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Politics : Stockman Scott's Political Debate Porch -- Ignore unavailable to you. Want to Upgrade?

To: GROUND ZERO™ who wrote (6073)	9/11/2002 12:09:50 PM
From: Jim Willie CB	Respond to of 89467

Tuesday September 10, 2002 Market WrapUp (Puplava) Corporate Earnings Out Soon In the next couple of weeks we will enter into the third round of the corporate earnings game. Companies that won’t be meeting analysts’ expectations will want to get out front with the bad news. Analysts can then downgrade them, allowing them to come in after the quarter and beat expectations. The market is a game of perceptions rather than reality. Reality matters in the long run. In the short term, it is perception that counts the most. It is going to be important to watch what companies say going forward after Q3 results are released. Everyone expects things to improve by the end of the year. Pro forma earnings growth is still expected to be over 20% for Q4 and economists are still expecting no recession this year. However, the risk to this scenario remains with business spending and the consumer. Businesses are reluctant to spend money with order backlogs still low and no noticeable pickup in revenues. Most companies that have been hitting their profit targets have been doing so as a result of cost cutting -- not revenue increases. With all of that said, analysts continue to predict that pro forma profits will rise by 11.1% into the third quarter and 22.7% in the fourth quarter. Please note that these are pro forma numbers and therefore do not reflect real profits. These are make-believe numbers, but Wall Street has been turned into an adult fantasyland anyway. Just keep this in mind when third quarter results are released. You’ll have to get out your magnifying glass to comb through the fine print to get at the real numbers. Your best bet will be to look at dividend yields which can’t be fudged. They actually get paid and are much more trustworthy than some pro forma fantasy. There is absolutely no reason to be invested in most stocks right now other than for technical trading reasons. Markets can rally within a bear market. Trading rallies are every bit a part of bear markets as corrections are in a bull market. Investors should not lose sight of the fact that the primary trend is still down despite whatever hype, drivel, or any other sort of nonsense you hear from bubbleheads and their bubble-promoting guests. Look at the chart of the S&P 500 today, which shows the index, measured against its 200-day moving average. This is the real trend that investors should not lose sight of before they jump back into the market as a result of a hype-induced rally. Regarding the consumer as the backbone of the economy, his backing is aching with a heavy load of debt. All we know about the consumer is that he is still spending money thanks to lower mortgage rates. But debt burdens are getting high and loan defaults and delinquencies on mortgages are rising along with debt levels. In the second quarter, 11.81% of all FHA loans were running past due. That is up from 11.23% during the first quarter. The rise to 11.81% is the highest level since MBA started tracking delinquency figures in 1972. Overall mortgage delinquencies in all mortgage categories are now 4.77%. If delinquencies keep creeping up, lenders could begin to tighten credit standards. This will tighten credit purse strings and the refi game and housing market would be hit hard. Bulls argue that most of the delinquencies are confined mainly to the FHA lending market. Conventional mortgage delinquencies are at 3.1% and rising. Economists still aren’t worried because they feel delinquency rates are a lagging economic indicator. Most economists see a strong economic recovery ahead of us. Of course that has been the view they have held for the last three years, including last year’s business recession. Nobody sees anything wrong with consumers piling on debt at record levels. Debt and consumption seem to be the standard policy response to any sign of economic weakness or recession. The Rebate Debate That may change if interest rates fail to revive the economy and markets and we head back into recession, this time led by the consumer. This morning’s Financial Times is calling upon the Fed to start monetizing household balance sheets by injections of cash. The story comes from a policy initiative that has been recommended in Japan. The new initiative would be equivalent to what monetarists, such as Milton Friedman, call the “helicopter drop.” Money would be deposited in each household’s bank account. The approach has been argued that a direct check into household bank accounts by the Fed would be no different than a tax cut or tax rebate. The rebate debate is argued to be more favorable since deposits to household bank accounts would expand the monetary base versus government deficits. The ‘reinflating of household balance sheet’ argument is now gaining favor in top policy circles as the most effective means of counteracting deflation. We have now gotten to the point of zero-percent interest rates, and it now looks like free money may be next. Maybe we’ll get free mortgages, or better yet, free homes if the economy gets bad enough. Absent from this debate is the inflationary implications of such policies. Essentially what is now being recommended is for the Fed to start monetizing assets. It remains to be seen as to which way the political winds blow. Monetizing household assets with free money has a populous ring to it. After all, Roman Emperors were able to mollify the crowds with free bread and entertainment in the coliseum as gladiators fought to the death to please the crowds. Why not combine free money with a war, a more modern version of the same Roman policy. It worked in Rome for centuries, so why not here in the US? We have had intervention in the financial markets for well over a decade. Just look at today’s graph at the first hour of trading and the final two hours of the day. We have intervention in the gold markets, the commodities markets, the stock and bond markets, and in the housing markets. As each policy intervention fails, more are recommended to take their place. It has now become the game of the financial alchemists of changing nothing into something by trying different fiscal and monetary policy mixes. Apparently no one trusts the free markets to work anymore, despite their efficacy in solving problems. What are often criticized as market failure are really the failures of intervention. Today’s Markets Looking at the markets today, all major indexes are trading at close to their 50-day moving averages. They are having difficulty overcoming these levels as we are trading around key reversal points. There seems to be a heroic effort undertaken to keep them at that level. If these levels are broached, the next step is hard down to panic levels. The markets are treading lightly ahead of tomorrow and the rest of this week. Today the government issued an “orange” terrorist warning, one notch below the highest level of alert, which is red. The State department issued a warning to all Americans traveling abroad. And the US Navy has warned that al-Qaeda is considering striking at oil tankers in the Persian Gulf and Red Sea. If nothing happens in the next few days, we could get an explosive relief rally that could carry stocks higher, but woe to the markets if another serious terrorist attack is carried out. Various al-Qaeda spokesmen have been issuing ominous attack warnings since mid-July. For the terrorist to maintain their credibility in the Arab world, it is either “put up or shut up” time. So far nothing serious has taken place. US exchanges will delay the market’s opening tomorrow until after memorial services are over at the World Trade Center site. Volume continues to remain weak with only 1.2 billion shares trading hands on the NYSE and only 1.43 billion shares on the Nasdaq. Winners beat out losers by a 17-13 margin on the big board. On the Nasdaq, losers and winners were at a draw. Overseas Markets European stocks rose, led by DaimlerChrysler and Anglo American as the companies said cost cuts are helping earnings. The Dow Jones Stoxx 50 Index added 2.7% to 2667.07, its highest in more than a week. All eight major European markets were up during today’s trading. Japanese stocks rose for a second day on expectations the government will announce as early as next week measures to spur economic growth and help banks clean up bad debts. The Topix added 0.5% to 912.61, its highest level since Sept. 2. The index tracking banks accounted for a fifth of the Topix's gain. The Nikkei 225 Stock Average rose 3.05 points to 9309.31. Treasury Markets In the bond market, U.S. Treasuries reversed from an early slump, with gains concentrated in the 10-year note and the 30-year bond that were tied to the U.S. security alert. © Copyright Jim Puplava, September 10, 2002