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August 2003

August 27, 2003

Why I might be totally and completely WRONG!
The Dow and NASDAQ could just keep going up and up...
posted by Rick Gagliano

A couple of weeks ago I penned an assessment of the markets (see story immediately below) in which I predicted an imminent selloff on the Dow and the NASDAQ. Since that time, both indices are higher, albeit not by much, proving once again that I - and countless other investors and analysts - am usually wrong when attempting to time the market. I may yet be proven right, but it could take months or even years, so I want to go on record with some thoughts about how I could be completely wrong in my conclusions about the markets.

First and foremost, one cannot discount investor enthusiasm and/or the sucker factor. With the indices and many popular stocks at or near their 52-week highs, there has to be a knee-jerk reaction by some to not want to miss the next leg up. Anyone sitting out this year has seemingly passed up the best year in the past three. Of course, money doesn't grow on trees and stocks are at a premium right now, with the average P/E hovering in nosebleed territory - above 30 - again. This may or may not auger well for late entrants into the rally of 2003 though anyone who got into the right stocks in the first quarter is now showing healthy gains.

Since the Dow in particular has risen far beyond it's previous high of December 2002, Dow Theorists maintain that we are in the early stages of a primary bull market. Not that I discount Dow Theory - indeed I ascribe to many of its principles - but the significant head-scratching problem is that the primary bear trend never seemed to run it's complete course. The October 2002 lows were neither low enough nor sustained for long enough to warrant a turn-around. Dow Theory is not perfect, so maybe it was wrong on the low end, and maybe it is wrong now. Nobody really knows unless he or she is a seer with infallible sight of the future. I am still siding with the thought that the bear market is far from over, and that this little violation of Dow Theory is simply symptomatic of a boom-and-bust economy built on little more than hype, innuendo, false hope, maladjusted government calculations, excessive speculation, rampant money supply and credit expansion and far too much manipulation by the Fed, and government and banking/finance insiders.

Now that last sentence was really a mouthful, even for me, and it probably places me squarely on the podium of the twisted conspiracy-theorist yoke. While heading off from Dow Theory to conspiracy theory may seem like a vicious leap, the two may not be so far apart. You can find out all you like about Dow Theory and the machinations of the Plunge Protection Team (PPT) and compare and contrast for yourself. Interestingly, the authors of the Dow Theory even pointed out that primary trends could not be manipulated. Maybe they were wrong, and maybe there's the reason I may be wrong - the markets are being manipulated.

And why would anyone want to manipulate our financial or stock markets? Besides the obvious - financial gain - other theories may include re-election (2004 is a presidential year), power, control, and a wealth of other nefarious activities usually confined to the pages of books of fiction, history or economics - and please note that some history and economics books are simply fiction, after all.

So call me a skeptic, but I still don't buy this rally which is now in its 6th month, nor do I put much faith in the talking heads on CNBC, nor government statistics, nor indicators. Actually, let me rephrase that. I have faith in all three. I have faith that the talking heads on CNBC are full of hot air, that the government statistics are either flawed or outright lies, and that the economic indicators are subject to a great deal of massaging and interpretation. But I digress. This is supposed to be about how I may be wrong.

It may be that the United States economy is the strongest and most powerful in the world and that corporate profits are going to improve dramatically over the next three to six quarters and that despite massive government deficits, bulging trade deficits, record-high unemployment, the unrestrained printing of dollars, rising energy costs, huge fraud, merciless taxation and rising inflation and destruction of the bond market, our economy will grow at an annual rate of 4-6% for the foreseeable future. It may be that our leaders in government know exactly what they are doing by annexing countries like Iraq, shutting down the power in the entire Northeast (notice how nobody has figured out what caused the blackout, just like nobody has found any WMDs in Iraq and nobody can find Saddam Hussein or Osama bin Laden) and allowing China to export everything to us while importing only our jobs.

But the real culprit is the Federal Reserve. Chairman Greenspan will not let the economy fall back into recession no matter how many dollars he has to print. Of course, running those printing presses day and night may have some long-term deleterious effects, those being inflation, more inflation and hyper-inflation, which, if memory serves me correctly, leads to drastic changes in currency markets, like devaluation of the currency. Maybe that doesn't concern the Fed or you, but there are lots of people out there who are concerned, and they don't like what they see. Among them is the intrepid, self-proclaimed adventure capitalist, Jim Rogers, who put the Fed's money creation quite succinctly the other day in a CNBC interview, saying, give me a trillion dollars and I'll show you a good time, too.

I may be wrong about the direction of the market for many other reasons, including, but not limited to, my lack of credentials as a junior economist, misreading completely the economic indicators, taking the rise in gold prices too seriously (it hit $372 today), having too little faith in institutions, watching too much television, my lack of a solid second serve, my love for donuts, and any other idiosyncrasies that may cloud my economic vision.

Yes, I may be wrong about the stock markets and Wall Street in general, but, then again, I may be right. Time will tell.

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August 06, 2003

Money Notes for August 6, 2003
posted by Rick Gagliano

"Chasing stocks at these prices is surely going to hurt somebody," a broker friend confided a few weeks ago.

On July 25, the flashy (or is that flash-in-the-pan?) NASDAQ closed the session at 1,730.70, while the old granddaddy DJIA ended at a robust 9,284.57. For the Dow, it was a 52-week high close, though hardly anyone noticed. It being mid-summer, everybody was either at the Hamptons or en route to Saratoga, where the action is a bit more - shall we say - frenetic.

Since October 9 of last year, when the Dow closed at 7,286.27, the tried-and-true index of America's industrial might was up a hearty 27%. Investors were happy, once again believing that the post-bubble slump had ended. Those favoring the NASDAQ were downright ebullient, as that index measured up some 55% from its low of 1,114.11 on that same blue Wednesday last fall. Some pundits and poseurs were calling it another Nasdaq bubble; others more seasoned in the ways and means of investors called it a desperate bear rally.

We tend to side with the old pros. Since the 25th, a mere eight trading days have passed, but both of our favorite indices (yes, we know many of you love the broad S&P 500, but it has bored us lately) are looking a bit peaked, flaccid, flat, lame, tame, slow, dull, tired, wearied, fatigued, bushed, expended. And, to be true, it's the formerly-peppy NASDAQ that looks the most run-down having shed nearly 80 points in that short time.

By comparison, the Dow has dipped more than 200 points, but percentage-wise, it's less than the junior circuit.

So, what seems to be the problem? The recovery road map that has been laid out by our wizened leaders seems to have hit a bump here. Not unnoticed was the enormous short squeeze on 10-year Treasuries and the corresponding death of the mortgage-refinance run. Bankers take note: you've dealt out billions at 40-year low rates; if inflation turns a trot into a gallop, you're going to look stupid, again. But, bankers weren't born smart, anyhow. That's why they're bankers.

As it is, banks aren't about to lend a whole bunch of money any time soon, but the money they do lend will be in a foolhardy endeavor. Despite the previously low rates, business hasn't been borrowing, and now consumers have had their fill at the five and six percent trough.

So, who's going to borrow at 7, 8, 9, 10, 12 percent? Those who missed the boat - or the house, as it may be - and businesses who are forced to borrow to stay afloat. Oh, the horror of it all! Bankers simply despise those nasty non-performing loans, like trained dogs who won't jump through the hoops, they need an extra biscuit or bone. The bankers, in their infinite imbecility, will actually loan money to somebody who needs it, when the compelling factor is the difference between getting nothing and maybe getting something.

And they'll charge them something like prime plus 12% plus another 5, plus points and whatever other fees they can tack on. Those bankers, always the money grubbers, just always have it back-asswards. Forcing the needy to borrow at higher rates only will exacerbate the obvious cash flow problems, not alleviate them. The bankers will be able to brag to each other for a while about the hefty returns they are getting on their big fish loans, but they won't mention the little fish who slipped out of the creel and are swiftly swimming downstream. And then someday, all those little fish outweigh the big fish and the bank is broke - again.

I have run amok here, ditching the opening of the market declines for a full-blown harange of the banking business. But it's not really that much of a stretch. The banks and brokerages (they're one and the same entity in the case of our nation's largest) are leveraged to the hilt and if stocks aren't cutting it, and bonds are biting the dust, they're in for a world of hurt, which also means that you and I and your neighbor and old aunt Susie with her fixed income are going to face some pain as well.

There are already millions of people out of work, and I have to digress here because figuring out just how many people are not working - and not including the government employees who are employed but not working - is a bit of a guess. Since February of 2001, according to the US Bureau of Labor Statistics, the workforce has shrunk by 2,657,000 to 129,870,000 workers currently employed. With unemployment at roughly 6%, that means nearly 10 million Americans are looking for work and aren't having a great time finding any. Then you can add in the people who have given up looking for work and are doing whatever people like that do, and people on public assistance (may be the same people) and.... well, it's more than 10 million people. Of course, there are a good number of people working for half of what they made in 2000 or 2001, but who's counting? And there sure are a lot more self-employed people these days, aren't there?

So, there's already some pain in the US of A. But, like our broker friend in the first sentence of this article pointed out, there's more pain on the way. If American businesses don't begin hiring soon, and in strong numbers, we may be falling back into another recession, because there's no more refi money, consumer spending tightens up, business profits erode, stock portfolios start going from gains to losses and at the bottom of it all, the banks get squeezed by excessive low-rate lending and non-performing loans.

Naturally, the federal government will hand out money feverishly and spend it faster than they collect it, creating a mountain of debt that will never be repaid and our monotonous Fed Chairman will be unable to either raise or lower rates - as though it would make any difference at all - so by mid-winter, we'll all be grumpy and probably pretty testy and maybe even sad.

Just a footnote: As I was researching unemployment numbers for this article I noticed that we're not alone. Unemployment in Germany is at 10.6%; Spain, 11.4%; France 9.3% and the entire EU - including the UK, Denmark and Sweden, 8.1%. And in India, where supposedly all of the US high tech jobs have been going, not everybody is working. In fact, some believe the unemployment situation there is alarming and a threat to democracy. Here's
an article
on the subject.

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