September 05, 2003

The REAL Case Against Gold

A sharp reader writes in on why governments have always feared gold: Military powers have a legitimate case against gold; it is impossible to wage aggressive war and maintain a gold standard concurrently, let alone Bread and Circuses. The government has convinced the masses of the disutility of gold so successfully, that if you suggest reinstituting a gold-backed currency to any 'peace-loving' Democrat - there are a lot of those here in Portland, OR -, they are more likely to mention WJB than listen to any reasoned statements about gold's inherent ability to restrain military spending. Incidentally the WJB referred to is William Jenning's Bryan, who opposed the gold standard at the Democratic Convention in 1896. I wrote up a brief analysis of the speech which I published earlier this month to paid-up subscribers of Strategic Investment (where I do my weekly stock picking and follow up on our portfolio, as well as editing the 16 page monthly paper letter, with articles from Dr. Kurt Richebacher, Dr. Marc Faber, and the Daily Reckoning's own Bill Bonner). Here's the excerpt from my SI article from June 13 of this year: "Gold as been at war with paper money forever, and in the United States since the Federal Reserve was created in 1913. 1913 was arguably the worst year in American history for liberty. It saw the creation of the Fed, the creation of the income tax via the 16th Amendment to the Constitution, and the 17th Amendment -- popular election of Senators. Believe it or not, after the United States passed the Gold Standard Act of 1900 under William McKinley, the country enjoyed what is now known as the era of the classical gold standard. During that brief era, gold was fixed at $20.67 and every dollar was redeemable for gold. The U.S. Treasury was required to maintain a minimum of $150 million in gold reserves. And in language that would embarrass a modern central banker with a big printing press, the act brashly asserted that the gold-backed dollar "shall be the standard unit of value, and all forms of money issued or coined by the United States shall be maintained at a parity of value with this standard, and it shall be the duty of the Secretary of the Treasury to maintain such parity." Imagine that, a stable currency backed by a real asset. The classical era fell apart when the world went to war in 1914. During wars, governments are fatally constricted by a gold standard. They can't print money to pay for the war. Under the gold standard, the money must be backed by an asset redeemable for paper. And seeing the wartime deficits, a skeptical populace would cash out its paper for gold -- thereby stripping the government of its ability to pay for war. That's why gold gets confiscated in wars. That's why Franklin Roosevelt made it illegal in 1933. That's why Nixon took us completely off the gold standard in 1971 and created the dollar standard. And that's why today, the government continues its war against gold. You have to wonder though, in a world increasingly at war and warlike, how long will the public keep paying for the government's wars? And not just the American public. The dollar is the world's reserve currency. If the U.S. government must borrow much more than it takes in to pay for wars that are not popular elsewhere, who will pay for them with dollars? Or will the rest of the world vote with its pocketbook... switching its dollars for gold, and bringing an end to the late, great U.S. dollar? P.P.S. For you hardcore historians, the heart and soul of the modern Democratic party has its roots in the debate over "the money issue." When William Jennings Bryan ran for President in 1896, he made the gold standard his enemy. Bryan took the floor in Chicago and gave birth to modern populism with his "Cross of Gold" speech in which he pitted Eastern business interests versus the backbone of the American Mid West. Bryan's money quote, from a populist perspective, his below. He's challenging the Democratic backers of the gold standard. He says: "They can find where the holders of the fixed investments have declared for a gold standard, but not where the masses have. Mr. Carlisle said in 1878 that this was a struggle between "the idle holders of capital" and "the struggling masses who produce the wealth and pay the taxes of the country;" and, my friends the question we are to decide is: Upon which side with the Democratic party fight; upon the side of "the idle holders of capital" or upon the side of "the struggling masses?" That is the question which the party must answer first, and then it must be answered by each individual hereafter. "The sympathies of the Democratic party, as show by the platform, are on the side of the struggling masses who have ever been the foundation of the Democratic party. There are two ideas of government. There are those who believe that, if you only legislate to make the well-to-do prosperous, their prosperity will leak through on those below. The Democratic idea, however, has been that if you legislate to make the masses prosperous, their prosperity will find its way up through every class which rests up on them." You can hear the whole thing at . And as they say here in France, "plus ca change, plus c'est la meme chose."

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.

This Just In...France and Germany Cast Their Votes for Bush in 2004

Jacques Chirac and Gerhard Schroeder cast their votes for George Bush yesterday, which is odd, given how stupid they think he is. With their beer swilling, smug, photo op, punctuated by the kind of comments sure to win Toby Keith another Grammy, they’re performing their anti-American shtick just in time to give Bush a big domestic political boost. They may even deliver him the election. Try this spin on for size: The Bush team senses the public mood shifting against them on Iraq. The media’s drumbeat of biased coverage is taking its toll in the polls. The “American street” is doubting its “Top Gun.” And now that political season is underway in earnest, the Democratic presidential candidates are scoring points with the out-to-lunch left wing of their party by attacking the President without offering any real answers to terrorism or even being serious about the threat of terrorism (or at least claiming, as some might, that terrorism is a red herring.) Bush and Rove know they can’t win a media war with a media full of liberal gasbags and a spattering of neocon blowhards. And they’re perfectly content to let the Democratic party nominate a candidate who could get whomped by 18 million votes, like Gene McCarthy did in 1972. In the meantime, to shore up support for the President in the “red” states, Bush and Rove offer U.S. voters another showcase of U.N. ineptitude and Franco/German diplomatic anti-Americanism. Even Bill Clinton couldn’t come up with a better way to show how astoundingly empty the idea of “multi-lateralism is” than to let the U.N. Security Council publicly humiliate Colin Powell on live T.V. It’s good theater, and might play well in Berlin and Paris. It won’t help get the power back on in Baghdad, though. And it won’t do much to root out die-hards in the Sunni triangle. And it won’t put an ounce of domestic political pressure on the President to “go along” with the U.N. But if the U.N. is asking for more rope… “Not dynamic enough and not far-reaching enough,” says German Chancellor. “The proposals seem quite far from what appears to us the primary objective, namely the transfer of political responsibility to an Iraqi government as soon as possible,” says the French President. Let me get one thing straight, Germany and France can’t be held accountable now for cleaning up a mess they didn’t want to cause in the first place (although I don’t think it’s nearly as messy as the hysteric media is making out. It’s complicated, but the American media is failing to tell an accurate story about Iraq in the most spectacular fashion since Vietnam. If they had any shame, they’d be feeling it.) But if Chirac and Schroeder think they can use the Security Council to get what they want out of Iraq AND bring Bush to heel, it’s the largest strategic miscalculation since the Maginot line. Nothing is more likely to rally Americans to the Bush position (and distract attention from those ballooning deficits) than the sight of U.N. diplomats scolding the American public for its arrogance and “unilateralism.” And if the Security Council happens to be debating on around…oh say…September 11th, what kind of reaction do you think the American public will have? Contrition? Penitence? Doubt? Humility? On bended knee to Jacques Chirac? The American public isn’t much in the mood to be lectured on how to handle a war in which its soldiers are still dying, much less, lectured by countries with nothing to lose politically and everything to gain economically by getting involved now. It’s hard to believe that this is anything but a carefully calculated political gesture. If the Administration’s strategy is to turn Iraq into a magnet for all the terrorists willing to die for jihad, it’s working. How does bringing the U.N. in now help that at all? It doesn’t. By making the rest of the world say exactly what they’d do in Iraq, I think the Bush folks want to show that even though what we have isn’t ideal, it ain’t the Ivory Coast either. Or Rwanda. Or Bosnia. Or any of those places where the U.N. has successfully conducted operations. We’ll consult with our allies, per the outraged requests of Carrol Mosely Braun, John Kerry, Howard Dean, Paul Krugman, the New York Times, and Katie Couric. And when they tell us we shouldn’t have been in Iraq in the first place and, by the way, WE have to solve the Palestinian question first and should go back and sign the Kyoto treaty and maybe see if the Supreme Court will take up the Florida election again and while we’re at it, we ought to consider that being rich is a natural affront to those that aren’t…and that maybe, finally, we ought to look deep within our greedy, materialistic, arrogant collective national soul and find that dark sin that causes the desperate, and poor, and hopeless to fly jet liners into our skyscrapers…what will we say? I can think of a couple of things. But none of them begin with “You’re right, let’s do things your way.” The President is lucky. His political opponents are unwilling or unable to make the sensible, direct, and obvious criticisms his policies so richly deserve. It’s too bad. Just when the country could use a legitimate opposition party to conduct a responsible national debate, we get Dennis Kucinich and Al Sharpton and Howard Dean. Then again, it’s been along time since national politics did anything but leave the country worse off. The really interesting question now is whether another diplomatic rift with Old Europe will lead to the kind of rhetoric that makes a trade war more politically justifiable domestically, and thus, a lot more likely. More to come...

September 04, 2003

Archive Problems

I notice some of the archived posts for September aren't publishing. Sorry. Working with blogger on it. I'll have it fixed soon. Dan

The Left Bank Diet

Instead of sharing my dinner menu before I cut out for the evening (it's too early for dinner here in don't really start until about 9pm), I thought I would share a revolutionary new diet plan I developed at lunch with Bill Bonner and Addison Wiggin and a few select members of the Daily Reckoning Staff. We call it the Left Bank Diet. Breakfast: One pain chocolate (chocolate croissant), one cigarette (any kind will do), and one grand creme (coffee with cream). The cigarette is an appetite suppressant. The caffeine gets you going. And the sugar in the chocolate will keep you going up until lunch. Lunch: Plat du jour. Note, all plats du jour contain fries (although they're called frites here...not freedom fries). Bread (Atkins dieters disregard.) Small pitcher of red wine. Any wine will do. You'll feel more sophisticated. And the buzz it gives you will make up for the fact that you just had french fries and raw meat but are still hungry. Dinner: More wine. Eat late. Drink a lot first. The drinking will provoke spirited conversation, about the nature of existence, Descartes, and the motives of the American hyper-power. You'll be so engrossed in your argument that you forget to eat. The main benefit, however, is that the more you drink, the louder you'll become, eventually making a spectacle of yourself. Word will get out among your co-workers. You'll be persona non grata at dinner from now on. You'll be resigned to nights at home alone, eating a bucket of chicken, drinking fine wine late into the Paris night...blogging to your friends and co-workers. You will wake up late most mornings, missing breakfast and settling for Diet Coke (no calories). Or you will wake up with a dull thud between your temples, also an appetite suppressant. Watch the pounds melt away. I live on the right bank, however. And I have not lost weight in Paris, but even gained a few pounds. To avoid that: stay away from Australian beer (the drink of choice on the right bank). And let me know how the diet goes...this thing could be huge...

The Unwinding of America's Debt Obligations Begins

It's easy to look like a fool when you're a bear in a bullish rally. Later, you'll look like a genius when still have your capital. But it IS hard looking at a market that's going up when you know that it defies reality, common sense, and more importantly, economic sense. Two things to keep in mind: first, in a secular bear market like the one we're in, the rallies can not only be large, they can last longer than you think. The rallies, after all, are now powered by positive business conditions or earnings growth, but emotion, hope, and fear that the good times are over. And when investors are making decisions based on false confidence instead of real facts, getting in their way can be a mistake, sort of like getting in the way of a sumo wrestler as the dessert cart passes by. But take a look at the chart below. And while you can't take comfort in it, it ought to be a cold shower...of sorts. Stock market rallies do not start with stocks being fully priced for economic conditions that don't exist. Economic recoveries do not rise from adding $5 in debt for every $1 in GDP growth. And healthy job markets are not characterized by a shrinking work force becoming more productive while the unemployment rolls get larger. And of course...the mother of all cold showers...governments do not indefinitely spend money they do not have without bankrupting themselves. And a bankrupt borrower, even one as big and powerful as the United States, is not a good credit risk. Of course, the U.S. isn't exactly bankrupt. Neither is it doing the things that make its bonds appealing to prospective lenders (the world's savers). For instance, increasing the supply of a commodity (dollars) when the demand for it is falling is not a good strategy. Nor is spending more money than you're already taking in, and adding new entitlement programs just for good measure. These actions may not literally bankrupt you right away. But these promises to pay--to bond buyers or your own voters--must be made by going further and further out into the future and making a claim on future revenues. And past a certain point, lenders begin to get leery of your ability to guarantee that your future revenues will be worth then what they're worth now---especially if you're stated goal is to inflate the daylights out of your currency. "Hey, China, lend me a few hundred million today. I promise to pay back with a currency that's declining in purchasing power." Bill Gross, the excellent bond analyst from PIMCO, looks at it in more sober terms. Here's what he finds. evidence that our government's running at $450 billion+, with few prospects for improvement (a new prescription drug bill and Alternative Minimum tax adjustment will add nearly 100 billion annually to the total and Iraq perhaps $50 billion more). President Bush and his economic team claim that the $450 billion is well spent, that it is an investment in America, and after all, "we owe it to ourselves." Such nonsense belongs in Mad magazine. The $450 billion is paying for overconsumption, for Hummers in L.A. and Hummvees in IRAQ and we increasingly owe it to foreign creditors. It is plain for all to see that we are living beyond our ability to pay... ... the spending/savings discipline necessary to right {the} fiscal ship has to come from the outside....Hummers and Hummvees are way too cool to say no to. So it's the creditors that say no. And their discipline has already started. Bond market vigilantes, (not so vigilant it seems prior to June of '03) have suddenly recoiled in horror at the U.S. budget deficit and the failure of the Fed to guarantee its funding at exorbitantly low interest rates. In turn, foreign creditors for more than a year have been liquidating dollars in favor of other country's currencies with current account/trade balances closer to neutral, and budget disciplines resembling that of an adult as opposed to a neurotic teenager with a credit card. Gross is dead on. "Recoiled in horror" is the reaction that takes the rug out from under the stock market. And it's why commerical speculators are bearish on the S&P. The only question now is who's emotional reaction is stronger: foreign lenders terrified about taking on U.S. debt obligations...or U.S. investors intent on ignoring the train wreck headed their way. Get gold. FEDERAL DEFICIT GOES OFF THE DEEP END

S&P Breaking Out? Or Breaking Down?

The chart and comments below courtesy of John Kosar at Bianco Research. The fact: S&P moving up. The question: why? Commercial traders are bearish. But up goes the index anyway. Denning Take: The market is floating on a sea of money. It's the only kind of inlfation the Fed can cause right now....asset inflation--and even that's breaking down in the housing market. So if it can't get businesses to borrow and if consumers can no longer refinance and cash out because long-term rates are rising...the last best bet is to keep bidding up stocks, stoking up confidence...and praying to the monetary gods for...for...well what exactly IS the Fed praying for now? Or are they stuck in a fruitless game of "forestall the correction at all costs?" If that's the case, Fed action essentially has a negative goal, not to produce anything, but to prevent something. And that something would be falling asset prices...and deflation. TODAY'S MARKET: PRICED FOR TOMORROW'S PERFECTION Here's the Kosar comment: "As of Friday's latest report (current through August 26), Commercials have increased their net short position to 62,609 contracts from 50,716 contracts a week earlier. This is Commercials' largest net short position since they initially went net short on June 24, and suggests they have renewed bearish conviction following a few weeks of uncertainty. moreover, this is Commercials' largest net short position since December 17, 2002 (see chart), which preceded the decline into the March 2003 low. "However, despite an apparent bearish directional bet by Commercial traders, the S&P 500 broke out higher Tuesday from ten weeks of sideways price activity (see chart below). We now interpret this ten-week period as a correction within the bull trend that began at the October 2002 low. Tuesday's close above the 1,015 upper boundary of this correction area indicates the bull trend has resumed, and targets a move to at least 1,065.

The Case AGAINST Gold

So you're a gold skeptic? The always insightful Dan Ferris responds to a challenge: what is the case AGAINST gold. Dan says (emphasis mine): During the California Gold Rush, all that new money supply created some inflation. In San Francisco, at one point, a single egg sold for a whole gold dollar (about $23.50 today). But the scarcity was soon solved, and eggs were $1.50 a dozen by the end of the 1850s. Bank failures were fairly common throughout the country, but there was a big banking panic in 1855 that shut down the two largest banks in SF and brought Wells Fargo to prominence. Page, Bacon & Co. suspended operations in the midwest (St. Louis?) Feb. 1855, and when news hit its San Fran offices, a panic resulted. The other big SF bank, Adams Co. went belly up, too. A lot of miners were wiped out. The fact that gold was money didn't save anyone from losing money in a banking panic. I think it was Doug Casey who wrote about how there's more gold in a cubic mile of seawater than presently exists above ground. (Remember, all the gold ever mined would form a cube only 20 meters, about 21.67 feet, on a side). That technology would create a new gold hyper inflation. Saying "gold doesn't do anything" strains credibility, though. Gold is quite useful. Gold is unmatched as an electricity/heat conductor. The touch tone phone on your desk employs 33 gold plated contacts. No metal is more malleable than gold, giving it an inherent usefulness. You can extrude a 35-mile (no typo) wire from a single ounce, or pound it into a paper thin sheet 300 feet square. Though soft and malleable, it is virtually indestructible, impervious to seawater or acids. The only real case against gold is the same as the case against heroin use, prostitution, or cursing on television: the U.S. government pretends not to like it. I say pretends because, besides the fact that the government uses heroin, employs prostitutes and curses, owning 261 million ounces, the largest single gold hoard in the world, is an odd way of showing its disdain. (#2 gold hoard is Germany; #3 IMF) But if you insist on a "Case Against Gold" essay, someone should find the original Keynes (was it?) "barbarous relic" reference, and WJB's "cross of gold" speech.

September 03, 2003

The Political Legacy of 9-11

Get ready for the barrage of 9-11 pieces...most of which, if you ask me, will probably take the tone that Bush did fine in Afghanistan but has screwed it all up in Iraq. We'll leave that discussion for another day. But the quote from the piece below takes what I think is the right perspective on how overbearing and empty most of the commentary from the elite "opinion class is." I pass it on to you as an essay you might enjoy. And maybe we'll come back to some of these themes later. I got it via Andrew Sullivan. But you can find the whole thing at . Emphasis added is mine. The liberal left has forgotten the grammar of pacificism: not absolute rejection of violence but liberal noninterventionism, the noble doctrines of Cobden and Bright. Plenty of the self-styled "dissenters" of two years ago evidently followed a new doctrine. Armed force may be justified, but not if it in any way coincides with British or American national interest. This is almost the opposite of what Bright advocated: armed violence should be restricted to the basic defence of the nation; otherwise although one may have sympathy with suffering peoples across the globe, "it is not my business to make my country the knight-errant of the human race." It was because the left had forgotten Bright’s dictum that Tony Blair was able to wrong-foot his party over Iraq. A clue to this sorry performance may be found in the relationship between the literary-academic left in the west—or "what’s left of the left"—and militant Islam. On the face of it they should be opposite magnetic poles. So they once were. The Enlightenment knew what to say about religions, all of them: "Écrasez l’infame!" In the 19th century, the progressive party believed that one of the reasons for European superiority over the benighted regions of Asia and Africa was the conquest of superstition. Today, credulous doting on Islam is not just an expression of western self-hatred. On the face of it, Islam and the western left have nothing in common at all. But they do, in fact, something profoundly important. They share the common experience of defeat. Islamic terrorism is not a function of success but of failure. As a culture and society, Islam enjoyed a glorious golden age between the 8th and 12th centuries, but it has been in decline for many centuries past, some would say since the first fall of Baghdad. As the 20th century ended, it saw another great defeat. Marxism-Leninism long predeceased Soviet Russia; even democratic socialism has conceded victory to the competitive free market. There was, and is, a distinction between the practical and intellectual left. In the 1930s, the "practical" left on either side of the Atlantic weren’t much interested in communism, but got on with making the New Deal, or preparing the Labour party to win a decisive election. It was the intellectual left, or part of it, which lost its heart to Stalin. But if those Stalinoids were nasty enough when they explained away the Moscow trials, they weren’t silly, and they could plausibly believe that history was on their side. To re-read that catalogue of nonsense from two years ago is to realise that their descendants simply aren’t serious any longer. If the old Leninist left was buried politically in the rubble of the Berlin wall, the literary-academic intelligentsia disappeared morally in the ashes of ground zero.

The Mutual Fund Industry is Cheating

Generally, I find government regulators to be sanctimonious blowhards. Most of their rhetoric about protecting small investors is cheap talk. We are all market manipulators in the sense that when we write or talk about a stock we like we are trying to get other people to buy it so the price goes up. Yet even though I think Eliot Spitzer is litigating his way to a run for public office, at least he's exposing some of the more...tawdry secrets of the fund industry. For example, the excerpt from the AP article below confirms one of the dangers that arises from the fact that mutual fund prices, unlike ETFs, change only once a day. It's left a hole wide enough for a big chunk of the industry to back up a fleet of trucks and pocket millions. The hell of it is that the firms responsible get off with what amounts to extortion from the regulating authority. In this case, it appears the actual defrauded investors will be remunerated. But generally, you see a big ol' fine and then back to business as usual. If it was you or me that got caught doing this sort of thing, we'd be going to jail, perp walk and all. Spitzer's investigation of mutual fund trading practices began earlier this year, largely focusing on techniques known as "late trading" and "market timing." "Late trading involves purchasing mutual fund shares at the 4 p.m. price after the market closes a practice equivalent to "betting on a horse race after the horses have crossed the finish line," Spitzer said. Late trading is prohibited by the Martin Act and Securities and Exchange Commission regulations. "Timing is an investment technique involving short-term, "in and out" trading of mutual fund shares, which has a detrimental effect on the long-term shareholders for whom mutual funds are designed. Timing aims to exploit market inefficiencies when the net asset value of the mutual fund shares, known as the NAV price, is set at market close, but does not reflect the current market value of the stocks held by the mutual fund. "When a market timer buys mutual fund shares at the NAV price, it realizes a profit when it sells those shares the next trading day. That profit dilutes the value of shares held by long term investors. "To allow people in after the gates have closed, when everyone else has to get back in line for the next day, is clearly not fair," said Morningstar's Phillips. "It's also likely not a case of some rogue employee's practices ... there had to be people very high up who knew what was going on. This is a real black eye for the fund industry." Shocking.

Cherry Picking Puts on Defense

I mentioned in my weekly e-mail today that the big-cap defense sector might be ripe for a little short-side cherry picking. Specifically, AMEX lists a defense index (DFI) that includes all the big names in the industry (Raytheon, Boeing, Lockheed Martin, Northrop, and General Dynamics). DFI is making new 52-week highs on a daily basis in the last week. And it's not far below the high it made in its post 9-11 run up. WHAT WALL OF WORRY? DFI may be headed back to post 9-11 rally territory. But I'd be surprised. Instead, I'd look closely at put options. But I would not buy front month contracts. Technically, the index is in the kind of rally you don't want to get in the way of in the short term. But it might make a nice hedge if you have a bullish position in any of the defense stocks I've recommended.

Risk at the Micro Level, the S&P

Yesterday I said I'd look at risk at the micro level. I didn't mean the household or individual level (although that would be worth doing to). Instead, I meant at the single stock level. Where are the biggest risks? Well... Forbes listed the top 10 best-performing stocks on the S&P 500 for August. The index itself was up only 1.8% in August. But that was good enough for its highest monthly close in a year. And it looked like a good place to start evaluating who has the most to lose as the month progresses. You’d think the S&P would act more like an industrial index. But in order to compete with the Nasdaq and the Dow, the S&P has reshuffled its membership in the last few years…adding the high-performing tech issues and dropping the old economy dinosaurs. The net effect is the S&P is now responsive to trends in technology spending, or even investor sentiment about technology. For example, the Bureau of Economic Analysis reports that in the second quarter, sales of computer equipment were up 27%. That translated into five of the top 10 gaining stocks in August coming from the semiconductor and computer equipment sectors. Here are the top ten S&P winners for August: Advanced Micro Devices (AMD), up 54.7%, Williams (WMB), up 43.8%, Network Appliance (NTAP) up 39%, Novell (NOVL) up 39%, Broadcom (BRCM) up 34%, National Semiconductor (NSM) up 30%, Goodyear Tire and Rubber (GT) up 29%, Texas Instruments (TXN) up 26%, Dollar General (DG) up 24%, and LSI Logic (LSI) up 24%. Now the fact that they were the biggest gainers in August doesn’t make each of these ten stocks AUTOMATICALLY risky for September, IF September turns out to be historically bad. But I would, ominously as possible, note the dominance of chip stocks. Semiconductor bulls are a little like perma bears. They persistently make a claim, often in the face of clear evidence to the contrary. This is NOT being contrarian at all. It’s stubborn. And expensive. The only relevant consideration for the semis is whether business spending on IT is going to absorb the amount of productive capacity already in the sector. I haven’t seen any evidence that shows it will…and that’s IF business spending on tech picks up--something the semi conductor bulls assume is just a matter of time. But even if you looked at it only in terms of fundamentals, there would be a lot to fear from semis. The entire industry trades at 60 times earnings and 5 times book value. And as if that wasn’t enough, look the chart blow. Semis Track the Nasdaq Tellingly, the SMH (the semiconductor holders) debuted in March of 2000--right at the top of the Nasdaq. Even though they look like a bargain relative to those levels, the reality is that at current multiples, they’re still toxic. And to the extent that they, and other tech stocks, have accounted for the improved performance of the S&P over the summer, the index and the market have an awfully slender reed to lean on.

September 02, 2003

French Menu du Jour, Chez Moi

PLUS The lines at KFC were long....they're always long. Instead, I went Chinese, French-style. The 2000 Domaine du Trapadis Rasteau is a spicey one, best served with spicey Thai-beef. If you have GERDS, or acid reflux, or hearburn, stick with chicken, original recipe.

China Embraces the Warfare State

China, like all communist/Stalinist governments, was a Warfare State long before the term applied to the United States. Such is the nature of command economies. The only real differene among them is the level of brutality the government unleashes on the people. But the initial U.S. success in taking Baghdad in three weeks really did spread shock and awe in the military establishments of Russia, Israel, and China. They now understand that in era of the 24-hour news cycle, all wars will be televised, and public appetite for casualties will plumment (thanks to the disturbing trend of body count journalism). Ironically, the same technology that brings the war to your desktop is changing the structure of the armies that fight the wars. We knew this already about the U.S., thanks to Rumsfeld's "Revolution in Military Affairs" and network centric style of warfare. In fact, today's New York Times reports that the 4th Infantry Division (the Army's poster child for networked warfare) is shifting to more precise, smaller raids in the Sunni triangle north of Baghdad in order not to antagonize the local population by needlessly rounding up dozens of locals in the search for a few bad apples. The Army can put a smaller number of troops in a hostile are because it's getting better tips from Iraqis. But there are two keys to deploying smaller forces within a battlespace that isn't completely secure. The first is having superior intelligence and communication--both of which are elements of the network centric model of fighting. You gain superior intelligence using total air superiority to fly manned and unmanned aerial vehicles which constantly monitor the ground wiht a variety of onboard sensors. The second key is to leverage that intelligence advantage by deploying extremely lethal, mobile groups of lightly armored infantry--supported from the air--into the hostile areas to do their job. But the communication between a small, lightly-armored company of combat infantry and the commanders back on base, and the airplanes or unmanned vehicles in the air is essential. Col. Guy Shields, a military spokesman in Baghdad says, "The main difference is the ability to focus more precisely because of better intelligence." And the Times article quotes Maj. Josslyn Aberle saying, "What we are doing is surgical strikes on more remote areas where we have not had a very large or enduring military presence." I'm guessing that as details come out, we'll find out just how critical a role networked communications have played in these opereations. Without the advantage in technology, you couldn't have the 4th ID doing what it's doing in Iraq. But WITH it, you suddenly have a model that allows the Pentagon to deploy about 5,000 armored infantry troops anywhere in the world in a few days--in some very hostile and inhospitable areas--and fight with precise lethality. And this result, conceivably, makes it likely that you'll see a lot more "limited wars" like the one we're seeing now in Iraq. In other words, the very concept of having a highly mobile, lethal, and technologically superior force actually makes it more likely that you'll use that force more often than you previously would have. It's an open question, in my mind, whether this is just planning for future conflicts, and building the the objective force the Army thinks it will need to win future wars...or whether it makes wars more likely because it makes them seem more winnable. It doesn't exactly make me comfortable the the Times ALSO reported today that China is having it's own "Revolution in Military Affairs." China is cutting its military by 200,000 troops. Jian Zemin, China's military boss, says, "The state of war is being transformed from mechanzied warfare to information warfare." Indeed. German General Eric Falkenhayn assumed that superior German artillery would give the Germans a favorable kill ratio at Verdun in World War one, where the French would "bleed to death." Yet even during the height of the initial offensives, when they were firing over 100,000 shells an hour at the French lines, the Germans failed to displace the French. They did kill 35,000 Frenchman in less than a month--obvioulsy a catastrophic loss. But the weapons lacked precision killing power. It wasn't until the German army transformed just 5% of its force into a high speed mechanized unit that it was able to roll over French lines in June of 1940. Only a small portion of the entire force was cutting edge. Yet it was enough to make the difference in the war. Only later, when mass-produced American Shermans swarmed over the more expensive German tanks was the weakness of the German war plan exposed: insufficient production. Having the superior force made the Germans more likely to use it. Is the same true for America? Maybe. But at the very least, the American military is forcing the Chinese to adopt what they've called a doctrine of "Unrestricted Warfare." In "Unrestricted Warfare," there is no conventional targeting. You assume you are in a constant state of war. In fact, the presumption is that if you're not militarily engaged in a battle, then you're fighting economically, and politically...war which, as Clausewitz said, is a "continuation of political intercourse with the admixture of different means." By the way, Lenin, ever the master of using language as a weapon, changed this phrase to the form you're most likely to hear it today: "War is nothing but a continuation of politics by other means." This fortells the use of "War" as a metaphor for all political dicussions...the War on Poverty...the War on Drugs...the War on Terrorism. It also makes the soil fertile for condoning murder as a legitimate "political" tool. In any event, the lines between peactime and war are further blurred in the Warfare State. Unrestricted Warfare means trade wars. It means computer viruses. It means anything that strikes at operational brains of your adversary's military or the economic heart from which he derives strength. It's possible, under that formulation, that a war between China and America has already begun....the same way World War Two started the moment Heing Guderian read British historian Liddell Hart's book "Strategy" on tanks and mechanized warfare. Guderian went on to organize the recruting, training, tactics, and technique of all of Germany's mechanized and motorized forces in World War Two--the same ones that blitzkrieged into France. Is there a Chinese Guderian out there who is even now studying the use of information technology to fight an "Unrestricted War." To be continued...

The Futures Market and Cash Indexes, Making it Work

For awhile now I've been saying this is a trader's market. I say that because most stocks aren't trading at good values. If you're going to be in the market, your main strategy is to find what the big themes are and then pick the exchange traded funds, holders, and iShares (I call them all Precision Guided Investments, or PGIs) that are leveraged to gain or lose if you're right about the them. And I'm finding out now that using the spread between the futures prices and cash index prices can help. Let's take oil. Crude oil futures were down this morning in London by $.175 to $27.50 per barrel. This alone didn't guarantee that oil stocks and the big oil indexes OIH, XOI, OIX, would be down. But it was a pretty good sign. Just as a large spread between the S&P futures and the S&P cash index triggers program buying when one index gets too far ahead of the other, it's conceivable that a similar dynamic takes place in the commodities markets...where you have cash indexes and futures indexes for most commodities...or in the interest rate market...or in the bond market. In fact, it's possible that there's a whole universe of correlations...whereby the futures prices tell you something about what the market might be doing on any given day. Of course, you'd have to expect that the real world to intrude on the theory. Again, let's take oil. The end of the summer driving season typically sees lower gas prices. But the wild card right now is Iraq. What is the stronger influence on oil prices right now: Iraq, or seasonal oil consumption patterns? And how do low natural gas and heating oil stocks heading into the winter complicate matters, and affect prices? And how efficient can the market possibly be at factoring these unknowns into prices? The futures market, which is trying to figure out what things will be worth, is inherently more speculative than the cash market (I know, I know, it's all speculative right now.) And to the extent the asset being traded is influenced by outside factors, the futures market and the cash index might tell you very different, even conflicting things. As it is, the CBOE oil index (OIX) is up 0.39% on the day. The Amex oil index (XOI) is up 0.37%. And the oil service holders (OIH) are down 1.17%. The markets is a mystery sometimes. It has a language. But sometimes in speaks with a forked tongue. I'm going to start watching the futures vs. the cash indexes and see if I can turn it into a meaningful indicator of what a) happened, or b) might happened. I'll keep you posted.

September Loser File: A Short List of Potential "Under performers"

Okay, so by now you've seen the quote from the Reuter's article about how horrible September is. If not, here it is: History shows September is the biggest loser for the Dow Jones Industrial Average, S&P 500 and Nasdaq indexes. Stocks fell in 33 of the past 52 Septembers. The biggest monthly percentage loss for the Dow Jones industrial average occurred in September (43 percent) as did the biggest monthly loss for the S&P 500 (27 percent), according to The Stock Trader's Almanac. The average move for the Nasdaq index in Septembers from 1971 to 2001 was a loss of 26 percent. And then there's this chart from the good folks at ArbResesarchrch which it makes it even clearer... DANGER! FALLING STOCKS! You can describe the process of generating an investment idea with two questions. First, "What?" Second, "So what?" You've got the what. September is a bad time for markets. And since this a cyclical bullish rally in the midst of secular market, answering the "So what" should tell you, at the least what NOT to own. And if you see any patterns, it can also give you a few new investment ideas. Let's look at the top ten performing stocks this year that have market caps over $400 million. That's an arbitrary number. But it does help us sort out the outlier small cap stocks whose outperformance this year doesn't tell us much about whether there's a class of stocks with a lot to lose from a correction. And that, by the way, is what we'Re looking for. Is there a particular sector that gained the most the re-exuberance? When we find it, THAT's the sector to attack. Here are the top ten performers year-to-date, ranked by market cap: 1. NTL Incorporated (NTLI), up 712%, market cap: $2.04 billion 2. XM Satellite Radio (XMSR), up 409%, market cap: $1.69 billion 3. Sonus Networks, Inc. (SONS), up 609%, market cap: $1.59 billion 4. NII Holdings, Inc. (NIHD), up 432%, market cap: $1.29 billion 5. Ask Jeeves, Inc. (ASKJ), up 611%, market cap: $807 million 6. Millicom Int’l Cellular, (MICC), up 648%, market cap $654 million 7. Dot Hill Systems (HILL), up 431%, market cap: $535 million 8. Westell Techonologies, Inc. (WSTL), up 567%, market cap: $531 million 9. Flamel Technologies, S.A. (ADR), up 554%, market cap: $460 million 10. Verso Technologies, Inc. (VRSO), up 740&, market cap: $403.2 million Not hard to see the common threads here...disk storage, broadband, packet-based switching, satellite radio, communications. This is Tech Boom, Episode Two. Shouldn't surprise you. Nor should it surprise you that five of these stocks don't have P/E ratios, because they don't have any earnings. Yet they all are up nicely, and so are the industries they represent. Take a loot the chart below. It shows the Internet architecture holders up 37% in the last 52 weeks. Not bad. Broadband holders are up 54%. The most diverse basket of Internet stocks--the Internet holders--are up 118% in the last year. And Internet infrastructure stocks are up 136%. All this while the S&P is up just 16% in the last year and the Dow up 13%. FOUR STRONG SECTORS WITH A LOT TO LOSE FROM A BEAR MAULING If you're looking for stocks to UNDER perform, or just get shellacked in September, I'd start with the 10 stocks on my list above. But if you're looking to make some money out of it, I wouldn't bother shorting any of them. I'd go after the holders--the baskets of stocks. They have leverage on both the upside and the downside. And because they've gotten so far ahead of the broad indexes on the way up, they'll give up the most ground on the way back down. Incidentally, none of the stocks on my top ten best-performers are holdings in any of the holders I've mentioned. And this is a point worth making: when stocks rise for no rhyme or reason, there's no intelligent way to about selecting them. What would you look for? Not value. You'd look for the stocks participating in the mania. And even then, if you're picking single stocks, you could be wrong. But what you DO no is that when they come back down, they'll come down hard. And on the downside, you don't have to take the risk of shorting individual stocks. You have the luxury of hindsight. In this case, you can clearly see that it's a handful of technology sectors that benefited the most in the last year. To profit on the downside, you simply buy put options on proxy indexes--baskets of stocks which represent that sector. You've targeted the idea and lowered your risk a the same time.

September 01, 2003

French Eating du Jour

Serve the rose chilled. And if you're eating the McNuggets at home, use your own bbq sauce. This week's batch of sauce condiments is heavy on the vinegar (disregard if English). PLUS

Bush Plays the "Fair Trade" Card

Last week I said the Trade Wars are coming, and that after them, the shooting ones might start. Hyperbole? You tell me. Bush is already outflanking pro-labor Democrats. Look at this excerpt from his speech to the Union of International Operating Engineers, as reported by Reuters. "One way to make sure the manufacturing sector does well is to send the message overseas ... We expect there to be a fair playing field when it comes to trade. See, we in America believe we can compete with anybody just so long as the rules are fair, and we intend to keep the rules fair." Hmm. Keeping the rules fair. What might that mean? Would fair be, for example, forcing domestic steel consumers to pay the highest steel prices in the world? High Steel Prices: Good for Steel, Bad For Everyone Else Source, Consuming Industries Trade Action Coalition Steel Task Force The article goes on... "He did not single out any countries for increased scrutiny, but U.S. manufacturers are pressuring the Bush administration to protect American jobs against what many see as unfair Japanese and Chinese currency policies. "U.S. companies complain Japan keeps its yen currency artificially low by intervening in currency markets to prevent its appreciation, while China's fixed currency peg has the same effect of giving its products an unfair trade advantage. "Major U.S. business and labor groups said on Friday they might ask the White House for an investigation of alleged currency manipulation by China, a move that could trigger trade sanctions if a negotiated settlement cannot be reached. "The trade complaint by the National Association of Manufacturers and some 80 other groups would be the first of its kind based on currency intervention, experts said. "The so-called Section 301 complaint, if filed, could markedly escalate the bilateral dispute, which U.S. Treasury Secretary John Snow plans to raise with Chinese officials in meetings in Beijing this week." Shame on those Chinese for manipulating the value of their currency. The nerve. They must pay. But how can we make them pay without, you know, causing them to invest their dollars elsewhere? After all, we kind of need those dollars to, you know, finance our, mmmph, you know, out of control spending habits. One reader repsponded last week with a three-point theoretical plan. (1) Crank up the rhetoric. Blame China, Japan et al for the C/A issue. "China and Japan refuse to allow their currencies to appreciate, which is costing Americans jobs." This phase has already begun. (ED NOTE, MY READERS ARE PROPHETS) (2) Raise the tariff walls sky high. This will anger Asia a great deal. (SOUNDS RIGHT AND YES, IT WILL ANGER THEM) (3) IF Asian reaction is to dump US bonds, impose capital controls (temporary) such that foreign capital cannot leave the USA. Then negotiate an orderly solution multilaterally with trade partners. This could take a number of months or years. Ah orderly solution with trading partners....that's the question isn't it? The orderly solution could take years, assuming we could get anyone to go along. The DIS-orderly solution, after a late-fall and early-winter rally against the Swedish-spurned euro and yen: the greenback falls victim to the politics of the Presidential election. Who can promise the most punitive tarrifs? And who really IS more to blame, those over-producing Chinese or those over-saving Japanese? Or both? AND those UNDER CONSUMING Europeans!! By the way, has anyone ever complained that the Chinese currency rigging gives the U.S. consumer and unfair consumption advantage? Is it really fair that we can actually trade paper dollars for real things? Someone should do something about this. Immediately.

Bond Market Rally and Euro Rout

When it’s all said and done, I think there’s a lot more pain to be had in the bond market than pleasure. But I’ve been looking for a rally in bonds in late summer after they got crushed in July and August. The chart below shows that rally may be in the offing this week, as December’s 10-year note futures closed up and outside of a range. The chart comes courtesy of John Kosar at Bianco Research. Bianco is an affiliate of Arbor Research and Trading, which provides outstanding research and data on the fixed income market, in addition to a whole suite of excellent research products. Here’s the chart: 10-YEAR BOND FUTURES BREAK OUT John says, “Thursday’s rally in Treasuries also resulted in a bullish breakout in December 10-year note futures and in cash 30-year T-bonds. In 10-year futures this breakout targets 113 16/32 as a minimum target, as long as support near 109-25 loosely contains below the market as support (see chart above). In cash 30-year T-bonds this breakout targets 4.91% as long as the 5.27% area contains as support.” If this rally in bonds is for real, traders should look to buy calls on IEF and TLT. The bond market may be getting a little boost from the Swedish scare in the euro currency market right now. Sweden is set to vote on entering the euro in less than two weeks. All the early polls show a “no” vote. IF that happens, you could easily see the euro lose 10% to the dollar in the next month. A no vote, coupled with France’s complete disregard of the stability pact limits on deficit spending shows you something: the euro is backed by the same asset the dollar is, confidence. And when that confidence falters, so does the currency. Aside from directly speculating in the forex or futures markets, an aggressive trader could put options on the Amex EuroTop 100 Index (EUR) or the CBOE-listed S&P Euro 100 index (XEO) . Strategic Options Alert subcribers...get ready to pull the trigger. INDEXES OF EUROPEAN STOCKS STAND TO BREAKDOWN ON EURO WEAKNESS

That Giant Sucking Sound is Getting Louder

Blogging is lite the U.S. markets are closed for Labor Day. Fittingly, let's take a closer look at the labor market. First, here's the key paragraph : "Longer-term, as the baby boomers retire, the erosion of workforce loyalty will become an even bigger problem for corporate America. By 2012, more people will be leaving than entering the workforce," said Marc Drizin, loyalty specialist at Walker Information, a research firm in Indianapolis. 'The biggest challenge for our economy over the next 50 years will not be a shortage of jobs; it will be a shortage of labor,' said Martin Regalia, chief economist at the U.S. Chamber of Commerce, an association with affiliates representing some 3 million firms nationwide. Of course, companies have been cutting wages, benefits and positions not to alienate workers but to stay in business, Regalia said. In a tough economy, they must keep prices low enough to be competitive while still rewarding investors." The first assumption in the article is that boomers will retire on schedule...not if they don't have the money they won't. You may see the average retirement age go up--especially if the government starts means testing Social Security benefits. But even if the boomers do retire on schedule, the assumption here is that corporate America will fill those jobs by hiring other Americans. It may not happen. First, allowing your workforce to get smaller through attrition (not filling vacancies caused by retirement) is a low-cost way of downsizing without paying high unemployment compensation. You can get smaller and more productive the natural way--with a smaller workforce. Let's assume, for a second, that each baby boomer retirement leads to one vacancy that will be filled. Who is to say it won't be filled by foreign labor? And I'm not talking about immigration. I'm talking about outsourcing. The great boomer retirement may lead to an exodus of jobs from the U.S. to places where the labor is cheaper. How extensively this happens depends on the type of job, of course. You can't outsource, for example, a dental hygienist. But there's no reason you couldn't outsource all the back-office record keeping and billing, is there?

The Saudis, al Qaeda, and Bush

Wonder what this will do the price of oil, or, eventually, the stability of the Saudi monarchy. The article refers to information gathered from the interrogation of Abu Zubaydah--the al Qaeda terrorist the U.S. captured in Pakistan in May of 2002. Posner has a reputation as a bit of a conspiracy theorist. But look for this to become a campaign issue. Why is the Bush Administration sitting on known ties between the Saudi royal family and Al Qaeda? Can you see Hillary Clinton asking that question? How much the public cares about the issue will depend on how things go in Iraq between now and the election. And last week's assasination of a Shia cleric suddenly makes things a lot more critical in Iraq. Either these are the tactics of an adersary whose only hope it to try and spark and civil war....or it's the beginning of a low-level religious/civil war...the kind everyone feared before the war. This is not the kind of scenario the market has "priced in." Could be a big--and bad--week for the indexes. Stay tuned. Confessions of a Terrorist -- Sep. 08, 2003: "Zubaydah, writes Posner, said the Saudi connection ran through Prince Turki al-Faisal bin Abdul Aziz, the kingdom's longtime intelligence chief. Zubaydah said bin Laden 'personally' told him of a 1991 meeting at which Turki agreed to let bin Laden leave Saudi Arabia and to provide him with secret funds as long as al-Qaeda refrained from promoting jihad in the kingdom. The Pakistani contact, high-ranking air force officer Mushaf Ali Mir, entered the equation, Zubaydah said, at a 1996 meeting in Pakistan also attended by Zubaydah. Bin Laden struck a deal with Mir, then in the military but tied closely to Islamists in Pakistan's Inter-Services Intelligence (isi), to get protection, arms and supplies for al-Qaeda. Zubaydah told interrogators bin Laden said the arrangement was 'blessed by the Saudis.' "

Good News for EWJ

Yes, Japan has its share of bad debt problems and horrible central banking. But there is SOME good news coming out. And with EWJ up 10% since we bought it, it may be time to buy some options on JPN, perhaps to hedge on the downside. More to follow Reuters | Latest Financial News / Full News Coverage: "Other speculation also emerged Japan may be letting the yen rise more than before as recent data have shown surprise improvement in the world's second largest economy. Tokyo stocks rose more than three percent on Monday on optimism about a recovery, their highest since July 2002."