The Wall Street Veil of Secrecy / The Daily Reckoning

verfasst von - ELLI -, 06.12.2002, 10:44

-->The Wall Street Veil of Secrecy

The Daily Reckoning

Paris, France

Thursday, 5 December 2002

---------------------

*** Old times? The Greenspan Put is 'alive and well.'

*** Auto sales stall...gold rolls ahead... Oh no, here
comes the anti-bubble!

*** You can stop worrying about deflation, say the experts.
What, you weren't worrying about it? Well, you should be!

--- Advertisement ---

Protect Yourself - And Profit - From Investors' Secret
Enemy

The market's current troubles are nothing compared to
what's ahead - and the culprit is not what you think. But
one special class of investments is quietly on the move...
and savvy investors are cashing in, already posting profits
of 53%...125%...and 332%, even during one of the worst
markets in history!

Click here for a strategy that could protect your wealth
and lead you to 500% profits or more.

http://www.agora-inc.com/reports/OST/GainToday

------------------------

Is it beginning to seem like old times, or what? We refer
to the period of unadulterated hallucination known as the
New Era, which lasted roughly from 1995 until the end of
the century.

One of the great things about those days was the idea that
Alan Greenspan, the world's best-known public servant since
Pontius Pilate, wouldn't let it end. The central banker was
supposed to have"the Greenspan Put." Like the red restart
button on a furnace, Mr. Greenspan's 'put option' gave him
a way to keep the economy heating up - simply by lowering
interest rates.

Imagine Abby Cohen's disappointment when Greenspan finally
went down into the basement during the cold days of
January, 2001, pushed the button - and nothing happened.

What to do? Well, push it again! And again. And again.

Now, he's pushed it 12 times...to the point where there's
not much room left to push. As in Japan, short-term rates
are"effectively zero" already, since the cost of short-
term credit is now lower than the inflation rate.

Still, the"Greenspan Put" is"alive and well," says
Merrill's Richard Bernstein. Investors seem to think that
the 12th try was a charm...that finally, Mr. Greenspan had
found the perfect overnight rate for bank borrowing.
There's a warm glow in the Wall Street firebox, they
note...and the radiators throughout the entire economy are
beginning to clank and hiss.

We're not so sure. Auto sales dropped 13% in November; Ford
reported sales 20% lower. GM stock fell 5% on Tuesday.
Worldwide, there's a huge glut of automobiles - which is
driving down prices. Year to year, auto prices are down 1%.

And now NewsObserver.com tells us that builders are having
to work harder and harder to make the sales. They are
adding landscaping, larger decks and kitchen upgrades -
anything to avoid lowering prices.

The Mortgage Bankers Association expects the rates of
growth in house prices and refinancings to be cut in half
next year. Housing prices have been rising at about 9% per
year; next year it will be only about 4%, says the MBA. And
this year, $1.4 trillion worth of mortgages were
refinanced. Next year, the figure will be closer to $700
billion.

But don't worry about it. If the"Greenspan Put" fails to
do the job, Fed governor Bernanke told the world two weeks
ago that the Fed will do whatever it takes to avoid
deflation (and keep the economy rolling.)

Oh what a weird and wacky world we live in. It is as if all
the economic sages from Say to Smith to Keynes to Friedman
had been reduced to a simple, corroded logic:

Economies are nothing more than people getting and spending
money. If you want more getting and spending...make sure
people borrow - so they'll have no choice but to keep
getting. And make sure their money loses its value, so
they'll want to spend it as fast as possible.

The Fed encouraged borrowing by cutting short-term rates.
Householders jumped at the chance to bury themselves under
bigger mortgages and zero-percent auto financing.

Now that they've cut rates as far as they can (if they cut
any more, money market returns could go negative, with
operating costs higher than earnings)...the Fed is looking
at ways to destroy the currency. We don't doubt they will
find them...but maybe not as soon as most people seem to
think - more below...

Eric?

------------

Eric Fry, reporting from Wall Street...

- The Dow slipped for the third straight day, as the blue-
chip index dropped 5 points to 8,737. The Nasdaq fell 19
points to 1,430. The bulls refer to the three-day retreat
as a"healthy correction," while the bears are afraid to
call it anything other than"welcome relief."

- Semiconductor stocks - conspicuously strong performers
over the last two months - have been conspicuous losers
over the last three days. The SOX Semiconductor index
tumbled nearly 6% yesterday after a Morgan Stanley analyst
highlighted what should have been obvious to everyone:
semiconductor stocks have rallied a tremendous amount,
despite the fact that growth prospects in the industry have
improved little, if at all...Ditto for the entire stock
market.

- Meanwhile, gold is quietly gaining ground. The yellow
metal added to its $2.70 gain on Tuesday by climbing
another $1.90 yesterday. An ounce of gold now fetches about
$323.10 per ounce.

- Worker productivity grew much faster in the third quarter
than originally thought, according to the Labor
Department's latest facts and figures. The government
agency reports that productivity rose at a brisk 5.1%
annual rate - the strongest showing since 1973...Does
anybody really believe this stuff? Measuring"productivity"
in a service economy like ours seems a bit like measuring
love. What is the appropriate standard for measuring love?
Total hours in the bedroom? Minutes of conversation per
hour of mealtime? The argument-to-embrace ratio?

- Likewise, productivity does not lend itself to
measurement. And even if, by some fluke, the Labor
Department happened to measure this financial love
correctly, there's nothing about this information that
would tell an investor whether he should buy 100 shares of
IBM or buy municipal bonds...

- Beware the"anti-bubble." That's the warning from two
"econophysicists" at the University of California, Los
Angeles (my alma mater). According to the esteemed
Professors Didier Sornette and Wei-Xing Zhou,"The actions
of investors tend to produce waves of behavior, leading to
self-reinforcing phases of bull or bear markets - bubbles
and anti-bubbles."

- Based on current wave patterns, Sornette and Zhou say
they have detected the"unmistakable pattern" of an anti-
bubble, the opposite of a speculative bubble. (Is there
anything these guys won't do to get tenure?) Further, the
provocative econophysicists predict that a growing anti-
bubble will leave the US stock market about 30% lower at
the end of 2004 than it is today.

-"This anti-bubble describes the bearish phase when stock
market traders sell, sell, sell, as the stock market begins
to slide into recession," Prof Sornette explains. Those of
us without doctoral degrees might refer to this phenomenon
as a"bear market."

- Bill, you'll be happy to know that the UCLA professors
support your theory that the Japanese stock market,
advanced by about ten years, bears a striking resemblance
to the US stock market. As the Financial Times explains,
"[The professors' research] reveals a remarkable
mathematical similarity between the US market's ups and
downs since 1996 and the behavior of its Japanese
counterpart, with an 11-year time shift."...Spooky.

- The curious similarity between the Japanese economic
experience of the early 1990s and the US economic
experience of today has tempted many market observers to
conclude that the US economy is hurtling toward deflation,
just like the Japanese economy of a decade earlier.

- I disagree. Deflation is a possibility, to be sure, but
certainly not an inevitability. To the contrary, in the US,
inflation is a way of life, especially when times get
tough. It is as American as apple pie and monster truck
races, and it is an expedient"cure-all" for a nation as
heavily indebted as ours. We've got the world's reserve
currency and we can print as many as needed to alleviate
economic pain and suffering within our borders. What better
way to satisfy a mountain of debts than to print the money
with which to repay them?

- What's more, our beloved Federal Reserve chairman has
stated repeatedly that he would prefer to err on the side
of inflation, rather than risk deflation. And he's
certainly walking the walk by slashing short-term interest
rates and aggressively boosting the money supply.

- Net-net, deflation is a bad bet...More tomorrow!

------------

Back in Paris....

*** Et tu, Eric?

The question is settled, or at least that is what everyone
says. Just as Greenspan was supposed to be able to revive
the economy with rate cuts, now he's supposed to be able to
destroy the currency by 'cranking up the printing press."

The Bernanke speech seemed to close the file on the
inflation/deflation debate. Bernanke told the world -
including foreigners, who hold more trillions of dollars'
worth of U.S. assets - that the Fed would not permit a more
valuable currency. How would it avoid it? By inflating as
much as the situation required. There was effectively 'no
limit' on how much inflation the Fed could create...or
would be willing to create...in order to avoid deflation,
he said.

"These people may be misguided," writes Bill Gross," their
policies might eventually do more harm than good, but I
believe them. They will not allow the U.S. economy to
deflate as long as the current regime (read:"Greenspan's
Fed") is in power."

Yesterday, Gross joined James Grant, Steve Sjuggerud, and
many other prominent analysts and economists, including our
own Eric Fry, concluding that there was no longer any
question of deflation. In their minds, it was as if German
central banker Hugo Stinnes had announced to the world in
the early 1920s that Germany intended to destroy the
deutschemark in order to skip out of its war reparations.
From August of '22 to November of '23, consumer price
inflation rose by 10 to the 10th power...so that by the end
of November, a single dollar was worth 4.2 trillion marks.

And today's printing presses are even faster, they note.
End of conversation.

Paper money never holds its value for long. We don't doubt
it. But today's money is not even paper. When it goes bad,
you cannot even wallpaper your bathroom with it; money
today is mostly electronic. People measure their spending
power not in piles of paper, but in digits on a bank
statement, credit card bill, or money market account. And
guess what. It is as easy to knock off a digit as to add
one. Decimals go in both directions.

We don't doubt that the government will eventually destroy
the dollar. But it still would not surprise us if a spell
of deflation and recession destroyed millions of investors
first. More to come...!

--- Advertisement ---

Turn $5,000 Into $205,882 by January 17, 2004
(And Grab Another $124,990 Bonus Profit While You're At It)

Once you click on the link below and you'll completely
understand why this opportunity is so enormous...and why
we're so confident we're a year or less away from literally
hundreds of thousands of dollars in profits.

And that's on the low side... You could make millions!
http://www.agora-inc.com/reports/OXF/WOXFCB22

-----------------------

The Daily Reckoning PRESENTS: While the vast majority of
stocks have been going down for three years now, 'short
sell' candidates are still abundant, suggests C. Alexander
Green. Especially given the rally we've had off the
October lows. But will you here about them from your
broker? Not likely.


THE WALL STREET VEIL OF SECRECY
by C. Alexander Green

What your broker is not telling you is costing you a
fortune. I'm not talking about 12b-1 fees or the Mt.
Rushmore-size internal expenses on the annuity you own.
Those are merely termites that gnaw away steadily at your
assets each year.

I'm talking about top-notch investment intelligence, here.
Your brokerage firm has this information and refuses to
share it with you...even though its brokers use it
themselves to make hundreds of millions of dollars every
year. Why?

Well, this Wall Street Journal headline from last week is
the beginning of an explanation:"Wall Street Fines May Top
$1 Billion."

"Regulators from the New York state attorney general's
office," Writer Charles Gasparino explains,"the Securities
and Exchange Commission and others are discussing fines
against Wall Street that could total more than $1 billion,
as they head into the final stages of a broad investigation
into whether securities firms misled small investors with
faulty research during the stock-market boom of the 1990s."

High-profile cases have already been splashed across the
financial press. You'll recall, for example, Merrill's head
Internet analyst, Henry Blodget, privately referring to his
department's"strong buy" recommendations as"dogs,"
"powder kegs" and"pieces of junk," among more descriptive
phrases unfit for print. And Citigroup analyst Jack Grubman
upgrading his rating on AT&T to help get his twins into an
exclusive pre-school in New York City.

As the SEC's investigation moves forward, more bodies like
these are likely to float to the surface. In all, Wall
Street firms are looking at total fines that will likely
exceed the $1 billion civil settlement in 1996 to resolve
charges of price-fixing on the Nasdaq. But what does this
have to do with Wall Street firms withholding crucial
investment intelligence?

Everything.

You may be aware of the potential conflict that exists
between your desire to make money and your broker's desire
to make a good living. But that pales in comparison to the
conflict of interest that exists between a major
brokerage's retail clients and their investment banking
clients.

On Wall Street, it makes getting an honest opinion on a
stock about as easy as Tom Hanks' dental work on"Cast
Away." It doesn't matter how large your brokerage account
is, or how long-standing your relationship, it's a drop in
the ocean compared to the business your major brokerage
seeks from the Fortune 500 companies that raise billions in
capital through the nation's stock and bond markets.

Wall Street's biggest firms are endlessly wooing these
companies. And the last thing they need are competitors
bringing up the unpleasant fact that their research
departments have a sell recommendation on the client's
stock. That would do nothing to grease the wheels of
commerce. So... brokers recommend selling virtually
nothing.

"Of 6,000 recommendations made by Wall Street firms during
1999," John C. Bogle, founder of the Vanguard Group founder
recently commented,"one study found only eight recommended
'sell'." Eight sell recommendations. Five thousand nine
hundred and ninety two buy recommendations. (I won't point
out that 1999 also happened to be the premier selling
opportunity of the past two decades. That would be
impolite.)

Investment banking clients can't stand to hear the words
"sell" about their shares - around which both their pension
value and option compensation revolve. Likewise, you can
bet a broker saying"sell short" is tantamount to
volunteering to serve with Custer at Little Big Horn.

That's the real reason why you've never seen a short
recommendation from a major Wall Street firm. That's why
most brokers have never entered a short sale order in their
entire career. And that's why your financial advisor is
likely to advise you that selling short is"too risky." It
is...but first and foremost, for his firm's investment
banking division.

The reality is that Wall Street's firms will never tell the
truth about the companies they cover, especially when their
opinion is negative. Instead, as I'm sure you've noticed,
they hide behind fuzzy language, using terms like"neutral"
or"reduce" instead of standing up and just saying"dump
it." Other firms use obscure index-related terminology like
"marketweight" or"underweight." Both are lily-livered ways
of saying a stock is unlikely to outperform the market
averages.

All this obscure terminology demonstrates that Wall Street
still bows down on one knee before their big investment
banking clients. (Sorry if that knee also happens to be on
your chest.) Of course, Wall Street firms deploy billions
of dollars of its own capital selling short every year.
Trading departments are shorting the bejesus out of every
troubled company it can find. After all, it is incredibly
profitable.

Any investor worth his salt knows that stocks go down a lot
faster than they go up. That means the profits come
quickly. And while the vast majority of stocks have been
going down for three years now, the pickings are still
excellent. Especially given the rally we've had off the
October lows.

Here's how you can find suitable 'short sell' candidates...
and bank profits despite the Wall Street veil of secrecy.
When screening the 8,000 public companies for short
candidates, the process is the very INVERSE of what 99% of
all investors are doing. Rather than looking for an
undiscovered gem that will soar in value, you look for
troubled companies. What gets me excited, for example, is a
stock whose 90-day moving average bears an uncanny
resemblance to a drunk going down a flight of stairs.

For the most part, a good short is grappling with serious
fundamental problems, is already in a confirmed downtrend
and has been issuing earnings estimate revisions -
downward. If a company meets all three of these
qualifications, it might be worth a closer look. Then, any
one of the following telltale signs indicates the company
is really in trouble: low profit margins, high debt levels,
paltry operating income, high price-to-book values, lofty
prospective P/E's, troublesome litigation, signs of
management incompetence, negative returns on equity,
unfavorable institutional activity and, of course...insider
selling.

That's a lot of homework - but it's worth it. For instance,
most investors have found this to be a difficult year. But
in 2002, double-digit profits were still to be had as these
big name corporations got hammered by the market: Eastman
Kodak, Merrill Lynch, Qwest, Siebel Systems, Hewlett
Packard, Halliburton, Sealed Air, FleetBoston, and Linear
Technology, among hundreds of others not so well known.

It's unfortunate that Wall Street categorically refuses to
share its short-selling intelligence with retail clients.
But, in a positive way, it reduces the competition for
great short-selling ideas.

Best Regards,

C. Alexander Green,
for The Daily Reckoning

Thread gesperrt

 

gesamter Thread:

• The Wall Street Veil of Secrecy / The Daily Reckoning - - ELLI -, 06.12.2002, 10:44