aIn the meantime...
--------------------
The Fed is a "serial bubble blower," says Stephen Roach.
First, it blows up a bubble in stocks...then in
housing...and then in bonds...and then back to stocks. Each
time, when the bubble began to leak air, the Fed puckers
up, and a new bubble bulges out.
And each time, the Fed seems to guarantee that investors
will not lose money - no matter how extreme prices become.
In the stock market, the 'Greenspan Put' was supposed to
make sure stock prices didn't fall significantly; if prices
began to fall, or so the Moms and Pops believed, Greenspan
would simply lower rates and drive them back up again. When
that failed, along came the 'Bernanke Put.' The economy
depends on housing, went the logic, and housing depends on
low mortgage rates. No way will Bernanke let rates rise;
instead, he'll cut them further in order to keep 'the
recovery' on track.
The weekend brought news that the Fed is considering
another bubble-blowing rate cut. Tech stocks are already
puffed up to grotesque size. But the obscenity seems to
attract the simple-minded investor, not repel him. Like
tourists at a Paris show bar, they wait to have their
drinks watered and their pockets picked.
"All of us thought it would take years of healing time
[before the lumpeninvestoriat returned to the stock
market]," said the president of E-Trade to the New York
Times.
"Instead," continues the Times article, "investors appear
to be returning to equities with their wounds barely
healed. Three years of stock market torment seem not to
have shaken the long-held view that stocks are best for the
long haul."
Stocks are best for the long haul, of course, when they are
exceedingly cheap...such as they were in 1980, when you
could get the average S&P stock for 6.8 times earnings.
Then, you could sit back for the next 20 years and enjoy
exceptional returns. But now the average S&P stock sells
for more than 32 times earnings, and the haul back down is
likely to be long and painful.
"It's hard to find any real news to justify the market's
leap," writes Paul Krugman, also in the Times. "Payrolls
are still contracting...desperate state and local
government are continuing to slash services...and raise
taxes..."
The U.S. trade deficit just hit a new record, MSNBC tell
us. So did the current account deficit. So did the U.S.
budget deficit. And so did the number of people whose
houses are being taken away in foreclosure.
"Oh, and the banana-republic policies now being followed in
Washington," Krugman concludes, "won't just drive up
interest rates; they'll probably generate a full-blown
fiscal crisis one of these years. That can't be good for
equity prices. In short, the current surge in stocks looks
like another bubble, one that will eventually burst."
Over to Eric Fry, with more of the latest news from the Big
Apple:
------------
Eric Fry in New York...
- The stock market continued dancing higher last week,
although the dance seemed to lack its usual élan...Are the
dancers tiring? The Dow sashayed 83 points higher to 9,200,
while the Nasdaq waltzed to a 1.1% gain, to 1644...
Meanwhile, the music stopped altogether in the bond market.
As Treasury prices tumbled, the yield on the benchmark 10-
year note moved sharply higher to 3.38%, up from 3.11% the
prior week. The 30-year Treasury bond yield also surged, to
4.45% from 4.17%.
- "We think bonds have peaked," says Donald Straszheim of
Straszhein Global Advisors. "Investors would be wise to not
get too greedy at these levels - the lowest yields in 40-50
years. Are we a little early in making this call?
Maybe...[But] the bond market during 2002-03 has begun to
look like Nasdaq, June 1999 to March 2000 - a blow-off. Too
far, too fast. Too good to last.
- "When memories and their lessons fade," Straszheim
continues, "investors pay the price. The last double in the
Nasdaq took just nine months (2524 on June 18, 1999, to the
peak of 5,048 on March 10, 2000). The bond market move has
been equally outsized...The 5-year Treasury yield is not
2.21%. From 6.35% in June 2000 and 4.34% in June 2002. What
a move!...Looks like a top [in price] in bonds to us."
- The stock market is also looking a little toppy and -
maybe, just maybe - nearing the point of exhaustion...Last
week's trading action resembled the final hour of a 1950s
dance marathon. The once-peppy Nasdaq and Dow are still
standing, but they aren't kicking up much dust...Let's give
the spunky couple a prize for endurance, but don't expect
them to continue dancing for much longer...These kids are
tired! One tell-tale sign of fatigue: the blue-chip stocks
are lagging far behind the market's most speculative issues
- biotech and high tech. In other words, the worst stocks
are going up the most.
- Alan Newman of CrossCurrents points out that biotech
stocks have rocketed nearly 50% since early March. He also
took a look at the companies that comprise the Merrill
Lynch Biotech Holders Trust (BBH) and determined that only
half had any earnings, and these sported an average P/E of
58. One final tidbit about the companies making up the
biotech trust: five insiders bought, 94 insiders sold; the
ratio of shares sold to shares purchased was 67 to 1.
- "The same exercise performed on the (IGW) [semiconductor
stocks]," Barron's reports, "shows that nine of the top 10
issues in the fund have an average P/E of 77.3 (the tenth
is in the red). Insider sellers among the companies making
up the fund outnumbered buyers by 81 to 2 and the ratio of
shares sold to shares bought was a staggering 1,665 to 1." Plain and simple, since mid-March ugly stocks have led the
way. Another telltale sign of exhaustion is that fact that
the stock market's popularity is soaring.
- "A rising market begets bulls and the crowd en masse has
been hustling over to the sunny side of the Street," says
Barron's Alan Abelson. "According to a Merrill Lynch survey
of fund managers, those worthies are the most fully
invested they've been in two years and cash is down to a
minuscule 4% of assets. Obviously, they're no longer
haunted by the fear of redemptions...Very much
participating in this growing but still rather mannerly
orgy of optimism are the investment advisors. According to
the latest soundings by Investors Intelligence, a full
60.2% of the seers are bullish, a mere 16.2% bearish.
- Unfortunately, the stock market is not a democracy; it
does not care what the majority believes or what it hopes.
The stock market is autocratic, and it delights in
frustrating the majority. It gets its jollies by doing
whatever is least expected...
- The stock market may not sell off immediately...but it
should. Even after a wicked three-year bear market, this
thing is pricey. "In 1982, stocks sold at 7.9 times
earnings, yielded 6.3%, were priced at less than one times
book value and one-third of sales," says Barron's.
"Currently, by contrast, stocks sell at 28 times earnings,
yield 2%, are priced at 2.75 times book and 1.3 times
sales. In other words, this market is anything but cheap by
any standard of valuation. As a matter of fact, as we've
noted before, those incredibly rich multiples smack more of
bull-market tops than of bear-market bottoms."
- Get ready for the last dance.
------------
Bill Bonner, back in Paris...
*** "The yuan is the most undervalued currency in the
world," the Economist reported, back on April 24th, 2003.
Using its 'Big Mac' indicator, the magazine showed that in
China a Big Mac costs $1.20, on average. In the United
States, the typical price is $2.40. In order for China's
yuan to reach parity with the U.S. dollar, the yuan would
have to appreciate 56% against the dollar.
"Said another way," writes the always controversial, always
entertaining Porter Stansberry, "because the yuan is kept
artificially low against the dollar, Chinese goods cost
half of what they should in America. China has been taking
U.S. jobs and collecting billions in U.S. hard currency
because it cheats. This can't go on forever. So it won't."
China, believes Marshall Auerback, has the power to shut
down the U.S. economy...the way the IMF pulled the plug on
Argentina. We reported Auerback's thoughts last week.
Porter expects the float of the yuan could set up as big a
default crisis as the Russian default of 1998, or the
Mexican default of 1994...or an even bigger 'windfall' than
the British EMU debacle, when George Soros made a billion
dollars in one day.
When will the Chinese renimbi, er, yuan float? That is
anyone's guess. In fact - will it float? - is perhaps the
better question. We suspect it will, some time before the
Chinese WTO-membership probation ends in 2008. That is, if
China feels the need to keep its membership.
Reading the tealeaves in the media, Porter suspects the
yuan float may come sooner, and suggests a few ways to take
advantage of it without becoming one of China's growing
legion of foreign direct investors:
Make The Chinese Pay
*** Could a floating yuan be "the deathblow for the
dollar"? We are not readily given to accepting hyperbole...
yet it is reasonable to think - as a report we produced
last January in conjunction with the Everbank World Markets
research squad purports - that the U.S. dollar is in the
beginning stages of a multi-year slump.
Accordingly, we've updated the report. As you'll see, many
of the initial forecasts of the report have been accurate.
The Everbank report explains why, regardless of your
opinions on the Chinese yuan, diversifying out of the
dollar is a prudent and remarkably easy thing to do.
Addison will fill you in on the details...Addison?
*** The moment we dreaded came on Saturday. A posse from
West Virginia caught up with us. A colleague and her family
came to visit us at Ouzilly. They aren't actually from West
Virginia, but from nearby Cumberland, Maryland. Still, that
was close enough. The Appalachians were in their hearts;
revenge was on their minds, and a rope in their hands, or
so we feared.
Long-term sufferers of the Daily Reckoning may recall our
comments. To say that we were unimpressed by the great
state of West Virginia would be a lie; we will never forget
the appalling architecture...and the junk. The indigenes
toss out refrigerators and leave old cars lying around, as
if they hoped they would take root and grow new ones.
We say these things not to be negative or unkind. We love
West Virginia. But when we see such ugly blemishes on such
graceful hills...it is as if someone had broken your
girlfriend's nose.
"Oh, your garden is so lovely," said one of the Cumberland
contingent, after shots had been fired and we were all
pleasantly out of ammunition.
"But that's what I mean," came the reply..."I don't see why
the West Virginians don't get off their duffs and do what I
have done - hire a gardener to put in a proper garden."
*** Speaking of dancing, we went to see an exhibition of
Tango last night at the Palais de Chaillot. What impressed
us most was that while the women performers were attractive
and nubile, most of their dancing partners were gray-haired
fellows in their 60s. The old guys were graceful and
dignified, but not the least bit athletic. They merely kept
the pace, while their women made such extraordinary
exertions it looked as though they might become completely
unhinged.
We have been thinking of taking up Tango the way some men
take up golf - as a middle-aged distraction. Like golf, a
man can do it without looking like a fool, until late in
life. But it has an added advantage; he can do it in the
company of attractive young women, rather than his paunchy
golf buddies.
*** Mogambo on Monday!...below...(he's remarkably lucid
today)... |
