I'm Back: Reflections from the Beach
By James J Puplava CFP, August 6, 2002
This summer's vacation will be a new experience for me. It will be the first time in 22 years that I will be taking a 2 week vacation. Up until now, all vacations have been 1 week -- too short and not long enough. This year I'm trying something different. Armed with technology, I've brought the world with me. A portable Bloomberg keeps me in touch with the financial markets around the globe. I even have a portable radio studio with me so I can do my radio show remotely. Just finished my interview with Clyde Harrison, CEO of Beeland Management, which manages the Rogers Raw Material Fund.
The day has been great filled with cool 12-15 knot breezes -- ideal for sailing. Just picked up a new Clancy novel and Lord of the Rings DVD. A great sail, a good book, and a great movie ... it just doesn't get any better than this. Still addicted to the markets and writing, so here I am again. Background is more conducive for reflection and relaxation. As I begin this short piece, I'm staring at a golden sunset, with Sinatra playing in the background so this will be short.
Running Out of Bullets on The Way to Zero
Markets got a great lift from news that the Fed will probably lower interest rates. Somehow this is gathering momentum even though the story isn't new. Three weeks ago Greenspan told Congress the economy was in great shape. Three weeks later we find that it isn't in great health and may require another injection of lower interest rates and a huge injection of liquidity. Five weeks ago Goldman Sachs was predicting that the Fed would have to raise interest rates. Now a little over a month later, they believe the Fed will have to lower interest rates 1 percent. In less than a month the economy has gone from being in great shape to back on the sick list again.
The view of the Fed lowering interest rates as another act of desperation has now been changed to, "It will be a good thing for the markets and the economy." In order to pull this off, the Fed will need the cooperation of other central banks. The rate of return in the US is much lower than in Europe where interest rates are far more attractive. In addition, the dollar's recent strength has more to do with US funds repatriating funds back to the US. This hammers European equity markets, the Euro, and temporarily causes the dollar to rally.
More One Day Wonders
Nonetheless, the markets rallied on the belief that more rate cuts will be good for the markets. It was a Pavlovian response to past behavior patterns when crises created lower rates and liquity that found its way into the financial markets. So, Wall Street is telling investors they can expect more of the same. It is a desperate effort to resurrect the "buy on dips" response from investors.
The financial media has been telling investors for the last year that we are closer to a bottom. The analogy used is the similarity to the 73-74 bear market where the Dow lost about 45% and the S&P 500 lost close to 50%. What they fail to say is that when that bear market was over, stocks were more reasonably priced. Yet, it would be 1982 before the major markets would pass there former highs. Investors turned to hard assets after that bear market because a new bull market in "things" had begun. Valuations were much lower after that bear market compared to today's trailing P/E ratio of 41 versus the average of 12-14.
Furthermore, the public is still fully invested with over 56% of Americans still invested in stocks. Back in the 70's, mutual funds only represented about 5% of the market. Today they hold over 40% of all stocks. Moreover, there has been no capitulation with most investors playing the game of ostrich, with complacency the common denominator with most investors. These are hardly the signs of a bottom.
While insiders have moved out of the markets based on earnings according to GAAP, John Q stays fully invested on earnings according to CRAP (Cloudy Reporting Accounting Principles). That's what they got today from Cisco. Cisco beat the Street, what else is new. Their numbers excluded acquisition-related expenses, payroll taxes on stock options, and gains for using inventory previously written off. Isn't that special! Take a big bath when nobody notices, then rewrite former losses into gains. Stock options weren't counted when they were granted. Now we don't count them when they are exercised and expensed. It never ceases to amaze me how gullible investors have become. The media is just as gullible or culpable, depending on your views as to what is really going on.
War Drums Beating Louder
The noise of a helicopter gunship hovers overhead. A lot of activity military activity here. Generals in Washington were told to take their vacations early this month. No time for vacations next month. Mobilization of troops for Army and Air Force is stepping up. So far 80,000 personnel have been called up from all branches of the military, mostly Army and Air Force.
Don't miss "Pot Calls Kettle Black," the CBS MarketWatch report by Mark Hulbert posted on Storm Watch. If you think the corporate books are cooked, read Hulbert's piece. Says what we've been saying here for quit a while. The government's books make Enron's look clean by comparison. An example, begins with the jobs report:
February: 66,000 jobs created. A month later revised to 2,000 jobs lost.
March: more good news -- 58,000 new jobs created. A month later revised down to 21,000 jobs lost.
April: more good news to follow the previous month's pro forma news. You guessed it. Even more hypothetical jobs. This time only 43.000. You got to love the world of make believe that we now live in. Very appropriate for a entertainment-oriented culture. Our financial markets now resemble Disneyland. It is all an illusion, a fantasy world.
Whoops. Said this was going to be short. I set a timer. Sinatra CD just finished with "A Summer Wind". Nice place to end.
Goodnight for now.
Reporting from the beach.
© 2002 James Puplava