Shock And Awe / The Daily Reckoning

verfasst von - Elli -, 14.06.2003, 15:51

-->Shock And Awe

The Daily Reckoning

Paris, France

Friday, 13 June 2003

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*** Dow up...S&P up...Nasdaq up...New bull? We have to
ask...

*** Money supply surging again...Alan Greenspan and natural
gas...

*** Is Martha Stewart a political prisoner?

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The Dow inched up 13 points yesterday, to settle in at
9,197.

From its low on March 11, the Dow has now risen over 20%...
and when compared to the other major indexes, it's pulling
up the rear. The S&P 500 has increased by 23% and the
Nasdaq has raced ahead 28%.

As 20% is generally considered enough to suggest a change
market trend from bull to bear...we're at least inclined to
ask, have we entered new bull?

But having done our duty and posed the question, we'll
spare short-time readers of the Daily Reckoning the
pretense of suspense and get right to the answer: no.

"The real trouble with this world of ours is not that it is
an unreasonable world," wrote the popular historian G.K.
Chesterton,"nor even that it is a reasonable one. The
commonest kind of trouble is that it is nearly reasonable,
but not quite. Life is not an illogicality; yet it is a
trap for logicians. It looks just a little more
mathematical and regular than it is; its exactitude is
obvious, but its inexactitude is hidden; its wildness lies
in wait."

In other words, the world maintains the appearance of
mathematical precision, but 'reality' often thwarts the
calculator - human or otherwise. You may have heard Bill
Bonner suggest, on occasion, that given the lack of
certainty about the world, we can only know things by way
of analogy.

By analogy, you may have also heard us say, Japan offers
the best possible explanation of what's going in the stock
market today. After the collapse of the Japanese market in
1989, the Nikkei has rallied more than 25% on 5 separate
occasions, while still continuing its death march. Despite
the rallies, over a 14-year period, Japanese stocks have
still lost 80% of their value.

Austrian economists provide an explanation for the short
upward bursts in an otherwise down-trending market.

"The tighter monetary stance that the Fed introduced on
June 1999 has likely triggered the present bear market,"
Frank Shostak explains. By the time rates reached 6.5% by
May 2000, there was a sharp fall in the 'momentum of money'
AMS (an Austrian measurement of the money supply) which
corresponds with the tighter stance adopted by the Fed.

"Now, since January of this year, the growth 'momentum of
money' shows a visible rebound," Shostak continues."The
yearly rate of growth jumped from 1% in January to 5.5% in
May...[which] should provide strong support for the stock
prices of various non-productive activities at the expense
of wealth-generating activities."

In other words, given the Fed's penchant for printing
money, stock prices could rise dramatically, but earnings
will remain...well, unearnt.

Indeed, while the market rallied, the P/E ratio of the S&P
500 stocks (using reported earnings) increased to 34 in
May...from 33 in April. That, dear reader, means the P/E is
traveling in the opposite direction from the historical
average... which Shostak puts at 18.

So...Eric, what's the word on the Street?

-----------

Eric Fry, writing from New York...

- Alan Greenspan isn't omniscient after all!...Only two
days after warning the nation that soaring natural gas
prices pose a risk to the economy, the price of natural gas
plummets. Yesterday, the July contract dropped 59 cents, or
nearly 10%, to $5.62 per million British thermal units. It
was bound to happen eventually...the natural gas price
can't go up each and every day. Only stocks possess that
sort of magic.

- Yesterday, the magical Dow Jones Industrial Average
advanced 13 points to 9,197, while the Nasdaq added half a
percent to 1,653. These meager gains were enough to push
both averages up to new one-year highs. Ironically, while
the stock market soars on the wings of hope, the economy
shuffles along like an octogenarian on a Boca Raton
sidewalk.

- Weekly jobless claims dipped to a still-dismal 430,000
this week, while May retail sales edged up a lackluster 0.1
percent. Business inventories rose a scant 0.1% in April.
In short, there's a whole lotta nuthin' goin' on out on
Main Street, which makes the stubbornly high energy prices
all the more worrisome. Notwithstanding Thursday's steep
selloff in natural gas prices, Mr. Greenspan may have cause
for concern about rising gas and oil prices.

- Yesterday's steep"correction" in the natural gas pits
was long overdue. The clean-burning fuel has more than
doubled over the last couple of years, and has continued
rising this year. But finally, the bears got a chance to
sell the market, thanks to the news that the nation's
underground gas supplies jumped 10% last week.

- Even so, natural gas inventories remain 35% lower than a
year ago, and 25% lower than the five-year average. So it
might be premature to kiss the natural gas bull market
goodbye...Which also means that it might be a bit premature
to dismiss the bold prediction by T. Boone Pickens a couple
of months back:"Gas prices would not fall below $4.50
again in my lifetime." The life-long oilman's prediction
would have been a bit more audacious if he were 26 instead
of 76.

- Nevertheless, the point is clear: the bull market in
natural gas is for real. The primary reason for Pickens'
bullishness is a familiar one - demand"exceeds" supply.

- John Myers emphatically agrees."The bull market in
natural gas is the real deal," says Myers,"and Canadian
oil and gas companies will be the biggest beneficiaries of
the rising gas prices. Canada's got lots of gas and the
United States needs it. Although Canada supplies only about
one-sixth of U.S. natural gas consumption," Myers explains,
"it has been supplying about half of all NEW U.S. gas
demand for the past decade."

- In other words, Canadian companies have become the
marginal suppliers to the North American market, which is
why Myers focuses his research efforts on selected Canadian
companies. In the past year, North American natural gas
inventories have dwindled to the lowest level in nearly 30
years."[But] there is virtually nothing that can be done
to increase the supply of natural gas," one industry expert
testified this week."This is a multi-year process, and big
projects - whether it's LNG [liquefied natural gas]
importation or natural gas from the north - take a long
time."

-"Some industry watchers are calling the natural gas
supply-demand imbalance a 'crisis,' albeit a silent
crisis," the Pittsburgh Tribune-Review notes,"because few
outside the industry have been concerned." It's true, no
one is organizing mass protests against rising gas prices.
And yet, many folks suffered a doubling of their energy
bills last winter. Many companies are also feeling the
pinch of rising oil and gas prices.

-"If crisis means to you that we will run out of fuel
(natural gas), that we will freeze in the winter or melt in
the summer, you have little to worry about," said Richard
Levitan, president of the consulting firm Levitan &
Associates, Boston."If crisis means to you economic
shocks, then get ready."

- We are ready. We suspect that John Myers' readers are
ready. But what about the owners of 10-year bonds yielding
3.16%, or the owners of stocks selling for 30 times
earnings?...Are they ready?

-----------

Addison Wiggin, back in Paris...

*** Is Martha Stewart...a political prisoner?

*** Martha, it seems, had a feeling the 4,000 shares she
owned in ImClone were going to tank...so she put in a sell
order on them. She claims she placed the order before her
pal Sam Waksal - former scientist and CEO of ImClone, now
convicted felon - told her anything about the company's
balance sheets. At first, her broker backed her up - then
he rolled over.

At least, those are the details as far as we can tell by
sifting through the drivel that portends to be the news
these days. For all we know, she may have added too much
yeast to a bunt cake, and served it to the wrong people.
But something disturbing this way comes.

For their part, the SEC has not accused the matron of
Maytag of"insider trading," a charge that may have been
warranted were she to have actually peeked under the hood
at ImClone. But they do charge her with"obstruction of
justice"...for what? For mounting her own defense? We don't
know.

But a NYTimes piece quotes a former attorney for the SEC:
"The deterrent effect is immeasurable. Even if the
government puts a thousand hours into building this case
against Martha Stewart, the risk-reward ratio is enormously
positive and constitutes a very prudent allocation of
government resources."

"One cannot discount the role of politics here," writes
William Anderson, an adjunct professor with the Mises
Insitute."The government is seeking to make her into a
political prisoner. It is politics, not the pursuit of
justice, which is driving this case...Her wealth and public
persona make her a convenient target of a very political
U.S. Department of Justice, and of U.S. attorneys who see
the example of the Guiliani path to fame and fortune.

"In the end, we are likely to have a well-known person
owning a felony record and being sentenced to prison or, at
best, receiving a suspended sentence or probation,"
Anderson continues,"and a once-prosperous company in
tatters. Oh, and we will see some federal prosecutors being
f^ted as though they had just solved the Case of the
Century. These are dark times, indeed, for the pursuit of
justice in the United States of America."

Dark times, indeed...dark times.

Addison Wiggin

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

The Daily Reckoning PRESENTS: Bill Bonner, bemused by the
demise of investors' latest fixation...


SHOCK AND AWE
by Bill Bonner


"I think we differ principally in that you assume the
future is a mere extension of the past whereas I find
history full of unexpected turns and retrogressions."

- Winston Churchill


Our mouths hang open.

What kind of a mad, mad world is it we live in?

Our subject today, dear reader, is bonds. U.S. Treasury
bonds, to be precise. They are said to be safe investments.
Are they?

We are old enough to remember Eisenhower. Which means we
should be old enough to know that the investment world is
full of surprises. In fact, we rather enjoy them. That
people should lose the most money from the most popular and
fashionable investments seems not only natural to us, but
fitting. That they should make the most profit from the
most despised investments, too, seems right. It is as if
the markets brought a little bit of the kingdom of God down
to the ground, where the last are first and meek investors
inherit the earth.

Still, we shiver when we consider the current status of the
most popular and fashionable investment today - U.S.
treasury obligations.

Peter G. Peterson - not to change the subject, but to
elaborate upon it - is the worst kind of political hack. We
have never met the man, but by reputation, he is honest,
smart and earnest. Like Kurt Volker, former head of the
Fed, Peterson is willing to look at numbers, speak his
mind, and do what he thinks necessary to keep the system
solvent. Were there more of his stripe in government,
people might come to trust it.

Fortunately, there are also men like George W. Bush and
Alan Greenspan.

We have been accused of having a bias against Bush and
Greenspan. We deny the charge. We love them both, in
roughly the same way and measure that we like performers on
the hit show 'Jackass.' After so many years of putting up
with mediocrities, it is a genuine relief to have such
exceptional mountebanks in high office. And while a
Peterson or a Volker might have supported the dollar with
sound fiscal and monetary policies, thus sustaining the
illusions of paper money for another generation or more,
this dynamic duo seem ready to destroy the dollar right
before our eyes. And the bond market, too. It should be fun
to watch.

"Among the bedrock principles that the Republican Party
stood for since its origins in the 1850's," writes Peterson
in the New York Times,"is the principle of fiscal
stewardship - the idea that government should invest in
posterity and safeguard future generations from
unsustainable liabilities. It is a priority that has always
attracted me to the party. At various times in our history
(especially after wars), Republican leaders have honored
this principle by advocating and legislating painful
budgetary retrenchment, including both spending cuts and
tax hikes.

"Over the last quarter century, however, the Grand Old
Party has abandoned these original convictions. Without
ever renouncing stewardship itself - indeed, while talking
incessantly about legacies, endowments, family values...and
leaving 'no child behind' - the GOP leadership has by
degrees come to embrace the very different notion that
deficit spending is a sort of fiscal wonder drug. like
taking aspirin, you should do it regularly just to stay
healthy and do lots of it whenever you're feeling out of
sorts."

When George W. Bush took office, Peterson explains, the
next 10 years were expected to produce a $5.6 trillion
deficit. By the end of 2002, that number had been reduced
to $1 trillion. More recently, the figure has sunk to minus
$10 trillion; the national economy seems to be feeling more
and more out of sorts.

That is just the public debt. Private debt has risen, too.
Altogether, corporate, individual and public non-financial
debt rose from about 140% of GDP in the Eisenhower years to
nearly 200% of GDP today.

But when a team of economists set in motion by former
Treasury secretary Paul O'Neill did a full exam, they found
that public debt alone, including health and pension
liabilities for the baby boomers, measured more than 400%
of GDP...$44 trillion.

Even more surprising than the diagnosis is the quack
treatment now being applied, like leeches, on the
collective economic body. Though the problem is clearly too
much debt, too much credit, too much spending, too many
deficits (budget and trade) and too many dollars...both
Bush and Greenspan hold up a needle the size of jackhammer
and squirt in more.

Easy credit has seemed to produce such happy effects over
the last 50 years. They cannot believe the near future will
be unlike the recent past.

And we cannot say that they are wrong. We merely note that
their field of vision is remarkably short. If they merely
looked across the Pacific, to Japan, they would see that
producing stable, modest rates of inflation is harder than
it looks. Or they could look across the Rio Plata, to
Argentina. Or to America itself in the 1930s.

Of course, we can anticipate their answer as well as you
can: this is different. True; that it is. But though modern
easy credit in the U.S. may be different in circumstance,
it is not necessarily so in result.

Today, the most astonishing thing about this mad investment
world is neither the extremity of the U.S. financial
condition, nor the absurdity of the official response.
Perhaps at no time in the past has the U.S. balance sheet
looked so bad. Still, investors are willing to lend the
country money at the lowest yields in two generations. The
two-year Treasury note yields only about 1.6%. A five-year
note brings the lender only 2.9%. Adjusted for current
inflation, the likely rate of return is about zero. Who in
his right mind would make such an investment?

Never before have investors had so much confidence in
something that deserved so little.

Bill Bonner

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• Shock And Awe / The Daily Reckoning - - Elli -, 14.06.2003, 15:51