THE REAPER MARKET COMMENTS
R.E. McMaster, Jr.
General Market Comments
Often the first rally after a significant drop off from a major top
is a sucker rally, a bull trap. This is the way this so-called
economic recovery feels after the post 9/11 economic freefall.
The retail stocks, which represent 70%-80% of U.S. GDP
(consumer borrowing/spending) are turning toppy/bearish. The
Dow Jones Transports, which are a proxy for the demand for
goods moving through the economy, have put in an ominous
head and shoulders top, peaking at 3,050.40 on March 4. Key
economic commodities, such as cotton, lumber, copper, silver,
and palladium are weak. The meats--pork and beef--indicative
of consumer spending, have been in freefalls. U.S.
manufacturing over the past two years has had the worst
slowdown since the Great Depression.
In mid March more than 400,000 people were added to the
unemployment rolls, a 19-year high. There are now over 3.76
million unemployed, the highest in nearly 20 years. Housing
construction fell by 7.8% in March, the largest decline in two
years. Building permits fell 10%. Advertising is still off, as is
PR work. It has been consumers' willingness to take out home
equity loans that has given consumers the ability to continue
spending, offsetting somewhat their stock market losses.
Jonathan Laing, however, recently did a feature article in
Barron' s, talking about the imminent end of the U.S. housing
bubble.
A U.S. stock market and a U. S. housing decline are a one-two
punch U.S. consumers cannot withstand. Consumers' incomes
are off anyway, as indicated by the sharp drop off in federal
income tax receipts from individuals. And foreign investors
have been supporting the U.S. housing market by buying a
third of Fannie Mae and Freddie Mac government guaranteed
mortgages.
Foreign investors have effectively financed 20% of the
business and residential investments in the United States. But
foreign investors are starting to repatriate their dollars into
other preferred currencies, a negative sign for the U.S. Dollar
and for U.S. interest rates. The U.S. Dollar is overvalued and
gold, Euros, yen, Australian Dollars, and New Zealand Dollars
are starting to be the favored. The huge U.S. trade deficit
widening 11.6% to $31.5 billion in February did not help
matters any. Nor does a median CPI at 4.2%.
The Federal Reserve flooded the U.S. financial system with
over $1 trillion in credit last year. And MZM is growing in
excess of a 20% rate. On April 17, when the June U.S. Dollar
Index gapped down and registered a low close below 117, a
major high in the U.S. Dollar was confirmed. ...Just imagine
what could happen if this economy turns down in the second
and the third quarter and the Fed simultaneously further boosts
the money supply. Then we could see real inflation and
commodities soaring, coinciding with our expected take-off
upside from the 30 and 60-year lows already registered for
commodities, as the U.S. Dollar weakens and interest rates
increase. The flight to tangibles from intangibles, to real assets
from paper assets, is already underway. We have seen that in
the rush to oil, oil stocks, the stealth bull market in gold and
gold stocks, and American consumers fleeing to real
estate--their homes and real estate investments. This is an
environment that could spell trouble between now and
October 2002. There is presently high anxiety in the air.
The CRB Index should hold 190-195 support, and will only
turn bearish on a weak close below 183. This is highly
unlikely. The Goldman Sachs Cash Commodity Index should
hold 175-185 support, and will only turn bearish on a weak
close below 160. This is highly unlikely. However,
commodities could chop sideways and/or move into swing
markets over the near term. It is of concern that the Asian and
European stock markets are overbought and showing signs of
rolling over to the downside. Could we see another
coordinated international decline in stock prices?
April 29, 2002
R.E. McMaster, Jr., Editor
The Reaper
P.O. Box 84901, Phoenix, Arizona
800-528-0559
www.TheReaper.com
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