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March 2004

March 31, 2004

Unconventional Market Manipulation
Daily Drift for Wednesday, March 31, 2004
posted by Rick Gagliano

10:02 AM EST

Let the pumping begin!

So speak the governors of the FOMC (Federal Open market Committee, otherwise known as the Federal Reserve) as they pump the general indices higher with "unconventional financial market manipulation."

The actions of the Fed and how it manages markets has been discussed here before and in other columns I have written. It's no secret that Chairman Greenspan and his buddies, especially Fed Governor Ben Bernanke - who only yesterday stated that "very, very low inflation is bad for the economy." - have been talking up the markets as well as goosing the bubble they created with low, easy credit for some time now.

The problem the Fed faces at this point is the "jobless recovery" is still not producing jobs. It has been estimated that the recovery should have produced more than 8 million new jobs by now; instead, the job market remains worrisome if not outright horrible. With job creation not happening and the Fed at the end of their means when it comes to priming the pump of the American economy, they have to turn to what they call "unconventional monetary policy" moves. We've been down this road before, but with the markets stalling and the economy not seemingly picking up any momentum, the Fed faces an end-game with very ugly potential consequences.

As the Fed, through its easy credit policy, has managed to create asset bubbles in stocks, bonds, real estate and commodities, these bubbles are not self-sustaining and will need to be deflated at some point. The Fed understands this and has all along planned to hike interest rates when the economy began to gather steam. With the economy staying flat, despite their best efforts to talk it up (the current mantra is that outsourcing is not to blame for US job losses, productivity is - more on this below) investors are losing confidence and heading to the safe haven of cash. A nation of savers is not a prescription the Fed would deliver. The Fed's very own Rx for the economy has been to spend, spend, borrow and spend and then borrow and spend some more. Anything that derails the cycle of borrowing and spending, outside of an actual robust, growing US economy, is going to pop the asset bubbles and flop the markets.

So, the Fed, in its very finite, and I might add, extremely short-sighted lack of wisdom, has once again turned to the pump priming famously known as the Plunge Protection Team or PPT. What the PPT does is manipulate stock index futures to a point that the markets respond positively. In a nutshell, they bid up the futures so that the market makers and actual traders of stocks and indices have to buy the cash market. Since this is a relatively inexpensive form of market manipulation and since the Fed can print up enough money or create it out of thin air on a whim, this seems - to them, anyway - to be prudent.

Recent market activity - especially yesterday's - is once again suggesting that the PPT and the Fed are up to their old pumping ways. I point to yesterday's sudden surge off the flat line for the Dow and NASDAQ commencing about 1:30 and continuing through to the close and the subsequent dramatic rise in S&P and NASDAQ futures overnight, which by 11:00 p. m. Eastern were both down significantly, but rallied through the night to presage a positive opening for Wall Street.

Rising stock prices make everybody happy. The OPEC oil ministers had other ideas.

OPEC announced right after the open that they would cut quotas for April. See: OPEC Tightens Screw on Oil Supply.

The Arabs apparently weren't paying attention to the PPT pump priming. It's also a safe bet that they don't really care much for George W. Bush. Their production cuts will keep oil prices high for the foreseeable future. Can one blame them? With the value of the US dollar deteriorating, they need higher prices just to keep up with the bin Joneses.

In any case, whatever unconventional moves the Fed makes from this point on will probably be countered in the markets by conventional activities by real traders. In other words, they can do whatever they like, but when people feel pinched by rising energy prices, higher property taxes, higher food prices (coming to a supermarket near you), they generally sell off the assets in which they have made gains. Call it downsizing American-household style. Wanna bet that sales of SUVs are going to be down this month, next month, the month after that, and for years into the future? Gas-and-road-hogging SUV, pick-ups, Hummers, Minivans and every other recreational/utility type vehicle produced over the past ten years have no doubt led us to where we are today - astronomical fuel prices with no end in sight. Thank you GM, Ford and Daimler-Chrysler. Short every one of them.

The downside of the Fed's unconventionality is that eventually this too will have ill effects. The overzealous mobs who buy stocks, speculate in real estate and commodities and generally only understand what they see on CNCB and in the mainstream financial press (they read the covers of Business Week and Forbes and Fortune and glance at the front page of the Wall Street Journal - less than 10% of individual investors are capable of serious equity analysis and less than half of the analysts employed by Wall Street firms are any good) are routinely led into buying overpriced assets of all stripes. When the Fed eventually raises rates, or, more likely, when outside events threaten the continuation of these asset bubbles, they burst, like the NASDAQ in March of 2000. Not only are paper profits lost, but real money, especially in the real estate market, goes down the drain.

Stocks do not normally trade at an average price-earnings ratio of over 25, real estate prices do not normally increase 15% per annum, and commodities do not regularly increase in price at a 30+% clip. These bubbles will burst, and from the looks of things, it's going to be sooner rather than later. The thorny issue for the Fed, depending on where one sits politically, is what to do prior to the presidential elections in November. Despite all the pundits' talk about Kerry and Bush battling on in pitched battle until the end, the truth is that one man - Alan Greenspan - will decide this election, based upon policy moves by the Fed and their resultant effects on the market.

At 10:01 AM EST
Dow 10,341.70 Down 40.00 (0.39%)
Nasdaq 1,993.14 Down 7.49 (0.37%)
S&P 500 1,126.25 Down 0.75 (0.07%)

March 30, 2004

Divorced From Reality (part 2)
Daily Drift for Tuesday, March 30, 2004
posted by Rick Gagliano

1:30 PM EST

"So what is it that really bothers you?" I asked my friend.

He looked off into the distance, collecting his thoughts. After a while, I could see him coming to grips with something… something that was deep inside him, gnawing at him, testing his will.

He came back with this: "It's two things, really, maybe three, maybe more that I'm not even aware of. The first is the memory of 9/11. I'll never forget that second plan slamming into the World Trade Center. I was watching it on TV. It was horrifying, ominous. And then watching both towers collapse - that was truly agonizing and amazing. I have wrestled with these images. Sometimes I wake up in the middle of the night and the images are fresh in my mind. I wonder how anybody could hate us so much to do such horrible things. And I wonder why we haven't destroyed them completely, utterly, without mercy. They invaded our lives, our security, our psyche. That's what really bothers me. I mean, is the American way of life ending? We were brought up in a good country, led by what I thought were good people. Yeah, we complained about this and that, taxes and whatever, but now I wonder about everything. The Twin Towers and these terrorists - that just blows me away. I wonder when they'll strike again and why we haven't rounded them up and just murdered everyone and anyone who was even loosely related to those people. And why, nearly three years later, Osama bin Laden is still out there, plotting, planning our destruction. I keep hearing that we know about where he is, in those mountains between Afghanistan and Pakistan. I don't know why we haven't just absolutely overrun the entire area with troops and guns and bombs. We should have caught him by now. That's the first thing."

"And the second," I sheepishly asked.

My friend composed himself a bit before continuing. I could tell that what he was exposing was deeply troubling to him. He took a drink of his beer and continued:

"The other thing is the government. You know me. I was a child of the 60s, a baby boomer. We came of age in the 60s and the 70s. I remember Kennedy being shot, and then Bobby Kennedy and Martin Luther King. I still remember Vietnam, and the protests and the killings at Kent State. We distrusted the government back then. And then the war ended and we all got on with our lives. Finished college, got jobs, raised families. And it seemed like everything was fine until, well, until the stock markets started crashing in, what, March or April of 2000?

"And then 9/11 happened." He stopped.

"I guess the two things are inter-related," he continued. "Since 9/11, I've gone back to not trusting the government very much anymore. Maybe I'm cynical, or scared, or protective of my family or my life or my lifestyle. I don't want to see surveillance cameras everywhere, armed guards and threat levels and warnings. I won't fly anymore, anywhere, not because I'm afraid, but because it's such a huge hassle. The waiting, the lines, and everybody's nervous. It's not a very good experience. And I'll never take my kids on a plane. I don't want them subjected to all of that. I remember when we used to go out to the airport to watch the planes land and take off. It was fun. You can't do that anymore. They've got the whole area around the airport cordoned off, barricaded like it's a military base. So, I mean the government's response to terrorism has resulted in some limitations on our lifestyle.

"It's not just the airport security, either. It's the whole sense of things, that we are now less free. You have to watch what you say, what you do, and who knows what the government is doing with our phone calls, emails, letters. Are we all being scrutinized? And why are we under the gun? Americans didn't do this, Al Queda did, and they should be wiped out. I would sign up to go and kill those bastards, but the government seems to have their own plans.

"What we did in Afghanistan was really, really great. We routed the Taliban and probably killed a lot of Al Queda. But then it just kind of stopped. Everybody became complacent and we started to focus on Iraq. At first, when the government was making their case to the United Nations, I was behind it. They seemed to have evidence that Iraq was involved in terrorism. I was all for the invasion. But then, we never found any weapons of mass destruction. I mean - none? I thought they would find lots of them. But finding none really blew me away and lately, all the talk is about how Bush and his administration really pushed for the war in Iraq and how the intelligence was kind of twisted. There are lots of conflicting reports. And now we're over there and the goal seems to be to establish a government over there, but the going is tough. Our guys are still being attacked and killed. So, I wonder why we are still there, how long we're going to stay there, what our real purpose was in the first place and when we'll get out and get back to wiping out the terrorists. I have a feeling that what's happening in Iraq is more of a distraction than anything else and that we're still not safe, we haven't defeated the terrorists and that it's just a matter of time before we get attacked again, and maybe, we've already been attacked and the government isn't telling us everything they know."

At that last remark, I became more interested. "What do you mean, we've been attacked already? When, by whom?"

"I can't say for sure, but you know, when the blackout happened last year, it scare a lot of people. People thought it was terrorism. I was struck by how quickly the government came out and said something to the effect, 'we don't know the exact cause, but we know it wasn't terrorism.' I mean, how can you make that kind of statement? It's not logical. If you don't know what caused something, how can you rule anything out?

I nodded, agreeing in principle.

"The thing that really got me wondering," he continued, "was that gas tanker that blew up and sank a couple of months ago off the coast of Virginia. Now, how often do these things happen? Not very. So, this is rather suspicious, especially given the climate we're living in. But the government - I think a Coast Guard spokesman - came out and said the same thing they said about the blackout: 'we don't know the exact cause, but it's definitely not terrorism.' So, there it is again. Are they not telling us?

"I don't know," I replied. "I guess they might not want to alarm the public, but on the other hand, I'd like the straight story. But I think the news media would report on whether or not an event looks like terrorism."

"You'd think so, right? I did a little research. About a month ago, a gas tanker truck crashed and blew up on an Interstate near Tampa, Florida. It burned and shut the road down for two weeks. A major artery shut down. It wasn't reported anywhere. It seems to me that it's a pretty big thing, but I never saw it on the news. Did you?


"So, what happened the other day on I-95 between New York and Boston? A gas tanker crashes, and burns down the highway, closes it down, melts it down. They say that section will be shut down for two weeks at least. It was immediately ruled an accident. But how many times do trucks crash and burn on major arteries within a month of each other? Not very often. Coincidence? I'm not buying it.

"Then I found out that a ferry in the Philippines blew up and there were something like 200 people missing. This was about 3 weeks, a month ago. And this is really weird. A terrorist group claimed responsibility for it, and the government denied it was a terrorist act. They actually laughed at the terrorists who claimed responsibility. This was not reported anywhere in the US. Why? It seems like a big ferry explosion would make the news no matter where it happened. But I didn't see or hear about it. I found it on the internet, reported by foreign newspapers. Did you see it?

"No, I wasn't aware of that. Are you sure about this?"

My friend looked at me with the most sternest of looks, "Absolutely sure. That happened, and the Philippine government denied it was terrorism. I have serious doubts and so do other people. Now, what happened in Spain, that had to be reported. There was no way around that. But when something happens in the Far East, we're not privy to it? It's suspicious."

"Well, I'll certainly check it out, but I think maybe you're overstating the case," I replied.

My friend actually became angered at my suggestion. "No way," he shouted. "We're not being told what's really going on, just like during Vietnam. The government is hiding the truth from us and that's what really has me troubled. If we can't trust our own government, and we're at war, where does that leave us? In the dark? I want to know. I want to know how safe my family is, how safe our country is. I want to know what the government knows."

"Well, OK, I can go along with you there, but I think the government will definitely not tell us everything. It's national security after all, and there's history here. I think during World War II, the public wasn't told everything. In fact, I'm sure the government made sure to keep plenty of secrets."

"That was different back then," he retorted. That was a major military conflict on both sides of the world. The Germans and the Japanese were menaces to huge regions of the world. Nobody was safe. There were whole countries, whole continents at war. And the government was very gung-ho about the whole thing. They advised us to be on our lookout, to be vigilant. Today, it's a different kind of conflict. These terrorists attack seemingly from out of nowhere. The strike and they're gone. It's not like we can bomb Berlin or Tokyo and get back at them like in WWII. This is different, though the danger is just as real. But the government doesn't tell us to be vigilant, to be tough, to be on the lookout. They seem to be telling us that they don't need the average citizen to help. They tell us to just go about our business as usual.

"And we really can't, can we? Business as usual is not the same as it was three years ago."

"That's right. We should be aware, alert, vigilant and some say, armed. We never know when these bastards will strike again, especially if the government insists on keeping secrets as a matter, as you say, of national security. So, I just don't know. Like I said, I am back to my Vietnam-era roots in basic mistrust of the government. It's not a happy feeling. What do I tell my kids? Daddy doesn't believe the government? Daddy thinks the government is off track? It's really a quandary, so I don't bring up talk about terrorism or the government around the house. But I feel a lot better at least talking to you about it."

"You needed to get it off your chest, I guess," was my sheepish reply.

"Yeah, I did. I feel a little better, but that doesn't solve the underlying problems. There's one more thing."

"What's that?"

"Social Security. It's broke. The government definitely lied to us about that."

"Well, you can't say I didn't tell you so."

"Yeah," he laughed, "you've been telling us we'd get taken even since we were sixteen. I honestly don't see how any of us panning on retiring in the next 15 to 20 years can expect to get anything out of social security. The numbers are all wrong, the money's already gone - it's a cash account - they never invested a dime of that money. It was in one hand and out the other, but that's not going to work with less people working than there are retired. It's just not going to work out, but we just keep paying and paying and paying into the system. Personally, I'd love to be able to opt out. I'm not planning on getting a nickel from the government, so I wish they'd allow me to invest that 15% of MY income that they routinely take out of my paycheck. Of course, already the age limitation for us is going to be 67, not 65, like they told us, if we get there."

"Yes," I agreed, "if we get there."


Follow up: After my friend and I retired for the night, I did some research on the internet and found that he was right about the Philippines ferry explosion. It was not reported on American television, though this Reuters story - Philippine ferry captain blames fire on explosion from March 11, tells the story, complete with government denials.

Another story on the ferry appears today on

For more information, search Google news for "Philippines ferry explosion."

At 1:30 PM EST
Dow 10,329.05 Down 0.58 (0.01%)
Nasdaq 1,986.53 Down 6.04 (0.30%)
S&P 500 1,121.47 Down 1.00 (0.09%)


March 29, 2004

Divorced From Reality
Daily Drift for Monday, March 29, 2004
posted by Rick Gagliano

11:15 AM EST

"Nothing makes sense anymore," lamented a friend recently. His unsolicited cry for compassion went unheeded by most, but I listened over drinks at a local pub.

"I have a good job, a home, three bright kids, but…" he continued with a hint of trepidation in his voice, "there just doesn't seem to be any joy in any of it. Here I am living the American dream, but I don't see any pot of gold at the end of the rainbow."

"Well," I told him, "pots of gold are for fairy tales. It's what's in your retirement account that really matters."

This comment produced a little bit of a frown from my friend and the following, "I don't trust the system anymore. What really pushed me over the edge was the Martha Stewart trial. I could not understand why the government pressed that case so hard while allowing other, more serious crimes go unchallenged."

He was talking about the non-case against Ken Lay, Chairman of Enron, author of possibly the biggest fraud ever foisted upon investors, but also one of the largest contributor to campaigns of all sizes and stripes.

"I guess they were just out to get her," was the best I could come up with. It failed to assuage my friend's somber mood.

"It's not that Martha Stewart didn't do anything wrong," he confided. "I just didn't think it was that serious. They should have made her a plea bargain offer and have been done with it. The whole trial was like a circus, for show and I'm not sure who was supposed to be watching. Is the government trying to tell us that they can do whatever they like and we shouldn't protest? It's the idea I'm getting, and I'm not all that comfortable with it. I think it all filters down from the White House. While I voted for George Bush in 2000, I don't think I'll be voting for him this time around. His push to go into Iraq was based on bad intelligence, but we did it anyway and where are we now? What are we planning to do over there?"

He was on a roll, and I wasn't about to stop him. I nodded in agreement, noting that his talk was getting far afield from where he began. I chimed in with, "how come we still haven't captured bin Laden?"

"Absolutely. It's been almost three years since 9/11 and he's still on the loose. I wonder how hard they're really looking for him. They put all that effort into Iraq and they found Saddam, so how come the real enemy is still on the loose? I just don't think they're trying very hard, but I have a suspicion their effort will be greater the closer we come to November."

I chuckled and opened another peanut. "You don't think the capture of the world's most wanted man could be politicized, do you?" I queried.

My friend grimaced and took on a more serious countenance. "I think everything is political. And I think the politicians are ruining this country. Do they really represent us? I don't think so. I think they represent whomever contributes the most to their election campaigns. And I haven't found one yet who is willing to talk about cutting spending and taxes. It's as though the idea of cutting government, making it smaller, is not a consideration any more. Government just keeps getting bigger, at our expense."

I was intrigued by his statements and wanted more. I asked, "are you talking about the federal level or the state, or both?"

"It's not even about which level of politics we're looking at," he followed. "My property taxes went up 35% in the last two years alone and they were already too high to begin with. Now, I understand that property values are increasing, but most of that increase was simply because the local government cannot stop spending our money faster than they get it. They more we pay, the more they want. I don't know where it's going to all end, but I'm betting that it won't be pretty."

"So what are you doing about it?"

"There isn't much I can do, really. My retirement plan is pretty much out of my hands. It's deducted straight from my paycheck and I don't control how it is invested. But the kids' college funds are under my control. I set them up. Lately, I've stopped putting money into them and just put the cash in the bank. I know it's not a sound strategy, but I got burned in 2000 when the tech stocks blew up and I'm not about to allow that to happen again. I made some money in the market last year, but I got out of a lot of stocks back in October and November. I just don't buy the idea that the economy is growing. I don't see it. My company hasn't hired anyone in two years and they don't plan on it. Other guys, guys my age and yours, baby boomers, are worried about their jobs. Some of them are out of jobs already. And people I do business with tell me the same story. They just don't see any new business."

"So you're in cash, like, money in the bank? Don't you think you should invest that money?" I asked.

"No, I don't. I'd rather have the cash on hand instead of it being in a stock that I don't know much about. I also got to thinking about how I invest. I used to look at fundamentals, like are the company's earnings growing, what's the p/e, stuff like that. Now I look at how much the CEO makes and the number of stock options the company offers executives. I have a rule of thumb. If the CEO makes more than a million a year in pay and also has stock options, I walk away. Call me crazy, but I wouldn't expect to make a million a year running any company. And then getting stock options on top of it, well, it just doesn’t add up. The day I find a company that ties executive compensation to performance, I'm buying."

"Now there's a novel idea," I added. "Pay for performance. Like the merit system. If the company makes money, you get more. If they lose money, you get your base pay and that's it. Kind of like how we all get paid. Regular pay and a bonus if we do well."

"Exactly," and that's why I'm so skeptical on the stock market right now. I think it is divorced from reality. Stocks are overvalued, but they just won't come down. I know they can't keep going up, so I've hedged and gotten out. I'll wait it out until value means something again."

"You and Warren Buffett," I said. "Buffett keeps saying he can't find anything to invest in. Everything is too expensive."

"I'm keeping good company anyway."

My friend and I looked at each other. A bond had been established. I felt that he hadn't confided as much information to many people and that somehow, he found me to be a good listener. But I sensed that he had more on his mind, that we had scratched the surface and his real concerns were deeper. I decided to probe.

(continued tomorrow)

March 26, 2004

Eternal Optimism
Daily Drift for Friday, March 26, 2004
posted by Rick Gagliano

10:45 AM EST

It was once said that it is better to light one candle than to curse the darkness. Taking that line of thought further, one might expect the logic to dictate the installation of lighting everywhere to be a sound idea. Maybe so, but in the world of equity analysis and real money chasing stocks, the eternal optimist often overlooks the realities of the market and the larger world around him.

A case in point would be yesterday's incredible rally in US equities. Taken alone, away from the context of historical trends, yesterday's markets would lead one to believe that the US economy is booming, tech stocks and their underlying companies hold incredible opportunity, and the market will continue to climb higher on old fashioned American optimism and industrial strength.

The bears know better.

One cannot make a reliable market analysis in a void, but some investors choose, unconsciously, to only see the positive side of an investment, rather than exploring all the angles, including the downside risk factors. The eternal optimism of Wall Street and the financial press has led investors to believe that stocks will always go up, regardless of underlying cause and effect.

Taken in the context of recent market trends, an astute analysis would conclude that yesterday's explosive rally was more market noise than anything else. A glimpse at the charts from the past three weeks would confirm that the indices, though experiencing a solid one-day event, still stand well below their recent highs, and that a bounce off the lows was predictable, acceptable and tradable.

As I write, the indices are mixed. Today is yet another day in the pantheon of markets, and yesterday is a fading memory. Optimism is a good quality in and of itself, but in the overall strategy of playing markets, stocks and especially options - which as a rule have short time horizons - optimism must be tempered with a healthy dose of realism, honesty and trading savvy. Short term gains can be quickly wiped out by external events, changes in perception, general trends and individual stock stories. The buy-and-hold strategy of long term investors simply does not cut it in today's trading environment. One has to be able to act quickly and decisively as markets can turn on a dime.

With those caveats in mind, an astute trader has to have some overriding common thread to his or her strategy. The very first concept the 21st century trader must develop is a sense of direction for the overall markets. That has to be in place before one can make a move in or out of equities in any direction. And once the direction of the markets or a sentiment is developed, one must stick to it despite day-to-day movements in the indices, commonly referred to as "market noise."

With direction established, one can begin to look in one of three distinct ways - up, down or flat. Nobody makes money in flat markets, so thankfully the don't last long. Flat periods, such as the one I postulate we are currently entertaining - typified by violent swings in either direction, but eventually ending up stuck in a range for weeks or months - can be traded, but they are the most difficult. These are the best times to do research, take vacations and especially let your money and your mind take a breather. One has to be sharp to play in these heady days, and the occasional market periods of consolidation are welcome respites. The best part about them is that they generally don't last very long and are always followed by discernable moves one way or the other, so the trick is to predict which way the market will move once investors make up their minds.

So, in reality there are only two directions a trader can take - up or down - and making the right choice is critical. You may agree or disagree with any number of analysts, government reports or financial TV commentaries, but you definitely cannot fight the tape. That's why it's important to have a strategy that is founded in solid research and backed by real evidence. Guessing will not cut it.

Currently, my bias is for the downside, though I have a strong suspicion that going through earnings season, i.e. the last three weeks of April and the first two weeks of May, will see no significant movement either way. Should the markets prove me wrong and move 5% off the midpoint between the three month highs and lows, I will take appropriate action in what hopefully will be the proper direction. Like I said, I'm betting on more downside.

More on Monday.

March 25, 2004

Beginning of the End?
Daily Drift for Thursday, March 25, 2004
posted by Rick Gagliano

11:15 AM EST

Stocks are being bouyed this morning by economic news that is uninspiring on either side of the debate. The averages are all up nicely, bouncing higher off two days of ho-hum news and trading.

It won't last.

The Bears have got plenty of ammunition for their side of the story, including recent news from the American Bankers Association that credit card delinquencies hit another record in 2003. While delinquencies in other areas of credit and lending have leveled off, thanks mostly to the massive refinancing efforts of American households, the credit boom is about to reach a climax, a tipping point, a point of no return.

Households are now leveraged as they have never been before. The level of indebtedness to equity is at an all time low and there are no signs that the "recovery" has created or will create any real new jobs. The bulk of the economy is being led by small business, who continues to innovate, scrimp, save and struggle along, while the giant corporations downsize, outsource and move offshore. Eventually, the big boys will be hurt the most when households stop spending or get tapped out or trapped by debt. Any way you want to slice it, American Big Business is in serious trouble and the trouble is not going away - in fact, it is only now beginning to surface. Get ready for the double dip - the larger recession that inevitably follows a mild recession. History shows that the double dip is the norm rather than the aberration.

The market continues to churn and I keep looking for up days to either enter or add to Options positions on Daimler Chrysler (DCX) - July 40 Puts, Guidant (GDT) - July 65 Puts (be careful, the premiums are rich), Corinthian College (COCO) a special situation here as the company split 2 for 1 today, and stands at just under 30. Wait until the dust settles and the options are reconfigured and then buy the puts at 30. I'll be updating this play.

Also, keep an eye on Celgene (CELG) and Forest Labs (FRX) for puts. There's significant downside risk, so the premiums are accordingly rich.

Overall, the markets are in a holding pattern until earnings begin in about two weeks. By the third week in April, we should be witnessing a near-term top in all of the indices and a great time to go short. Right now, I am sitting tight, keeping my power dry, so to speak.

March 23, 2004

The future and the real world
Daily Drift for Monday, March 23, 2004
posted by Rick Gagliano

9:55 AM EST

Maybe I'm just a skeptic. Lately, I seem to have to defend my overtly bearish posture at every turn, regardless of the value in my arguments. It's not that I am always bearish on stocks - I'm not. In the 80s I was the loudest, hardest-charging, no-turning-back bull you'd ever want to see. I had predicted the bull market of the 80s and 90s and was feeding off of it.

1999 and 2000 changed all of that. By November of 1999, I thought stocks had seen their day and we're ready to fall apart. Naturally, I was 4 to 5 months early and missed out on the last leg of the spectacular dotcom rally, which, as we all know now, was nothing but a bubble of unrealistic valuations that finally burst in March of 2000. It wasn't until June of that year that I became a fully fledged card-carrying, bear, complete with growls and claws, and that posture has served me well since then.

2003 witnessed a resumption of the equities boom, as prices soared despite poor fundamentals and ridiculous valuations. Being fundamentally bearish, I was on the wrong side of this move, but stayed there, keeping my outlook the same. What's particularly tempting right now, having been bearish when the Dow was trading below 8000, is the notion of intense gains to be made on the short side as the Dow hovers above 10,000. Of course, the NASDAQ is even more absurdly valued, but it is losing value at a faster clip than the Dow, which is and was predictable.

My growling, menacing demeanor has nothing to do with past performance. I am not bitter over the recent rise in equities, but rather am optimistic about opportunities that present themselves to realists who assume a future filled with uncertainty, doubt, fear, potential protectionism, excessive government spending, rampant credit creation and a rebalancing of the world's economies.

First and foremost, profiting on the "greater fool" theory seems to be the simplest manner in which to play the US equities game currently. With risk premiums at near-nosebleed levels, it isn't a matter of who will be stepping up to buy stocks, but how many, and the answer to that lies in the hearts and minds of investment analysts, fund managers and institutional traders who contribute the majority of trading volume on the major indices.

With a seemingly overdue shift in sentiment seen over the past month, the big traders may be looking to book profits, cycle out of sectors and/or pursue a strategy of hedging or sideline-sitting. As one analyst from an Australian investment firm told me just yesterday, "we’re not that positive on US equities."

I like my odds.

Global uncertainty amid constant fear of attack cannot foster a golden trading environment. Now that the Arab world has correctly made the connection between Israel and the US, I'm expecting that the terror wars will only escalate into more bloody conflict to the detriment of all parties. Americans, for the most part, have been far too complacent concerning terrorism, even after 9/11, and, as the situation has grown exceedingly more precarious, Americans have not prepared themselves for the eventualities of a long, bloody conflict.

As Israel demonstrated yesterday with the assassination of Hamas leader Ahmed Yassin, there's no more negotiating or posturing to be done. The conflict has come down to the essence of war - to kill or be killed - and damn the rhetoric. What's fast becoming a true "jihad" in every sense of the word, is about to explode not only trains, planes and buildings, but the fabric of economies and societies as well. With US president George Bush and Israel's Ariel Sharon spearheading the Western alliance with a bellicose attitude, there's little doubt that the Islamists will respond with heightened savagery.

The Middle East conflict has always been about Israel and Palestine, but lately it has taken on a more provocative tone - that of Islam versus the Western civilized nations. Now that America has been drawn in (or rather pushed in by a zealous president), the battle lines are drawn and we will soon be engaged in an all-out cultural conflict. Some say we are already there.

A strategy of finding a safe-haven - out of stocks - for the foreseeable future would be a prudent one.

March 22, 2004

Trotting out the truth twisters
Daily Drift for Monday, March 22, 2004
posted by Rick Gagliano

8:25 AM EST

ABC and CBS did bang-up jobs on George Bush and his administration yesterday. ABC got the ball rolling with a panel discussion which featured Senators Joe Biden of Delaware and Chuck Hagel of Nebraska on "This Week with George Stephanopoulos". The two discussed and shared their views on the various aspects of the war in Iraq, the war on terror and related topics.

Biden, a Democrat, was dynamic and easily outshone the Republican Hagel, who looked half asleep and did not elucidate his points very well. One wondered why the administration allowed Hagel to go to bat for them, or if the administration had a hand in it at all. Hagel, a two-term Senator, was originally elected in one of the more controversial and surprising elections of 1996, winning him a seat in the Senate.

What most people don't know about Hagel is that at the time of his election, he was a part owner of the company who manufactured the voting machines! Was there fraud in the voting results? Is Hagel actually qualified to be a US Senator? Quite a bit of information has been disseminated on the internet, but widespread voting manipulation and fraud is an area the major media is not about to entertain. Still, one should take a look at Hagel's forced resignation as Chairman of the Senate ETHICS Committee, the work freelance writer Bev Harris has done on the topic, and the slew of articles one can find on the internet merely by doing a Google search for "Chuck Hagel election fraud" before believing a single word that comes from this guy's mouth.

So, it was not surprising that Hagel was on the ABC show, nor was it much of a shock that Biden made him look like a dim-witted dunce. The idea that Hagel is even allowed to appear on TV is a bit of a shock, however, inasmuch as he was also elected to a second term in 2002. Heck, own the voting machines and you can be Senator for life.

The CBS "60 Minutes" piece on presidential terrorism advisor Richard Clarke, whose book, Against All Enemies debuts today, was a general indictment against the Bush administration and it's motives towards Iraq to the detriment of the efforts against real terrorists in Afghanistan, according to Clarke. Clarke's claims that the President has done a "terrible" job fighting terrorism is just the latest in a lengthening string of negative rejoinders by former members of the Bush administration.

So what does all of this have to do with your money, the markets, investing and speculating? In a word - Everything. Simply put, there should be NO question as to the integrity of our top elected official, but in Bush's case, the charges are flowing, and the denials are beginning to ring hollow. If we cannot have faith in our government, how much faith will there be in our markets by individuals, institutions and foreigners?

Does VP Dick Cheney really have to hide in an undisclosed location, only coming out for campaign appearances? Did the President act against Iraq in a manner that was preconceived, despite the lack of evidence of WMDs and/or links to terror? Are they selling the security of the nation down the river? Why is Martha Stewart charged, indicted and convicted before the biggest scammer of all time - and the leading contributor to Bush's election campaign - Enron Chairman Kenneth Lay not even charged? And worst of all, are elections being rigged?

These are questions that we should not have to ask. There was a time when even questions of impropriety were enough to topple or trip up politicians, but has this imperialist presidency tipped the scales so much that they can run roughshod over Congress, the Constitution and the law? Ask Attorney General John Ashcroft. He seems to make it up as he goes along.

With the integrity of the federal government at risk, your investments are also in danger. As a market timer and options player, that's why I recommend being 100% on the short side, in puts. The US equity markets are long overdue for a serious hammering which could happen at any time.

March 19, 2004

Let the dumping commence!
Daily Drift for Friday, March 19, 2004
posted by Rick Gagliano

5:37 PM EST

Stocks are what I would call "jittery" at the moment. It seems that barely anybody is doing any serious investment, more or less waiting for upcoming earnings announcements in mid-to-late-April. In the interim, traders seem to be booking profits at every opportunity, so mass sell-offs are not unusual. With the shorts still in a cautious mood, the potential for real declines is somewhat muted and trading for the past few weeks has been tepid at best.

I have identified six or seven short plays especially designed for options players, at the heart of the speculative regime, as well as one long position which I count as the best of all the current positions. This particular stock sells for under $10 per share and that is where I consider it in a solid range. This stock could easily double in the next year and quadruple in two to three years. Beyond that it is difficult to predict, but this company is poised to become a major global services and communications company.

If you're interested in my current investing suggestions and methodology, I invite you to subscribe to my exclusive newsletter, available ONLY online, in a password-protected web site. The newsletter has more insight and inside information than is presented in the Daily Drift (though I consider the DD to be one of the miracles of modern communications), and especially, I tell you which stocks I think are going up and which are going down, my options and market timing thoughts and strategies, and how to rack up serious profits while protecting your backside with a small amount of risked capital. Options trading is pretty speculative stuff, but I believe that anyone armed with the proper information can successfully predict market trends or at least understand and stay within them.

Meanwhile, I've had two interruptions, the market is closing for the week, and the sell-off I was talking about has come along like a big dog after a tasty bone - the Dow is off 80 points since 2:30 and it's 3:49. The day isn't over.

So, since I'm mostly in naked puts, I'd say this is a good thing.

In a completely unrelated note, the government released January's PPI which wasn't much of anything since the report was late and everybody already anticipated less-than-encouraging news. The report revealed hints of inflation, which, for the government, is tantamount to yelling "fire" in a crowded theater, or should be, since any kind of inflation is bad, but the overpaid, incompetent government economists and the old coots over at the Fed know inflation is inevitable and actually welcome it and encourage it with their loose credit policies.

While we're talking about inflation, how about those gold bugs, who managed to get the shiny metal all the way up to $412 in New York today. I personally like gold in this range, and suggest buying as it may not get much lower any time soon. And the charts say gold could ratchet up another leg shortly.

With that, and the declining dollar, I wish all a pleasant weekend.

March 17, 2004

Inflation for the Government and the Rest of Us
Daily Drift for Wednesday, March 17, 2004
posted by Rick Gagliano

9:25 AM EST

The Bureau of Labor Statistics (BLS), otherwise known as Chairman Greenspan's automatic stay of execution, released the Consumer Price Index (CPI) for February at 8:30 AM EST this morning. Since I am always interested in how much less my money is worth today than a month ago, I took a peek at the raw figures.

As usual, the BLS provides about as much clarity as a pool of mud. Since the goal of the BLS and the Federal Reserve is to keep the CPI at a controlled level so as to keep Cost of Living Adjustments (COLAs) for federal employees, social security and other welfare recipients down, the numbers were hardly startling.

For the month of February, the basic, fat CPI was set at an unadjusted 0.5% increase. To the trained eye and sharp mind, this would translate into 6% annual inflation (0.5 x 12), but hold on, the Bureau goes a step further, making the necessary caveat for "seasonal adjustment" which drops the figure to 0.2% or 2.4% annualized, which, thank God for that adjustment, is reasonable and manageable.

Not that the actual government figures mean anything at all anymore, since the CPI is arguably the most abused and massaged figure the government throws out, but I have to report these things being an American and all that.

How ridiculous is the CPI? Well, for starters, Chairman Greenspan actually said in testimony before Congress that the government should look into ways to lower the CPI as a hedge against those nasty COLAs, which give more money to the minions who collect government checks whenever the CPI goes up. Actually, I'm all for that, even to the point of making the numbers go backwards for about 10 years, so that by 2014 the average welfare recipient would receive a monthly check of around $34 and those retired folks would get maybe a little more, like maybe eighty-five bucks or so.

The other absurdities of the CPI include the assumptions made about actual living expenses. For instance, the household expense is calculated using RENT as a guideline, even though over 70% of all Americans own their homes. And since rents have been flat or falling for the past three years while the cost of owning a home (calculate this any way you want: either the total purchase price or by adding up mortgage payments, property tax, insurance, etc.) has been rising steadily.

Other vagaries of the CPI include the adjustments, most notably the seasonal and quality varieties. I have no clue why every month must be seasonally adjusted nor why that adjustment always lowers the figure. I suppose somewhere some clueless bureaucrat has made the assumption that the actual figure is too high, and that the particular month is somehow out of whack.

The quality adjustments are even more ridiculous. The government manages to make assumptions like, say, if a computer cost $1000 last year, but costs $1200 this year but has more RAM, a faster CPU and other bells and whistles, the actual "quality" cost went down. Never mind the fact that we're all buying the more expensive computers. They're better, so they actually cost less. Don't argue with the government.

And they do this with things like chicken, apples, beef, rent, etc. In other words, that steak you bought last week at $6.99 a pound is actually a much better steak than the same one you bought last year at $4.99 a pound, so it is actually cheaper because it has higher "quality." Don't ask how a steak or a chicken improves one year to the next, just eat up and enjoy your low-inflation happy meal.

So, we can clearly see that the government is pretty much fully outside of the realm of reality here, and to counter it, I have produced a simple back-of-the-envelope gauge to inflation in real terms. Anyone can do this, believe me. Write down the things you spend money on, like groceries, gas for your car, property taxes, utilities, health care, etc. Mark next to each either UP or DOWN, depending on the price you are paying now and what you paid a year ago. Not sure? Well, here's a clue: Groceries UP; Gas WAY UP; Property Tax WAY UP; Utilities UP; Health Care WAY UP. I added the "WAY" to signify the heartiest increases. So, do you now believe the government figures that tell us there's almost NO inflation?

The CPI is pure fantasy.

On a related note, the BLS still has not released the Producer Price Index (PPI) for January or February, noting "unexpected difficulties in the conversion of PPI data from the Standard Industrial Classification system to the North American Industry Classification System." That's shorthand for what's really happening, in essence, the numbers are so far out of control, due to the massive price increases in raw materials and component parts, that they need more time to massage them down. Also, the government economists are furiously scratching their heads trying to figure out what happened to entire segments of the economy. Hint: they moved to China.

Someday, the BLS will release the PPI for those two months and I predict that their figures will be roughly as significant and consequential as the CPI. In other words, they won't matter and will be so far off as to make people laugh. We all need a laugh. God bless the government for providing a good dose of jockularity on a regular basis.

Until then, just remember that inflation is officially under control.

March 16, 2004

Hiring at last, and whether it matters
Daily Drift for Tuesday, March 16, 2004
posted by Rick Gagliano

9:45 AM EST

Word comes this morning from Manpower International that companies are poised to hire more workers in the coming quarter. According to their survey of over 16,000 employers, 28% say they plan to increase payrolls in the 2nd quarter - April through June - while a scant 6% say they will cut jobs. The vast majority of employers polled (62%) plan to keep employment at current levels.

These are numbers for which the bulls have long been waiting. They are not government mish-mash, resplendent with estimates, revisions, inflators and other obfuscating approximations. Rather, these numbers come from an independent, established, reputable firm with first-hand experience in the business of employment. So, this is, in fact, good news, and the market should respond positively to it.

As with seemingly all things in this crazy world of economics, there is a bit of the double-edged sword with which to contend, however. While more than a quarter of companies plan to hire more workers, simple arithmetic tells us that the offset, without increased demand, is one of two undesired consequences: higher prices or lower profits. Either of these will have a chilling effect down the road, but, since that will only be found out later, I'll not throw a wet blanket on this party. This is the kind of balancing news the market absolutely needs right now, as investors readjust their expectations, and it fits perfectly with my calculation that the markets are going to trend sideways for a while.

What this news does not do is present a buying opportunity. Stocks are still overvalued in the aggregate, and I am still recommending puts or outright shorting of weak, overbought equities, a few of which I have mentioned in previous columns. With earnings season in sight, pre-announcements will be forthcoming from some companies in the next week or two. In a month, we'll be waist-deep in real earnings announcements, and my suspicion is that they will, for the most part, be good. American companies have done a good job overall of handling the faux-recovery and trimming costs while wringing all they could out of the consumer economy. The real problems are of the macro-economic kind, which won't show up in any realistic manner for another 3 to 6 months. These include - not necessarily in any kind of order - the massive worldwide credit expansion, the US and British real estate bubble, consumer/household debt levels, government deficits, the exceedingly grotesque US imbalance of trade, over-taxation, over-regulation, the value of the dollar vs. other world currencies, underutilization of productive resources, inflation, and the decline of real wages in the US.

These issues are immense and mostly hidden in the background, yet they are forces which play upon individual lives in myriad ways every day. Some will rear up on occasion and make the front page of your local newspaper, but mostly they are unnoticed by the general public while economists rage and pop their shirt buttons over these kinds of things. For the time being, however, the US and the developed nations are safe, though not sound. The Asian nations are expanding at a much faster clip and will be the dominant force in world economics for the nest 20 to 40 years, beginning with the nation of China.

This isn't to say that the US and Europe are in any way marginalized or insignificant, it is only to point out a radical shift in the power of world economies. The wild cards remain the Islamic states, terrorism and the price of oil. Being that all of these are intertwined I should point out that we are already in the throes of World War III. It is beginning to shape up as Western civilization vs. Islam and it is persisting. The Al Queda groups continue to recruit and commit acts of terror upon any Western nation they see as aligned with the West. In these Western nations themselves, tolerance for terror has nearly reached its nadir. Islamists are about to be shown the door out of many countries. Nobody wants terror and the easiest way to prevent it is to oust the most likely perpetrators. Once this becomes de rigeur, the violence will escalate as the tentacles of Al Queda reach into the hearts and minds of the common Islamist citizen. That's when all hell breaks loose. Parts of South America remain a relatively safe haven.

As far as this scenario plays out, it is exceedingly bad for markets, especially Western markets, Europe and the United States. Uncertainty and war are generally bad for investors. They simply see too much risk in paper securities. Many will flee to gold and safer currencies like the Swiss Franc. Others will be crushed in the equity markets. It takes time, however, and for now, the stories are still developing.

Dow 10,187.26 Up 84.37 (0.84%)
Nasdaq 1,957.66 Up 18.46 (0.95%)

March 15, 2004

Let the Hand-Wringing Begin
Daily Drift for Monday, March 15, 2004
posted by Rick Gagliano

10:25 AM EST

With Friday's easily anticipated snap-back rebound on the markets behind us, Wall Street is set to put in a performance this week that may well be worthy of a best acting award. The Street will do its utmost to look and act orderly and sensible, all the while knowing that stocks are wildly overvalued and an impending sense of doom has pervaded even the most optimistic board rooms and ebullient analysts' desks.

That stocks are overpriced is not a matter of conjecture or opinion but rather a statement of fact. Many stocks were overpriced at the bottom of this cycle. They are now merely more overpriced than before. One needs only look at two gauges to determine that stocks are overpriced, regardless of the individual index. The first, trailing price-earnings ratios, shows that the Standard & Poor's 500 average trailing p/e is roughly 26 times earnings, depending on whose figures you use. One also has to account for the number of equities still employing accounting methods other than GAAP, so the figure is probably higher.

A simpler method is to just look at charts with 200-day moving averages superimposed. The Dow, Nasdaq and S&P 500 indices all have been above the 200 DMA since April of 2003. They are quickly heading back towards their respective reference lines. The S&P is especially interesting as this one has been on the north side of the 200 DMA to an excessive degree for the better part of 9 months. With 5% corrections in place on both the Dow and Nasdaq, the S&P has thus far remained above the 5% Maginot Line of 1005 and continues resistant to decline. The inevitability of the correction that is coming its way merely prolongs the agony of buy-and-hold investors while offering the ever-wiser and sharper short to medium term traders ample opportunity to sell before the rush to the exits begins in earnest.

When the deluge of selling will occur is a very good question, one which I am keeping fairly mum about, having constructed some model scenarios for my subscribers, and since they pay for my analysis, I'm not about to reveal any of my scenarios here. Suffice it to say that I have an idea, and most of the people who have retirement plans, 401Ks, and other passive investment instruments are going to get skewered again. Of course, I decided a long time ago not to be very passive about money and investment, and that thinking has aided me greatly in being right about turning points and overall timing of the markets.

For today, the play continues according to the script. The general queasiness on Wall Street will be attributed to increased fears of terrorism, instead of facing up squarely and talking about relative overvaluation. No, Wall Street wants the buying public to continue thinking that stocks are going up even as they are going down. It's all part of the mystery and magic of the arcane world of big business and investing. As the indices decline, they will remind you that the averages are up xxx percent from March 2003 - never mind the retracement from the highs.

As I have stated repeatedly, the analysts, traders, brokers and dealers on Wall Street do not tell YOU the truth, and are mostly in denial themselves. A more deluded bunch of narcissistic liars cannot be found anywhere on the planet (well, with the possible exception of the Federal Reserve or the White House). And they are about to gnaw at each other's flesh - much as they did in 2000 - all over again. Stand back, the blood is going to splatter.

March 12, 2004

Daily Drift for Friday, March 12, 2004
OK, we're in a Bear Zone, so how low can we go?
posted by Rick Gagliano

8:55 AM EST

OK, we're in a Bear Zone, so how low can we go?

The Dow followed its younger brother, the Nasdaq, into corrective territory yesterday by piercing the 10190 level. I would say smashing through it might be closer to the reality of the situation, as the Dow took a 180-point nose dive in the last hour and 40 minutes of trading on increased volume. To highlight the significance of the sell-off, the average closed within whispering distance of its low for the day, and has done that in three of the last four sessions.

For those of you who still think we are in a bull market, please stop reading right here. You haven't the foggiest. All indications are that the year-long rally in stocks has come to an abrupt and overdue end and we are embarking on a period of prolonged decline. While we are certain that a bounce will occur at some point in the near future as the market becomes oversold on a short term basis, the reality is still that stocks are grossly overvalued and in need of a serious multi-level, multi-stage correction.

As for the bull run of the past year, I have this to say: it was the most overdone, overextended rally I have ever seen and I've been around a while. It even outdid the bubble of 1999-2000. It did so in regards to how soon after the disaster of 2000 it occurred. Sensible people would have to only look back on the mammoth sell off in 2000 to see how wrong everybody was and not want to repeat those same mistakes. The rally of 2003 also was the psychological equivalent of the dating cycle. After a disastrous affair, the typical response is to wallow and vacillate for an extended period, and then, once feeling healthy again, embark upon a new romance. What happens is all-too-common. The new relationship brings a renewed sense of vigor and excitement. Every day seems better than the one before. The sex is great, but at some point becomes routine. Then the arguments start and eventually the whole thing falls apart. In simple terms: don't get married to your stocks and, yes, I missed the entire rally.

So, since 2003 was not such a good year for me in the markets, 2004 is already awesome. The positions I mentioned here last week are all performing very well and I may begin trimming some soon. The Kodak April 30 Puts are already a four-bagger, and I have gotten out of some, as the stock fell well below my target of 26.40. Any further decline is simply gravy. I am going to recommend buying the Kodak October 27.50 puts right now. They are sporting a very small premium currently and are super cheap. Wait for an up day and grab your share. There's a very good chance that Kodak will be taken out of the Dow by then, and also the chance that the stock could fall below 15 in short order on its own, without any external event affecting its price.

The larger question remains, however, how low can we go? Markets have a nasty habit of fluctuating and over the past five years the major averages have had swings that people with bi-polar disorders would envy. We've already entered the first phase of decline - in fact, the first phase, the rapid deterioration, is nearly over. I am looking at a short-term sideways trade for the next 2 to 4 weeks, barring any unforeseen events. It's a very good time to be looking for short candidates or defensive positions.

But where is the bottom? Will the markets give back all of the gains made from October 2002? While that seems doubtful, I have some inkling to think that over the next 2 to 3 years the averages will hit new lows. Shorter term, I see the Dow testing support in the 9800 range. If that level is breached, all hell could break loose, though short, weak rallies will be common. You'll see these short bursts, mostly fueled by short covering and institutional manipulation, commonly when stocks reach near term bottoms. Look for one soon after the Dow breaks below 10,000.

A few quick notes on the news that shapes our world:

Martha Stewart: A travesty of justice, especially when Enron CEO Ken Lay has not even been charged. Reminiscent of the Russian show trials. Martha was guilty of poor judgement and shaking the old boys network. She'll pay, but she'll be back.

The train bombings in Madrid: A tragedy of comparable scale to America's 9/11. Oddly enough, it happened on 3/11/04, exactly 911 days after 9/11/01. Without a doubt the work of Al Queda.

War on Terror: Despite what the press and the president tell you, we're losing. Sure, there have been no attacks in the US, but we've lost hundreds of soldiers in Iraq and Afghanistan (along with thousands of wounded), the number of terrorist attacks worldwide since 9/11/01 has increased dramatically, and the governments of the United States, the Philippines and France are in denial. Not so much the French, but in the Philippines, the standard routine is now, after a ferry or police station blows up, the terrorists make their claim of responsibility and the government denies that the terrorists had anything to do with it. Here in the US, the standard line is, and watch these words carefully, "we don't know the exact cause, but we know it was accidental." That's been used twice now; first, in last summer's blackout and most recently in the grossly underreported explosion and sinking of a gas tanker off the coast of Virginia on February 28. The statement is not a logically acceptable argument. If one does not know the exact cause of something, one cannot label it in any way. It's just like the government to immediately come out and say that some event was not caused by terrorism even though they don't know what caused the event. They'll continue to do it until buildings, planes and trains are blowing up and falling down all over the place. Naturally, the government will explain that they were managing the news so as not to alarm the public. By then it will be too late.

Al Queda is a deadly force and they will continue to attack civilian targets. Having over 250,000 US troops in Iraq and Afghanistan is a sorry excuse for actively rooting out the terrorists. Bush needs to get with it and stop trying to manage the situation or he's going to be gone in November. Maybe that would be preferable to another four years of expanding deficits, bullying and mostly the mouthing of tired, empty, tough-sounding rhetoric.

March 11, 2004

Daily Drift for Thursday, March 11, 2004
What Happened Yesterday?
posted by Rick Gagliano

9:25 AM EST

What Happened Yesterday?

While I was away working on yet another unplanned project, the markets turned even more sour than they had been over the past few weeks. The Nasdaq, already in corrective mode, dropped well below the key psychological level of 2000, while the Dow dipped dangerously close to official correction territory (the Dow needs to reach the 10,190 level to have officially shed 5% of its value).

The biggest news of the day was that the US trade deficit had once again expanded, this time to a record $43.1 Billion. With that kind of data in hand, investors scurried to sell off their inflated holdings of US stocks. The Dow has now erased all of its gains for the year. I've been saying it for weeks, and it looks fairly clear now - the rally is OVER.

So much for yesterday. Today's news is hardly heartening to the bulls. First, commuter train explosions in Spain are sending European stocks into a bottomless pit. Across the pond, here in America, land of the numb and the home of the naive, Reuters is reporting that import prices have risen another 0.4% - that data for February. This being the fifth consecutive monthly rise in import prices, including a revised 1.5% jump in January, one wonders how long Fed Chairman Alan Greenspan will continue to insist that inflation is not a risk.

With gasoline prices near all-time highs, imports (much of it food - why are we importing food?) soaring in price, real estate property taxes, utility bills and health care costs all spiraling upwards, is there any evidence that there is NOT inflation?

Armed with the anecdotal evidence we have, instead of the sloppy official numbers and statistics the government routinely trots out, the Average American has a much better view of the situation than all of the pointy-headed bean counters in Washington. And that view is not pretty. Mr. and Mrs. Middle Class are being squeezed on all fronts, from fuel to food, from education to doctor visits and taxes, taxes, taxes, fees, fees, fees everywhere at all levels of government. It's close to panic stage for many middle class Americans. Those in the two-income trap who have already lost one income are already in a panic and many are headed to bankruptcy court.

So, Wall Street will do what it always does best - overreact. The markets will more than likely stay in a declining channel for the duration of the summer. Political winds being as they are, a rising stock market would be the best tonic for George Bush, though his manipulating friends may want to save their best ammo for the fall, as a rising stock market then will have a more beneficial effect on his re-election scheme.

Once the Dow gets close to the psych-out level of 10,000 - a level it should never have attained in the first place - the next resistance or congestion point is in the 9800 - 9870 range. If that is breached, I'll be looking for 9000 in fairly short order. When it becomes clear that the recovery is a fraud, the war in Iraq is a fraud, Homeland Security is a massive fraud that has not even begun to hit the headlines, the US markets will tank back to more reasonable levels.

You can only puff up a balloon so much. It either bursts, or you have to let the air out.

March 09, 2004

Daily Drift for Tuesday, March 9, 2004
Stocks in broad decline, at last!
posted by Rick Gagliano

2:05 PM EST

Reporting from Rochester, NY, future hell hole of the universe.

Sure, I go away saying there's nothing to move the markets and they tank on no news. What I have suspected all along is now coming home to roost. The markets are turning and there's no turning back. We are heading into a deep decline. Since the markets have turned on NO news, any bad news will absolutely tank them.

My favorite play, April 30 puts on Eastman Kodak, is turning up nicely. The stock has shed over a point and a half in the past two days alone. Further deterioration is not only expected, but demanded. The stock is radically overvalued at current levels. It's trading today at a shade over 26, when fair value is actually around 6 or 8. You can buy 30, 27.50 or 25 puts out about 3 or 4 months and just sit back and watch the money roll in.

The reason I love playing puts on Kodak is because I know the company so well. I live literally in the shadow of Kodak Park. They have already announced that they will lay off between 5,000 and 8,000 workers locally over the next three years, and those layoffs will begin to commence in July. The company has almost no value outside the buildings and real estate they own and they are selling those as quickly as they can.

Current management at Eastman Kodak, headed by CEO Daniel Carp, is completely clueless and is only trying to downsize as fast as humanly possible to avoid bankruptcy court. Traditional film sales, long the heart of the business, were off 20% Y-Y in February, according to industry sources, so we see the flight to digital photography is accelerating.

Inside of three years, Rochester, New York will be a depressing, desolate place, burdened with high taxes, high unemployment, a high crime rate (already the highest in the state and it's going to get worse), no job creation and no prospects for the future. Real estate will be cheap, but the property taxes will be burdensome due to a failing tax base. It's a lovely picture painted primarily by big business and local government.

At 2:04 PM EST
Dow 10,454.67 Down 74.81 (0.71%)
Nasdaq 1,996.84 Down 11.94 (0.59%)
S&P 500 1,140.71 Down 6.49 (0.57%)

Hey, and the day's not over...

March 08, 2004

Daily Drift for Monday, March 8, 2004
Thank goodness for rich people.
posted by Rick Gagliano

The Oracle Delivers

10:46 AM EST

There is little in the way of real news to move the markets very much today, so possibly it's good to devote a little time to the politics and various machinations in play.

The Associated Press is reporting that none other than Warren Buffett, famed investor extraordinary and Chairman of Berkshire Hathaway - and, I might add, a mightily wealthy individual - is complaining that the Bush tax cuts favor large corporations and the wealthy.

On the surface, this may seem odd, as Buffet is the second richest person in the world, with an estimated fortune of over $42 billion. Why would a man, who is so rich complain about lower taxes for precisely his kind of people - rich ones?

Mr. Buffett apparently has a conscience, but I think his unveiled criticism of the Bush tax policy is really centered in good old greed, and in this case, greed is good. Buffett realizes that to a large extent his vast wealth was created by the prosperity and freedom of a large American middle class. This large group of people buy the things Buffett's companies make and the more the government gives in the way of tax breaks to the wealthy, who can afford to pay after all, the less there is for the middle class, as they have to dole out a larger percentage of their paychecks to the taxman.

Buffett realizes that the middle class is being squeezed ever tighter in America. Really great jobs are nearly impossible to find. Even marginally good jobs may not be found easily in some localities. Health care, energy, school costs are all rising and squeezing the general population tighter and tighter. The government tax burden - not only the federal share, but the state and local portions as well - have reached epidemic proportions and still, governments at any level are unwilling or unable to either cut costs or balance budgets. It is spiraling out of control, led by the feds and their ungodly 1/2 Billion dollar deficit.

In truth, without the middle class, Buffett's boat is sunk, so he casually goes out and makes these statements in support of us little folk. We should all take some time out to thank Mr. Buffett, because he realizes the imbalance that exists between the wealthy and the rest of us is not healthy and cannot continue without taking down not only the middle class, but the upper crust as well.

Dow 10,613.40 Up 17.85 (0.17%)
Nasdaq 2,049.02 Up 1.39 (0.07%)
S&P 500 1,157.40 Up 0.54 (0.05%)


March 05, 2004

Drifting along on a Friday morning...
posted by Rick Gagliano

10:27 AM EST


I have been very busy on a project the past two days, and I apologize for not keeping people up to date on the madness in our world markets. However, yesterday didn't add up to much of anything, though I was watching sporadically throughout the day.

Today, however, we begin to see some clarity in the belief that I and many others who have been around this block a few times share. We have been called, by some, "gloom and doom" merchants for our realistic, albeit downbeat, and by some standards, pessimistic outlook on the US economy.

But today's Labor Department release of employment for February just makes us all roll on the floor in uncontrollable laughter. Not because we like seeing Americans out of work - rather the opposite. We would like nothing better than to see Americans enjoying ever greater wealth and prosperity. Most of us in the camp we call honest economists, do not see the economy picking up, gaining momentum or growing. And when the government's own department can't fudge the number enough to show anything better than a measly 21,000 new jobs created last month, we can only shake our heads in disbelief that so many did not see this coming.

In fact, the rumors and innuendo circulating around the various news wires and media were suggesting that this month's job growth would be significant. Obviously, somebody is buying the administration's politically-charged pitch. Real, serious, honest economists are not. 21,000 new jobs is laughable. It does not even come close to even keeping pace with the new individuals entering the job market.

But what is the market reaction? Though the Dow dropped 60 points in the first 8 to 10 minutes, has now gone positive for the session. WOW!

Let me put it this way: if stocks will not break down even in the light of significant and persistently weak data, then prepare yourself for a mammoth readjustment at some point. It may not come this week or next or next month, or even next year but it will "surprise" everyone. Actually, I believe everybody will feel it differently because it's a game, and the fellows down on Wall Street are using your money, so how can they lose?

Average Americans who have 401K plans or other passive investments in securities will feel the pinch the most. It's coming. The question is when?

Stay tuned for further developments.

Dow 10,598.96 Up 10.96 (0.10%)
Nasdaq 2,059.13 Up 4.02 (0.20%)
S&P 500 1,154.53 Down 0.34 (0.03%)

March 03, 2004

Daily Drift for Wednesday, March 3, 2004
Another short story, plus, lambs eating the lions?
posted by Rick Gagliano

9:25 AM EST

Another Short Story

While the In like a lion, out like a lamb strategy seems to be in play - though I'd really like to have seen a little more of a move to the upside, as in, more than a one-day bump - it's time to turn our attention to overvalued stocks and the opportunity to make a little green on the way down.

I'm looking at April Puts mostly, though some May and July contracts may prove to be just as rewarding, though you will be paying a premium for the additional time horizon.

Today's darling is Maxim Integrated Products (MXIM). Maxim manufactures a wide array of integrated circuits and they are in the semiconductor industry group. Most of what they do is unimportant because we're looking at this only as a chartists dream, a stock that is leaking sideways down, after hitting a 52-week high just over a month ago. The best part of the chart is from the 5-year perspective, which shows Maxim in a long term downward trend, having tested support twice over the period and failed.

The stock also carries a trailing p/e of 50, which is not unusual in today's market, but as I've said repeatedly, today's market is unusual. Stocks are wildly overvalued and will eventually revert to historical standards, sporting a p/e in the 12-15 range.

So, Maxim, has two strikes against it. The charts and the value. How about the true value of the company. Maxim is one of the most generous out there when it comes to granting stock options for employees and top management. And they are selling, though not with a great deal of gusto. Still, the VPs, directors and other executives aren't buying at these levels, so who will be? Not us, that's for sure.

Play the puts at whatever time horizon you're comfortable with, but I might add that long term, fair value on this stock could be around 22, not 50, where it closed yesterday. You have the option of playing May or August puts, and I would go for both, buying the May 50 puts and the August 45 puts. That gives you some flexibility and potential for nice profits without a lot of risk.

Well, the markets are getting set to open, lower, again. If this trend continues, much longer, we may witness a radical reshuffling of the deck, as in, a major correction of 15-30%. The longer the sideways to downward leaking continues, the more potential is created for major downside risk.


March 02, 2004

Daily Drift for Tuesday, March 2, 2004
Superheros on Wall Street
posted by Rick Gagliano

9:15 AM EST

With the markets about to open a little shakier this morning, I was pleasantly greeted with news of a stock split on one of my picks from March of 2003 and there's a story to be told.

This morning, Marvel Enterprises, the people who brought us such notable characters as Spider-Man, the Incredible Hulk, the X-Men and many more through the magic of comic books and now feature films, announced a 3 for 2 stock split. They did, however, lower their full-year earnings estimates, while raising their revenue figures, due to a problem most of us wish we had - taxes. Apparently, the company is making so much money that they're being pushed to a higher tax bracket. Ah, the pain of it all…

But herein lies the story: When I was a kid back in the 60s, I loved Marvel comics. I was at the drugstore when the new issues arrived, shelling out my 12˘, which quickly became 15˘, for the latest issues. Captain America, Dr. Strange, Thor, the Avengers, Spidey, the Fantastic Four were favorites. I believe I bought nearly every title they produced in the superhero category, and enjoyed and savored the adventures of these fantastical heroes.

Flash ahead to 2003. It's mid-January, frightfully cold outside, so I decide to stay home one Sunday evening and catch the X-Men on the tube. It was the first airing of the popular film that hit the theaters in 2002, I believe. Well, having thoroughly enjoyed the film, and noting that the script had stayed relatively true to the original characters, I thought maybe I should look at the stock.

It was trading right around $10 a share and I began to investigate. My understanding of the superhero genre from years earlier gave me strong insights into the potential for feature films. But here was the best part: Marvel was not actually producing the films themselves, they were selling licensing rights to producers and collecting a share of revenue not only on the gross receipts but on sales of related merchandise like action figures, lunch boxes, etc. I advised several people to buy shares at $10-$15, with a target of $25 and higher.

After Spider-Man and the X-Men registered big numbers at the box office, revenues and profits soared in 2003 and the stock quickly moved up to 15, 20, 25, eventually hitting a high of 35 recently. They have new films coming out this summer and more in the pipeline. The forward p/e is about 26-28, which, compared to most of the stocks traded, is dirt cheap for a company that is hitting and exceeding their targets, has a super, high margin business and a stable of over 2500 characters to license.

Post split, which should put the shares around 21, there may be a dip, and I would buy at any price under 18, though if it breaks through 24, it may continue to run. Though it may be pricey at that level, it's becoming somewhat of a darling to analysts and the interest from institutions is only now becoming strong.

My point is one which I believe the great fund manager, Peter Lynch, made constantly - invest in things you know and understand. For me, Marvel was the perfect example of that principle and it has paid off handsomely with a 200% return in just over a year. Not bad for a kid who was "wasting his time" reading comic books.



I took a look around and screen for some high p/e stocks to short or buy puts against into the summer and came up with a list of the usual suspects and a few surprises. The most obvious has to be Amazon (AMZN), trading in a range of 42-45 currently and well off its recent high of 60, but the stock seems to be showing no evidence of upside potential and is stuck in a downward draft. If the markets in general turn sour, this one will get hammered even more. I like the July or October 40 puts. The stock has no legs whatsoever.

One that jumped out at me was Biogen Idec (BIIB) which ran up 20% in one day (February 18) on news that it was pushing up its timetable on an MS drug with partner Elan. Now that the news is out and they are announcing earnings today after the bell, so you can jump in today in hopes that investors will "sell the news" or wait until the dust settles. The July 55 puts are where to be, even though they are pricey. This one can be volatile, so put your stop loss at 25 or even 30%. If it hits it, bail out, as pure sentiment could take this higher. The chart is saying that it should retest the upper end of its trading channel, since it has broken out of it, which is around 50. Could be a 3 to 5 bagger or a complete flop. This one is high risk/reward.

Take a look at a one year chart for Cognizant Technologies (CTSH). This stock is bleeding. The chart shows a clear top and the beginning of a distribution pattern. I don't even want to know what business they are in since the chart is telling me to sell and I don't want to argue with the raw data. I would buy the July 50 puts (already well in the money and selling for 6.80) and not even look at it for two months. If it breaks support in the 45.50 - 46.80 range, the bottom could be in the 20s. Something is very wrong here and the chart is screaming it. Could be a bonanza.

More Short Stories tomorrow.


4:15 PM EST


No, I am not calling your brother, nor talking about a kid's toy. I am explaining the action of the stock markets over the past three weeks, and especially the past two days. We're in a holding pattern, up one day, down the next. One things for sure, it won't last forever - never does. The market is going to go one way or the other, and considering my call yesterday for the "in like a lion" start to March madness, this is just the first assault of the lamb-y end of the equation which will come on the 31st. So, let's not get too excited over one-day swings, OK?

I have to comment on the EU's decision to slap the US around a little bit today, imposing additional 5% tariffs on a basket of goods in retaliation for the US tax loopholes which essentially allow corporations export subsidies and, in effect, unfair pricing in the Eurozone.

The EU is actually betting that we will CHANGE OUR TAX LAWS, in hopes of closing the subsidy loophole and leveling out the proverbial playing field. It's not the first time that foreigners are forcing our hand to change our laws (in fact, it happens every day in California), but it is exceedingly rare and not something we would want to see repeated often.

Americans like making their own laws, despite how awful, stupid, excessive, moronic or downright stupid they may be (smoking bans and gay marriage come to mind). However, the bunch of overpaid nitwits we so lovingly call the US Congress, is scrambling to make something of it. Chances are they will bungle the whole thing, maybe impose some tariffs of their own against the French and Germans, and muck up the whole situation.

As a junior economist (I would be a senior economist, but I hate the sound of it), I have studied a little history, notably, the Great Depression (I'm not afraid to use the D word around here). While many people blame the stock market for the crash and subsequent lean years of the 30s, the crash of '29 was more of an episodic event, a signal that the good times were over, that credit was excessive. Sure, people lost a lot of money in October of 1929, but the main culprits, as far as I can glean, for the extended period of economic malaise worldwide, was the breakdown of foreign currency exchange and trade agreements.

According to some, the Brits raided our gold reserves and in retaliation rounds upon rounds of trade sanctions and tariffs were imposed by the leading nations of the world, crippling international trade and forcing nations' economies to provide for their own, on their own. Of course, we were on the gold standard back then, and I wasn't around, so I am just passing along information I have read from other sources, but I can tell you this: if the US keeps messing with and violating trade agreements, there will be hell to pay.

In a related note, the action taken today by the EU is rather mild. They have the authority to impose 100% tariffs, which would essentially suspend the sale of all US finished goods in Europe. As it stands, the EU will raise the tariffs by 1% per month until we step into line. As they say, the clock is ticking….

And it's time for me to go.

At the close:
Dow 10,591.48 Down 86.66 (0.81%)
Nasdaq 2,039.66 Down 18.14 (0.88%)
S&P 500 1,150.36 Down 5.61 (0.49%)

Volume was moderate, but the yo-yos did give back most of yesterday's gains. Lions and lambs - not a pretty picture.

March 01, 2004

Daily Drift for Monday, March 1, 2004
Expert opinions are not important
posted by Rick Gagliano

Since so many of you wrote in to tell me how much you liked the new format (thanks, Mom!) showcased Monday, I've decided to continue writing a running commentary on the stock market throughout each day.

Of course, I can't write a continuing blow-by-blow account of the day on the street (well, I could, but I won't) so I'll be updating it at irregular intervals. And I will stick to my motto, "All the news that fits around the ads" and my mantra, "When news breaks, we clean up the mess." So, without further ado, redo, or do-do, I present:

How to become an expert in 20 minutes, or, the latest and greatest installment of the Daily Drift!

It's 9:15, and the markets are set to open higher. I actually am hoping that the indices tack on some big numbers this morning, because it being the first day of March, the dual-edged adage, "in like a lion, out like a lamb" applies. The opposite, "in like a lamb, out like a lion," would upset my finely tuned investment strategy, which is simply to sit back and watch the rally fizzle into oblivion. Oblivion is a rather stark term and a desolate place, just past Hades on the Road to Ruin. But, as I will point out in the days ahead, we're well on our way.

Incidentally, just watching stocks go down is not my favorite pastime. I much prefer profiting on the decline by playing puts, selling short and investing in commodities.

Currently, my favorites are the April Kodak (EK) 30 puts, buying gold under $400 an ounce and accumulating silver at any price.

Back to becoming an expert which is really a quite simple enterprise these days. Get yourself a computer, a web site and start copying a bunch of stuff from other web sites. Pick an area you like, such as consumer spending or cattle futures or oil prices and start making predictions. Certainly, you will not do much worse than the bozos regularly polled by Reuters or CNBC (which I do not watch; it's so much dribble), who are usually ghastly over-or-under-estimating everything.

Well, the markets are about to open, so I'll check back in an hour or so.


Sorry to be back so soon, but I forgot to do my solemn duty as an "expert." Here are my March predictions for the Dow and NASDAQ. By the end of the month, the Dow will be in the range of 10,200 to 10,300. The NASDAQ will continue to decline, breaching the 2000 mark clearly by mid-month and hit a near-term bottom in the 1875-1910 range. I think both averages have lots of room on the downside, but March is usually a good month for declines, if not outright routs.


12:25 EST

Dow 10,656.96 +73.04(+0.69%)
Nasdaq 2,043.07 +13.25(+0.65%)
S&P 500 1,151.60 +6.66(+0.58%)

Yessir! The averages are doing what they do best, going straight up - even when stocks are terrifically overpriced. I am loving every minute of today's action, mostly because I am not paying close attention. It's just that when the markets consistently tend to defy gravity, news and all the rules of economics, it gets a trifle repetitive and boring.

But, the good news is that if the indices go higher, and you are sitting on cash, like Bill Gates, John Templeton and Warren Buffett (who is reportedly selling the dollar), you're going to be ready for some real bear when things start slipping.

While we have a fairly robust and large economy overall, our trade balance and the government deficits are going to fuel inflation, which means credit will tighten and markets will sour. And speaking of fuel, I had my highest ever utility bill last month (I live in the Northeast and heat with natural gas), and so did my father, who has been around a LONG time. To add a little more fuel to the fire, I just paid $1.72 per gallon for regular unleaded gas. That's a little high and it is probably going to go higher, so keep buying those SUVs and Minivans and especially those Hummers! Meanwhile, I will be zipping by you in my sports car which does get an average of 22 MPG.

So, as many pundits have been recommending for months, buying some shares of oil producers and distributors and utility companies was probably a good thing to do six months ago and there still may be some upside, especially when they get close to their reporting periods - about a month and a half from now.

Fuel for thought.


3:30 PM EST

Dow 10,676.88 +92.96 (+0.88%)
Nasdaq 2,054.97 +25.15 (+1.24%)
S&P 500 1,156.35 +11.41 (+1.00%)

OUTSTANDING! It's not investing anymore, it's gambling. Tomorrow, some short candidates, now that the Wall Street boys have put their money down. Volume is fairly average for the day, so all you Bulls out there, don't go out and buy new suits just yet.

Hasta la vista, baby!

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