THIS COULD BE IMPORTANT

bull and bear alike will soon know if the recent market rally is the beginning of a new bull market or if it was just another in a 3 year long series of bear market rallies that end in further destruction of capital. what seems fairly clear is that the market looks like its getting ready to decide. since the pre-war lows in early march, the broad market is up some 25% and individual stocks are up much more. that gain was made by early june and since then we have made no further gains. in fact today, the broad market closed at its lowest level since early june. and that i might add, is down some 8% from its recent top in early july.

some companies literally "back from the dead", as the credit markets unseized and liquidity was poured back onto them. now, if the business revives, they will live on. if business does not recover, the equity will evaporate once again. if the later is the outcome, the next downturn will be disasterous for newly recovering investors. the latest rally has done great things for investor confidence and consumer confidence. to disrupt that confidence would create, in my opinion, a race for the exits that would be historic.

i dont mean to sound alarmist, but with the latest upgrades in consumer technology, every single investor now has cnbc, a pc, and a high speed access. they have all been watching the market for quite some time and they have all seen some pretty unexplainable things and lost lots of capital watching. so my guess is that next time things start to look crazy, i think they might all hit the "sell" button at the same time and well, you know what happens then. last one outs a rotten egg. then they'll become "long term" investors again.

have a grateful day!

larry

2nd HALF RECOVERY aka 6th PIE SLICE SURGE

well, here we are again. july 2003 and the beginning of the 2nd half of 2003 or the 6th pie piece of the first 3 years of the 21st century. WOW. its already the 3rd year of the 2000's and still no economic recovery from the 1990's economic party. we all know that the harder and longer you party, the harder your head bangs and the longer the hangover lasts. so here we are. the alarms still going off. ready to wake up yet? open those eyes and stumble out of bed? lots of people are counting on you, so get up. that would be the economic recovery we have been talking about.

the stock market is tired of waiting and is forecasting the long awaited recovery. even in the face of persistently mixed economic data and less than robust corporate forecasts, stocks have been rising for almost 5 months pricing in lots of hope that the economy is ready to get out of bed now.

problem is that so many companies are still cutting costs (jobs, SG&A, and capital expenditures) and prices that a real economic recovery seems much more of a prayer than a hope. in fact, judging by the recent consumer confidence readings, the only ones who are confident are the stock market bulls. as we await further economic data that i'm sure will most certainly and unambiguously reinforce the fact that the economy is still readying itself for the 2nd half recovery, the presdients economic team continues to tout the great economic plan that the president has initiated and its incredible effects on the slow, soon to be above-average, recovery we are now experiencing. got it. by the way, that 2nd half part of the story is upon us. how you feeling?!

last years 2nd quarter (2Q 2002) was pretty bad on the heels of the surge in the first quarter (1Q 2002) after the attacks on 9/11 (late 3Q 2001) so this years performance was relatively good compared to a lousy 2Q 2002. i know thats alot of Q's, but for the 2nd half recovery to materialize, economic activity has to pick up substantially and soon.

even as most companies have been reporting "better than expected" eps, they almost all say that the rest of the year is uncertain at best. in fact many companies are lowering forecasts due to the "continued slow economic recovery" which makes for lousy pricing power(read big discounts and lower margins) and the higher costs of doing business in todays world of high energy prices, insurance rates, healthcare increases, pension deficits, and labor costs(unless they are laying off workers). if that enviroment is still persisting now, all the stimulus in the world, which by the way we are getting, wont get business capital spending to come back and will only get the consumer into more debt.

now its time for the rubber to meet the road or for the economy to start its recovery. we are 1/6 into the 2nd 1/2 of the 3rd year that we've been working on this. the NBER courageously called the end of the last recession as november 2001. that was 19 months ago! since then we have been in a liquidity and debt driven "bounce", fueled by 2 tax cuts and numerous interest rate reductions. unemployment has risen from 4.5% to 6.4% as the nation has lost some 1.5 million jobs.

hopefully, thats enough "pain" for the time being and we can get back to the business of re-building this nations economy. my fear is that theres still a bunch more jobs to be cut and further reorganizing to do before this economy gets back on the track.

have a grateful day!

larry

THE MORAL LOWGROUND

it was not long ago when our sons & daughters killed & captured in battle were put on TV by the iraqi army. when that was done our nation was outraged. our president invoked the geneva convention and threatened to capture and try those responsible for degrading our soldiers for war crimes. fast forward to today when our secretary of defense committed the same violation by releasing pictures of the dead iraqi leaders sons who were killed by US troops. claiming that it was our responsibility to prove that these wicked men were dead, secretary rumsfeld rebutted those claims by stating it was important for the iraqi people and in fact said that the iraqi people "have been waiting to see the sons dead".

first of all, the whole thing was gross and was on national TV during dinnertime.
if the iraqi people wanted to see the dead bodies, the military could have had some sort of private viewing for designated leaders who could then go out and verify to the masses that the dead men were indeed the sons of saddam that they fear so much.

second, the pictures werent even good. why didnt they get good clean shots of these whackos? with all the new technology and medical advances we've made, couldnt our government make the bodies look better? what i saw was not such great matches to the living photos that were used to show that the dead guys were the hussein brothers.

and why didnt they try to capture them??? military accounts of the "intense" battle sounded kind of silly. scores of 3rd infantry division soldiers with armored vehicles, tanks, and tomohawk missle carrying humvees were surrounding a residential home. there were four men inside with small arms fighting all this military power and it was "intense"? intense for the hussein boys but not for our troops. why not just wait them out? maybe they knew where saddam is? maybe they knew where the WMD's are hidden? unfortunately, we will never know, but at least we have a pair of aces to open with.

look, after all the stuff i've read and seen about these two psychopaths, courtesy of our great news-propaganda machine, they deserved to be killed and displayed. but we are definitelty doing some new things nowadays. this new war has changed many long held traditions of this country. we now accept pre-emptive war. we allow our government to openly solicit and participate in assasinations of our enemies. we now put our dead enemies on TV. all things we admonish when done by any other government. we are supposed to set the bar for morality. lately, we have lowered that bar quite a bit.

have a grateful day!

larry

HOW MUCH WILL BE TOO MUCH?

during the latest, longest and most powerful bear market rally, the economic data has been lackluster and news that nothing has changed in how wall street does business has continued. the question i have posed is how much will be too much? how much more bad economic data can the market endure before it realizes that not much has changed with the economy. and how much more distain for investors will wall street need to show before the last individual investor goes on-line for its brokerage needs. the tipping point is unclear.

what will be the straw that breaks the bulls back? i'm not sure. the market has become numb to bad news and so anxious for the bear market to end that it just doesnt care what the reality is. surely a terror attack in the US would wreck havok on the markets but thats an ongoing possibility that has been all but ignored by the equity markets even when the terror alert is raised to orange or high. the dollar has its issues but can and will be manipulated by our federal reserve as well as the BOJ and the european union in coordinated efforts to maintain "stability". employment data is always something that worries economists but any further weakness in the labor market will be dismissed as a lagging indicator and will not make the optimists nervous. capital spending by businesses remains weak and excess capacity is expected to keep a lid on that for sometime to come so that wont be a shocker. consumers are being "reflated" with record low interest rates making their homes cash machines and supporting their spending habits so they shouldn't be a big focus. wall street corruption has been swept under the rug again and further scandal will be good reading but not market moving.

over the last few weeks, scandal at the NY Times, investigation into IBM accounting, the SEC criminal probe into Freddie Mac's CEO, government inquiry into how Boeing won business from competitors, and the list continues to grow. isnt this enough to show that the "new and improved" wall street morality and investor focus is a bunch of bogus nonsense?

so what will correct the latest rally and keep the market in check? maybe it will be the same thing that corrected the bear market in march. that would be a war. not sure who the target will be but the list has grown since our most recent victory. i'm certainly not predicting another military confrontation, but its not out of the realm of possibility. and if the tax package doesnt work like the president wants, he may have to resort to his ability to overthrow regimes to get himself re-elected. not sure that would help the economy but it would be a big distraction and we could have another war rally.

have a grateful day!
larry

WHATS ALL THIS TALK ABOUT THE DEFLATION?

the FED has begun discussing deflation on a regular basis. the entire group of FED officials have stated many times that deflation is not an issue for the US, but if it were to be an issue, they can fix it. used to be inflation was the primary concern but now that we are mired in a recessionary enviroment, deflation has become a focal point. the FED has jaw-boned us to death about how deflation wont happen in the US because of all the tools the FED has to defeat it. yet each governor and mr. greenspan himself have said that the onset of deflation can be hard to detect and can get out of control very fast. the most recent FED official to comment on deflation was roger ferguson. "i do not believe that the US is at the brink of significant and sustained deflation. i believe that the probability of such an eventuality is quite low. but as the japanese experience shows, the onset of deflation can be unexpected." ferguson went on to say, "preventing deflation remains preferable to reversing it, however, if an economy slips into deflation, my belief that a sufficiently determined central bank can spur aggregate demand and end the deflation." so we can all rest assured that even though deflation is hard to detect and its onset can be sudden the FED can and will reverse it when and if it shows up. whew. good thing they are on top of this.

deflation, the prolonged decline in prices of most products and services. if dollars are the ultimate store of wealth and financing is the ultimate source of funds, then deflation is upon us. when the FED lowers interest rates, that reduces the "cost" of money and in turn the cost of anything you buy with that money. when the dollar loses value against other currencies, that reduces the "buying power" of that dollar. interest rates have been falling for over 2 years and the dollar has been declining in value for the last year. both of these deflationary forces have created numerous economic results most of which are not good.

since interest rates are low, the cost of owning a home (and many other durable goods) has decreased. that in turn allows home values to hold steady or rise as its cheaper to "carry" or afford the home. good for the short term, but dangerous for the long term, as those rates will ultimately have to go up again. another example is in automobiles. if the car price stays the same but the cost to finance it gets cheaper, the result is a lower cost to own the same priced car. if rates were not low, the cost of that car would need to come down to keep demand stable. same with homes or anything else that can be financed.

as for the dollar losing value, thats a bit more complicated because with the global economy, FX fluctuations have many effects. suffice to say, a lower valued dollar makes imports more expensive in the US (making US goods relatively less expensive) and exported goods less expensive overseas. implications for the dollars valuation are widespread, but for some reason our government says it committed to a "strong" dollar policy. or in other terms, our government wants the benefits of a weak dollar but the prestige of a strong currency.

so even as the FED pledges to watch and act if necessary, they themselves continue to foster an enviroment of lower cost of money and lower valuation of the dollar. both of which do nothing to fight off further deflationary forces.

have a grateful day!
larry

DISGRUNTALED BEAR

still grateful, but now disgruntaled as well. like many in my "cave" i have been beaten into submission. despite the fact that some very smart people are questioning whether the economy is righting itself and beginning a new growth cycle the market continues to rise. is this just another in a long series of "fake-outs"? equity prices have surged in anticipation of the outcome, whatever it may be. which leaves many asking "why are stocks acting so great when there continues to be so much uncertainty?"

asking the question and not getting a good answer allows for gains to beget gains, while we await the answer. momentum has turned incredibly bullish. news reports have become markedly more upbeat. fear has vanished! and with the action in the NASDAQ, greed is back in play! each sell-off is being met with renewed buying vigor by portfolio managers and small investors alike. that activity creates its own special dynamic and continues to crush the bears and force their reluctant participation in the buying to cover short positions.

the reasons for the market rally include record low interest rates, unprecedented tax relief, and an enormous amount of hope that all the optimistic forecasts will become a reality. the reasons the market is ahead of the current economic health and outlook are too long to list. not one of my or anybody elses continuing economic concerns have abated (except stock prices but that is self-fulfilling & self-serving). buying has perpetuated itself and the gains make investors question less and hope more.

hope is a good thing, and gains are an even better thing. take them while you can because gains can disappear and hope can turn to dispair.

have a grateful day!
larry