September 05, 2003

S&P and the Promised Land

The S&P is in rare historical territory. It's just broken out of a series of tops that tell us one of two things: one, maybe this bullish rally (in the middle of a mammoth secular bear market) could try and take us to new highs, OR, the index is about to make a blow off top and reverse itself quickly. I think you know which scenario I envision. But, the bull market preceding the bear market was like none other. And never has an honest bear market been so dishonestly opposed by the Federal reserve. The Fed is determined not make the mistakes of the past, even though its new mistakes could be far, far worse--and prevent the bear market from doing the destruction that's essential before new wealth creation can take place. S&P OVER 1,000...FOR HOW LONG? Bears shouldn't underestimate the staying power of the Fed. Ultimately, I don't think the Fed is going to be any more effective at rescuing the economy with low short-term interest rates that it would be at say, learning to speak Chinese by eating spinach. But if it keeps the money spigots open at the current pace, it can inflate stock values even higher than their currently absurd levels. As long as money keeps finding its way into the market, stock prices will go up. But there's a lot going against the Fed. There's the federal deficit, which I referred to yesterday. It's already beginning to scare away foreign bond investors. And there's the current account balance, the other deficit that threatens to destroy the confidence foreign lenders have in the credit-worthiness of U.S. borrowers. I'm assuming you share at least part of my concern with the unwinding of this debt obligation. Can the Fed engineer a muddle through? Will the economy muddle through anyway, despite the Fed's actions? And if it really is as bad as I say it is, what in the world can you do as an investor? First, be prepared for more rallies. It defies sense and reality and history, but the market can go higher from here. Don't get caught in too many speculative bearish positions, or in too many shorts. If you are short or own puts, hedge them with calls. This is something I ought to have done better this summer. Yet there are non-financial reasons the market could keep rising as well. One is the Presidential election. The Fed will stay loose during the election cycle, and who knows, maybe, just maybe, there IS such a thing as the Plunge Protection Team intervening in the markets to limit the losses on the big indexes. But even without it, the market could still go up as long as money from the Fed and BS from Wall Street keep flowing. In fact, in a speculative market like this, you could do worse than buy calls on the most speculative sectors. In the past I've recommended a small-cap index fund IWO and Biotech holders. As you can see below, they've both done quite well, as have the semiconductor holders. As toppy as they look to me, in a continued rally, they'll go up even more. THREE LEADING SPECULATIONS Be advised, playing the upside in those sectors is a "greater fool" exercise. You can do it. And you can even do it profitably. But you'd better have good timing. What if you don't want to take the risk of being in the market but want to do something about the risk in the dollar? Should you buy bullion? Should you sell everything and move to Thailand (I mention this because two of my subscribers, a husband and wife, did just that. The husband up and quit is job in Silicon Valley and cashed out everything, and the wife did the same. They now run a business from there.) First, I believe you can make money on gold stocks even with the risk to overall equities in the event of a massive stock market correction. Gold stocks are the most liquid way for most investors to profit from rising spot gold. You can't trade your stock certificates for lunch at the Wendy's down the street. But you ought to be able to profit from a rise in the stocks of gold companies as they come the lifeboats of choice on the S.S. Bull Market Rally. The key will be knowing when to sell, and then what to do with your dollar denominated proceeds. Keep in mind, I'm not predicting the end of the American Way of Life and the Collapse of Western Civilization. I don't believe a major stock market collapse and economic recession/depression will lead to the complete loss of civil order. But standards of living will fall. And the dollar will get inflated to the moon. Your paper assets will be worth less than your hard assets. And in that case, you ought to own some gold coins. Next week, I'm going to give you a list of just who to contact and what kind to buy. But for now, keep in mind that even if you turned just 2% of your cash into gold coins, it would be better than none at all. Most of you probably won't do this. You'll worry about looking foolish. Or owning a bunch of gold coins which don't throw off the 1-2% interest you can get in a more socially respectable money market fund. But if and when you need them, it will be awfully nice to have those coins in your pocket. More next week. As for the today...stock markets will not be helped by the news that August payrolls fell by 93,000. It was the 7th consecutive month of declines in non-farm payrolls. The press seems fascinated by the synchronous decline in payrolls and rise in productivity. I was a liberal arts major back in my college days (history and literature). But even I have figured out how statistics work. When the number of workers fired goes up, but the quantity of work that gets done remains the same, productivity (output) per worker rises. Yet even then, U.S. workers are NOT the world's most productive workers, at least on an hourly basis. A study released last week shows that the average Norwegian, Belgian, and yes, Frenchmen beat the U.S. when it comes to output per our. But because the average U.S. worker works an additional three hours per week, the U.S. comes out on top in terms of total productivity per worker. U.S. output per U.S. worker last year was $60,728, according to the report, while Belgium ranked tops in Europe with an output of $54,333 per worker. When it comes to productivity per hour, the report says,""Norwegians lead the world with an output of $38 per hour worked last year. French workers were in second place, averaging $35 an hour,. Belgians were third at $34, followed by Americans at $32." Americans stubbornly believe that pervasive use of information technology gives the American worker a decisive advantage in productivity over his foreign counterparts. I admit, IT makes me enormously productive (perhaps too productive, judging my some of your comments, counter productive even). But my job, all kidding aside, is fairly unique. The fact is, the productivity miracle is a myth, and has been for the duration of the bull market. It's a convenient shibboleth for the CNBC crowd which has been repeated so often its taken for gospel--even though there's no evidence its true. One by one the myths of the old bull are destroyed. The market can float on a sea of liquidity for awhile. But sooner later, it's going to begin to sink under the weight of America's collossal debt.


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