Wednesday, December 29, 2004

Slower Growth in 2005?

Some of the quotes kill me.


Henry TO MArket Market Analysis

The market has certainly not disappointed since I left the United States more than a week ago. Expensive valuations or not, the technical conditions of the stock market still look good here. Again, a lot of my short-term indicators are overbought, but in a typical cyclical bull market, these indicators can stay overbought for a long time even as the market continues to rise. As long as the money keeps coming in; as long as the speculative fever does not get too out of control; and as long as there is no huge insider selling or a financial dislocation, we are most probably still safe for now.

A few things that I would like to mention:

The jump in The Conference Board’s Consumer Confidence from 92.6 to 102.4 is bullish, as it is now on an uptrend once again while the reading is still not too excessive. Once this reading gets up to over 110, however, it is time to start being more careful – especially if liquidity starts declining in the stock market.
The conclusion of the PeopleSoft and Oracle deal in mid-January will bring in approximately $10 billion in cash – providing a further boost to the stock market.
The numbers (and size) of buybacks and cash acquisition deals continue their brisk pace per TrimTabs. The fact that the IPO calendar is also now virtually non-existent until mid-January is very bullish. TrimTabs now says that their liquidity indicators are at their most bullish since they began their services in 1995.
The total short interest on both the NYSE and on the NASDAQ is still at historically high levels – suggesting that few investors have bothered to cover their short positions since the late-October lows. This is further confirmed by the low levels of the NYSE specialist short ratio (however, the latest week’s data has not been updated for some reason).
The amount of margin debt outstanding on the NYSE rose $11 billion to $197 billion from October to November but is still more than $80 billion off from its all-time set at the end of March 2000. The experience of the October 1966 to 1968 and May 1970 to 1972 cyclical bull markets has shown that the peak of margin debt tends to surpass the peaks of the prior cyclical bull markets – even if we are still in the context of a secular bear market (which I believe we are in now). The fact that margin debt has only grown $15.4 billion in the last six months is also not excessive. For comparison purposes, margin debt outstanding on the NYSE increased $110 billion (!) in the six months leading up to the grand finale in March 2000.

I hope my subscribers will have a great New Year’s as well as a great 2005! May you enjoy great returns in 2005 – remember, there are always more important things than the stock market!

Signing off,

Henry To, CFA

2004-2005 A look back and A look Forward

BusinessWeek on Tech

Tech Outlook 2005 -- Part 1
S&P analysts provide their 2005 outlook for chips, chip equipment, hardware, electronic manufacturers, and softwareThe tech sector lost some shine in 2004, as worries about economic growth and weaker demand persuaded investors to look elsewhere for growth. So far this year through Dec. 17, Standard & Poor's Information Technology index edged up just 0.3%, vs. a 7.4% gain in the broader S&P 500. The tepid gain isn't too surprising after the 47.2% jump for Info Tech in 2003. However, telecommunications stocks have fared much better this year, climbing 16%, after rising just 3.2% in 2003, amid consolidation news and more focus on dividend-paying stocks. The strongest performers in 2004 were Internet software and services (up 61%), followed by wireless telecom services (up 53%). Semiconductor-related shares were the big losers. For clues about what to expect from info tech and telecom, BusinessWeek Online asked S&P analysts about their 2005 outlook for key industry segments, along with their favorite stocks. Overall, S&P has a market weight recommendations on both the Info Tech and Telecommunications Services sectors. This means investors should be particularly choosy. TOP NAMES. S&P has its top ranking on a few familiar names, including software makers Microsoft (MSFT ) and McAfee (MFE ) and hardware giants IBM (IBM ) and Dell (DELL ). In Internet advertising, S&P's favorite pick is ValueClick (VCLK ). S&P also has strong buy recommendations on two analog chip outfits, Maxim Integrated Products (MXIM ) and Linear Technology (LLTC ); electronic manufacturing services provider Sanmina-SCI (SANM ); storage provider EMC (EMC ); and outsourcing companies Affiliated Computer Services (ACS ), Automatic Data Processing (ADP ), and Computer Sciences (CSC ). In telecom services, S&P's top picks include Verizon (VZ ), CenturyTel (CTL ) and Canada-based BCE (BCE ). Among wireless-telecom equipment, Qualcomm (QCOM ) and Motorola (MOT ) get the top ranking. COMING ATTRACTIONS. Part 1 of this two-part series provides outlooks from S&P chip analyst Amrit Tewary, semiconductor-equipment analyst Colin McArdle, computer-hardware analyst Megan Graham-Hackett, information-technology services and data-storage analyst Richard Stice, software analyst Jonathan Rudy, and specialty software analyst Zaineb Bokhari. Part 2 of this report will offer overviews from Scott Kessler, who covers Internet software and services, consulting and outsourcing analyst Stephanie Crane, wireline telecom services analyst Todd Rosenbluth, wireless-equipment analyst Ken Leon, and communications-equipment analyst Ari Bensinger. Amrit Tewary, semiconductors Standard & Poor's maintains a neutral outlook for semiconductor stocks over the next 12 months. Despite the significant year-to-date decline in chip-stock prices (the S&P Semiconductor Index fell 24% through Dec. 17), we think current valuation multiples are warranted in most cases, given some lingering inventory concerns, some macroeconomic uncertainty, and our expectation for moderating sales growth for the chip industry in 2005. We think significant gains are unlikely for most chip stocks in the near term, given our belief that we're entering the latter stages of the current industry upcycle. We expect chip industry sales growth to moderate from a projected 30% this year to about 8% in 2005, before weakening to a flat-to-down year in 2006. Despite our overall neutral outlook for the industry, we do have 5-STARS, or strong buy, opinions on two chip stocks that we believe will outperform peers during the next 12 months: Maxim Integrated Products (MXIM ; recent price: $42) and Linear Technology (LLTC ; $40), two high-end analog chip outfits that have similar businesses. We think the high-end analog business has more attractive long-term growth prospects than most other chip segments. HEALTHY BALANCE SHEETS. Also, we believe Maxim and Linear are both well-run companies that have a diverse customer base in a number of end-markets such as automotive, consumer, communications, data processing, industrial, instrumentation, and medical. We believe this diversity results in a lower risk profile for these companies, as it limits exposure to weakness at any one customer or end-market. Both Maxim and Linear are highly profitable companies with well-above-average gross and net margins. In addition, with no long-term debt and plenty of cash, they have what we see as healthy balance sheets. Furthermore, we think both stocks are attractively priced at current levels, based on price-earnings and price-to-sales analyses. For Maxim, we see fiscal year 2005 (ending June) earnings per share advancing 45% to $1.74, on sales growth of 25% and significant operating margin expansion. Our 12-month target price of $60 is based on our p-e model, and values the company at 34.5 times our fiscal year 2005 EPS estimate, which represents a premium to most peers but a discount to the stock's historical average multiple. PEER LEADER. For Linear, we see fiscal year 2005 (ending June) EPS advancing 32%, to $1.35, on 29% sales growth and continued margin expansion. Our 12-month target price of $50 assumes a forward p-e of 36, above most chip peers but below historical averages. We believe both Maxim and Linear merit premium valuations to most peers, given our view of their above-average prospects for growth and profitability, and below-average risk profiles. Risks to our opinions and target prices for the semiconductor companies mentioned here include semiconductor industry cyclicality, increased competition, the risks of wafer-fab ownership, and an above-average reliance on stock-based compensation. Colin McArdle, semiconductor equipment The S&P Semiconductor Equipment Index declined 26% year to date through Dec. 17, vs. a gain of 8% for the S&P 1500. In the three months through October, 2004, the North American semiconductor equipment industry's preliminary book-to-bill ratio was 0.96, the first time it has been below 1.0 in 2004. But this is up from a low of 0.78 in October, 2002. We believe near-term uncertainties will persist in the first half of 2005, as semiconductor manufacturers defer incremental capital spending, though we expect a stronger second half. We currently have a neutral outlook on the sub-industry. We continue to favor diversified front-end equipment suppliers with economies of scale, as global demand continues to shift outside North America. We expect business in Asia, particularly China, to continue to grow at a significantly faster pace than the rest of the world over the next few years. TWO WINNERS. As the industry's largest supplier by a wide margin and a leader in what we see as cutting-edge technology, we believe Applied Materials (AMAT ; buy; $17) has a compelling risk/reward profile. The stock is trading at 19 times our fiscal year 2005 (ending October) EPS estimate of 91 cents, below relevant peers. We maintain our 12-month target price of $21 based upon peer-group p-e multiples. A second stock we like is Lam Research (LRCX ; buy; $28). With Lam reporting September-quarter results that were stronger than we anticipated and our belief that the company's earnings will grow faster than the industry average, we raised out 12-month price target to $32, representing appreciation potential of 14% from Lam's recent price. Risks to our recommendations and target prices include a prolonged slowdown in demand for chips worldwide, as well as pricing pressure due to potentially increasing competition. Megan Graham-Hackett, Computer Hardware We have a neutral opinion on the computer hardware sub-industry for 2005. While we do believe 2004 witnessed healthy units growth in PCs (our forecast is 12.5%), we think easy year-over-year comparisons helped, as well as stronger-than-expected demand from consumers. In 2005, we expect the demand for PCs to ease to a 7% to 10% rate of growth in global unit shipments, assuming a relatively stable economic environment, as the demand surge following a two-year dearth of spending on PCs in 2001 and 2002 unwinds. We anticipate pricing pressure to remain intense. On the server side, we forecast a 2% to 5% increase in server revenues in 2005. Although we believe there were some stronger signs of corporate IT demand late in 2004, we expect the focus of IT spending to continue to be on areas that enable customers to make better use of infrastructures already built -- such as software and services-related spending which raise the efficiency and productivity and return on invested capital of current data centers. PRICE ADVANTAGE. Given these two scenarios, our 5-STARS, or strong buy, recommendations are IBM (IBM ; $98) and Dell (DELL ; $42). Our investment thesis for IBM is predicated on it having larger software and services assets than its peers that, in our view, are strategically well positioned and enable the company to differentiate its products and solutions. For Dell, our recommendation reflects our assumption that its competitive advantage lies in its direct-selling model, which enables the company to have a lower cost structure than peers and take market share. We expect the scrutiny on IT budgets to remain intense, and believe Dell's ability to price below peers, based on structural efficiencies in its business model, should enable these share gains to be sustainable. Richard Stice, electronic manufacturing services and data storage We believe demand for electronic manufacturing services (EMS) should improve in 2005 as more businesses look to outsource the production of their merchandise. In addition, we think EMS companies will benefit from their efforts to reduce costs, streamline operating models, and better manage inventory levels. We anticipate further penetration into design-related activities, which feature a collaborative relationship with respect to the creation and development of a product, and see revenue growth for this type of service continuing to accelerate. Our top pick in this sector is Sanmina-SCI (SANM ; strong buy; $8). We view Sanmina-SCI as being in the final stages of a significant financial turnaround, following a slump in IT spending and integration issues associated with its acquisition of SCI Systems in 2001. Steps taken to combat these factors include shifting production to lower-cost locations (with a particular emphasis on Asia), reducing headcount, and broadening service offerings. This strategy has paid off, in our opinion, as the company's quarterly operating income has more than doubled over the same period just two years earlier. SMART BUYS. We believe the data-storage industry possesses several favorable trends as it heads into 2005. Storage remains a top priority for corporations due not only to the growing amount of data being created and managed but also as a result of more stringent regulatory requirements for record keeping. Companies in this industry are increasingly focusing on a total package that emphasizes software and services, in addition to hardware offerings. On the downside, we are concerned with the potential of more aggressive pricing tactics by competitors, as well as the limited amount of visibility into overall demand trends. Our favorite name in this group is EMC Corp. (EMC ; strong buy; $15). The company maintains an industry-leading market-share position and has, in our view, adroitly built its product portfolio through acquisitions. EMC's push into the storage software area has helped gross margins to widen for eight consecutive quarters. We believe the company's balance sheet is another attractive feature, containing close to $3 a share in cash and investments and a long-term debt-to-capital ratio of 1%. Jonathan Rudy, software We anticipate that the overall software industry should grow in the low to mid-single digits in 2005. However, we like certain areas of software better than others. We have a positive outlook on the systems-software group as we enter 2005, but are neutral on the application software and home-entertainment software groups. Specific areas such as security, data backup, and recovery software are positioned to do well in an economic expansion, in our opinion. Within these particular areas, we like certain companies that have leading market shares, strong balance sheets, and high profitability. In systems software, we remain bullish on Internet security, and one of our top picks is McAfee (MFE ); strong buy; $28), a leading provider of anti-virus and Internet security solutions under the McAfee brand name. We also like Check Point Software (CHKP ; buy; $24), the leader in firewall and virtual private network (VPN) software. Another top pick in systems software is Microsoft (MSFT ; strong buy; $27). The company continues to execute extremely well, in our view, and with its recent $32 billion special dividend and ongoing $30 billion stock repurchase program, we believe that the company continues to deliver value to shareholders. HIGH SCORERS. Other picks in systems software include Sybase (SY ; buy; $19), and Oracle (ORCL ; buy; $14). SAP AG (SAP ; buy; $44) is the only application software company that we rank as a buy. We believe that SAP continues to benefit from enhanced product offerings, in addition to the protracted Oracle/PeopleSoft (PSFT ; $26) takeover battle. In home-entertainment software, we continue to like Electronic Arts (ERTS ; buy; $62), and Activision (ATVI ; buy; $19), because of their market leadership, strong balance sheets, and diversified brand libraries. Zaineb Bokhari, specialty software Extracting value from existing corporate investment in information technology will be a key theme for 2005, in our view. As widely reported, the freewheeling spending in the mid-90s, particularly in anticipation of Y2K, is a thing of the past. Shelf-ware issues still persist and return on investments (ROI) from hefty spending on customer relationship management (CRM) and enterprise resource planning (ERP) applications has been slow to materialize. IT is fast evolving from being viewed as a cost to a revenue/productivity enhancer, driven largely by the need of chief investment officers and other IT executives to justify spending to meet operational goals. This has resulted in spending on an as-needed basis and a preference among customers for smaller deal sizes or subscription-based licenses. In this tight corporate spending environment, we look for a shift in emphasis favoring technology companies whose products either extend the value of the IT investment or enhance the ability of decisionmakers to allocate resources effectively. Two software segments that play to this theme are systems management software (SMS) and business intelligence (BI). We expect mid-single-digit revenue growth for the SMS companies that derive a significant portion of sales from mainframes, such as BMC Software (BMC ; hold; $18), Computer Associates (CA ; hold; $31), and Compuware (CPWR ; hold; $6). While these companies are attempting to rejuvenate growth by entering new markets like security, asset management, and application-lifecycle management, we believe it will be difficult for them to gain critical mass in these growth areas because of their size and competition from super-niche outfits. INTELLIGENCE AGENTS. We expect SMS vendors to use their sizable cash and balance sheets for acquisitions or mergers and fill out their product offerings in the next several quarters. Vendors with attractive customer bases in asset-management and security administration are likely targets, in our opinion. The importance of mainframe revenue, however, isn't likely to diminish soon and has come under attack. The fiercest competitor, in our view is IBM, which has leveraged its natural advantage over the SMS vendors by bundling hardware, software, and services and competing on price to lower its customers' total cost of ownership. Given our outlook for moderate growth and increasing competitive pressure, we have hold opinions on shares of mainframe-centric SMS vendors BMC Software, Computer Associates, and Compuware. Business-intelligence software involves reporting and query, data integration, and performance analysis. While the overall BI area is growing at a 5% long-term rate, according to market researcher IDC, it is under-penetrated, in our view. Market leaders Business Objects (BOBJ ; hold; $25) and Cognos (COGN ; buy; $43) have been increasing share in the mid-teens, due largely to acquisitions and growing business momentum. READY FOR EMBEDDING. We like the fundamentals of BI because it coincides with our view that technology with lower price tags, quick deployments, and immediate ROI will be less vulnerable to spending slowdowns. The key to success and ultimately greater revenue streams, in our view, is for corporate customers to standardize on a single BI product. Standardization affords vendors the opportunity to cross-sell and up-sell into an organization and makes competitive replacements difficult. Business Objects and Cognos are pursuing vastly different strategies to achieve the same goal. Business Objects is employing a "built to embed" strategy in which it offers BI tools that allow users to build custom software, and relies heavily on partners like PeopleSoft and SAP to sell restricted versions of its products. Cognos, which we recently upgraded to buy, offers a packaged application, which is ready to go out of the box. While it may ultimately boil down to a build-vs.-buy decision, we think it's too early to say which strategy will ultimately win or if there's room for both to be successful. Other large software makers see the attractiveness of BI. Oracle has built additional BI capabilities into its Oracle 10g release, and Microsoft has enhanced the reporting functionalities of its SQL server. We look for continued consolidation in the BI area in 2005 and for database vendors to acquire smaller-niche companies specializing in the data integration and query and reporting areas, as we view it as a natural extension to their product functionality. We believe the positive business trends discussed above are adequately reflected in current stock valuations, and we have hold opinions on shares of Business Objects and Cognos. Note: S&P analysts have no stock ownership or financial interest in any of the companies in their coverage area. All of the views expressed accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed. Price charts and required disclosures for all STARS-ranked companies can be found at
Edited by Karyn McCormack

Housing Market Forecast

Tuesday, December 28, 2004

"THE MISSING LINK" by Dr Richebacher

by Dr. Kurt Richebächer

The badly flawed consensus thinking about the implications of sustained large U.S. capital inflow starts with the error that U.S. assets are uniquely attractive to foreign investors. The reality is that U.S. investors are earning far higher returns on their assets in Europe and Asia than foreign investors do on their U.S. assets. European firms and investors who invested heavily in the United States during the "new paradigm" years in the late 1990s are still smarting from horrendous losses. The DaimlerChrysler disaster is by no means an isolated case.
As to U.S. bond yields, they are just marginally above euro yields, but considerably below the yields obtainable in emerging countries. What is more, after inflation, they are the lowest in the world. A falling dollar is, of course, a virtually prohibitive deterrent to foreign bond purchases. In fact, it might induce selling.
This leaves the central banks of Asian surplus countries as the potential buyers of last resort for the dollar, unwanted by private investors. They did heavy dollar buying in 2003 and in early 2004, but never forget, the dollar purchases by the central banks have a heavy price in turning healthy economies into sickly bubble economies.
The sustainability of the U.S. capital inflows is, actually, the totally wrong question to ask from the American point-of-view. Far more important is another question, concerning the effects of the trade deficit on the U.S. economy, in particular on employment and income creation. We find that the dogmatic belief in the mutual benefit of foreign trade has stifled any reasonable discussion in this respect.
The benefits for the surplus countries are obvious. Exports in excess of imports create higher employment, higher profits and higher incomes. But what are the benefits to the United States? Frankly speaking, we do not see any true benefit of a trade deficit. What the American "mutual-benefit" apostles fail to see is that a balance in benefits essentially presupposes a balance in the underlying trade.
Yet there is a widespread view that the flood of cheap imports, by keeping a lid on U.S. inflation and wage pressures, fosters lower interest rates, which tend to spur economic growth.
For us, both effects are not beneficial at all, because the imports implicitly distort both inflation rates and interest rates to the downside. In essence, the lower inflation rates allow a looser monetary policy than domestic conditions justify. For Greenspan and many others wanting the loosest possible monetary policy, this was certainly a highly esteemed effect of the trade deficit. For us, it is insane.
Nobody seems to realize the enormous damages that the egregious trade deficit has inflicted on the U.S. economy. Indisputably, it diverts U.S. demand from domestic producers to foreign producers, and this implies an equivalent diversion of employment and associated income creation from the United States to these countries. That is the manifest direct damage of the trade deficit to the U.S. economy, the obvious main victim being the manufacturing sector, with horrendous job and income losses.
Blinded by the dogma of compelling mutual benefits; policymakers, economists, investors and the American public flatly refuse to see this disastrous causal connection. The alternative explanation is that America's extremely poor job performance has its main cause in the highly desirable high rate of productivity growth.
It is a convenient, but foolish explanation, reminding us of the early days of industrialization, when people destroyed machinery for fear of unemployment. For us, productivity growth that destroys millions of jobs is definitely suspect as a mirage. Historically, strong productivity growth has always coincided with strong capital investment involving, in turn, strong employment growth in the capital goods industries.
That is presently, of course, precisely the missing link in the U.S. economic recovery. (As an aside, in a healthy economy with adequate savings, cutting labor costs generally takes place through investment, not through firing.)
The job losses from the soaring trade deficit have always been there. But they did not show up in the aggregate for many years because the booming economy - driven by extremely loose monetary policy - created sufficient alternative jobs. But this alternative job creation has drastically abated since 2000, and the soaring trade deficit's damage to manufacturing is now surfacing in full force.
Having said this, we hasten to add that the U.S. trade deficit must be seen as one imbalance among several others, whether zero or even negative national savings, a soaring budget deficit, record-low net capital investment or sky-high consumer debt. They all derive from the same underlying key cause: Unprecedented credit excesses that have boosted consumption for years at the expense of capital formation.
What governs the U.S. trade deficit is not the law of "comparative advantages," but the careless depletion of domestic saving and investment resources though policies that have recklessly bolstered consumption. Essentially, employment creation through capital investment is out. Putting it bluntly, the U.S. trade deficit, like all other imbalances, reflects a grossly skewed resource allocation toward consumption.
To American economists, this idea that over time, excessive consumer spending leads to recession and worse, by crowding out capital investment may seem preposterous. Widely unknown, it happens to be the central idea that F.A. von Hayek developed in his famous lectures at the London School of Economics in 1931.
In essence, he explained in great detail that an increase in consumer demand at the expense of saving will inevitably lead to a scarcity of capital, which forces a "shortening in the process of production," and so causes depression. Putting it in simpler parlance: Excessive consumption inevitably crowds out business investment. As a share of GDP, consumption in the United States is presently excessive as never before. And it keeps worsening.
Assessing the U.S. economy's prospects, it also has to be realized that the bubble-driven consumer-spending boom represents artificial, unsustainable demand. Apocalypse will follow when the housing bubble bursts - which is sure to happen in the near future.
As the Boston Herald recently reported: "[Stephen] Roach met select groups of fund managers downtown last week, including a group at Fidelity. His prediction: America has no better than a 10% chance of avoiding economic 'Armageddon'... Roach's argument is that America's record trade deficit means the dollar will keep falling. To keep foreigners buying T-bills and prevent a resulting rise in inflation, Federal Reserve Chairman Alan Greenspan will be forced to raise interest rates further and faster than he wants. The result: U.S. consumers, in debt up to their eyeballs, will get pounded."
We could not agree more. Our particular nightmare is that the huge carry trade bubble in bonds will inevitably burst in this process. A fire sale of bonds in unimaginable proportions would begin, with bond prices crashing and yields soaring. With the prices of housing, stocks and bonds crashing, the entire U.S. financial system would be at risk.
It is typically argued that the U.S. economy is importing too much in comparison to exports. Superficially, that is true. Yet on closer look, it is a mistaken perception. Compared to other industrialized countries, U.S. imports are very low as a ratio of GDP. The true key problem is abysmally low goods exports, accounting lately for barely 7% of nominal GDP. This compares, by the way, with a German goods export ratio of 35% of GDP.
The next implicit question is the cause or causes of this extremely low U.S. export ratio. The answer is strikingly obvious. It is precisely the same cause that chokes productive capital investment - the progressive shift in the allocation of available domestic resources away from capital formation through saving and investment in plants and equipment, and toward immediate consumption.
That is the supply-side problem. Yet there is a demand-side problem, too. Greenspan and others like to boast that America is creating growing demand for the rest of the world. The ugly truth, rather, is that U.S. monetary policy has been excessively loose in relation to potential domestic output, because Greenspan has wanted maximum economic growth for years. But lacking domestic output capacity to meet the soaring domestic demand, an increasing share of the demand creation from monetary excess exited to foreign producers, resulting in the huge U.S. trade deficit.
It is a flagrant policy failure that has created a monstrous, unsustainable imbalance, both domestically in the United States and globally. However, for years, American policymakers and economists have glorified this deficit as America's great contribution to world economic growth. But the day of reckoning is rapidly approaching.
Kurt Richebächerfor The Daily Reckoning

Warren Buffett's Dollar short

Monday, December 27, 2004


Dollar Heads for Worst Quarter in More Than 2 Years - Bloomberg 27-Dec-Mon Dollar Falls to New Low Against Euro - AP 27-Dec-Mon Dollar to Record Low Vs Euro After Data

Not too many folks looking for a dollar rally! Sentiment is so low towards the dollar it is ripe for a rebound IMHO.

BUT, it has not materialized as yet, been VERY slow in getting going.

A level we should be watching is its deacde low of 80.0 A persuasive break of that support level could bring about additional selling.

Many think it would take either a dollar catastrophy of a bond bomb meaning sharply higher interest rates to derail current equity momentum.

Where have you read in local papers or on BOOB TUBE that troulbe is dead ahead for stock markets?

It is near impossible to calculate when an end of one thing and the start of something else.

We are already beyond some historical extremes.



Bloomberg on US TREASURIES

U.S. Treasuries Fall on Speculation Dollar Slide to Curb Demand

Dec. 27 (Bloomberg) -- U.S. Treasury notes declined on concern the dollar's slump will crimp demand for the securities and as the Federal Reserve raises interest rates next year to ward off inflation.
The dollar today fell to a record low against the euro for a third straight day, sapping demand for U.S. assets. The Fed raised its target for the overnight lending rate between banks five times since June, to 2.25 percent from 1 percent. The rate will reach 3.5 percent by 2006, according to the median forecast of 61 economists polled by Bloomberg earlier this month.
``The continued slide on the dollar is probably going to hurt demand for U.S. assets in general, not only Treasuries,'' said Sharon Lee Stark, chief fixed-income strategist at Legg Mason Wood Walker Inc. in Baltimore. ``Yields are up a bit today and as the new year starts I expect them to move even higher. The U.S. economy is growing at a sustained pace and the Fed is moving benchmark rates up to a more neutral level.''
The 4 1/4 percent note maturing in November 2014 fell about 3/8, or $3.75 per $1,000 in face value, to 99 15/16 at 9:16 a.m. in New York, according to bond broker Cantor Fitzgerald LP. The yield rose 4 basis points, or 0.04 percentage point, to 4.26 percent, and is little changed from the end of 2003. Stark has said this month that the yield may rise as high as 5.5 percent in the next 12 months. Two-year yields rose 3 basis points to 3.03 percent, and are up from 1.82 percent at the end of 2003.
The U.S. Treasury will today announce the amount of two-year notes it is selling on Dec. 29, which may total $24 billion, the same as the last five monthly sales, according to Wrightson ICAP. The dollar's 8.1 percent slump against the euro and 5.8 percent versus the yen since the end of September has fed concern bidding from outside the U.S. may decline.
``The drop in the dollar is leading to foreign capital outflows, and there is anxiety demand

Thursday, December 23, 2004


For some reason, the tune from the Scarecrow in Wizard of OZ came to mind.....

Santa will see the world as white as snow. and there will be a BULL MARKET that will never end. Valuations won't matter because there is always someone ready to pay more for it, there are no rules or technical analysis because everyone will buy and never sell.

US Coporations will be hiring US workers, and not Chinese. They will take the hoards of cash piled up by laying off millions during the bear market and the extra millions earned thanks to an easy AL FED and BUSH policies and invest in AMerica! Because it's the right thing to do.

Santa will bring all the little and big kids what they want for XMAS, and it will all be MADE IN AMERICA. And all that money spent will stay here, in America and bring more jobs.

Interest will rise and afford savers a safe haven to SAVE and gain interest instead of being forced into risky stocks or bonds paying too little. With the savings, we can lend to ourselves instead of using 80% of the WORLD'S savings to consume OTHERS goods.

Santa sees a world with no war, where all are respected. More can be spent on productive means making our lives better. With NO WAR to pay for and no military race, the deficit is paid down and all unfunded liabilities are funded.

Santa's wish is a fair tax system that takes into account how much you make and can afford to pay without limiting desire for profits by TOO high taxes for any given class, but the RICH will be happy to pay more because they can and they feel they should.

No gas guzzlers wasting precious fuel sold to consumers with slick ad campaigns, instead sensible vehicles with style and gas sipping abilities, alternative fuels as well help conserve non replenishing natural resources.

ALL schools, whether in City or not get proper funding so everyone has EQUAL chance in the world with good education.

Santa will also bring a dust he will sprinkle and all the drug addicts will be healed and taken off drugs, there is no business for the drug lords and they are put out of business. NO NEED to watse our time and money trying to catch them and out those innocents in jail or use.

A clean world that doesn't pollute the air ans water......Santa can do it all.

People can take on edless debt and it won;t matter because they can get endless credit, there is no end to the joy and stability that brings.

THose on Wall Street are put out of business as everything is electronic and all stocks go up.

The Chinese are buying finished goods from us.

There are no perverts to hurt our children, Santa has made sure there is no pornography, lovers can use their own imagination and are inspired by THEIR partner.

The government stops the WASTE and reckless spending, the pork projects are outlawed, the lobby groups are disbanded. The governement runs a huge surplus the dollar is KING now backed by GOLD, interest rates stay low.

There is no threat of inflation nor deflation, people live within their means.

The little things in life are rediscovered. People stop watching so much TV. The outdoors is appreciated and enjoyed.

Life is good.

Duratek and to all a good night.


End of year and seasonal positioning and year ending in 5.....I contend MAY already be in stock prices.
Beside data on sentiment etc in last post we should consider this as well.
Before last months meager gain, LEI was down for 5 CONSECUTIVE months.(kind of data Recessions are made of)
Money supply has been flat since end of summer. (ususally predicts softness ahead)
Bullish sentiment data at extreme extremes.
First of year ususally sees some unwinding of extreme positioning added on to make MM's look good.
Minutemen leading the Generals and WHO is lagging? SOX INTC MSFT CSCO DD WMT and others WHO is leading? GOOG RIMM TASR etc
Relative strength has weakened on EACH new top in NDX (4 now in row)
FRIDAY where (OPEX) key reversal was had was highs in volume a down day.
20% DROP in NEW HOUSING STARTS last report.(unexpected)
Flattening yield curve (falling long rate is spelling slowdown?) YET we know what the PRESSURES are on long rates to rise!
A WORSENING situation in IRAQ, GOV own records indicate they thought by NOW they would be out. INABILITY for IRAQI'S to police themselves means US occupation to go on for years!and escallating costs.
HISTORIC high in total credit market debt ratio to GDP, all good things come to an end? WHEN CREDIT expansion ENDS or STALLS....the decline would be next as was the case in 1929-30's era extremes.
BREAK in US DOLLAR BONDS/RATES would be key to watch, a SUDDEN RISE in rates could start a PANIC with such extremes in bullishness.
SPX/VIX ratio 17% ABOVE its 2000 BUBBLE extremes (cannot go on ONE indicator but this is a shocker IMHO...LOTS for Bear to feed on!)
ANY ADVANCE and subsequent fall or stal in level of VIX will even more so distort historic complacency.
SOX reflecting dataquest estimate for 2% decline in semi demand?
US consumes 80% of worlds savings...another EXTREME.
LAME DUCK President also brings out Republican critics.
I DON'T SEE how these EXTREMES can PERSIST well into 2005
I can say no more.
I look forward to 2005 however with you all.

Wednesday, December 22, 2004


I posted this when it first came out. I felt at this time with so much rampant bullishness I would revisit it for a slap of reality.

Bulls plurality for 2 running years (has that ever been done?) years ending in 5, Greenspan the man etc.

SEE what was present in 1920 and 1980? LITTLE DEBT. ROOM FOR CREDIT EXPANSION!

Then what? a TOP and credit CONTRACTION.

SEE where we are now?



Years ending in '5' always thrive? Headed for a down cycle
Commentary: Years ending in '5' always thrive? By Peter Eliades, Stockmarket CyclesLast

Update: 12:17 PM ET Dec. 22, 2004 SANTA ROSA, Calif. (SMC) -- We believe investors are about to be bombarded with good news about the prospects for the stock market in 2005. Indeed, a review of stock market performance since the inception of the Dow Jones Industrial Average (INDU: news, chart, profile) in 1897 reveals some startling and very optimistic statistics relating to the fifth year within every decade. There has never been a down year in a year ending in "5." That, however, is only part of the story.

Here are the results for the Dow Jones Industrial Average from the close on the last trading day of the year ending in "4" within each decade to the high close of the following year: Year 12-Months 1995 36.0% 1985 28.2 1975 43.0 1965 10.9 1955 44.0 1945 29.0 1935 42.7 1925 32.3 1915 80.5 1905 38.7 Average gain 38.5% In other words, if we assume the Dow Jones Industrial Average closes the year 2004 around its current level of 10,690, an average "5" year would produce a close of 14,804 sometime during 2005. There is another fascinating statistic relating to the year ending in "5" within each decade. Virtually every one of these "5" years has registered its low for the year or within just a few percent of its low for the year in the month of January.

Here are the statistics: Year Date 1995 January 30 1985 January 4 1975 January 2 1965 January 4 Five days in June closed slightly lower. 1955 January 18 1945 January 24 1935 January 15 Nine days in March closed lower, then straight up. 1925 March 30 This was the only exception. 1915 January 2 February 24th closed less than 1 percent lower 1905 January 25 On average, the low for the year within the "5" year occurred around Jan. 22, from which point the market never looked back. These are spectacular statistics which seem to be preparing us for a stock market year that will make everyone (but the Bears) happy.

But let's take a moment to play devil's advocate. We started by saying that we felt investors would soon be bombarded with the type of news and statistics we've just presented to you. There's no denying that history has smiled upon the "5" year of each decade for the past century or longer, but therein lies part of the problem for the year 2005. What everyone knows in the stock market is usually not worth knowing. Stockmarket Cycles began publicizing the mystique of the "5" year 20 years ago when very few people were aware of the phenomenon. In 1994, awareness was increased. As we approach 2005, we believe the publicity concerning the phenomenon will increase dramatically.

At the end of 1974, 1984, and 1994, adviser sentiment had been bearish for a significant percentage of the calendar year. Unfortunately, we are facing an almost exactly opposite sentiment picture that stands ready to be fuelled to even greater heights of bullishness by siren promises of another great "5" year. By the end of 1974, there had been 42 weeks in that calendar year when the Investors Intelligence ( survey of investment advisers showed a plurality of bears over bulls. At the end of 1984, there had been 20 weeks showing a plurality of bears over bulls. At the end of 1994, the sentiment statistics had been so amazingly one-sided that there had been 47 weeks with a bearish plurality. It was a perfect set up for a spectacular 1995. Absence of bears.
Now we approach the end of the year 2004. What is the current sentiment picture? There was not a single week within the year that showed a plurality of bears over bulls. In fact, the plurality of bulls over bears remained so steadfast throughout the year that the smallest plurality was 9 percent. What makes that all the more remarkable is that it was preceded by the same statistics throughout the year 2003 -- not a single week with a plurality of bears. There has been a mindset of steadfast bullishness for well over two years. The average plurality of weekly bulls over bears since March 2003 has been a staggering 31.4 percent. To put these data in perspective, there have been only seven full calendar years in the history of Investors Intelligence data (since March 1964) where bullishness has been so great they have escaped without seeing even one week with a plurality of bears over bulls -- and only one other consecutive two-year pairing such as we are seeing in 2003-2004. The other consecutive year pairing occurred in 1999-2000. The other years were 1972, 1976, and 1983.

Here comes the killer statistic! So far, each and every year that has failed to see even one weekly reading with a plurality of bears has been followed by a negative year. As we write this, the jury is still out for the year 2004. The Dow closed out 2003 with a reading of 10,453.92. What is perhaps even more troubling is that the only other instance of consecutive years without a plurality of bears over bulls, 1999-2000, was followed by a decline of 41.8 percent by the Standard & Poor's 500 Index (SPX: news, chart, profile) and 33.2 percent on the Dow Jones Industrial Average.
Based on these data and other sentiment data, and on the market's current valuation, we believe the odds favor a breaking of the win streak for the "5" year and we fear the market faces great vulnerability over at least the next 12 to18 months.
Here are a few clues to watch for in the coming year. We noted earlier that the "5" year within each decade has almost always registered its low for the year in January. Amazingly enough, the high for the year following years without one weekly plurality of bears over bulls has been registered within the first 10 trading days of January in four of the previous six cases, and before February 12 in five of the six cases. We should have a strong indication of a bull or a bear year for 2005 by the end of February. If February registers a high above January, the odds favor an up year overall. Conversely, if February makes a lower high than January, the odds would favor a down year overall -- perhaps a big down year. We will watch February with great interest.

Peter Eliades edits the Stockmarket Cycles market timing newsletter, which is cyclically and technically oriented and based on Eliades' theory that price movement in the stock market is related to repeating cycles rhythms. ( found in The Guru's Corner is subject to the terms and conditions found in the Disclaimer and does not represent a recommendation of investment advice. Investors should seek the advice of a qualified investment professional prior to making any investment decisions. (disclaimer)

IMPORTANCE OF THE Q'S Click "Pictures of stock mkt mania" then choose NOV 6th report IMportance of the Q/s

BALTIC DRY INDEX as INDICATOR Look at drop in BADI going into year end. Explanation of index


PDF is 26 pages!


Markets are showing highest bullishness since 1987 on several polls. Markets bested their 2004 highs yesterday on lackluster volume and breadth.

IMHO lemmings are being set up for a significant decline which may rival 2000-2002. Seeing how far rally has come, I choose NOT to chase it.


Saturday, December 18, 2004

SPX/VIX RATIO REVISITED$SPX:$VIX,uu[w,a]wallyiay[pb50!f][vc60][iut!La12,26,9!Lh14,3]&pref=G

Hit an all time high of just better then 100 Friday! ALL I hear is that the ratio is useless and broken. The LESS that follow and believe, the better the chances it has merit.

RSI, relative strength of the market has made 3 lower highs in the face of 3 higher highs (NAZ INDEX). I find this as a stern warning. Difference between IIAA bulls minus bears is above 40 !
Not a single reading of 2003-2004 showed bears outnumbering bulls.

2005 is another in pattern of years ending in FIVE. ALL have been positive, though NO TA can say why. WIth bullishness at all-time highs, will this be true again?

IMHO, this is IN the market already because it has been discussed ad nauseum, and I think the bulls are FULLY committed to this rally leaving precious few left out.


Friday, December 17, 2004

Expensing Stock Options,0,3755460.story?coll=bal-business-headlines
FASB requires expensing of stock options
Accounting board rule goes into effect June 15; Tech companies strongly object; Small businesses, others get later starting times
Bloomberg NewsDecember 17, 2004
The body that sets accounting standards for U.S. companies passed a final rule yesterday requiring companies to start counting employee stock options as an expense starting in June.
The rule was adopted over the vehement objections of technology companies that contend the measure will hurt their competitiveness.
The Financial Accounting Standards Board unanimously approved the rule, Chairman Robert H. Herz said at a news conference.
Small businesses won't have to comply with the rule until after Dec. 15, 2005, and closely held companies will have until 2006.
The rule seeks to clarify financial reports by putting the cost of options, now relegated to footnotes in regulatory filings, on a company's income statement.
The rule would have trimmed reported 2003 profit by 8 percent for companies listed on the Standard & Poor's 500, according to a study by Bear Stearns Cos.
But the study found the reductions would have been much larger for technology companies, such as Microsoft Corp., which issue large amounts of options to employees as part of their compensation packages.
Under the new rule, companies must begin calculating the value of options given to employees at the time the securities are awarded and count them as a cost for all financial statements issued after June 15. Options enable a holder to buy stock at a specific price for a set period of time.
The rule is supported by billionaire investor Warren E. Buffett and Federal Reserve Board Chairman Alan Greenspan.
Opponents, such as Intel Corp. chief executive Craig R. Barrett, argue there is no reliable way to value employee options. They warn that expenses may force companies to eliminate the awards to employees.
Stock options have been a "free good" because their cost was omitted, Herz said yesterday. "Once you have the accounting costs, you get a much more robust debate on the appropriate way of compensating executives."
Lobbyists for technology companies plan to press Congress and the Securities and Exchange Commission to preempt the requirement.
"Since FASB is moving ahead with its fundamentally flawed proposal, we sincerely hope the Securities and Exchange Commission will intervene," said Rob Haralson, a spokesman for the for the American Electronics Association, a trade group in Washington. He said association members also will "aggressively lobby" Congress.
The House passed a bill in July that would have limited the cost of options to those awarded to a company's five top executives. The bill died in the Senate amid opposition from Sen. Richard C. Shelby, the Alabama Republican who chairs the banking committee, and Sen. John McCain, the Arizona Republican.
An attempt in 1995 by the accounting board to have options treated as expenses was squelched by computer companies and lawmakers such as Sen. Joseph I. Lieberman, a Connecticut Democrat.
"There still a very strong lobby trying to stop the rule," said G. Michael Crooch, a member of the accounting board, which is based in Norwalk, Conn. "We tried to get everyone's input, so we'd understand the impact of the rule."
About 750 companies already have begun treating options as a compensation expense, or have announced plans to do so, FASB Chairman Herz said. Coca-Cola Co., Wal-Mart Stores Inc. and General Electric Co. are among U.S. companies that have made the switch.
Copyright © 2004, The Baltimore Sun

Thursday, December 16, 2004

Cato Institute Social Security Solution

Bush to cut the deficits?

"A renewed drive to cut the deficits"
Bush said yesterday....really? How he gonna do that? more manipulation of data? He gonna open a lemonade stand?How he gonna start a $2 trillion SS fix? will that LOWER the deficit? Cut military spending? STar wars? (which failed another missle test and is a HUGE waste of money) HAs he vetoed ONE spending bill? He has MORE hot air than a zeplin.

Factoid, 2004 has been another RECORD year for US funds going into Foreign markets.And it is no coincidence than these markets are then performing VERY well, and that the EURO hit an alltime high.Think back.....isn't this the opposite of what happened at end of bubble?

In flow of funds into the US drove up equity prices and the dollar! Foreign buying of our bonds hit a record high in DEC.....BONDS are obviously right at some important trend lines of support for recent higher highs and lows.How significant is it that the US is a ZERO savings historic low? same time debt at historic highs? 25 year trend of lower rates?

IIAA poll just hit a 3wk avg 17 yr high of bullishness....SEVENTEEN YEAR HIGH and not daily......3 WEEK AVG!EVERYONE KNOWS ABOUT DEC INFLUENCE and are playing it textbook......what happens to the easily predictable?

Tuesday, December 14, 2004

Factory Capacity and end of Year boom

This is not the data of a strong economy. As factory ute rates continue near Recession lows. Factory production declined from prior month.

WE already have 5 consecutive declines in the LEI's. SLow growth in Money SUpply. Trouble ahead IMHO in 2005.

BUT, with mergers being all cash, and IPO'S dwindling next week. It seems almost certain the stock market will see a rally into early next year. PErhaps then reality will sink in.

As there are NO values to be found in market, money coming in will chase hot money, MOMO stocks, in feeling they must go higher. And someone will be there to pay HIGHER price, which is not based on historical value.

As FED continues to raise, the low 1% rate argument for paying higher PE's for stocks weakens.

RECORD bullishness under this scenario does not leave ANY room for error. BULLS have the reins still, and I expect higher stock prices even with all the contrarian indicators, until perception changes, and risk creeps back into market.


Monday, December 13, 2004


INSANE! 94.92!! Another new high above 2000 bubble top reading, yet indexes are WELL below 2000 levels (except Transports and small caps)

AS I pointed out in earlier post, the level we are seeing is just one item, and until it turns DOWN will not signal a turn.

I would still argue, and like 1999-2000, it has a similar pattern 2003-2004....and this is certainly worth noting.


Sunday, December 12, 2004

100 Years of Market HIstory Ignored

SIt back, and let Papa take you on a ride, you may want to strap yourselves could get BUMPY! (remember, this is attempt at bigger picture, not a call for pin point market turn)
When too many use the SAME tool, it can negate its usefullness, AKA LOW VIX. Now the SPX/VIX ratio is being questioned (in a healthy way)as to whether it also is either outdated or not useful.
In the very attack of the tool being not useful, IMHO it brings it back into usefullness, it is NO longer "accepted" it has any bearing what so have other indicators like PE ratio and Dividend yield!
I believe the detractors have MISINTERPRETED the ratio.
AS before (1999-2000) this ratio has been topping for a period of about one year, except this time making even MORE EXTREME readings.
For over 100 years of market history, the DIVIDEND YIELD has been an ACCURATE MEASURE of CYCLE BOTTOMS and TOPS, without FAIL! (Figure 17 in DEC EWT) SO now.......2 of the most important measures of stock valuations and cycle degrees is...."no longer relevant?"
POINT IS, I think it prudent to understand what may be now occuring.
CYCLE LOWS, meaning beginning of NEW BULL MARKETS have occurred when the dividend yield reaches 6-6.5%. (PE ratio's single digits)
CYCLE PEAKS (Bull market TOPS) over 100 years of market history have occurred when dividend yields reach around 3%.
We are in process of making history, because at 2000 top the dividend yield on DOW was 1.5% (1929 top was 3%) DOW is curretly near 2% yield.
UNLESS you agree that 100 years of stock market study and history are meaningless and not relevant.....the current situations full impact should be crystal clear.
Then we must be making a top of a MUCH larger scale then almost anyone could imagine.
UNTIL the same measurements or criteria which defined EVERY BEAR MARKET in the history of the market are fullfilled, then what is now occuring is something other than a new bull market....and so long investments are at substantial isk.
To fullfill a cycle low according to past data, it doesn't take much imagination to figure out what that "COULD" mean.A drop in prices of more than 50% from current levels.
Knowing we have bettered the other outragious cycle top of 1929 by a magnatude when it comes to total credit market debt (now at near 300% of GDP) it makes total common sense that we soon enter or have already a period, a phase of unwinding of this EXTREME....the cycle goes from contraction to expansion and back to contraction, knowing prior extremes and knowing we have bettered them in many ways as I Have outlined, it is perfectly logical to assume the worst case scenario is more than possible.
The FED hs reversed its easing course, the outragious rise in money supply has slowed....the wind is no longer at our backs.
Also reaching extremes is borrowing 80% of the worlds SAVINGS to support our consumption addiction.
It is interesting that though the DOW is well below its all time high, its still below the 2004 high.....outdated unstrusted BULLISH indicators have reached levels never seen before.
The Bear Market which began in 2000, started to retrace the excesses and attempted to cleanse the system, right the ship....adjust the maladjustments and investments...the delerium.
HOWEVER, at the low reading to date, PE was 30 and div yield was under 2% (unless we IGNORE over 100 years of history, that means something)
The FED intervened the process, put it on cold ice...a LONG time out. Money supply DOUBLED in a short 5 years. Interest rates were dropped 13 times to 45 year lows in a "CRISIS" move.
Were the results worth it? sustainable? I SAY NO!
SUrely the liquidity went the easiest route, DID it STIMULATE growth through investment and manufacturing and savings? NO! It did it through speculating in ASSETS housing and the stock market.....and built a MASSIVE carry trade imbalance in BONDS which STILL goes on to this day! WHEN WILL IT GET UNWOUND? CAN IT?
ANother low SAVINGS at historic LOWS. DEBT and deficts at historic highs.
With everything I pointed out and we know, the consolidation of the DOW this past year is NOT in preperation for a move to new highs IMHO.
NO 2002-2005 has served to seperate us from PHASE I of the bear market from PHASE II...TEXTBOOK.
To adjust the paralell trend channels we need to draw the lines for bottom at 1980 and 1988 and top around 1987 and 1997. You can see 2000 is a "throwover" above this upper channel andnow consolidation near that area.....prices tend to move from upper trendline to lower tendline especialy after a throwover.
Dow Theory explicitly defines value for tops and bottoms.
To assume under current GOV predicament...and need for existing borrowing already straining trade and value of dollar and if not for continued carry trade speculation, interest rates......can this continue indefinately?
HAsn't stimulus and policy been an abject failure? and made things worse?
Built CHina into SUper Power, and they are now going around the globe buying it up! with our dollars! PSSSTTTTTT they are also using the dollars to build up their Military!
We still in entire RECOVERY only 2 -3 readings of job gains over 300,000. and we are still net 1 MILLION jobs DOWN from beginning of recovery!
When the economy grows from higher wages and employment is one thing, then it grows from ZERO savings and borrowings/DEBT is another.
These imbalances that existed and now the new ones wouldn't be present at the beginning of a new bull market.....we have managed to pass any past specualtion and top.....I feel it inevitable that we are near, at the end of the line.
And because of the extreme situation and imbalances, ill prepared to deal with it....what will the FED do next time? PRINT MORE MONEY? GOV......MORE STIMULUS?
Exact timing aside.....there is enough evidence IMHO to begin to prepare for some VERY tough sledding ahead.


Saturday, December 11, 2004


SPX VIX Debate (from my posting on a message baord)

I am the one who seems to bring this up the most, so let me have another stab at it.AS above link will show and point out (at the we do have highest ever readings)....this ratio IS significant.However, like the CPC, it is not just the rise in this ratio to new heights that is will be when it begins a decisive DECENT!

Point is, pointing out attitudes and extremes is only half of equation, it is when they CHANGE we really want to know.SO, IMHO this ratio is VERY pertinent, however the guy who bet the farm on it was mistaken on its importance.
Investing long when in this now unknown zone but above previous no win zones is just a warning signal, heed it or not, it is not a TIMING MECH by itself! I never said it was.I would please like to point out the period of about ONE YEAR that was spent ABOVE "crash" readings higher than 68 or so is now about the same, only readings are at HIGHER than 1999-2000 levels.But until it descends in clue indeed attitudes have changed, risk is feared....the high reading itself will not be a problem.

As a LOW CPC is NOT a problem, until it TURNS UP in earnest.That is ANOTHER misidentified is VIX....what does it matter if VIX is low? until it TURNS UP IN EARNEST

3 GOOD indicators together when they turn up in earnest a more clear signal of what investors are thinking.UNLIKE when coming DOWN ( a SPIKE of fear seems to last briefly, is why a VIX 50 had been a great BUY signal!)....this FEAR subsiding can no longer FEED the we have greed....and LACK of fear existing and the WANT to take risks.

Pointing to the SPX for now will only tell you to be watching it when it CHANGES!In that sense.....never discount its meaning or validity....only how to interpret it.


A few charts Velocity of money has BARELY moved Money supply has DOUBLED in last 10 years. To show Fed funds since 1950 change staring date (if my chart doesn't show it) and hit make chart. WHAT IS NORMAL? Bull mkt rates headed down, now rates headed UP

"Hostage Of The Carry Trade Bubble"


December 1, 2004


While the Fed has raised its federal funds rate from 1% to 1.75%, longer-term interest rates simultaneously went in the opposite direction. The consensus sees the positive rationale in quiescent inflation and inflation expectations.

Our rationale is different: The sharp decline in long-term rates has its primary cause in the Fed’s continuous, extreme monetary looseness fueling a new wave of carry trade. Though its rate hikes have made the carry trade play more expensive, the spread between funding costs and returns, determined by the difference between short-term rates and longer-term bond yields, remains quite attractive, in particular when market participants perceive little or no risk of a rise in long-term rates, which would quickly destroy the market value of their highly leveraged bond holdings.

In essence, two reasons mainly have led market participants to discard any risk of rising long-term rates. One is disappointing economic news, and the other is Mr. Greenspan. They have realized that the Greenspan Fed is effectively hostage to the carry trade bubble.

Running into trillions of dollars and involving an enormous part of corporate and financial America, the pricking of this asset bubble would spell financial apocalypse for America. It would trigger a fire sale of unimaginable proportions in the bond market, with bond prices crashing and yields soaring. Mr. Greenspan must be desperate to avoid this. It implies further that a return to "normal" short-term interest rates in the United States is completely out of the question, even if rising inflation rates or a collapsing dollar would urgently demand it.

Manifestly, the potential bond buyers needed to accommodate the potential sellers involved in the carry trade will not exist when the day of reckoning arrives. Liquidity will disappear overnight. Be prepared for double-digit U.S. long-term rates.

In short, U.S. monetary policy is inexorably stuck with artificially low interest rates.

Intrinsically, a weakening economy should boost further carry trade in bonds, and thus lower long-term rates. But a new, outright economic downturn will come as a rude awakening from prior complacency. Earlier, we said it might cause a cataclysmic shock. In the first place, it would hurt the other two asset bubbles, housing and stocks, and also the dollar bubble. Altogether, this would surely generate general uncertainty and turmoil in the financial markets, affecting the bond market negatively, too.

It is for two reasons, really, the most vulnerable and the most dangerous bubble. It is most vulnerable because any rise in long-term rates will prick it; and it is most dangerous because this would trigger immediate collective unwinding of positions running into trillions of dollars. It could devastate the whole financial system. No responsible central banker would allow such a bubble to develop.

The big problem lies in the fact that with a usual leverage of 20-to-1, even minimal rises in bond yields may endanger the capital of a yield-curve player. Another big risk looms in a widening of credit spreads. Given the unusually low level of yields, many players have shifted to higher-yielding junk bonds. One of the results has been a drastic narrowing of the yield spread. With a weakening economy, these spreads would certainly widen again.


Friday ended the week with a whimper. A stalemate for traders. But within a flat close was some volatility.

Heavy profit taking swept through the tanker sector, not so much the energy group in particular. Next week will be pivotal for that group (TK,NAT,SFL and TOPT are some).

I think the market is ripe for a decline of some kind, this last rally has not had a 3% correction as yet. It is getting overextended, and the internals are weakening. Breadth has been weaker, lower number of new highs.

The market was not able to BUILD on Thursdays reversal from RED to BLACK, and Friday gave us CHEAPER OIL and a RISE in Consumer Sentiment.

Yet it also gave us a larger than expected RISE in PPI. INflation guages are flashing warning signs, I think the data will keep the FED in a tightening mode (raising short term rates)

10 YR treasuries held at 50 SMA, MUST move higher now or would question direction of rates, perhaps the move down from 4.40% already has.

Bullish readings are still near or ABOVE any previous bull market readings, it doesn't take much understanding of emotion and nature to deduce we are MUCH closer to an important TOP in the market, not an extended bull market, IMHO.

TRansports came witin 16 points of surpassing its ALL TIME high, yet turned down very next day, surely it still might surpass it.

News has changed from tentative and nagative to positive and sure with BUSH in office, less news from IRAQ, and falling OIL!

Considering how much STIMULUS and FED action has been in favor of the market liquidity melt up, why then has DOW failed to take out its OLD HIGHS? let alone the high set in 2004?

Japan economy slowing, Europe slow, it's down to China and the US!

COmmodities have been demand slowing?

Total credit market debt in the US as % of GDP is at all time highs. The US borrows 80% of the world's savings to consume, because we have near ZERO SAVINGS RATE!

Additional debt issuance by the US should put pressure for higher rates.....but it realy hasn't yet.

P and F charts shows 7% the upside target for the 10 YR.

Put call ratios have been the lowest in years, the VIX registers NO FEAR.

I do not know how this gets resolved. I just know the scene is set for dissapointment, when it arrives is another kettle of fish.

The EASY money has been made with 48% gains since lows, now.......will these gains be held?


Friday, December 10, 2004

Delphi job cuts

"The rise in wholesale prices has not yet filtered down to consumers to any great degree, which has left many companies with tighter margins and the prospects of reduced growth, or even modest downsizing. Auto parts maker Delphi Corp. said it plans to cut 8,500 jobs in 2005, with 5,500 of those cuts coming from overseas jobs. The company also reduced its fourth quarter earnings forecasts to reflect the cuts and lower sales. Delphi lost 34 cents to $8.30."

**HIGHER COSTS......CAN'T PASS THEM ON......time for a new round of job cutting to greater profits?

D.....I will try to come back Sat and add my FRI and weekend comments.

Thursday, December 09, 2004

DEC 9th Data

THis AM's DataPrices continue to SOAR EX OIL up another .7%
ALSO job losses continue to CLIMB up some 354,000 on tops of last week 349,000.WHERE is the employment MIRACLE we should have had some 3 PLUS years AFTER official end to recession and historic CRISIS 13 rate cuts?We are STILL down 1 Million jobs from whence it began...if you BELIEVE GOV stats?
WHERE THEN with ZERO SAVINGS and NO WAGE GROWTH......where is the evidence fo the sustainability of said recovery?LOOK at the FACTS....and you will SEE.
be careful my friends.

Wednesday, December 08, 2004

Morning Market Wrap


Spx/VIX ratio
Inverse Vix
PTI (An exclusive Russell indicator)
Foreign Savings
Domestic Investment
Inverse US Savings
Inverse Dollar
Fed/Bush Stimulus
PE RAtio's
Inverse Div Yields
Bottoms? up

IMHO (remember PApa is not a "pro" nor an "expert") WE have ALREADY seen the BEST "iT" can be, and AGAINST popular OPINION the TOP that "could" be in (now synchronized worldwide)given the EXTENT of bullish indicators.....EXTREME readings....above PRIOR Bull MKT...that this TOP(potential) is now a MAJOR ONE.
A final push up? to a new high? Not without the DOW we don't....and it has continuously this year for now 11 months been telling investors none listening cept RR) that it no can do better....WHY? you should know by now.
AT ZERO SAVINGS and HISTORIC HIGH IN DEBT...ONLY MORE FOREIGN SAVINGS can FUEL this psychco rally....myth of a recovery that isn' 80% of world's savings consumption, my only that we have reached the end of the line.

Tuesday, December 07, 2004




Dow Falls 106 SO?

Papa got a brand new band

Yes when I write PIMPCO I KNOW I am misspelling it, or actually spelling it like I intended....another Papa factoid.NO, I don't suspect I all of a sudden have come back in favor like a chile rubbed steak or very trendy you know.....but perhaps finally.......some sort of shakeout has begun...for various reasoning's.

Now...folks, I barely got a patch of hair left on my back (maybe that's a good thing?) and as I said before my ribs are showing.....damn I'm malnourished and's well down right 9 yr old son won't come out of his room......yum but I hear him whimpering in I said before.....I can be patient....or maybe I should be a patient...some have said.

OOHHHH....2 people just came thru my office to look at my IRELAND PHOTO'S.......I'm a squirrel who finds some nuts when it comes to that....

Where was I? careful folks until we see how this unfolds.....all that MSFT money and HIT seasonal stuff should have caught the DOW on FIRE BY NOW IMHO!....and why ISN'T FALLING OIL a cure all of a sudden? many questions....and maybe so little time....or brain power to figure them out...and why do I care....


from Businessweek (Dec 6th) 'The China Price""In bedroom furn, 59 US plants employingg 15,5000 workers have CLOSED since (FED REVULSION) JAN 2001, as Chinese IMPORTS have rocketed 221%. HALF of the US Market!...."meanwhile prices consumers pay have plumeted. Chinese buy only $1 for ever $5 we buy of theirs.

""Tax incentive was SUPPOSED to make business spending on NEW equip EXPLODE this year! THose tax breaks are near an end......SO FAR. NO MANUFACTURER or DEALER IS SUGGESTING IT HELPED a BIT!

"LISTA will cut 29 jobs, LISTA is a SWEEDISH INdustrial, office and stroage furn company....blames it on a "sluggish Eurpoean economy".WE have declining productivity miracle over? ADDING workers would DENT the bottom line.Papa don't make this stuff up.....see what FED and BUSH policy have wrought? Multiple bubbles and the destruction of our manufactruing base....cept weapons of mass destruction.

3 SCARIEST WORDS "Papa is right"


Hewlett News

HP plans to use $2.9 bln in FY05 to buy back stock
Tue Dec 7, 2004 08:56 AM ET SAN FRANCISCO, Dec 7 (Reuters) - Hewlett-Packard Co.(HPQ.N: Quote, Profile, Research) , the world's No. 2 computer maker, plans to use the remaining $2.9 billion in its authorized stock buy back plan to repurchase its common shares, the company's chief financial officer said on Tuesday.
"We fundamentally plan" to use the remaining funds allocated for its buy back program in its fiscal 2005, Bob Wayman, HP's CFO, told analysts at the company's annual financial analyst meeting, held this year in Boston.
Stock repurchases, however, Wayman said, would depend on the Palo Alto, California-based company's share price, repatriation of cash held overseas, and other factors.

**Can't see fit to spend it on CAPITAL EQUIPMENT? Need to lessen outstanding shares to meet earnings estimates? Or fund gross stock option giveaways?


Monday, December 06, 2004

MARKET WRAP for 12/6/2004

Frist off, my silent readers (hey it's OK to contact me through my email listed.....give me feedback, what you like or don't like, what you'd like to see me add etc).......I will try to write something every MOnday and Friday after the close. Any other day I see something worthwhile I will try to post, so odd days just come back and check.

I noticed today theNYSE volume lagging the NAZ by a wude margin as well as its own recent volume levels. NYSE traded around 1.3 B shares and the NAZ around 2.1 B

AGAIN, the DOW is the weak sister, ending down about 40 points with the NAZ up around 3. The Transports lost aorund 15 points today, still withing 30-40 points of all time highs.

Nobody gives this divergence any press, but we will. The market is strongest if the Dow and Trannies move together, when one opposes the other, we must give that some weight. And the Dow has lagged the trannies and other indexes all of 2004! And we MUST ask WHY?

One reason could be that what is getting carted around the trucks and shipping channels isn't made here, how about a made in China stIcker on it, good chance?

THE TRANSPORTS MAKING NEW HIGHS AS THE DOW DOES NOT IS CONSIDERED A "DOW THEORY" NON CONFIRMATION AND CARRIES GREAT WEIGHT. The foremost author of Dow Theory is Richard Russell and his Dow Theory Letters,at 80 yrs old, he hasn't lost a step, an amazing man I admire greatly, and I continue to learn from.

At this time nearing end of 2004 and beginning of 2005 is where do we stand, what do we know, what can we expect.

Many think 2005 will be great year as NO year ending in 5 has been a down year, however, there is no statistical evidence to give it any meaning, it is just a fact. I might try and explore this phenom at a later date.

WE look to be long the market when values are to be had.But with SPX earnings near 20, Transports near 90, and NAZ near 40, bargains are HARD to find.

You make money when you buy low and sell high, you ROLL the dice when you buy high and HOPE to sell higher, which is exactly what is happening now!

The market is run by 6000 to 10,000 hdege funds,there aren't that many good managers out there, and now these big players,call them LARGE SPECULATORS are near RECORD LONG POSITIONS....a contrary indicator.

10 DAY Daily Sentiment Index is at RECORD HIGH, 52 WEEK Moving Average of AAII Investors Poll just hit a record high ABOVE 50% bulls, second time , last time was in 2000! but this time it was a record high! and it is now declining as what we want to see as signal trouble may be ahead.

WHILE Walmart GM GE INTC etc stagnate, stock likes TZOO TASR and friends SOAR! The soldiers are leading the generals, spells trouble to me.

DO I know when? WHO can? But I do know what SHOULD be place early in a bull market is GONE. What was IN PLACE at TOP of the great bull market has in MANY WAYS been surpassed!

SO this is telling me the SWEET SPOT is gone. If I were long stocks, I would have some kind of protective stops under my prices to PRESRVE profits, if you have them.

With record bullishness towards the metals, and record bearishness towards the dollar, even a novice would suspect a trend reversal to be in the near term offing. NO ONE wants the dollar, can't stand the sight of it, time for a rally, IMHO.

You have end of year bullishness, and seasonal positive present, and I think it has helped digest some bad news.

Job creation a ONE MONTH WONDER! I figured when you took out previous months 97,000 PART TIMERS (holiday hires) and the 70,000 hires in Fla. for huricane clean up, a potential was for a LIGHT number, a MISS.

The "experts" were expecting at LEAST 220,000! We got 112,000 !! Previous month was 337,000 and LIT the fuse of current rally led IMHO.

Folks, silent readers, fans or stalkers, it is all smoke and mirrors BS! The man behind the curtain is a fraud and has small .......mind.

DO stocks do well in an inflationary environment? in a rising interes trate environment? Nooot bloody likely,

Rampant speculation in the cheap stuff, stodgey old Dow 30 like the ugly sister.

LEI declining in last 5 readings. (leading economic indicators)
HELP WANTED INDEX still near 2001 lows.

In a nut shell, we go from periods (long time frames, in the 10's of years) of CREDIT EXPANSION, we PEAK somewhere, then we go to CREDIT CONTRACTION.

We have NO SAVINGS. We have record deficits, and trade imbalances.


Foreignor's OWN over 50% of our DEBT!

WE need 42 BILLION a DAY coming in to fund our gluttony.

THIS my fine furry friends, is NOT the back drop, to a NEW GREAT BULL MARKET, which is being sold to you by CNBC and Wall Street.

Please, be careful. ALLof course IMHO. *(see my standard disclaimer where Iwarn you I am crazy and don't have any idea of what I am saying.....and advise not listening to me)

What I DO advise? Challenge yourself, to think, to question the status quo, if I can spark that with anything I might post or say, then I have done my job.


Friday, December 03, 2004

Destiny Of Greenspsn

The Fabulous Destiny of Alan Greenspan By: Bill Bonner, Martin Spring & Eric Fry ,The Daily Reckoning
The Daily Reckoning
London, England
Friday, December 03, 2004
*** Ain't nothin' gonna break our stride...
*** The jobs numbers are traders rejoice...
*** Reflecting on Japan...natural frugal - and loving it...and more!
No word from Bill this morning. We looked for him in London and Paris and even Baltimore too, but to no avail. No matter, we move swiftly on... This morning, we found the latest payroll data waiting for us when we tuned into CNBC. 112,000 new jobs were added, says the Labor Department, about half the number economists had predicted, and the slowest gain in five months. Stocks shrugged and then rallied, but bond traders rejoiced. The yield on the 10-year note is nearly 16 points lower this morning. Gold is also strong, and is up over $5. With only 26 minutes of trading remaining in the metal pits, our favorite yellow metal looks like it might close the week above $455. Hoo-rah! Here's more news from Eric, with an unofficial survey on the state of the nation's housing market!
Eric Fry, reporting from New York City...
"It goes like this: the housing market is in a bubble of sorts, but one that accelerating inflation will gently deflate. In other words, most of us homeowners will barely notice the demise of the bubble because the NOMINAL value of our houses will not drop. Indeed, they might even continue rising."
For the rest of this must-read issue of The Rude Awakening, click here:
Anatomy of a Bubble
Back in Baltimore:
*** Our old friend, Martin Spring, sends these impressions from his recent trip to Japan:
"Our visit to Japan proved to be a stimulating experience... in more ways than one.
"As we lay on the tatami in Japanese traditional accommodation in Hakone, a typhoon swept over us. Two days later our hotel bedroom in Tokyo on the 28th floor vibrated from the spreading shock waves of the worst earthquake to hit the country in ten years. More than a hundred people died in the two natural disasters, with even one of the "bullet" trains we used to travel around the country being derailed for the first time in their 40-year history.
"However, our abiding impression of Japan is not of disasters, but of a nation that remains immensely strong, socially and economically.
"The social breakdown that is slowly destroying the quality of life in Britain and elsewhere in Europe is completely absent. The 'old-fashioned' virtues, such as respect for others, willingness to work hard for long hours, and loyalty to family, group and nation, remain pre-eminent.
"Because the woes of its financial system are paraded endlessly in global financial media, it's easy to forget how strong this economy remains. Japanese enjoy incomes significantly higher than the citizens of Western Europe, and their prosperity is 'in your face' when you visit their vibrant cities. Although their quality of life has some well-known deficiencies, such as tiny homes, it also boasts favorable features, such as excellent educational, medical and public services, while the range and quality of the goods on display in its stores is a wonder to behold.
"Dazzled by China's current emergence as a major economic power, it's easy to forget that the Japanese economy is three times its size. And, being both far more advanced technologically and managerially, and conveniently located in the region, it seems certain to be a major beneficiary - perhaps the biggest - of China's future growth. However, in contrast to China, which is a huge country whose government is a nasty dictatorship lacking legitimacy, Japan is a stable democracy with sophisticated institutions.
"Although Japan's growth rate in recent years has been even poorer than Europe's, I have the impression that enough things are going right for it to do rather better over the coming decade. It would be foolish to underestimate the continuing dynamism of this industrial juggernaut and to ignore the investment opportunities there. [Ed. Note: Martin Spring isn't the only one who thinks Japan holds a plethora of investment today's issue of The Daily Pfenning, our very our currency counselor, Chuck Butler, urges his readers to put their money in one of the currencies from the "tremendous trio: Japan, Thailand or Singapore." For more on this story, see here:
Hitting the Wall
*** A Daily Reckoning reader writes:
I must be a bit of a freak; I have managed for several months to live comfortably (though certainly not frivolously) on the combined income from a small pension and my Social Security, which total $1775/month. I own a very nice, small condo with a mortgage balance of just over $31,000 and a current market value of about $180,000. I've handled my stock investments rather poorly, and have less than $40,000 left in various funds. My credit cards are paid up to date, though Christmas may put a bit of a dent in that.
I eat out very rarely, and don't entertain at home, but I have good friends whom I cherish, to say nothing of my two adult children and four grandchildren. I have more to read than I have time for, and lately have been spending a lot of time sorting and getting rid of the mountains of paper that clutter the place.
I am in the process of retiring from my career in real estate sales (which I have let go defunct this year anyway) and will save quite a bit from dues and other fees I won't pay any more.
The only reason I can give for being perfectly happy on so little money is that I was born in 1937 and grew up with very little. When I was five years old, my parents started giving me a weekly allowance, of which 10 cents was for Sunday school, 10 cents for War Bonds, and 5 cents to spend or save. We didn't have a lot of "stuff" at our house - probably because first there was no money and then there was nothing much available to buy. My kids have more income but thank goodness they also live simply.
I'm not sure why I decided to bore you with all this, except perhaps to let you know that there still are a few of us who live frugally and enjoy it.

This week marks an important anniversary.
"How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions, as they have in Japan over the past decade?" asked the Fed chairman, when he was still mortal. The occasion was a black-tie dinner at the American Enterprise Institute in December - five years ago.
"We as central bankers," Greenspan continued, "need not be concerned if a collapsing financial asset bubble does not threaten to impair the real economy, its production, jobs, and price stability. But we should not underestimate or become complacent about the complexity of the interactions of the asset markets and the economy. Thus, evaluating shifts in balance sheets generally, and in asset prices particularly, must be an integral part of the development of monetary policy."
Mortals make mistakes. But Greenspan was right on target in '96. It was later, after he became a demi-god, the "Maestro," that the Fed chief erred.
In 1996, the bear market of '73-74 and the crash of '87 were still functioning as caution signs. Greenspan spoke on the evening of the 5th. On the morning of the 6th, markets reacted. Investors in Tokyo the Nikkei Dow a 3% loss for the day, its biggest drop of the year. Hong Kong fell almost 3%. Frankfurt 4%. London 2%. But by the time the sun rose in New York, where the Fed chairman was better known, investors had decided not to care. After a steep drop in the first half-hour, as overnight sell orders were executed, the market began a rebound and never looked back. By the spring of the year 2,000, the Dow had almost doubled from the level that had so concerned the Fed chairman.
But while the maestro was alarmed at Dow 6,437, he was serene at Dow 11,722. Fatal to Greenspan's judgment was a combination of bad information, bad theory and a human nature that - though unchanged for many millennia - seems to have slipped the attention of central bankers.
Greenspan's theory was that by carefully controlling the cost of credit and the money supply he could avoid serious economic downturns. You have suffered enough discussion of this issue here in the Daily Reckoning, dear reader. For today's purpose, we will just point out that Mr. Greenspan has everything he needs to get the economy back on track, except the essentials. He cannot make telecom debt worth what people paid for it. He can't restock consumers' savings accounts. He can't make Enron a good business. He can't erase excess capacity, nor make investment losses disappear.
In addition to the bad theory, Mr. Greenspan had bad information. The "information age" brought more information to more people - including to central bankers...but the more information people had, the more opportunity they had to choose the misinformation that suited their purposes.
Since the late '90s, however, many of the figures used to justify the New Economy have been revised, downward. "The government previously decided that neither corporate profits nor productivity improvements were nearly as good as they appeared to be in 1999 and 2000," reports Floyd Norris in the New York Times. "And now the industrial production numbers have been sharply revised downward."
"The new numbers show industrial production was dramatically overestimated, particularly in the high- technology area," Norris quotes John Vail, the chief strategist of Fuji Futures, a financial futures firm in Chicago.
What was true for the nation's financial performance was also true for that of individual companies. Companies engineered their financial reports to give investors the information they wanted to hear - that they earned one penny more per share than anticipated. But what they were often doing was exactly what Alan Greenspan worried about - impairing balance sheets in order to produce growth and earnings numbers that delighted Wall Street. Curiously, during what was supposed to be the greatest economic boom in history, the financial condition of many major companies - such as Enron and IBM - actually deteriorated.
But by 1998, Alan Greenspan no longer noticed; he had become irrationally exuberant himself. Markets make opinions, as they say on Wall Street. The Fed chairman's opinion soon caught up with the bull market in equities. As Benjamin Graham wrote of the '49-'66 bull market: "It created a natural satisfaction on Wall Street with such fine achievements and a quite illogical and dangerous conviction that equally marvelous results could be expected for common stocks in the future."
Shares rise, as Buffett put it, first for the right reasons, and then for the wrong ones. Shares were cheap in '82...the Dow rose 550% over the next 14 years. Then, by the time Greenspan warned of "irrational exuberance", shares were no longer cheap. But by then, no one cared. Benjamin Graham's giant "voting machine" of Wall Street cast its ballots for slick shares with go-go technology and can-do management. Shares rose further; and people became more and more sure that they would continue to rise.
"Greenspan will never allow the economy to fall into recession," said analysts. "The Fed will always step in to avoid a really bad bear market," said investors. Over the long term, there was no longer any risk from owning shares, they said. And even Alan Greenspan seemed to believe it. If the Fed chairman believed it, who could doubt it was true? And the more true it seemed, the more exuberant people became.
"What happened in the 1990s," says Robert Shiller, author of the book Irrational Exuberance, "is that people really believed that we were going into a new era and were willing to take risks rational people would not take...people did not feel they had to save. They spent heavily because they thought the future was riskless."
But risk - like value - has a way of mounting up, even while it seems to disappear. The more infallible Alan Greenspan appeared...the more "unduly escalated" asset values became. Having warned of a modest "irrational exuberance," the maestro created a greater one.
Bill Bonner The Daily Reckoning

Thursday, December 02, 2004

When Our Dollars come marching home

When Our Dollars Come Marching Home
By: Richard Benson, SFGroup
Benson’s Economic & Market Trends
December 2, 2004
Written and published by Richard Benson,

The financial and popular press has lately focused on the now obvious problems for the dollar created from our massive budget and trade deficits. Indeed, everyone now realizes that for the deficits to be brought into balance, the dollar must go down. It seems that virtually every financial pundit, though, still assumes that not only will the Asian and other foreign central banks continue to accumulate dollar assets forever, but that “those foreigners will never spend their dollars”. However, very little is written about what will happen when all the dollars, built up as foreign central bank and private holdings, get spent. Indeed, we believe that not only will the dollars get spent, but this spending will have massive inflationary implications for America.

Up to now, foreign central banks – particularly the Asian central banks that currently hold over $1 trillion in dollar assets – have had every reason to accumulate as many dollar credits, in the form of U.S. treasury securities, as possible. Accumulating these dollar assets has cost foreign central banks nothing as long as they have a trade surplus and can print up more of their own currency for free and swap their free money for U.S. treasuries. Rather than spending their dollars today, America’s trade partners are saving them so they can be spent tomorrow. Moreover, as long as our dollars are happily accepted by countries that produce oil, raw materials, and goods and services they need, America’s trade partners can profit in the future in exchange for paying nothing today, simply by running mercantilist policies!

Another perspective on what is happening is if trade flows were currently matched, foreign countries would not be building up dollar credits; they would be spending dollars “taken in trade today”! This dollar spending would increase the demand for goods and services in America and raise prices, creating inflation. The very fact that foreign countries have not been spending their dollars now but are, instead, storing up massive dollar credits, means there is going to be a whole lot of dollar spending in the future. One can compare this to a huge dam filling up with dollar credits, but look out when this “dollar dam” breaks and the pent up dollar reserves flow out and flood America.

Sooner or later all currencies come home to their native country to be spent, but as long as the dollar is viewed as the international reserve currency, the process of massive credit and dollar inflation showing up is delayed. The fact that the dollar has been the world reserve currency simply means that the dam full of dollars has been allowed to fill up higher than anyone could have ever imagined.
Take China as a shinning example. China has amassed over $500 billion in dollar credits and is a developing country with 1.3 billion hungry, needy and politically restless people. The Chinese government has built up dollar credits temporarily, but as their citizens learn more about the good life – which includes electricity, heat, air conditioning, two cars and meat in their diet – the government may have to share some of its wealth with them. Not only is it possible for the trade deficit to swing into balance if this occurs, but all those dollar credits will get spent while they are still worth something.
What is on China’s shopping list? Already announced are purchases of Noranda and Husky in Canada, the large mining and energy groups, as well as other significant investments in synthetic oil (tar sands). A major Chinese supplier of automobile parts has been buying up rustbelt auto part suppliers in the American Midwest. President Hu of China just came back from Latin America and announced plans to invest over $30 billion in Argentina and Brazil in order to build plants that are needed to extract raw materials. We expect that China’s shopping list will continue to grow and they will start buying up the world with America’s money!
How do our dollars finally get back home to our country? Well, if China does buy Noranda, the Canadians can invade shopping malls south of the border. If China also buys Latin American resources, Latin Americans can then buy the rest of Miami. As dollars get spent and move from country to country like a hot potato, eventually the dollars will come marching home because a dollar will always buy something in America, even if it isn’t very much.
The fact that dollar credits will get spent will help pressure the dollar far more than is currently appreciated. There are reports that the average man in China is already willing to stand in a long line at a bank to convert dollars into the Renminbi; they have already dumped over $20 billion of U.S. dollars this year. How many Americans do you know are willing to wait in line to dump their dollars, other than Warren Buffet or George Soros?
The Russian President, Vladimir Putin, recently announced that his country will diversify foreign exchange holdings away from the dollar. Upon hearing that, every Russian or Eastern European gangster, drug-runner or plain old tax-avoiding businessman, should take the hint from Putin and swap old greenbacks for crisp new appreciating Euros, rather than consider holding on to our new pretty pink $20 and $50 dollar bills.
Think for a moment of all that cash in German Marks, French Francs, and Italian Lire that came out from under the mattresses to be converted into Euros. Now, consider that as much as two-thirds of all U.S. currency is still held outside the 50 states. Every foreign citizen who holds dollars should pray that their central bank will buy even more bad dollars at current levels so that they can get out without further loss.
The real problem for dollar investors is that as soon as it is realized that dollars will get spent – meaning significant dollar inflation – it is clear that the dollar can no longer be a stable store of value. So, even before our dollars come marching home anyone holding dollars can see there is a light at the end of the tunnel, but it’s a train! He who swaps out of the dollar first, loses the least!
Foreign central banks hold about 75 percent of their total foreign exchange reserves in dollars, yet the financial markets have only vaguely acknowledged the problems associated with the spending of these dollar credits. As an investor, you should expect a further decline in the value of the dollar and the beginning of significant long-term U.S. inflation.-- Posted Thursday, December 2 2004
- Richard Benson, SFGroup, is a widely published author on securitization and specialty finance, and a sought after speaker at financing conferences on raising equity for mid-market companies. Prior to founding the Specialty Finance Group in 1989, Mr. Benson acted as a trading desk economist for Chase Manhattan Bank in the early 1980's and started in the securitization business in 1983 at Bear Stearns, and helped build the early securitization businesses at Citibank and E.F. Hutton. Mr. Benson graduated from the University of Wisconsin in 1970 in the Honors Program in Math, and did his doctoral work in Economics at Harvard University. Mr. Benson is a member of the Harvard Club of New York and Palm Beach. The Specialty Finance Group, LLC is a Florida Limited Liability Company and is registered with the NASD/SIPC as a Broker/Dealer.