MARKET MANIPULATION alive & well

I know this may not seem like news, but with the low volume of trading activity and collusion among brokers, mutual funds, hedge funds and specialists at the NYSE, it seems fairly obvious that all interested parties are manipulating stock price action, probably by using market basket ETF's, in order to lock in performance #'s and their annual bonuses. The investing public has no clue and is just fine seeing the market stay above 10,000 so they can feel better about there holiday shopping budget.

What is very confusing and concerning is why the so called "smart" market players are not reacting to things that they normally would react to, including but not limited to the following >>>>>>>>>>>>>>>>>>>>>>>>>>

OIL @ $34/brl and OPEC contemplating cuts in production in feb. Natural gas $6.50/btu and shortages foreseen. metals including silver, platinum, nickle, copper, paladium, and gold all at multi year highs. The US$ continuing to press out new lows vs. Euro, Pound, Swiss franc, and Yen. Hints of deflation at the consumer level, first time in 21 years that core consumer prices dropped. Huge deficits in budget and trade that are not being addressed in any meaningful way.

Still no major public outrage about the corruption and fraud at the largest mutual funds or the NYSE, as the regulators seemingly stay out in front with comments about how they will fix what was wrong and how it won't happen again...even as it continues to happen NOW!

It seems to me that way too many interested parties are on the same side of a very unbalanced see-saw, all hoping that the important issues i just mentioned get overlooked until they get back from holiday vacations. I guess we will have to see if there will be an exciting finish to this years stellar market performance or if we can just glide in for a perfect landing. Hopefully, all the interested parties will be able to enjoy the holidays without having to come back to their offices early to deal with something that goes horribly wrong with the perfect landing scenario.

Enjoy the holidays and have a happy, healthy, and grateful New Year!

A FEW BAD APPLES

it has been repeatedly said over the past few years, that it was just "a few bad apples" that were responsible for the corporate malfeasence and fraud that occurred during the boom of the 1990's. as time goes on, it seems that there were more than just a few bad apples responsible for the corporate scandals that fleeced the investing public. if we use ENRON as the start and follow the news coverage to where we are currently uncovering a widespread mutual fund trading scandal, the few have clearly turned to many and i fear that the many will turn into alot.

it started off slowly with the uncovering of the enron fraud. lay, skilling, and fastow along with the investment bankers, arthur andersen and probably the unknowing aide of the vice president and his energy task force. to date, the only apple that has been punished is arthur andersen and its top notch cpa's that created the books for the corporation. ernst & young got to stay in business but has had to pay lots of fines for assisting other companies in various frauds, including illegal tax evasion schemes. from there, and in no specific order, we had tyco's kozlowsky and sullivan, worldcoms ebbers, and adelphias rigis family. we've had tenet healthcares barbakow and healthsouths scrushy scamming medicare. we had martha stewarts and imclone's waksul fiasco. we've had bristol meyers forcing drugs on wholesalers to meet eps estimates. we continued with aol/time warners advertising scam, and interpublic groups misdeeds. we've had bad apples in the nyse trading pits with the labranche scalping clients pennies by jumping a front a few too many times and other specialists being investigated for the same. we've had to clean house at the nyse because the BOD paid the CEO too much. we've had foriegn currency trading scam and an energy trading scam. we have had corporate espionage at boeing and huge defense contracts awarded to the presidents ceo buddies with no bidding. we have had the investment banks in unison claim they did nothing wrong in there research divisions, yet pay $1.4 billion back to investors due to conflict of interest violations. freddie mac miscalculated eps for the last 3 years to by $4.5billion. ceo's of some of the largest mutual fund companies have been indicted for fraud including pilgrim & baxter, strong and others are under investigation. now we are uncovering that mutual funds were gaming the public with the help of hedge funds and brokerage houses each accepting fees along the way. names include janus, prudential, putnam and alliance, all of which oversee billions of dollars in assets belonging to state and corporate pension funds.

without the efforts of elliot spitzer and his team of investigators, most of the above crimes and indiscretions, would have never been uncovered. the SEC along with the other self regulatory agencies, were unaware and unconcerned about continued violations of securities laws being broken and disregarded by almost every player in the industry. even now, the SRO's are hesitant to punish and prevent further abuses.

A FEW BAD APPLES?! maybe a few bad apples at every large publicly traded company and at every investment firm, mutual fund company, stock exchange and self regulatory agency. when it is looked with a broader perspective, it seems to me that there was a kind of coordinated effort to rip off the investing public. a sort of conspiracy between the
investment banks, public companies, mutual funds, self regulatory agencies and accounting firms to create an investing environment that hides risk and overstates returns.

unless the culture of greed in corporate america and the environment of biased and unchecked investment advice is radically reformed, the capital markets will remain corrupted, inefficient and very risky.

HOW'S YOUR RESOLVE HOLDING UP?

at the recent british-american summit, president bush and prime minister blair made statements about the most recent terror attacks in turkey and bahgdad. while expressing grief and horror about the attacks against innocent civilians and calling the terrorists evil, they both said that the latest attacks "strengthen their resolve" to continue the fight and complete the mission of ridding the planet of terrorists. after the bloodiest month for casualties since the war began, resolve must be at or near all-time highs for the two leaders. what may be more important, is the resolve of the american soldiers.

without a plan of any kind or a date certain for getting out of iraq, it seems as though the troops are in the midst of a full scale escalation of military force being directed at soft targets, which they seem unable to defend, and against military targets which they are woefully unprepared for. our troops are in the middle of a full out guerrila war while our government and civilian contractors are trying to rebuild the ravaged country so that the iraqi population will start to support the troops, rather than loathe them.

our leaders have told us that the major conflict was over in may. now, a full 6 months later, the major combat is clearly still on, and the risks and casualties are mounting. the iraqi resistance is becoming bolder and more successful with each attack, and the civilian population is scared at best and angry at worst. the US government claims they were ready and prepared for a long hard battle, yet the soldiers and american population are not ready for such a circumstance. in fact, our president and secretary of defense still is touting the successes of the war.

from my standpoint and the standpoint of many others, there has been no 'real' success and the situation has become far worse. terror attacks around the world have increased dramatically since the invasion of iraq. we havent caught saddam or osama. we havent found WMD's in iraq, or anywhere else for that matter. threats of bigger and more devastating terror attacks have been broadcast loud and clear. no real global support, either financial or military, has been forthcoming from any other nation. the 9/11 report still doesnt acknowledge the saudi factor. and we are still claimimng success?

the president uses the word 'resolve' to let us know that he is 100% committed to the war he began, regardless of what american or world opinion is, yet his resolve will not win the war or stop terror. the 'resolve' of our troops and the american people, along with the support of the rest of the world will be necessary to achieve anything close to success.

FINANCIAL INSECURITY

the following survey results reflects on a society of people working very hard to make "ends meet" each and every week. not the best of situations for an highly leveraged society of people. its also a potentially disasterous situation for the banks that have been so willing to lend to these 'paycheck to paycheck' consumers. with an insatiable appetite for all the new stuff that corporate america's advertising engines keep telling us we need, we collectively seek out new and innovative ways to satisfy our desires. in doing so, we are able to keep living the american dream while we create a future nightmare of financial distress.

the american "rat race" provides the impetus for huge sales of anti-depressants and sexual aides, and it is setting the stage for lots and lots of unprepared employees who may continue to see corporate america laying off more and more of their friends, loved ones, and g-d forbid themselves. without any financial cushion, and lots of debt, the respondents, along with their peers, face some serious financial problems. many seeking the american dream of a new home have been fortunate enough to get a great deal on rates and down payments in the last 2 years. with their new homes, they needed new furniture, electronics, and appliances all financed by cheap credit with easy terms, some of which they got from the equity in their newly acquired homes. now, not only are they relying on their paychecks to stay current on their committments, but lots of banks are relying on those paychecks to get there monthly payments as well.

here is the survey i am referring to>>>>>>>>>>>>>>

By Jane J. Kim
Of DOW JONES NEWSWIRES

NEW YORK (Dow Jones)--Most workers are living paycheck to paycheck, hurt, in
part, by a weak economy and rising health-care costs, according to a new study.
Although younger workers are more likely than older workers to live paycheck
to paycheck, slightly more than half of those nearing retirement age depend on
each paycheck, according to MetLife's 2003 Employee Benefits Trend Study,
scheduled to be released this week.
Individuals have been "challenged" by a weak economy and have seen the value
of their own assets decline, said Craig Guiffre, vice president of national
accounts at MetLife. And although overall inflation has been low, certain costs
are rising, such as medical care and college tuition. Meanwhile, employers have
been shifting more of costs of benefits to employees, he said.
"The percentage of people in the boat of people living paycheck to paycheck is
going up," he said.
Among those with children under 18, more than half, or 57%, rely on their
paycheck to manage finances. Even among employees earning $75,000 or more a
year, more than 34% live are relying on their paychecks to get by.
In fact, the survey found there were few differences across age, gender or the
respondents' ethnicities. "The interesting thing was there weren't huge
differences between all the populations," Guiffre said.
Due in large part to a heavy reliance on work income, more than two-thirds of
employees are extremely or very concerned about making ends meet. For example,
a majority of respondents, or 71%, do not have or don't know if they have a
financial plan.
"The good news is that even for folks who are living paycheck to paycheck, it
doesn't have to be expensive" to put together a financial plan, Guiffre said.
People can find free information and financial planning tools online or can get
information from their employers. And since most companies are in the midst of
open enrollment, now is a good time for workers to ask their employers for more
information. Nearly two-thirds of employees surveyed said they spend less than
an hour each year considering their household's financial needs during their
company's open enrollment for employee benefits.
The study consisted of two separate surveys: one survey polled 728 full-time
employees, age 21 and older, at companies with at least two employees and had a
margin of error of plus or minus 3.1%. The second survey polled 1,548 human
resources and benefits executives and had a margin of error of plus or minus
2.1%. Both surveys, which were conducted by NFO World Group, were conducted
online in September. END>>>>>>>>>>>>>>>>>>>>

paycheck to paycheck consumers are problematic in a fragile economic recovery. the banks that hold the loans will soon face problems handling the non-performing loans and credit losses.

have a grateful day!

larry

Is That An ELEPHANT I Smell?

As a perma-bear on most things economic these days, i seek out others with similar thoughts of doom and gloom. as there is a distinct minority of us pessimists, i always like to share my more mainstream findings. Morgan Stanley has a conference each year that brings together its clients, analysts, fund managers and others to discuss the state of the world economy and forces that may be important in the upcoming year. Stephen Roach wrote the following piece after the conference. i found it heartening to my thought process and intresting in its comments about the nervousness out there regarding the more macro decline of the U.S. and its world dominance financially and militarily. i have read it and i am equally as nervous as the people at the conference.

Global: Macro Passion

Stephen Roach (New York)


Our annual global investment conference in Lyford Cay has become an important milestone in my own macro journey. Client sentiment at this gathering provides those of us at Morgan Stanley with invaluable insights into the markets and offers a unique sounding board for our own views. But this isn’t just any conference. After 19 years, it has taken on a special character. Most of the attendees are repeat participants. And with that repetition comes familiarity -- almost like family. The feedback is fair and direct -- and often intense. Over the years, the dialog at Lyford Cay has become the marker by which I have learned to set my personal macro compass for the year ahead.

The mood this year was cautious, risk-averse, and introspective. Largely an equity crowd, you would have thought that the surge in global stock markets over the past eight months would have put the group in a giddy mood. That was not the case. Yes, by a margin of two to one, the group thought 2004 would be an up year in equity markets. But it was largely envisioned as a dull year of single-digit returns. I’ll leave it to our market strategists to comment on the specifics of the recommendations that came out of the round-table at the end of this event. But from my perch, there was nothing “early-cycle” about the collective insights of this seasoned crowd; in particular, there was little interest in consumer durables and capital equipment. More focused on pharmaceuticals and healthcare, this was a group that was enamored of defensive, late-cycle ideas. It was almost as if it was time to play the downside of an economic recovery -- a recovery, of course, which has barely begun.

Don’t get me wrong. This was not a group that was willing to endorse my bleak view of the world. There wasn’t an investor in the crowd who thought the US economy would grow by less than 3% next year. The case for deflation, which had blindsided this group just a few months ago, never even came up in the macro discussions. At the same time, few looked for a meaningful acceleration in inflation; instead they favored a scenario that depicted more of a gradual and relatively benign updrift in pricing (see Dick Berner’s dispatch in today’s Forum, “The Inflation Conundrum at Lyford Cay”). Reflecting that view, the group was on the fence insofar as Fed policy was concerned; however, of the 50% that were looking for a tightening next year, three-fourths thought any such action would be deferred to the second half. Nevertheless, the bond market was viewed as largely a one-way bet: By a margin of four to one, the consensus looked for yields on 10-year Treasuries to exceed 5% by the end of 2004. None of these are extreme views that threaten to derail financial markets. That didn’t surprise me. This is a group that is paid to be fully invested. As such, it invariably favors soft landings in downturns and soft takeoffs in an upswing.

As the house skeptic, with a seemingly chronic case of jetlag, maybe I’m guilty of selective recall. But as I attempted to back out the risks to the macro overlay from three days of discussions, I sensed far more concern than optimism. In the interest of full disclosure, I’ll be the first to admit that I’m reading between the lines in drawing that conclusion. But over the years, my experience has taught me that that’s exactly what you have to do to get the real message of Lyford Cay. The best economic scenario that emerged for the United States was a last-gasp surge in early 2004 driven by the second installment of the recently enacted fiscal stimulus. After then, even the growth bulls on the economy feared a sharp deceleration. At the same time, there was nearly unanimous sentiment that the dollar was headed lower. Byron Wien made an impassioned presentation of the bull case for the US currency, but there were no takers. The general sense of the group was that America’s gaping current-account deficit had left the dollar in the early stages of a multi-year downtrend. Against that backdrop and in the context of the potential perils of competitive devaluation that a weak dollar might trigger, there was considerable interest in gold -- more so than I have seen at any year in this conference.

Perhaps the most surprising commentary came from one of the perma-bulls. As a long-time attendee at the conference, he has repeatedly stressed the inherent resilience of the US economy and its financial markets. He was one of the first to grasp the powerful implications of 20 years of disinflation and the extraordinary ability of Corporate America to take advantage of that trend -- initially by lowering its cost of capital and eventually by riding the wave of accelerated productivity growth. His optimism is now gone. He is deeply concerned about an America that has lost its way. The excesses of debt and the shortfall of saving are at the top of his list. But he also waxed eloquently on the perils of massive trade deficits and the job losses they spawned. He found the erosion of America’s manufacturing base especially disturbing. He was also convinced that Washington had gone past the point of no return in creating a fiscal train wreck. This was a minority view, to be sure. But it came from one of the savviest investors I know. And he swears he doesn’t read my research.

Those troubling views were expressed in the very first session of the conference. But they didn’t really resonate with the group at large as the debate unfolded over the next few days. That was certainly the message from the macro conclusions described above. But the bearish view resurfaced with a vengeance in the final session of the conference -- our Saturday night rump-session at Lyford Cay. With the roundtable completed at midday, we had set aside some time before the final dinner to reflect on our collective discussions. About half the group remained at that point. The converted perma-bull had left for home. But the group picked up where he left off. With an emotional intensity that I have rarely seen at this conference, there was a deep sense of concern expressed about America’s future.

The elephant that had been in the conference room the whole time finally stomped out into the open. There was widespread fear that many of the most important icons of the American system were at risk of crumbling in this post-bubble climate of vindictiveness. It wasn’t just the Wall Street scandals. It was also the Enron-led accounting scandals and the damaged credibility of the New York Stock Exchange. The litany of a seemingly open-ended crisis in corporate governance and the political backlash it has spawned deeply troubled these investors. So, too, did America’s mis-adventures in Iraq, the latent fear of another terrorist attack, and the ominous rumblings of protectionism -- especially America’s politically-inspired imposition of steel tariffs and the more recent outbreak of China bashing. I will confess to playing the role as something of a provocateur in that part of the discussion. But it didn’t take much to open the floodgates of angst. There was also a philosophical discussion of the deep flaws of America’s debt-driven culture. Related concerns were expressed over the post-bubble response of the Fed -- interest rates that are far too low to inhibit the appetite for excess leverage. Another investor stressed that the American consumer -- long the mainstay of a US-centric global economy -- was literally living on borrowed time. With the last of America’s five home mortgage refinancing cycles behind us, he suggested there’s good reason to worry about the staying power of increasingly wealth-driven American consumers.

That unleashed a torrent of counter-attacks in defense of the American way. The most passionate case seemed to borrow a page right out of “The End of History and the Last Man” by Francis Fukiyama (Free Press, 1992). With the demise of communism, the triumph of market-based capitalism was argued to be the functional equivalent of permanent support for the US-centric growth model of the global economy. US current account deficits were depicted as being only symptomatic of how feeble the rest of the growth-impaired world really is. Even if it takes more debt for America to continue to pull the rest of the world along for the ride, so be it. After all, claim the optimists, the one thing non-US economies can do is fund America’s external imbalances and keep US interest rates down. If that’s the case, never mind the so-called excesses of the American consumer. As one investor quipped, “We can always be counted on to go down to the mall and support the global economy.” In the end, it turned out that by a thin margin, even the sentiment in the rump session was skewed toward a US economy that continues to finesse its ever-mounting twin deficits.

Maybe I’m making too much out of all this. But over the years, my experience has taught me to pay much greater attention to the body language of the most passionate investors than to the results of the various polls we conduct in an effort to glean insights into consensus thinking. Of course, it’s always easy to “game” the consensus at this conference. The now infamous “Curse of Lyford Cay” suggests that the consensus is invariably wrong on the big views in which there is most agreement. To the extent the curse is alive and well, that points to two possibilities -- a sharp further upside move in world equity markets or an equally sharp downside breakout. I know where I’m leaning. END>>

My take on mr. roach's tilt is toward the dark side of the spectrum. maybe the stock market is just fine ignoring the real things that are going on around the world and within our own country. some seem on the surface to reflect the freedoms and joys of living in a free and democratic society. too much of a good thing may not be good for the U.S. or us.

have a grateful day!

larry

MISSION JUST BEGUN

iraq will be a democratic nation and will be a model for other countries in the "Global Democratic Revolution"!

Last week, in the midst of the worst attacks on coalition forces since the war began, president bush was questioned by reporters about the 'mission accomplished' banner that was on the deck of the ship he made the speech from stating that the "major combat" was over. the president, backed up by the white house spokespeople, stated that neither had anything to do with the banner. the now infamous banner, was the idea of the commander of the warship, and it was a statement of the ships mission being accomplished and not a statement about the war. hard as it is to believe that the white house didnt call for that banner to be there, after this weeks major speech by the president calling for democracy in the middle east, its probably true. since now it is clear that iraq was only meant to be a so called beachfront stronghold in the ultimate quest for peace, freedom, & democracy in the entire middle east region. so clearly, president bush could not have thought or wanted to project that the mission was accomplished. far from it.

currently, the only free and democratic country in the middle east is israel. and being that israel is not a very big place, i'd say its fair to say that the middle east has no democratic governments. monarchies with radical islamic support systems, dating back much further than our wonderful democracy, and further bolstered by the developed world governments in order to keep the oil flowing, is what the order and rule is in the region. the populations are not represented by the leadership and the wealth is disproportionately distributed. power is tightly held by the kings and they control the wealth and the oil.

now far be it from me to stand in the way of a good plan, but it seems to me that president bush needs to think long and hard about what he is about to do, or has already started to do, in order to bring democracy to the middle east. if i'm not mistaken, this has been tried before, and it didnt end pretty. i am young enough, or for that matter old enough to remember beirut and the news reports about the bombing of the marine barracks. as i remember it, we were there to help facilitate the peace process in the middle east, yet we were not very welcome and ultimately withdrew our troops. president bush feels much more confident and committed in our efforts this time and is telling the world that our mission is vital to the safety and security of the U.S. and world peace.

here is the link to the speech...it is worth reading as it may be important to the future of the U.S. and the world.

http://www.nytimes.com/2003/11/06/politics/06TEXT-BUSH.html

i agree that our efforts to democratize the middle east are vital to the safety and security to the U.S., yet i disagree that a military solution will be successful, especially if led by the U.S.

have a grateful day!

larry

EMPLOYMENT & GROWTH DISCONNECT

GDP grows!...JOBS shrink?

ECONOMY GROWING with LESS JOBS

How can the economy grow while businesses are cutting jobs? How can fewer employees produce more goods & services? How can the government crow about 7.2% GDP growth while the unemployed stay that way for longer periods of time and have less opportunities for employment going forward? How can we be doing better when so much is doing worse? why is there such an obvious disconnect between the prosperity and the problems?

I am not sure who is going to be happy about the recent news that the economy grew at its fastest pace in 20 years when the labor market continues to cut jobs. the presidents economic dreamteam, led by the elaine choa and john snow, cheered on by the media bulls, are so full of themselves for calling the bottom and encouraging investors to believe, that they have failed to see, or acknowledge, some very obvious problems with the extraordinary surge in GDP growth just reported. how can the economy be growing so fast? how can the stimulus that created the growth continue? what will happen when the stimulus is taken away? have any of the structural problems in the economy been fixed? what will we do about continued job cuts? what is REALLY going on and how can it be continued?

lots of questions with very few GOOD answers. the FED seems to see that things are tenuous, or else rates would have been raised to reflect the robust growth. greenspan and co. have stated on numerous occasions, any occasion they can, that rates will stay where they are for a "considerable period of time" in order to support the economic recovery, with no worries about inflation. How can that be??? 7.2% growth with no inflationary pressure? best growth in 20 years with no job creation? has that ever happened before? have we ever had record home sales coming out of a recession? have we ever had record auto sales coming out of a recession? have we ever pulled forward so many sales in so many areas without a severe falloff in demand? have any of the things happening in todays economy ever happened before? so why is this all happening now? one answer is the cost of money.

the "fuel" for all the growth has been FREE money. 0% financing on all durable goods. lowest home mortgage rates ever, along with low or no down payments and easier credit approval criteria(low income borrowers can now add aunts, uncles, brothers, sisters, cousins, etc. to mortgage applications in order to get approved). creative financing for businesses to finance the purchase of new technology so they can produce and sell more...with fewer employees! easier lending guidelines so banks, brokerages and any other quasi-banking company can easily lend to sub-prime credits, in order to put more money in the hands of less qualified borrowers so they can keep consuming.

needless to say its worked. and being that the 2nd qtr saw record borrowing and 3rd qtr saw record growth, all is well in bush-land. the home of the free and the debt burdened. US government debt is at an all-time high. consumer credit is at all time highs. mortgage borrowing is at all-time highs. mortgage to assets, home equity and income is also at all-time highs. other things at all-time highs would be personal bankruptcies, mortgage defaults, credit card charge-offs, and some other credit stats. spending by consumers coming out of a recession is also at an all-time high. How can this be? what is the consequence of all this stimulation?

footnote to GDP report
10:00am 11/04/03
U.S. October layoffs surge 125%, Challenger says By Rex Nutting
WASHINGTON (CBS.MW) -- Layoff announcements from U.S. companies more than doubled in October to 171,874, the highest in a year, according to the monthly tally released Tuesday by outplacement firm Challenger Gray & Christmas. October is typically the largest month for layoff notices, as companies slash costs at the end of the fiscal year. The Challenger survey is not adjusted for seasonal factors. Layoff announcements had fallen for three months in a row before October's 125 percent increase. In October, the auto industry sacked 28,363 workers, followed by 21,169 in the retail sector. Telecommunications companies cut 21,030. So far in 2003, 1.04 million job reductions have been announced.


Can someone please explain how the economy is growing so fast while jobs continue to be cut? Oh yeah, its that great productivity.

GDP...The New LEADING INDICATOR

Throughout my career in the brokerage business, I was always taught that the GDP was a lagging indicator. Meaning that it showed what had happened last quarter and did not necessarily forecast what was going to happen in the next quarter...that would be a leading indicator like ISM, consumer sentiment, durable goods orders, housing permits, etc. Sometimes, the GDP was labeled a coincident indicator, which would mean that it was reflecting what is going on now, but it was never seen as an indicator of things to come.

today, the GDP was much stronger than anticipated, even by the most bullish analysis. After the report, the analysis came in fast and with almost a unanimous call for further growth and for the fat lady to start singing for the end of the bear market and the recessionary period of the last few years.

HUH? Whatever happened to lagging indicator status of the GDP? Past quarter GDP performance is not an indication of future results. It is a report on the past. Why now is it a predictor of the future? OH YEAH, it fits the scenario that bush wants us all to buy into...get it, buy into with all the tax cuts & low interest refis. Why the pundits are extrapolating the incredibly, unbelievably, extraordinarily, amazingly(not my adjectives) strong Q3 GDP information into the current quarter and 2004 I do not understand. Why isn't anyone talking about sales being 'pulled forward', the apparent slowdown in growth of homebuilding and refinance activity, companies still cost cutting & announcing further labor force reductions, inventories still being depleted and not rebuilt, CEO's still talking cautiously, NO JOB GROWTH at all(what type of growth will we need for jobs to be added?), government spending on war goosing GDP beyond sustainable levels, or any of the other obvious questions that would be prudent now that the number is in and shows how powerful monetary stimulus (money printing) can be?

the real questions might be, if growth was so great and is expected by most to continue, then why is the FED willing to stay so accommodative and leading the markets to think that they wont raise rates for a "considerable period of time"? Are they just being really nice? Are they no longer worried about overheating the economy and causing rampant inflation?(more worried about DEFLATION in an economy that's growing at that pace?) are they not real believers in the 7.2% growth rate? Are they concerned about something we are not aware of? What is different this time? And how will the FED get out of this very accommodative interest rate environment without pressuring home prices? Oh, never mind that, they aren't raising rates anytime soon. But, when rates rise, the cost to carry a home will increase. Values will need to decline to keep a sort of "carry" equilibrium. Adjustable Rate Mortgages will adjust UP, creating serious issues for homeowners,especially the new ones who have never had to deal with repairs, maintenance, insurance, energy and now interest rate costs increasing!!!!, credit card debt that is being accumulated will cost more and be more difficult to afford, and 0% loans for durable goods will vanish creating real problems for companies trying to sell us anything we might really have to pay for going forward. That will all feel very inflationary and cause consumer spending to come to an abrupt halt. But forget about that for now, we'll get back to that next year sometime.

it is much more popular to look at the rosy data and say "isn't this great! The recession is over! I may not have a job, but I'm sure one is coming soon." once again the market is safe and profitable place to save and invest again. I'm not really sure why with all the mutual fund chicanery and NYSE upheaval going on, but nevermind that, I gotta be on the market gravy train or I'll miss out again! Speculation is back in vogue and the NASDAQ is chugging along at its best pace since....ever. Don't miss out on the next boom time or you will regret it. Or will you?.

seems to me, the problems that were on the front burner just 6 months ago, are now on the back burner, or maybe they are in the fridge for now (amazing what big stock gains can do to your memory). Regardless of feelings and perception, most of the problems remain including, but not limited to, under funded pension plans (new bush administration reform bill just passed letting major corporations off the hook for pension contributions for a few years. This doesn't fix the problem...just delays the day of reckoning for a few years. And in fact, the Pension Benefit Guarantee Corporation is almost insolvent and social security system is broken with the baby boomers readying for retirement years...we'll address these issues in the next presidential term.), almost every state has a budget deficit (most notable of late being California's $8bil annual deficit and $30bil accumulated deficit), jobs are still being eliminated by major corporations and others are being sent overseas...most of the jobs lost during the last 3 years will NEVER come back...they are permanently gone, wall street is still defrauding/deceiving the public in various ways (mutual fund market timing scandal, NYSE specialist system about to be eliminated due to fraud, corporate scandals still being exposed, etc., etc.), war on terror costing much more $$$ and lives and security than expected or can be absorbed, other potential geopolitical firestorms looming in North Korea, Iran, Israel, Syria, Saudi Arabia, etc., potential housing slowdown, potential auto sales slowdown, consumer debt levels up at unsustainable and in some cases unserviceable levels (personal bankruptcies still hitting new highs!), healthcare costs continuing to rise, energy costs high and problems with oil, natural gas, and electricity grid, huge federal budget deficit, huge trade deficit, unconscious political leadership only concerned with staying in power, and finally, the longterm decline of the American society at large...including immigration, education, infrastructure, healthcare, poverty, and unprecedented hatred towards the United States.

OK, ok, so I got into a rant, but why is it that the GDP is now a leading indicator? And what exactly is it leading to? 99 out of 100 CNBC analysts say its leading to more growth and a sustained economic recovery. When they have an interview with the "1" that thinks something other than bullish things, I'll let you know what might go wrong.

have a grateful day!

Larry

CUTTING OFF THE HEAD DOESN'T KILL THE SNAKE

the Board of Directors of the NYSE decided to ask for dick grasso's resignation yesterday. and, as all well paid CEO's do, he bowed to the request and reluctantly resigned. his resignation is a continuation of the cleansing process that the financial markets have been undergoing for the past year in its quest for a fair and transparent trading enviroment. what makes no sense at all is why mr. grasso was asked to resign by a board that decided to give him the outrageous pay package.

in the coming weeks, or possibly days, the question of responsibility and lack of oversight will surely come into play here. conflicts of interest will be examined. lack of competent governance will be discussed. and more resignations will be tendered.

the NYSE is a SRO or self regulatory organization, that presides over the trading of securities on the largest exchange in the world. during the boom time and the subsequent downturn, the NYSE discovered, or was informed about, lots of business being conducted on its floor that was illegal or unethical. now its in the process of fixing itself and the systems that were, and still seem to be, broken. cutting off dicks head, i know that sounded painful, will not correct the problems or kill the snake!

have a grateful day!

larry

"I'M BLESSED, THANK YOU" by NYSE BALD HEAD GRASSO

as howie mandel would say, "well...what would you say?" if i was given a pay package like grasso was, i think that his response was well thought out and proper. "no thanks thats way too much" would have been silly and frankly, stupid.

as the head, bald head, of the NYSE, grasso was at the helm during the most widespread wave of corporate crime and fraud in the exchanges history. and thats just the stuff we know about. he claims to have saved the exchange from the electronic trading assault that is still ongoing. he claims to have preserved the antiquated open call-out system manned by specialists. he claims to have grown the number of companies listed. he claims lots of stuff that seem somewhat meaningless, compared to the investor assets lost during the corporate crime spree of the 1990's.

what exactly he was doing to oversee the exchange and ensure that the investor was being protected is not clear. the exchange has investigated many companies after the fact. the exchange has been notified of every kind of illegal activity going on under its not so watchful eye. it has done nothing to protect the small investor from the wolves that dominate the exchange activity. in fact, those wolves are the very people who sit on the board of the NYSE and make up the compensation committee that determined what grasso was worth.

the ole boy system at its very best. certainly not capitalism. no checks, and no balances, just lots of pats on the back and undeserved kudos for a job not very well done. in an effort to quell public and private outrage, grasso has agreed to forego an additional $48 million he didn't deserve. the $140 million he claims is due and payable for services rendered over his 35 year career he'll take. a good part of that was "earned" in the last few years as he was compensated like a dot-comer.

as he claims to be fixing the problems of the past and protecting the interests of the 85 million investors who have money under his watch, he is bilking the exchange and proving that nothing has changed and nothing will change.

have a grateful day!

larry

SCARED TO CRY WOLF AGAIN

yesterday, the US State Department issued its latest warning, classified as a "Worldwide Caution", of a possible terrorist attack against US interests abroad. the warning said that it could not rule out the potential for al-qaida to attempt a second catastrophic attack within the US. the warning is fairly clear and lists basically every type of venue as a potential target. the warning is ominous in its scare level, as it states that the attack could include the use of nonconventional weapons such as chemical or biological agents. YIKES!

something new about the latest warning is that it was not followed by an increase in the "Terror Alert Level". previous warnings of this type, were accompanied by an increase to an 'orange' or heightened level of alert that would mobilize certain emergency agencies to increase staffing levels, security procedures at bridges and tunnels and heightened levels of checks at airports and seaports. i'll assume for the time being that those areas are being addressed in the proper way based on the state departments concerns.

what is a bit disturbing is that the government is trying to keep this warning "quiet" in order to save money, as the heightened alert status causes many state and local government agencies to have to spend extra money, and to keep the general public from altering plans to travel and go about there daily activities. if there is a potential for an attack, shouldn't we reconsider our plans?

on the second anniversary of the 9/11 attacks, we are almost ready to abandon one of the first systems put in place to prevent another attack from occuring. we all would like to forget what happened, but the reality is that the longer we go without an attack, the more likely one will happen. so to get lax with the alert level is just what we should not be doing.

i have said that the alert system is a bad idea and won't stop another attack or get the general public to behave differently. but, i think that if there is a system, we should use it. just because we have had 4 alert increases with no subsequent attack does not mean that we should not use it if it is still a viable system. if it isnt reliable, abandon it. we will never go below yellow alert and we will never go to red alert. so why not just be on alert until we ultimately win the war on terror. until then, all these alerts are useless.

the boy that cried wolf was soon ignored. for fear of that same consequence, abandon the alert system. then just tell us when the wolf is here.

have a grateful day!

larry

WHERE DOES ALL THE RISK LIE? the banks!

i know its not unusual for me to focus on the potential negatives, but here i go again.

during the past few years of easy money, banks & financial institutions have had a wonderful opportunity to exploit low interest rates in order to dramatically increase their lending to businesses and consumers. recently, in an effort to maintain the volumes and activity levels in their lending businesses, the banks, and all other companies who are now acting like banks(i.e. auto cos., consumer elec. retailers, computer cos., furniture cos., tax prep. cos., etc) have all foregone good risk management and lowered credit standards in order to qualify more borrowers in order to keep the volume of loans up. while doing that, they have also foregone profits/returns on the loans, i.e 0% financing or very low rates on loans. in effect, what they have done is the most dangerous thing a bank can do. THEY HAVE TAKEN ON MUCH MORE RISK WHILE ACCEPTING MUCH LESS RETURN!

that leaves banks in a very bad place. they have huge portfolios of riskier loans that have low or no returns. the banks in effect own all the new homes, cars, and everything else sold with these financing incentives and they have a potential for higher loss rates as the quality of the borrowers has declined and the assets that support those loans decline. furthermore, in order to handle the unprecedented demand for loans, the financial institutions mentioned above have utilized computers to qualify borrowers. these computer programs are unproven during difficult economic periods, or any periods for that matter, and could result in even more bad credits that the banks are unaware of because only the computers know, until the loans go bad.

lastly, a large portion of the lending has been refi's on homes that have risen in value, some much more than others. if the loan to values prove to be to high, or way too high, once again banks will be left in an even worse place...holding lots of bad mortagages on homes that drop in value significantly.

finally, as the credit situation could be an issue, so to will the demand for new lending. we have all refied at least once. we have bought autos for 0%(autos on the road are the youngest ever & have great warranties). we have decorated our new homes w/ loans that don't require payments until 2004. what will we borrow money for next? i think the consumer is full up with stuff and loans on that stuff.

i know that my view is unpopular, yet if it is thought through and analyzed in a quiet room without all the bulls screaming about the recovery and the end of the bear market, it makes much more sense than the unsupported bull case for nothing but up. if the banks come under pressure from this, it could result in the catalyst that ends this CYCLICAL BULL market we have been in for the past 4 months and the SECULAR BEAR market we are STILL IN will resume in full force.

its very hard to fight all the cheerleading, yet it is sheer stupidity to ignore the facts of dangers that still loom large in our economy.

have a grateful day!

larry

THE CLEANSING CONTINUES

just when you thought the bubblesque malfeasence was over and done with, eliot spitzer strikes again. now its the mutual funds who have been called out to account for their improprieties. it seems that the fund families have been treating some of their customers like children and some like step-children. the funds have been allowing hedge funds to front-run retail clients and make short term trading profits.

the subpeonas went out last week and already 2 of the majors, janus and Bank of America, have admitted to the scam and agree to stop it now. i'm sure there is more to come as the information requests get completed. emails will be a great source of information and, if recent history is any guide, they will shed the most light on this latest bout of wall streets untrustworthiness.

the public seems immune to the latest news as it is now clearly taken for granted that the small investor invests in the market at a signifcant disadvantage to the institutions. so whats another round of sunlight going to do to change things? there will be more fines levied with no admitting or denying of the charges. there will be more compliance officers hired and oversight committees formed. there will be more ceo's saying that they will do whatever necessary to regain customer confidence. and on we will go.

it is just another stark admission of how broken wall street really is and how the rules and regulations do nothing to protect the average investor. the more things change, the more they remain the same.

have a grateful day!

larry

DID YOU HEAR WHAT HE SAID?

we will not leave until our goals are achieved. its a worthy and just cause. we will spend whatever is necessary to achieve the goal of a free iraq. its vital to the stability of the middle east and the security of america. bush did an "i told you so as well by stating that "i told you this would be a long and hard war, fought on many fronts and iraq is currently the main front". here are some of the other important quotes...

"The terrorists have cited the examples of Beirut and Somalia, claiming that if you inflict harm on Americans we will run from a challenge. In this they are mistaken.''

"The surest way to avoid attacks on our own people is to engage the enemy where he lives and plans."

"We are fighting that enemy in Iraq and Afghanistan today, so that we do not meet him again on our own streets, in our own cities.''

“The Middle East will either become a place of progress and peace, or it will be an exporter of violence and terror that takes more lives in America and in other free nations,”

“This will take time and require sacrifice. Yet we will do what is necessary, we will spend what is necessary, to achieve this essential victory in the war on terror, to promote freedom and to make our own nation more secure.”

the stage is set for this generations' war. get ready to pay for it with blood, tears and money.

have a grateful day!

larry

MISERY LOVES COMPANY...bears of a feather

a few blogs ago i mentioned some of my favorite mentors. like they could hear my call, they both fed me with my weekly juice to keep me steadfast in my beliefs about the financial and geopolitical risks we face in our world and how over valued the stock market is. fleck quotes roach in his latest piece. get a load of this and tell me your ready to buy more stocks.

Sounding an alarm on global disequilibrium

The folly of that approach was articulated recently in a brilliant piece by Morgan Stanley’s Steve Roach, "Do Global Imbalances Matter?" I’d like to share some of it with readers. He has been one of the few people to understand the mania and its consequences. In other words, he's not your typical Wall Street hack economist. His discussion puts into perspective the risks assumed by folks who play beat the number with other people's money, and what they will ultimately face when the psychology changes:


"As the summer of 2003 winds down, the markets are going through a classic cyclical drill. Around the world, financial assets are being priced for recovery, renewed inflationary pressures, and central bank tightening. It's a scenario we've all been through before, time and time again. . . . It's times like this that test any macro practitioner. Resolve and discipline are one thing. But in this mark-to-market world of momentum investing, you can't afford to be wrong for long.

"While I am acutely sensitive to this feedback, I see little in the tea leaves that convinces me to abandon the basic framework that has guided my thinking over most of the past four years. As I continue to see it, the macro conundrum remains very much a tug-of-war between policy reflation and an extraordinary confluence of global imbalances. In the end, it boils down to whether the authorities have the wherewithal to spark a cyclical revival that offsets these excesses.

"There is always the issue of timing -- that fundamental imbalances are more of a distant concern that do not translate into a near-term macro call. While I have to concede that's always possible, I fear that the excesses have now gone to such extremes that vigorous growth in the global economy cannot be sustained. My bet is that today's imbalances are different. Believe me, I know full well that financial markets are now telling me that I'm dead wrong. In all my years in this business, I've never come across such a worrisome and potentially lethal confluence of imbalances. . . . "
He then goes on to cite these, most of which I have covered over time. Not surprisingly, I basically agree with his every word.

He sums up:

"Can policy traction 'paper over' the imbalances of a U.S.-centric world? This is where the rubber meets the road, as far as I am concerned. Reflationary policy initiatives are no substitute for global rebalancing. In the case of the United States, another burst of deficit-financed domestic demand will only exacerbate the excesses of debt, saving, and the current account. In the cases of Japan and Europe, competitive currency devaluation will only inhibit the very reforms that are needed to unshackle domestic demand.

"And, at the same time, politically inspired China-bashing can only threaten the global trade dynamic that now plays such an important role in driving world economic growth. That underscores the ultimate irony of the so-called reflation play -- that any policy-inspired rebound may well exacerbate the imbalances of the U.S.-centric world. Financial markets that bet on a quick and easy fix do so at considerable peril, in my view."
I agree completely. The risk/reward proposition is totally out of whack. While it may seem fun to bet on the upside for now, which may last a bit longer, after this party ends, it will be worse than when the bubble burst the first time. A lot worse.

don't you just love these guys. unashamed to be honest and bearish. as fleck agrees with roach, i agree with fleck and roach!

have a grateful day!

larry

HE LEFT OUT THE ECONOMY...stupid

i guess i was wrong. it was all iraq. i would have thought he might have given the economy an honorable mention, but why mess up a perfectly good chest banging, war mongering speech. or, maybe it was intentional. it must be that he and his strategists feel that his achievements in iraq relative to his record on the economy make it a lay down for what he will have us focus on. and since the iraq democratization is as the president put it, "a just cause", lets try to get everybody on board for the third world war that we must complete in order to make the world a safer place. as for the economy, since he didn't mention it, maybe he thinks that it will take care of itself.

now for the speech. actually, i would say it bordered on a fundraiser for the war in iraq. president bush confidently asked the american taxpayer for an additional $87 billion to pay for the war and reconstruction of iraq. president bush likened what we face currently to the destruction and subsequent reconstruction of germany and japan after WWII. in fact he tried to place a spin on it by stating that, "we have been repaid many times over for the money spent to rebuild those countries". so in a way he's saying that its an investment in our country's future.

in case anyone was wondering when or how the war on iraq will end, tonights speech made it very clear that he has no answers right now, yet he is prepared to see it through without "backing down". continuing his tough talk, the president unambiguously recommitted himself and the resources of our country, both money and lives, to the fight. seems to me that its coming a bit after the fact, and what are we all to do now? i don't think many people are prepared for this war to be a real war. this is starting to cost much more than most people signed on for and i think that many will be revoking their support shortly.

as that happens, unless the economy is really humming along and jobs are being created, support for the war will disipate, and so will the presidents hopes for a second term. it will be quite interesting to see a second bush win the war and lose the presidency. in fact, it looks like he may lose the war as well.

have a grateful day!

larry

BUSH BABBLE

tonight the president of the united states will make a prime-time speech to the world in order to reassure all interested observers that, despite the seemingly unending news of terror bombings and economic malaise, everything is under control and is going according to plan. not many people know what that plan is, but its going according to it. with all his popularity and money from fund raising, it would seem that he has a firm grip on the white house through 2008 so this speech is sort of a reminder of how well things are going, or will be going shortly.

the president is in a full court press to keep business rolling along and to squelch discontent with the war just enough to obscure the facts of what is really going on and just how dangerous each of these two policy initiatives have become not only to the US and the world, but to his stay in the white house.

this week, instead of firing elaine chou, the secretary of labor, for her lousy job of creating jobs, not that its her fault, but that has never stopped bush from firing a cabinet member, he hired a deputy secretary of labor to preside over new job creation. nice public relations move but probably won't creat any new jobs, except for the job of deputy labor secretary. one down 1,999,999 to go! well its a start anyway.

in addition, president bush sent john snow over to china, the next great economic super power, in order to convince the chinese government that allowing their currency to float, read 'drop in value', would help them to be even more economically powerful. i'm not sure why the chinese would want to listen to secretary snow when he is clueless about foriegn exchange policy, but i will assume that he went with enough academic and economic data to prove the point and ask them, read 'beg them', to consider helping the US out of its financial problems. because of course, that would undoubtledly help the chinese. for the past few years they haven't seemed to need our help so why will they concede now? can you say "protectionism"? the truth is, snow brought with him a message of "tariffs till you drop" if you don't do what we want.

both of these recent moves were made out of desperation rather than strength, no matter how the administration couches them. both moves will probably be ineffective at achieving their stated goals, but they may stem some of the criticism being levied at the administration for their handling of the economy.

facts are facts, and here is one. corporations will not start hiring workers, or for that matter stop firing workers, until the economy is clearly and sustainably growing without all the help from government overspending and historically low interest rates. and china will not do what washington wants, because they never have and don't need to in order to prosper. remember tieneman square, that was supposed to change things in china. fast forward to tady, and basically, nothing has changed except the way we percieve it. that fact is we need china's cheap labor and sourcing in order to maintain our standard of living. kind of like we need illegal immigrants to build houses and do manual labor that americans will not do. and we don't have the ability to change a country that has 1 billion people and is still communist.

the bottom line here is that the president will babble on about how strong our nation is and how fundamentally sound our consumer based economy continues to be. especially due to his tax cuts and economic policy. he will reiterate that we will not leave iraq until we democratize it, no matter the cost militarily, financially or in human life, because it is a worthy cause. and becaus ehe says so. he will reassure the country that good times are upon us and that we have exited a bleak period of time and sunny skies are here to stay. just as long as I get re-elected and am at the helm of the country. can you say 'titanic'? the speech will be a great way to start off the 2004 election campaign.

god bless america...we are going to need all the blessings we can get!

have a grateful day!

larry

THE LITTLE STOCK MARKET THAT COULD

remember that story about the train loaded with all the toys for christmas that couldn't make it up the mountain. then it got this great positive attitude and kept saying to itself, "i think i can, i think i can, i think i can". with that it slowly made its way to the top of the mountain and was able to get over the top and make its way down to the town to deliver the its payload to the town. the moral of the story is that if you think you can, you can. aren't fairytales great!

for the past few months, the stock market has had a wonderful attitude and in turn has had a wonderful rally. we are all convinced that the economy either is or will recover and that in turn, the stock market will (or has) recover as well. attitude is everything!

as long as we all keep believing that the market will rise, it may do just that. lots of what happens in the stock market is about perception and attitude. right now, we have a great attitude and consequently we have a great market. yet, unlike personal motivation that can lift our spirits and help us to achieve personal goals, stocks need fundamental business strength and profits to justify valuations. attitude can help us to achieve our goals but it can't fix structural problems in the economy or in business operations.

businesses can't operate from an attitude of "i think i can" for very much time if revenues and profits don't grow. the stock market can't maintain its gains or rise further, if the valuations are based on "positive attitude" influenced valuations. business and economic fundamentals must follow, and soon, or else the positive attitude will fade and gains will as well.

have a grateful day!

larry

AND YOU THOUGHT I WAS NEGATIVE

its hard for me to find people in my world that are as concerned about the furture as i am. most of my blogs have a kind of negative skew. most of my near and intermediate forecasts about the economy are bearish. most of my opinions about our government policies are critical and skeptical. and most of my general evaluations about the state of our society are less than complimentary.

in order to feed my need for realism about what is actually going on around me, i seek out others who are not fooled by the rhetoric, propaganda and outright lies from popular press, respected pundits and elected officials. some of my favorite realists include sir john templeton, stephen roach, richard russel, and bill fleckenstien. i enjoy jim grant, barton biggs, bill gross and robert prechter is my hero.

i also like reading marc fabers commentary on the state of the world. his website has a catchy name... www.gloomboomdoom.com. perfect for the ultimate pessimist. and his latest piece is pretty grim. he basically compares the iraq war to frances conflict with algeria in the 1950's and israels conflict with lebanon in the 1980's. he makes a brief mention of the US conflict in vietnam, but suffice to say, he's not too upbeat about the prospects for democracy speading in the middle east. or for that matter global peace and prosperity. he clearly labels the iraq situation as a guerrilla war that will end in defeat for the US & coalition forces and believes it will have dire consequences for the US financially and geo-politically.

i highly recommend the site for all who want some balance in what they read and hear about the state of the world. we are very fortunate to live in this country and to have the freedom and prosperity it affords us. yet to live in a fabricated, media coordinated world where our society hopes its way to the next generation is crazy. we all need balance in our understanding of what is going on in the world and our country in order to be able to live our lives realistically. faber brings reality to a new level.

have a grateful day!

larry

ITS ALL BAKED IN THE CAKE...now for the frosting

the news of the economic recovery is baked in and now we get to let the cake cool as we ready to spread the frosting. analogies are the best way for the human brain to understand things. with that in mind, the market has fully cooked the economic data and has baked a beautiful cake for us all to enjoy. but, just as we make our children wait to spread the frosting and then eat the cake, we all must allow the proverbial cake, that would be the stock market, to cool and then we should be able to put the frosting on, that would be another 5-10% rally, and then we can enjoy the finished dessert. just in time for the holiday season. sounds good doesn't it?

unfortunately, lots of times during the cooling process, unforeseen things can happen to the cake. sometimes the nice rounded top of the cake falls inward making it look yucky and difficult to frost. sometimes a sneaky child comes by and takes a finger to the cooling pastry. other times, the impatient parent or child starts to frost the cake before it cools and the whole cake gets messed up.

and just as a baked cake can get ruined, so too can a stock market rally. as the cooling process has begun, it seems that the bulls are anxious to spread the frosting. maybe even before the rally cools and the economic and business data confirm what is already believed to be a foregone conclusion. that we are in the early stages of a full blown and sustainable economic recovery.

the cake is baked. let it cool and maybe we will get to frost it properly and then enjoy eating it.

have a grateful day!

larry

ARE YOU A "NEWMAN" FAMILY

i make a habit of reading an investment outlook monthly newsletter written by pimco's bill gross. for those of you who aren't familiar with mr. gross, he is the largest bond fund manager in the world. and for full disclosure purposes, mr. gross was the crazy who predicted, and i think still predicts, that the dow will go down to 5,000. actually, in an interview after he wrote his piece called "dow 5000", he hedged a bit and said that 6,000 would be a better target but 5,000 was possible. now you might think that a bond guy saying nasty things about the stock market is just sour grapes. for what its worth, he also called the top of the long bond rally we experienced over the past few years and that could have exacerbated the recent swings in the bond market and caused losses in some of the funds he manages.

with that being said, he has been fairly downbeat on the prospects for the US economy going forward. in fact, as i have mentioned, he is calling for a huge decline in equity valuations based primarily on the fact that he believes equities are way overvalued based on all sorts of methodologies. instead of boring you with numbers and graphs, his most recent piece is one the best i have read. i highly recommend reading it and digesting the full gravity of his scenario and susequent thesis of what may or may not happen to our country and all of us who are fortunate enough to live here.

you can read it at www.pimco.com. hopefully you are not a newman. but, if his analysis of what the current state of our country, or its mainstream middle class families, is even a little bit correct, dow 6,000 or for that matter 5,000 may be optimistic.

have a grateful day!

larry

AMERICA...WHERE NOTHING CAN GO WRONG, wrong, wrong...

when i was a child i saw a movie called "westworld", which was about a vacation land where the visitor could create a fantasy for themselves with everything happening in real life but with predetermined outcomes which would always be what they wanted. those outcomes were controlled by the people who ran the resort by computers and the outcomes were all designed to fulfill the desires and dreams of the visitor. sounds pretty neat, huh. the movie was great. yet, the best part was when the computer operated clones in the fantasies went out of control and things started to go very WRONG.

lately, that is how our great nation, and the stock market, is being portryed. "AMERICA, the strongest most resilient nation in the world with an economy that is fundamentally sound". our leaders have convinced everybody that they are in control of the world and the economy and basically, nothing can go wrong.

with that as our national slogan, retail and institutional investors alike are pouring money back into the stock market as if that is a foregone conclusion. and its not only in the stock market where the fanatsy is alive. the terror alert system is all but defunct, even with the 2nd anniversary of 9/11 approaching; last year the alert level was raised due to the fact that terrorist organizations attempt attacks to coincide with previous attacks, not a mention of terror issues in this country. terror attacks in iraq, indonesia and elsewhere are seen as far away and of no consequence to the US. news reports of soldiers being killed and wounded are now a given, and it is seen as a part of an ongoing operation(war) to democratize iraq. did someone say "vietnam"?

since these issues are not effecting the US, it certainly feels good and makes most of us act like 'good' americans and shop with all the credit at there fingertips and equity in their homes, thanks in no small part to the bush/greenspan bubble blowers. even with jobs continuing to be shipped overseas we continue to hear that the recovery will produce new jobs, it'll just take some more time. during that time, we will hear lots of upbeat news about the great productivity gains we have made during the 3 year downturn, and how that will help the economy grow even stronger. but, very little will be said of how those productivity gains continue to hurt employment and weakens our jobs market. but once again, the 'controllers' of this westworld will assure us that nothing can go wrong and jobs will be available for all americans soon.

the stock market seems to have no problems with the rosy outlooks and forecasts for continued growth and in turn higher stock prices. bulls and bull believers continue to bid up prices while the bears and disbelievers continue to reluctantly get in, despite valuations and reliance on 'hope', rather than hard data, for the recovery to continue. with so many on one side of the boat, lots of people could fall in if things don't go as planned or if the computers that control all the credit reports and bank transfers break down for some reason, i.e. an unexplainable blackout, a terrorist attack in the US, a bond market blow-out, or some other unforeseen breakdown. a very lonely position to take, yet one that seems prudent considering what has happened over the past few years.

corporate america isn't quite as complacent and seems a bit more leary of all the optimistic talk coming from washington and wall street. don't get me wrong though, corporate leaders are thrilled with the upbeat mood and may very well take advantage of new tax laws and the corporate downsizing wave in order to keep profits coming in. that being said, capital spending still has not picked up and layoff announcements continue. corporations are taking full advantage of the low interest rates to lower borrowing costs and are issuing equity to raise capital at a brisk pace. yet, ceo's and cfo's are very reluctant to say that things have improved markedly. i think stabilized is the word of choice with some mention of slight improvement, with hedges about if the improvement can be sustained.

the controllers of the outlook and propaganda machine have their hands full. this westworld is at full occupancy and the computers are keeping things humming along just fine for now. president bush has the bulley pulpit to operate from and the FED chief is in his pocket. wall street is loving the support and looks forward to its first round of bonus checks in a few years. the general public is happy to believe after 3 hard years. my fear is that just as in the movie, when you think that nothing can go wrong, watch out for what can!

have a grateful day!

larry

THE FRENCH ARE TRUELY UNIQUE

what would happen if 11,435 people died in two weeks from heat in this country. 9/11 was about 3,000 people. SARS was a handful. why didnt the french help these people? how could they have allowed this type of tragedy to happen? how could they have not helped one another and made sure there neighbors or relatives weren't frying to death during the terrible heatwave? what is wrong with these people?

as i read about the french heatwave, i was amazed at the blatent disregard for community and family that must exist for this type of thing to happen. whenever a bad storm hits the united states from ny to la chicago to dallas, friends & family call or email to find out how they are and emergency response teams are sent to help the people who can't help themselves. in france, the heat was historical and it lasted weeks and these people didn't check on one another? what were they doing?

i could understand some beach days or wear shorts to work day, but not checking on the elderly or the sick? if that happened for 1 day in NYC thousands of people would die!

all i have to say is that their blatant disregard for human life and compassion is just plain disgusting and borders on criminal. i'm glad i'm an american.

have a grateful day!

larry

JOB"LOSS" RECOVERY

since the recession ended in march 2002 the labor force has declined by nearly 1.5 million jobs. in fact, in the past 3 months, during what has been unambiguously described as an economic recovery, approximately 400,000 of those jobs were lost. economists and wall street strategists have made it perfectly clear that there is nothing wrong with continued job losses, as the job market is a 'lagging' indicator and will pick up well after the recovery is underway. yet some do say a stabilizing job market would make them feel much more confident in the recovery.

in most of the commentary about the recovery and the continued problems in the jobs data, the optimists use the term "jobless" recovery, which implies that the recovery is underway, yet no jobs are being created. as noted in the title of this piece, i think a better description of the recovery would be a "jobloss" recovery. as the term implies, this recovery, if it indeed a recovery, is not only not creating jobs but is being fostered and supported by a REDUCTION in jobs. in fact, while jobs continue to be eliminated by corporations, thousands of the discouraged unemployed are leaving the search altogether as they cant find jobs, even after 2 extensions of government unemployment benefits. those benefits are about to end and the employment difficulties seem far from over.

if in fact the recovery is underway, then jobs MUST start to be created in order for the economy to stay in the recovering mode. most agree that the recovery has been bouyed by low interest rates, 2 historically large federal tax cuts, huge government spending, enormous corporate restructurings and write-offs (the famed 1 time charges that have been many more than 1 time), continued cost cutting and all sorts of other "propping policies". all of those efforts will certainly help corporations fix there business models, but none will assist the unemployed find jobs. job creation needs to follow or else another leg down will be made as consumers will not be able to stay with the economic recovery program.

no economic recovery has seen this type of employment market and been able to sustain itself. companies continue to cut costs and jobs in order to align costs and production with demand. as with the historic downturn and the 'new' enviroment we live in, i am sure this time will be different. how it will be different is yet to be seen. my best guess is that it will be different in a very negative way.

have a great day!

larry

FINDING INFLATION in a deflationary cycle

with all the recent talk of deflation, its not that hard to find things that are going up in price. home prices, energy costs, insurance premiums, and healthcare costs all are rising. the reasons for the rise in each of these four areas is different, but an important point is that none of the reasons have anything to do with a strong economy. the reason thats important is that normally, prices rise due to strong demand and/or economic growth. that allows companies to have pricing power. that creates an enviroment where companies dont have to compete ferociously for business or market share, because as the economy grows, demand grows and prices can rise. what is happening in each of the above mentioned areas is very different from a strong economy.

lets start with housing. over the last 2 years, interest rates have been lowered and that makes it less expensive to 'carry' or finance the purchase of a home, even if the price of that home is raised. when interest rates move lower it costs less to pay for an asset that is financed, especially if you can finance 80-90% of the purchase price. that allows the property value to rise while the cost to carry it stays the same or goes down. home prices have not necessarily risen due to demand, as much as demand has risen due to the lower cost to own a home. so prices have been able to rise even while the cost to own a home has declined.

a similar phenomenom has occured with automobiles. the 0% financing deals make it less expensive to buy the cars even though prices have remained fairly stable. in fact, automobile companies have been quietly raising prices on the cars they sell, yet with the 0% deals, it seems less expensive to buy a new car since the financing deals are so great which makes the payments lower.

the next area that has seen inflationary forces is the cost of energy. oil, gasoline, & natural gas prices have all risen steadily over the past year. the reasons for the rise in energy costs dont matter except for the fact that none of the reasons include strong demand due to a strong economy. oil prices are up due to geo-political factors as well as supply problems. gasoline prices are up due to oil prices being up and supply and demand issues, most not due to a strong economic rebound. and natural gas has its own issues, some include more demand due to conversions that took place for companies and consumers wanting to move away from a dependence on oil.

the other 2 areas where inflation is prevalent is insurance and healthcare. one of which has an effect on the other. healthcare providers are paying more for insurance and are passing those costs along to consumers. insurers are charging more due to higher claims and more liabilities due to natural disasters which continue to occur at an ever increasing pace and with ever increasing claims. more disasters and higher costs to rebuild the destruction, costs insurers more than they are prepared for. also lawsuits run amok have caused insurers to have to payout more than in the past. as for healthcare costs, we are living longer and having ourselves repaired and improved more and more. as that continues and our society ages, claims will continue to rise and the costs will as well.

all these inflationary forces do not help the economy. each of them is a 'drag' on growth. whats worse is that the deflation that is so prevalent in other areas i.e. technology, furniture, appliances, food, clothing, etc. is effecting businesses profits and enticing consumers to keep spending. most of the spending is being supported by money they are pulling from their homes as homeowners continue to refinance and pull cash out of their ever rising home values. if the deflation starts to hit that part of the economy, homeowners will all go 'upside down' very fast. that in turn will create a deflationary cycle in the most valuable and important asset most of us own.

have a grateful day!

larry

BLUE BEAR

i am and have been very "un"constructive on the economy and the equity markets for some time now. in fact, i believe we are in the 2-3rd year of what will be looked back on as the "2nd great depression" that could last for a other 3-7 years. the good news is i was bearish starting from the end of 2001, so i was correct and did well for quite sometime. the bad news is i have remained bearish during the recent surge and it hasnt been fun or profitable.

so heres my current connundrum. it seems very obvious to me that nothing much has changed in the "real" economy for most people/businesses, and in fact many of the "critical" issues, i.e pension problems, over-capacity in almost every industry, high corporate and personal debt levels, record high default/bankruptcy rates, airline industry distress, auto industry problems, weak int'l economies (germany, france, italy and one other are in technicalrecessions), high energy costs (oil $31/brl & natural gas $5/btu), employment declines continuing as we export jobs to china & india...now even including white collar jobs, dis- or deflation, ballooning FED deficit, growing trade deficit, baby boom retirement wave wave upon us, war in iraq, afghanistan, & on terror, etc, etc, have not improved at all.

even with numerous band-aides and anesthetics prescribed by the FED and the president, none of the underlying issues have been resolved, and the negative consequences have only been postponed for a later date, presumably sometime after bush gets re-elected.

in fact, much of the recent "good mood" has been a direct result of the stock market rally. which i guess should have been obvious as every single strategist and economist called the turn in such perfect harmony. that would include the recent surge in M&A activity, investor sentiment, consumer sentiment, retail spending, smiley faces, more cautiously optimistic CEO's. unfortunately, i thought fundamentals and reality stilled mattered but i was proven very wrong. my guess is that i won't be wrong for very much longer.

whats also obvious is that the stock market cannot hold this all together just by being UP. the whole thing smacks of "manipulation" coordinated by the federal government. They "reflate" and throw all this "liquidity" at the economy. force banks to lend regardless of risk, return or return of capital, and HOPE that time heals all wounds of the bubble and the broken economy.

its hard not to sound disgruntled but as a bear, i am that way alot. you know the deal, nobody likes a bear. i feel like there is a conspiracy going on. everybody wants stocks to go up and wall street and the government are just fine with that. up is good and down is bad. yet we all should remeber this.

all great bear markets have equally sensational rallies that 'reconvince' the masses to believe again. its just part of the cycle of fear and greed. its now pretty obvious that too much, got too good, too fast.

they'll call it a correction. they'll tell you it had to pullback after such a strong rally. the gurus on the stock market infomercials will hail it as a great buying oppportunity in the newly started bull market. don't believe them and take back your capital. if you don't the market will swallow it up again in a continuation of the greatest bear market in history.

have a grateful day!

larry

FED likes rates unchanged...MARKET don't!
(mini-me likes chocolate...scottie don't!)

the federal reserve left interest rates unchanged at 1% after their last meeting. since that meeting ended, interest rates have risen by about 0.25%. in fact, since the meeting they held in june when they lowered interest rates by 0.25% to the current 1% level, interest rates on the 10 year treasury have risen from 3.10% to 4.55% or 1.45% in absolute terms and by almost 50% in relative terms. talk about the law of unintended consequences.

the FED has gone to great stakes to assure the markets that they will leave interest rates at the current low levels until the economic recovery has firmly taken hold. its clear that they feel it is important to keep an accomodative monetary stance in order to allow the economy to get back on a growth path that is robust and sustainable.

measuring by the back-up in rates, the bond market doesn't feel the same way. and if the market is not cooperative, it seems clear that the FED has lost its power and the market forces are in firm control of where interest rates will be. there are a number of reasons that could be the cause of this disparity, but the only thing that really matters is that rates are higher which will slow growth just as we start to take hold of the economic recovery.

the FED seemed to feel that rates needed to remain low in order to sustain the economic stability. so why are the markets challenging that? this is a question that will be answered over the next few weeks or months.

have a grateful day!

larry

UNDERSTANDING THE FEDERAL RESERVE STATEMENTS


today, the federal reserve open market committee met to discuss the state of the economy and to decide if they needed to adjust their stance with regards to monetary policy. interest rates are the key to the whole thing yet what they say, in their all important statement, is much more important than what they do. in fact, the interpretation of what they say or do is even more important than what they actually say or do. FED 101 would be a great course on college campuses. i'm not sure if it would be a business course or an english course, but nontheless a great pre-requisite for anyone who needs to understand the economy or the english language.

with that as the intro to this blog, i'll do my best to decipher exactly what they said and did.

the easy part is that they did not change the FED funds rate of interest charged to banks for overnight lending. easy enough to understand and no interpretation necessary. except for the fact that the FED funds rate is at 45 year lows and has been steadily lowered over the past few years in order to 'prop' up the economy and prevent a deeper economic slowdown or crisis. please note that as many as two of the rate reductions were self proclaimed 'emergency' inter-meeting moves &/or 'insurance' moves to make sure that the economy wouldn't fall back into recession. thus, by leaving rates unchanged, they must feel that the economy continues to need its current accomodative policy stance in order to sustain its recent activity level.

interpretations would vary but its clear that the FED felt that the interest rates needed to be held at the current low level in order to allow the recovery to proceed. other interpretations might be that the FED is continuing to see uncertainties and has concerns about the recovery, so they need to keep money easy. a final interpretation could be that they still don't feel that the economy could handle higher rates and would jeopardize the recovery if rates got rose to normalized levels.

then theres the verbatim statement issued by the FED. this is where it gets complicated. what i will try to do is unravel each sentence in order to break it down into bits of information that a non-fed pro can understand.

it starts with one sentence stating that the FOMC decided to keep its target for the federal funds rate at 1%. simple enough.

the next paragraph states that the committee believes that their "accomodative stance and still robust underlying growth in productivity, is providing important ongoing support to economic activity". it continues by stating that "the evidence accumulated over the intermeeting period shows that spending is firming". that sentence is modified by an evaluation of the labor market, stating that "labor market indicators are mixed". i'm not sure why they modify the spending evaluation with the labor issues, but its probably got something to do with the fact that if people don't have jobs, they spend less. the paragraph ends with the FED pointing out that "business pricing power and increases in core consumer prices remain muted". not knowing exactly what a muted price is i looked up what muted means. encarta had the following definition...understated: subdued and understated rather than forceful or enthusiastic. my take is that businesses cannot raise prices due to fierce competition, which normally is not a good thing.

ready for the 2nd paragraph? "the committe perceives that the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal". interpretation...no call, it could go either way, we just don't know. so these geniuses, with much more information than the other geniuses out there, just don't know if the economy is recovering or not. thats what they said. not me, them!

they continue by stating that "in contrast, the probability, though minor, of an unwelcome fall in inflation exceeds that of a rise in inflation from its already low level". wow. thats some sentence. lets analyze together. 1st paragraph they state that the upside and downside risks to sustainable growth are roughly equal". then they state that in contrast, there is a minor probability for an unwelcome fall in inflation. aside from the fact that it seems like a double negative of sorts, how can there be a fall in an indicator that measures something that goes up? not to get bogged down in semantics, the whole sentence is uninterpretable. but please be advised that they state very clearly, as unusual as it may be, that inflation is already at a low level. and by the way, thats something that the FED has strived to achieve for many years! now they are worried that its a bad thing!!!! are they serious?

the last part of the paragraph states that "the committee judges that, on balance, the risk of inflation becoming undesirably low is likely to be the predominant concern for the forseeable future. in these circumstances, the committee believes that policy accommodation can be maintained for a considerablew period". enough said. they won't raise rates till they can be sure that inflation isn't too "muted" and that the recovery has taken hold...firmly. feel better now?

i know that seems like alot, and i'm sure that is exactly what their intention is, but it does little to explain what is really going on in the most vibrant and resiliant economy in the world. which by the way, is vital to the world economic recovery that is forecast for the second half of this year. by the way, the FED statement is subject to your own interpretation.

have a great day!

larry

THE NEXT BIG ECONOMIC STORY...OIL IS STILL EXPENSIVE!

one of the major benefits that was touted as a result of overthrowing & taking over iraq was that OIL would drop back to $20/brl. getting control of iraqs vast oil reserves would allow the US to better control the flow of oil from the middle east and that would be an economic positive for the US economy.

we are now some 3 months into the re-building of iraq and oil is $32/brl. some may credit this to stronger demand for oil due to a strengthening economy or the fact that OPEC left output quotas unch at their last meeting. regardless of the reason, $32 oil is not a positive for the economy. it acts as a tax on businesses and consumers.

businesses in every industry have discussed high energy costs as contributing to the challenging business enviroment and the cause for higher operating costs, lower margins & lower eps. consumers will no doubt be adversely effected by higher gas prices, especially with the proliferation of low gas mileage vehicles, i.e. SUV's, hummers, etc.

one good note on the energy front is the fact that natural gas has dropped back to $4.50/btu, which is much lower than the $7+ it peaked at a few months ago. still considerably higher than the $2.50-3.00/btu it has averaged for the last few years. greenspan discussed natural gas at a few of his recent hearings and the FED also discussed its implications for the economy, so if natural gas starts to rise again due to spikes in demand or otherwise that would be an incremental energy negative.

back to oil. if oil prices remain at current levels or goes higher, the economy will be effected in a negative way. the implications are widespread, but suffice to say that business energy costs will remain high and consumers will have less money to spend on "stuff", which will hurt business revenues. double negative for earnings. any company that has benefitted from lower energy prices, or the prospect of lower energy prices, will have to be re-evaluated based on more expensive energy. regardless of what our government says about iraqi oil.

have a grateful day!

larry

HOW DO YOU FEEL ABOUT YOUR FINANCES?

the following survey might make you feel better. than again it might not. according to the survey, even the wealthy are feeling the pain of the currently ending economic slowdown and stock bear market.

WASHINGTON (Dow Jones)--Wealthy people are generally more pessimistic about their financial future today than they were a year ago, according to the 2003 Phoenix/Harris Interactive Wealth Survey.
The survey, which polled 1,496 people who had a net worth of at least $1 million, excluding the value of their primary home, showed that 22% of the respondents are somewhat pessimistic or very pessimistic about their financial future, versus 12% in 2002, 7% in 2001 and 5% in 2000. The respondents were polled in March, and the survey has a margin of error of plus or minus three percentage points.
The majority of those polled, 63%, say they believe the worst is over for the economy; 20% feel the U.S. will remain in a prolonged economic downturn for the next two years; 13% said the worst is yet to come before a rebound; and 4% had no opinion. The same question wasn't asked in previous years' polls.
Of those surveyed, 37% feel slightly to very pessimistic about the U.S. economy for the next one to two years; 12% say they are neither optimistic or pessimistic; and 51% are slightly to very optimistic. Again, results weren't comparable to past years.
A rising percentage - 39% versus 34% in 2002 - are very concerned about outliving their money, with similar upturns in the percentage of people who feel they don't invest the time they should to manage their finance and who prefer to deal with several financial advisors rather than one.
A rising proportion of wealthy people also consider themselves more as savers than investors, with 43% describing themselves that way, compared to 35% in previous years. In addition, 40% said they either didn't rely on financial advisors or didn't find them helpful in achieving their wealth; 40% found them somewhat helpful; 18% found them very helpful; and 2% found them vital.
Overall, the largest contingent of those surveyed, 62%, estimated they had lost between 15% and 40% of their investment portfolio in the past three years, with the largest subsection, 18%, estimating their losses at 30%. As a result, 60% said they have rebalanced their portfolios; of those who didn't rebalance, only 14% say they plan to this year, and 71% said they didn't think it was necessary to rebalance. The majority of those who did rebalance or plan to rebalance - 65% - said they decided on their own that they needed to, but 62% said they have used or will use a financial advisor to do the actual task of rebalancing.

so if you're feeling a bit less wealthy, at least you are not alone. what is that saying, "misery loves company"... well, at least you're in good company!

have a grateful day!
larry

THE REFINANCE BOOM LIVES ON

the refinance boom has not ended...at least not yet. the federal government has proved that in the last few days by coming to market with some $60billion worth of 3, 5, and 10 year treasury notes, in order to refinance its own debt. the government is doing exactly what all of us have been doing for the last few years. with revenues falling and huge demands spending side, the US government is in the process of refinancing the nations debt. and just like we all did, its getting a "cash out" refi. with the latest refunding of some $60billion it is repaying $47billion of debt and taking an additional $13billion in debt to fund the war on iraq and all the other extra expenditures.

the good news is that the government was able to sell all the bonds and therefore has the money it needs to do what it wants. the bad news is that the government has no plans to payback the money, or stop borrowing so aggressively, anytime soon. just like you and i, the federal government is just fine with pushing out the obligations to sometime in the future, probably the distant future. in fact, our children and grandchildren will be talking about what this administration did when they are dealing with the repercussions of todays actions.

no doubt the economic team is aware of whats its doing, yet it has no alternatives but to hope for a better economy which will lessen the consequences of todays actions. if the economy doesnt do what they hope, then the consequences will be bad and will last a very long time.

academics and economists have lots of different opinions and thesis on the national debt and what it will do to interest rates, the dollar, the economy, the trade deficit, future generations, and all sorts of other things that will be affected by this american habit of leveraging the future. our current leaders have one mind on the subject. we need to spend this money so we need to borrow it. we will deal with the consequences later.

have a grateful day!

larry