and ended up as today's port in the storm. Not much changed over the course of the day, other than a modest sharpening in the declines.

Prospecting for Post-Cut Clarity:

Away from stocks, the long bond was up a buck, but fixed income in Japan was slightly under pressure, with yields up 4 basis points. Currencies were a mixed bag, with the euro particularly heavy and the Canadian dollar and the yen a tiny bit stronger. The metals were mixed as well, with gold down a little better than 0.5% and silver up over 0.5%. A few days after the FOMC meeting, we may get some clues as to whether the correction in gold has run its course, or if we have more time to go. But just as I think there's a good chance the equity market will have seen its peak by the Fourth of July, perhaps a correction in gold and foreign currencies will be over by then. It's just a working hypothesis at the moment. Again, we'll have to see what those markets look like during the next week.

Now on to the major topics du jour: sentiment and the upcoming FOMC meeting. Everyone, of course, knows that Investors Intelligence shows over 60% bulls and 16% bears. It's a reading that's never been more lopsided since the spring of 1987, which I believe is saying something. Bullish sentiment was also on display in the midyear update of


Roundtable, which ran this past weekend. Interestingly, besides the bulls being more bullish (surprise, surprise), the bears who I find thoughtful, led by Felix Zulauf and Marc Faber, appear not to be bearish for the moment. They allowed as to the prospect that the rally could continue, or that the economy might be in a sweet spot for a bit.

Playing Bear Solitaire:

The reason I bring this up is to underscore a point: Hardly anyone is bearish. I myself have not been operating bearishly, as I have been waiting for this rally to play itself out. I have a very dim outlook for the second half, yet virtually no one seems to share that view, other than my good friend Fred Hickey, or Stephen Roach (more about him in a minute). As I continue to reappraise my assessment, I ask myself, what is it that these folks see that I do not see? Why is it that they are so lathered up about


particular moment in time and this particular


rate cut?

A few things come to mind that separate the environment right now from other bear market rallies: 1. Many people were just tired of being bearish. 2. The market has been rallying for a time now, and it's currently up on the year. 3. In February and March, many folks feared terrorism and war. Those fears in particular made me nervous about being short back then (i.e., folks were bearish for the

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reasons). But these reasons don't tempt me to change my view.







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Lip Service vs. Embracing the Bubble:

More importantly, it strikes me that many people fail to understand that we had a bubble, and that it has created long-lasting, unavoidable repercussions. They can say the words "We had a bubble" but never get beyond that to accept the implications. So, when you put a summation sign in front of all this, it adds up to folks being particularly optimistic (more so than at any time in 16 years) about right here, right now, when in fact it's just another bear market rally and rate cut.

Now perhaps the cumulative effect of the previous 12 cuts


make the 13th magical. Perhaps the cumulative effect of what's gone on from a downsizing standpoint may matter. Perhaps the economy will see a bounce, but I find it unlikely that we will see anything more than that, if we even get that. To summarize, the bulls have yet to come up with a persuasive argument for their case. I still firmly believe that the second half is going to be a disappointment, both in the economy and the stock market.

Sentiment Sets Up for a Letdown:

Further, since so many people have swung their views around so hard, betting heavily on second-half wonders, I believe that sentiment is now


binary than ever. If disappointment starts to rear its ugly head, we will see a real wipeout in the equity market. That could happen later this year, even if the economy does better for a short period. (As an aside, and to repeat my recent comments, the Fed has now positioned itself so that in the event of an economic recovery, the law of unintended consequences might surface, in terms of a bond market wipeout, especially if the Japanese bond market starts to decline.) And that's the situation in which we find ourselves, with very few skeptics remaining. Yet the people making the bullish case, though they could possibly turn out to be right, have nothing new to bolster their prior arguments, which have not worked.

The only person who inhabits the Wall Street mainstream and has voiced concern about the bubble and its aftermath these past three to five years is Stephen Roach. In his piece titled "Endless Bubble," he paints the picture of a Fed in the serial bubble-blowing business. He says that the Fed created a bubble in the stock market.

Now, to try to solve the problems of the bust, it's creating a bubble in the bond market. "The result," he writes, "is a seemingly endless array of bubbles that only heightens the perils of the post-bubble endgame. ... The legacy of these bubbles is a sad testament to the excesses of an increasingly wealth-dependent U.S. economy: Consumers have now become addicted to the 'extra' purchasing power they can extract from overvalued assets." This is as succinct and brilliant a discussion as you'll find on the subject.

Moving On, by Owning Up to the Bubble:

My favorite part, however was his conclusion, which is a perfect ending to today's Rap: "The biggest difference between my bearish view of the world and the more sanguine views of others can be traced to the bubble. More than three years after America's equity bubble popped, there is an understandable temptation to believe that it's time to move on. A massive dose of fiscal and monetary stimulus, in conjunction with a sharp rebound in the stock market, adds to that conviction.

"As I see it, however, the legacy of this monstrous bubble endures -- not just in financial markets but also in the form of the excesses that it has fostered in the real economy and in its balance-sheet underpinnings. Until those excesses are purged, I maintain my view that America still needs to be seen through the lens of a post-bubble workout. As one bubble morphs into the next one, the moral hazard dilemma only deepens. And the endgame -- including the risks of deflation and a dollar crisis -- appears all the more treacherous."

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 positions 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