NWMC
For the week of 01/19/2004
Apologies for my tardy and partial postings of late. However, I work at home and there is no chore or errand too trivial to demand my attention.
Got a big chuckle as a panelist in Barron's round table raised my two pet peeves. Mark Faber says the United States is following the path of Argentina and is sliding from First World to Third World status. He expects 50 years, I say 30.
Second and most important, Faber argued that there is real and fictitious growth (not all transactions are equal) and, to the unanimous boos of the rest of the panelists, argued that the service economy is a chimera. I agree. The service economy consists of two parts. The local part has us paying each other to wash each other's cars, clean each other's homes, and cook and serve each others meals. This is stuff that has moved from the self help economy 50 years ago to the transaction economy now. And it can all dissappear right back into the self help economy in a heartbeat, at the first sign of stagnant wage growth - and we will save a ton of taxes by making it disappear. The second element is the giant financial services industry which will crumple if debt stops growing. Every street maven and economist cheers that we are no longer dependent on manufacturing - producing real things. So now we create GDP by throwing dollars at each other for doing stuff we can do just as easily for ourselves. Thus our economy is now far more vulnerable to long term secular collapse - the fast road to Argentina.
Mark my words!
It is ironic that by trashing its dollar, the U.S. forces Japan to dump helicopter money on the system. Without Japan's helicopter money, the U.S. economy would be in a very powerful deflation as the chart of M3 demonstrates. We are now 15 months from the bottom in this rally, which has now exceeded 50% of the time the market was in decline. The 61.8% mark occurs in mid April.
Turning to the markets, I am forced to confess that I tend to deal with issues that interest me rather than stuff that might be more useful to the general public - especially longer term indicators. Most non-professionals want to get the big - once every two years type of decisions right, rather than do swing trades. So this week I would like to note that there has not been a single new low in any stock in the NDX for the past 8 1/2 months. This indicates that there is a strong flow of indexing money into the NDX and that this flow of index funds is powerful enough to keep any stock from touching a new 52 week low. While this condition obtains, the odds of a trend change are very low, and for those of you who like the bear side, I would suggest that shorting the index is a low percentage play until we get 3 new lows in the NDX. We need to see people selling some ndx stocks to get the money to drive others higher before we are likely to get a major trend change.
This illustrates a very important point. It is often the simplest indicators that will keep you on the right side of the market. When the market is rising, watch the new lows, and when it is falling, watch the new highs. The NDX works superbly as a measure of index flows since so many of its components are junk that can only be kept aloft by their presence in the index.
Tracking new lows on the OEX may produce an indicator of similar stability and simplicity, but I don't track it so I don't know.
To the charts!
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