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To: ild who wrote (187200)	8/12/2002 2:23:34 PM
From: Knighty Tin	Respond to of 436258

ild, I love the way he nips around the fact that he thinks the consensus at his own firm is full of crap, though he has "great respect for the process." <g> Emerging Asia still looks hot if they are right. Latin America may have to do some soul searching. How many loans can we afford to float down there?

To: ild who wrote (187200)	8/12/2002 3:09:45 PM
From: ild	Respond to of 436258

Sunday August 11, 2002 : Special Hotline Update The Market Climate remains characterized by unfavorable valuations and favorable trend uniformity. While unfavorable valuations suggest unsatisfactory long-term returns and a lack of compelling investment merit for major indices like the S&P 500, favorable trend uniformity suggests that investors are becoming somewhat less averse to risk - a condition which produces sufficient speculative merit to take a modest amount of market risk here. So while our portfolio of favored stocks is currently 40% unhedged and exposed to market fluctuations, this is not an indication that I view stocks as a "value" or a "buy." Our Market Climate approach does not require forecasts but identification. I spend virtually no time trying to predict market moves or "time" rallies or declines - the effort is to properly identify the prevailing Climate. Any tendency for our shifts to look like "market calls" is incidental. If you're sailing a boat, you can go anywhere you wish simply by adjusting the sails to the prevailing wind. When the wind changes, you change the tack again. No forecasting is required in order to do this. What is required is the ability to properly identify the prevailing wind, and to recognize shifts as they develop. In view of last week's favorable shift in trend uniformity, it was amusing to see news reports attributing the rally to "hopes of a Federal Reserve rate cut." It is much more accurate to say that stocks rallied because investors had become less averse to risk. But falling risk aversion doesn't make good headlines, and unless you've got good tools to identify falling risk aversion, you don't know that it's happening except in hindsight. From the standpoint of our investment discipline, we identified a shift toward lower risk aversion last week. When investors are willing to take on greater amounts of market risk, valuations become temporarily irrelevant. This is how a modestly overvalued market was able to become breathtakingly overvalued between 1995 and 2000. In my opinion, the recent shift is more likely to represent a bear market rally rather than a sustainable bull move, but we don't trade on that opinion. Until we observe an unfavorable shift in trend uniformity, we'll hold to a modestly constructive position, regardless of my opinions about economic fragility. Though I would still prefer to see much stronger volume on advances, it is notable that the percentage of bearish investment advisors in the Investor's Intelligence figures has moved above the percentage of bulls in recent weeks - the first time since a 3-week period near last September's lows. Lowry's turned positive late last week based on its own price-volume studies (though these signals can be of a fairly short-term nature). We're also seeing fewer news stories that take a bull market and an economic recovery as givens. Until very recently, the news media preferred to choke, gag and turn vibrant shades of purple rather than spit out the phrases "bear market" or "double dip." The fact that they're using these phrases now suggests that the "recognition" phase of the bear market may be complete. Bear markets tend to be broken into several phases, each punctuated by counter-trend rallies. Typically, the final phase of a bear market is marked by a sizeable majority of bears and "revulsion" for stocks by investors. We're not at such a point here, but there's no requirement that such a situation has to occur on any particular time schedule. An opportunity to buy stocks for outstanding investment merit may be months away, or it may be years away. But it is nearly certain that long term investors will see such a point before the "long term" actually arrives. Regardless of favorable speculative merit at present, stocks are likely to produce very disappointing returns between now and the eventual point that they become outstanding values. I say this to underscore the point that the current, modestly favorable Climate is not an indication of compelling long-term investment merit. On the subject of Fed rate cuts, I noted my opinion a few weeks ago that Greenspan has become more reactive since 1998, buying short-term crisis resolution at the cost of increased long-term economic instability. I was impressed, however, that he did not announce a surprise cut at the depths of the recent selloff. This also makes me hopeful that the FOMC has gained enough clarity to leave rates unchanged this week. As I've noted over the past year, rate cuts in the current environment do not sponsor new bank lending. Nearly all of the increased monetary base produced by the Fed (the only aggregate the Fed directly controls) has been drawn off as currency in circulation. The only function of lower short term rates has been to shift portfolio preferences toward greater holdings of currency, in an amount which must exactly absorb the increased supply. If anything, lower short-term rates at present would further reduce the "opportunity cost" of holding currency, which would actually work against greater bank lending because the cash balances in people's pockets are not intermediated to borrowers. Over the past decade, Japan's near-zero interest rates also did little to spur bank lending. Instead, those low rates decimated the willingness of the Japanese to save in the form of bank deposits. Before the Fed compounds its errors, it would be helpful to consider the potential for such unintended consequences. hussman.com