It's The War, Stupid / The Daily Reckoning

verfasst von - ELLI -, 05.03.2003, 16:07

-->It's The War, Stupid

The Daily Reckoning

Paris, France

Wednesday, 5 March 2003

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

*** A"Mauve Alert"...watch out!

*** Dow falling...could be worse than '29-'31...buy
Newmont...But Greenspan saw no reason to sell stocks in
2000...and he's not worried now...

*** Housing slipping...but at least we're safer, right?

"Mauve Alert."

We were so impressed with the administration's color-coded
anti-terrorism system (more below), we decided to make more
use of the light spectrum ourselves.

We might have chosen black or blue, which would have been
more in keeping with our expectations, but we're trying to
be less depressing. So, today is mauve. Which is not as
dangerous as fuchsia but a lot more treacherous than, say,
chartreuse.

The reasons for our alarm are many. Yesterday, the Dow
reached its lowest level so far this year, tripping Dow
Theory sell signals. We are in the second phase of a major
bear market, we believe. By fits and starts, stock prices
work their way to lower - until they finally reach
attractive levels...and people finally give up on them. We
don't know any more than the Bush administration - but we
feel a fit coming on...

Normally, this part of the year is the most bullish season.
Stocks typically rise in the winter and ease off in the
summer."Go away in May," has been good advice on Wall
Street for several generations.

But instead of rising, the Dow is falling. So is consumer
confidence. And consumer spending. And employment. And bond
yields. And auto sales. And homebuilding stocks. (Kaufman &
Broad fell $2.87 yesterday...Lennar dropped $4.) And the
dollar.

Meanwhile, we approach a war...and what could be the
biggest economic setback in U.S. history...the End-of-the-
world-as-we-have-known-it...when the dollar collapses and
foreigners stop financing America's deficits. All of a
sudden, Americans would have to do their own saving...and
the economy would sink into a deep, prolonged slump,
possibly aggravated by long, drawn-out, costly military
adventures in the Middle East.

Oops...that doesn't sound very up-beat, does it? But won't
it be a delight when what ought to happen does happen? And
yes, it is a mess when Humpty-Dumpty falls off the wall,
but is it not also amusing?

Michael O'Higgins is looking for a depression to begin
soon...or to be already in progress."Perhaps the greatest
deflation and depression of all time," he told the Miami
Herald over the weekend. O'Higgins, author of"Dogs of the
Dow," predicted 3 years ago that stocks would lose half
their value. Since then, the S&P 500 has fallen 41%. Now,
he says, the damage is far from over. It could be worse
than the period '29-'31, he continued, as today's
depression would come"following the greatest speculative
boom...of all time."

"The hangover may prove to be proportional to the binge,"
adds Warren Buffett.

So what do you do when you get a"Mauve Alert"? You move to
gold, says O'Higgins,"because it's real money; because it
has held its value for thousands of years, because it's not
subject to manipulation by government or central bankers or
dishonest corporate executives."

Even during the Great Depression, '29-'39, gold rose 69%.
O'Higgins reportedly owns only one stock: Newmont Mining.

Over to you, Eric...

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

Eric Fry, reporting from New York...

- The stock market stumbled again yesterday, as the Dow
fell 133 points to 7,705 - a new closing low for 2003. The
Nasdaq slipped about 1% to 1,308. The hapless greenback,
meanwhile, fell to a new four-year low of $1.092 against
the euro. Bad news for stocks yesterday was good news for
the"safe havens" - gold and Treasury bonds. The yellow
metal gained $4.00 to $353.30 an ounce, while the 10-year
Treasury rallied to push its yield down to a 5-month low of
3.64%.

- Stocks fell for many reasons, but no reason in
particular. A bomb blast in the Philippines, dour words
about the U.S. stock market from Warren Buffett and
continuing Iraqi war jitters all conspired to drag the
market lower. The Oracle of Omaha's annual letter to
Berkshire Hathaway shareholders flatly states:"Despite
three years of falling prices, which have significantly
improved the attractiveness of common stocks, we still find
very few that even mildly interest us." (If memory serves,
we've expressed a similar sentiment once or twice before in
the Daily Reckoning.)

- Housing stocks were among yesterday's conspicuously large
losers. The S&P Homebuilding Index tumbled seven percent,
notwithstanding the fact that the Chairman of the Federal
Reserve was busily assuring a group of bankers in Florida
that there is no housing bubble in the U.S.

-"The very large flows of mortgage funds over the past two
years have been described by some analysts as possibly
symptomatic of an emerging housing bubble, not unlike the
stock market bubble whose bursting wreaked considerable
distress in recent years," Greenspan explained."But any
analogy to stock market pricing behavior and bubbles is a
rather large stretch...

-"Clearly, after their very substantial run-up in recent
years, home prices could recede," the chairman allows."A
sharp decline, the consequences of a bursting bubble,
however, seems most unlikely."

- That's a relief!...The same government bureaucrat who
failed to see the massive stock market bubble while it was
sitting in his lap, now confidently assures the nation that
the so-called housing bubble is a figment of our collective
imaginations. Interestingly, Greenspan does admit that if
the housing-bubble-that-does-not-exist were to burst, or
merely deflate, trouble would ensue.

-"Even modestly declining home prices would reduce the
level of unrealized capital gains and presumably dampen the
pace of home equity extraction," he says."Home mortgage
cash-outs and home equity loan expansion would likely
decline in the face of declining home prices...The frenetic
pace of home-equity extraction last year is likely to
appreciably simmer down in 2003, possibly notably lessening
support to household purchases of goods and services."

- Should we be worried about a housing bubble? Most of
God's creatures never worry about such things. They don't
worry about the market value of their dwelling places."The
birds of the air," to borrow from St. Matthew's gospel,"do
not sow; neither do they reap, nor gather into barns," nor
do they worry about how well their nests would appraise
against a set of bird-nest"comps". Then again, the birds
of the air don't have to worry about getting a cash-out
refi mortgage in order to buy a big-screen TV. Only Man
wrestles with such anxiety-inducing issues, especially when
Man is desperate for cash.

- Happily, for the past several years, the strong housing
market has been allaying some of Man's financial anxieties.
Thanks to plummeting long-term interest rates and the ready
availability of"cash-out" mortgages, homo erectus
consumerus has been able to continue accessing money that
does not belong to him in order to continue buying things
he doesn't need.

- But the robust housing market is showing some mild signs
of weakness. For one thing, within the Conference Board's
recent consumer confidence survey, only 1% of respondents
said they plan to buy a house in the next six months.
That's down 20% from the 1.2% who said in December that
they were planning to buy a house. Furthermore, the
inventory of homes for sale is inching higher, while home
prices are slipping lower. The average national home price
has slipped about 3% since the middle of last year.

- These data are not terribly troubling just yet, but they
bear watching, housing bubble or no.

-----------

Back in Paris...

*** Darn. The price of gold jumped yesterday. We got our
coin order in time to catch the recent low, but we were
hoping to buy more.

*** Maybe gold will go nowhere, of course. Maybe it will
even fall in price. But what do we care? We buy it for
insurance. No one complains that his wife doesn't get to
cash in his life insurance policy. Likewise, if the price
of gold doesn't go up...then, the U.S. economy has not gone
to hell. We still have our jobs...our homes...our piggy
SUVs...our snobby wines...

*** Your editor will still have his Savile Row jacket too.
He picked it up, finally, from his London tailor on a
recent trip. It looks great...well, at least as good as a
jacket he could have gotten at Brooks Brothers for a third
the price. But now he will treasure it...maybe he will take
out an insurance policy on it...or put it in a safety
deposit box - for it is too precious to wear. Or else, he
will wear it every day, in order to get his money's worth.

***"Dad, it looks dorky," was the judgment of his 9-year-
old.

***"Veddy, veddy English," came the verdict of his model
daughter."Too bad..."

*** In addition to the thousands and thousands of county
and municipal police, security guards, state troopers, FBI,
BATF, CIA, NSA, Secret Service, airport security, highway
patrol, Coast Guard, Marines, Navy, Air Force, Army,
Special Forces, and cross-walk guards...now the Department
of Homeland Security is officially open for business. We
feel so much safer; for every scrawny terrorist hidden in
the caves of Afghanistan, there are now at least 10,000
more fat derrières right out in the open - in cushy office
chairs spread across the nation.


The Daily Reckoning PRESENTS: Lynn Carpenter with a few
choice words for"deep thinkers", economists and
politicians, tries to out-contrarian the contrarians.


IT'S THE WAR, STUPID
By Lynn Carpenter

In the last year, there has been a lot of market comment on
how the stock market rebounds after crises. Most of the
charts show how much stocks rise after 60 days. I recently
gathered up the weekly index numbers from our four most
recent wars to see what really happened.

The market does not simply"rebound" after a crises that
leads to war. It goes straight into an uphill ramp that
would support a Mack truck.

The shorter the war, the better it is. Only Vietnam's rise
was subdued - but it is hard to pinpoint when that war
really began as"advisors" became soldiers and peace talks
preceded troop withdrawals. We can expect the market to
rise this time, too.

It doesn't have to happen, but there's nothing in the
economy standing in the way. Only problems of the kind
we've fixed before. It's not the threat of war that has the
market down - it's the delay that is keeping the bull at
bay. In fact, I would go so far as to say that you can
thank Washington for unplugging the November rally.

Of course, by suggesting"war" is the problem, I'm opening
myself to a flood of criticism from all the"deep thinkers"
out there who are convinced that there is a deeper crisis
brewing in the economy, and a pending invasion of Iraq
couldn't possibly have any effect on the markets.

Unfortunately for the brilliant, sometimes, what looks like
the big problem IS the big problem.

Up to this point, about the only people to benefit from all
this saber rattling so far live in Akron, Ohio. That's
where most of the nation's supply of duct tape is made.
After Tom Ridge's jerrybuilt Department of Homeland
Security scared everyone from New York to Charleston with a
code orange terror alert, and then suggested buying duct
tape and plastic to create a 'secure room', you couldn't
find enough silver stuff on the whole East Coast to repair
a hangnail.

That's the silly side of the PR run-up to this war the
president wants so badly. By now, the whole country
suspects that even if Saddam Hussein volunteered to retire
to a nunnery in Siberia, the White House would still find a
reason to attack Iraq.

What is serious about this threat from the Middle East has
been made silly in the PR process. On the truly serious
side, there are several healthy young men and women who may
be living their last weeks now. They may have to fight. I
wish this gung-ho administration would mention the cost,
but it won't. The Bush daughters won't be in Iraq, so the
heck with other people's kids.

Don't get me wrong...I'm no softie on Hussein, and
certainly no admirer. Possibly war is necessary. I am
skeptical, because I doubt we're likely to get anything
resembling"truth" from the likes of Defense Secretary
Donald Rumsfeld and Homeland Security's Tom Ridge. Even if
these two knew it, why would they want"us" to know it,
too?

Hussein is a small-time thug compared to Pol Pot, Idi Amin,
or Kim Jong Il. All of whom got"get out of jail free"
cards from US administrations. Robert Taylor is about equal
to Hussein in the number of political murders committed.
Can't place the name? Taylor's that guy in Liberia.

As for the nuclear threat...We're more likely to be hit by
some of the lost materiel from the former U.S.S.R. that has
fallen to Russian Mafiosi. Pakistan and North Korea are
miles ahead of Iraq in nuclear power and about 1000 times
more scary.

The problem with the market right now IS Iraq...or more
accurately, the very successful PR campaign to keep war
talk in the news. It's not the economy.

This may come as a shock to Daily Reckoning readers, but
not one significant bit of market-driving economic news has
worsened since November. Far from it. Capital spending is
rising; durable goods orders and shipments are up. The
inventory overhang is down. Savings are up. Nobody has
raised interest rates. Foreign investments in stocks grew
another $100 billion last quarter (although direct
investment in factories and real estate is down). The GDP
is up.

Altogether, most of the news is a bit better these days.
I'll admit that the trade deficit is bad and the current
account deficit is very bad. But I can assure you, Joe
Sixpack doesn't know any of this. He's not cutting back on
his 401(k) contributions because of the current account
deficit.

And yes, the dollar's weaker. But that's not even bad news.
It's just what American farmers and manufacturers were
praying for a year ago. A little more of this and the trade
balance and the current account deficit will self-cure. The
last time the dollar weakened, the economy did very well.

It's not the economy. It's the war.

Anyone who says otherwise is trying to be clever or got it
backwards. The economy doesn't predict the market...the
market is better at predicting the economy six months
ahead. And it's a so-so fit at that.

As an investor, you can skip the economic news if you want
to know what's up with the market. The only question of
consequence right now is,"when does the war start?"

Regards,


Lynn Carpenter
for The Daily Reckoning

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• It's The War, Stupid / The Daily Reckoning - - ELLI -, 05.03.2003, 16:07