The Daily Reckoning - Five Signs of Financial Reckoning Day (Dan Denning)

verfasst von Firmian, 11.02.2004, 22:17

-->Five Signs of Financial Reckoning Day

The Daily Reckoning

Madrid, Spain

Tuesday, 10 February 2004

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

*** The trouble is, there's not enough trouble. Investors
"emboldened by their own desire"...

*** Uncle Sam wins at the national pastime... Financial
excesses beget no adverse consequences, nary a whisper of
protest... It's ALL good, man!

*** Civilized countries... coffee plantations... the trail of
the Faberge collection... and more!

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

The trouble with trouble is that there is not enough of it.

At least, not yet.

When markets are at bottoms - such as they were in August
of 1982 - investors are timid. As prices rise, they are
emboldened, but only reluctantly. Each sector, each
milestone, each day's news is threatening. They are
prepared to hunker down at the slightest hint of trouble.
Gradually, as long as no really serious trouble develops,
the market climbs the 'wall of worry' and the news becomes
less threatening.

Eventually, the absence of trouble breeds a carefree
attitude... a certainty that trouble is a thing of the
past... that whatever happens, investors will continue to
hunker up towards higher and higher prices - forever.

This was the state of mind of millions when the first phase
of the present bear market struck in March of 2000. A touch
of trouble had arrived. But not enough, apparently.
Investors remained buoyant, positive... and more delusional
than ever, for now they included the 'survivor's illusion'
among their many hallucinations. Having survived the bear
market and recession of 2000-2002, they believe they have
some special grace...

They are"emboldened by their own survival," says Seth
Klarman in Barron's."If three years of losses did not
extirpate investor greed, it seems likely only truly
excruciating circumstances will do the job."

The work Klarman refers to is the job of changing
investors' moods... and asset prices. Once extremely
expensive, one would expect to see them at least modestly
cheap before they are extremely expensive again. And that
requires trouble. A lot of it.

Somehow, investors must come to want to sell, something
they have been - thus far - loath to do.

Au contraire, even at today's prices, they still seem to
want to buy.

"The Consensus stock index and the Market Vane index of
investor sentiment," explains Steve Leuthold, also in
Barron's,"were recently around 81% bullish. I have never
seen a reading that high. Usually, above 65% is getting
extreme. I'm uncomfortable in crowds, and this bullish
crowd is huge... just about everybody is bullish. I don't
remember a time at the start of a new year when we have had
so much unanimity of opinion, and that is scary."

Stocks, bonds, real estate. There is hardly a single asset
class that is still cheap. Yields are pathetic almost
everywhere. Even junk bonds produce little more yield than
treasuries. Risk?"What risk?" the lumps ask. Apparently,
investors' moods are bullish on everything.

"Short sellers are again aging in dog years," comments
Klarman.

"History tells us a correction is overdue at this point,"
adds Leuthold.

And now... more news from Eric, our man in New York...

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

Eric Fry, on the trading floor in Manhattan...

- A"technical glitch" shuttered the American Stock
Exchange for three hours yesterday. But equity trading on
the AMEX resumed about midday. A different sort of glitch
hobbled the Big Board: buyers failed to show up. The Dow
Jones Industrial Average slipped 14 points to 10,579, while
the Nasdaq Composite Index fell 3 points to 2061.

- The major stock averages drifted listlessly all day, as
did bonds and the dollar. There was little reaction, if any
to the G7 meeting in Boca Raton. The gold market featured a
small bit of excitement, as the yellow metal jumped $3.20
to $407.40 an ounce. But that was all.

- Since the newswires contained conspicuously little news
yesterday, let's turn our attention to a few back-page
stories. First up, as Northern Trust economist Paul Kasriel
notes,"Banks are willing to lend and businesses are taking
them up on it."

- Says Kasriel:"Last week, the Fed released the results of
its January 2004 Senior Loan Officers Survey... Banks
greatly eased their lending terms to large- and medium-
sized firms. A net 18% of domestic banks eased their
lending standards on commercial and industrial (C&I) loans
in the three months ended January. This was the largest net
easing in lending terms since the latter half of 1993.
Interestingly enough, businesses seem to be taking their
bankers up on their new-found willingness to lend. For the
first time since early 2001, C&I loan growth at commercial
banks on an annualized 13-week basis edged (barely) into
positive territory in the second half of January."

- Of course, American corporations are not the only
entities in this fair land of ours that have been stepping
up their borrowing and spending. Heck, borrowing and
spending is our national pastime, and no one plays the game
better than Uncle Sam. One week ago, President Bush
released his budget proposal, forecasting a $521 billion
shortfall for the current fiscal year. Remarkably, the news
scarcely caused a ripple in the bond market.

- The astonishing thing is that a half-a-trillion dollar
deficit arouses nary a whisper of protest. Since the
President released his budget, bond yields have actually
fallen. In this age of financial heresy, the old rules of
financial conservatism and austerity seem not to apply.
Thus, expensive stocks may rise without limit; profligate
governments may borrow without limit, and the currency in
which expensive stocks rise and profligate governments
borrow may fall without limit... And none of these financial
marvels ever begets an adverse consequence. (It's ALL good,
man!)

- Earlier generations of investors would worry,
occasionally, about financial excesses like overpriced
stocks and over-indebted governments. But we do not worry,
nor do we modify our behavior. That's because we have
learned that big P/E ratios and big budget deficits are
just big numbers... big numbers of no particular - and
certainly, no immediate - consequence.

-"Most people old enough to vote can remember the 1980's,
another time when the government spent more than it had,"
the NYTimes remarks."Few people can think of any lasting
harm those debts caused. So it may come as no surprise that
only 2 percent of Americans named the deficit as the main
issue they would like to hear candidates discuss in the
2004 presidential election."

- If budget deficits are of little or no concern to the
lumpeninvestoriat, then the dollar's waning purchasing
power must be of no concern whatsoever. The lumps seem to
care only about the purchasing power of their houses.

- Thus, the Bush Administration, while keeping a steady eye
on the public opinion polls, pumps up the public spending
no one cares about, while deflating the dollar no one cares
about. As a result, the administration hopes to create the
economic recovery that everyone cares about... and if a
recovering economy happens to escort President Bush to a
second term, well, that's okay too.

- But maybe the Wall Street strategists and economists are
right. Maybe our massive deficit-spending is no big deal.
Maybe the old rules are, in fact, old rules that no longer
apply. And maybe the Greenspan/Bush team should submit its
innovative economic prototype to the U.S. Patent office as
the first-ever fully operational"free lunch."

- Or maybe, as we suspect, big budget deficits are still
bad and a plummeting currency is still not good. On paper,
we Americans are all poorer than we were last year. We owe
more dollars per capita than we did last year and the
dollars we have are worth less than they were last year.

- Is this what prosperity looks like?

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

Bill Bonner, back in Madrid...

*** Manufacturing shrank again in January, bringing the
number of consecutive months of decline to 42. But who
cares? We have a 'service economy' now, right? While
factory employment slumps, people get jobs in nursing
homes, restaurants and brokerage houses. What's wrong with
that?

Nothing, really. Except that, somehow, Americans will have
to pay for all the things they import from overseas.

Service industry jobs are protected from low wage
competition because you cannot import someone to park your
car or wash your laundry. But neither can you export car
parking or laundry services overseas. There's the rub. If
you can't export them... you can't sell them to foreigners.
And you can't use them to pay for the things you import.

*** We got to the Charles de Gaulle airport at 7am. By 7:05
we were ready to board a plane. No one asked if we were
carrying weapons. No one rifled through our luggage. No one
threatened to tow our car away... or warned us against
making unwelcome comments. There were no long lines. We
didn't have to take off our shoes. It was as if we lived in
a civilized country.

*** Everything seems overvalued. Except coffee, which is
near 100-year lows. Does anyone know where we could buy a
coffee plantation?

***"If you are not buying gold," says the great Mogambo,
simplifying things,"you are an idiot."

*** Our friend Byron King, back from Guatemala, sends these
thoughts...

"Permit me to comment on a news event and related article,
as reported in the New York Times of 06 February 2004.

Last week, a Russian industrialist named Viktor Vekselberg
arranged to purchase the entire Faberge collection that was
accumulated over many decades by the late Malcolm Forbes.

"The Faberge collection was recently put on the auction
block by members of the Forbes family. The collection
includes nine Imperial Easter Eggs, created by the House of
Faberge in the late 19th and early 20th centuries on
commission from Russia's Czars, and about 180 other
Russian-related Faberge pieces. Mr. Vekselberg's purchase
price was in excess of $90 million in a transaction
arranged through Sotheby's and in lieu of public auction.

"Mr. Vekselberg intends to return the Faberge eggs and
other items to Russia before 11 April, which is Easter this
year according to both the Russian Orthodox and Western
Christian holy calendars. The new owner plans to exhibit
the historic pieces in the city of Yekaterinburg, where
members of the Romanov dynasty were executed by the
Bolsheviks in 1918.

"According to Mr. Vekselberg, as quoted in the NYTimes,
'Right now in Russia, capital is being accumulated at a
huge rate and there is a question of how to use private
property.' Mr. Vekselberg, apparently, has no 'question' in
his mind as to how to use at least some of his accumulating
fortune, the fruits of his efforts in the Russian aluminum
and oil industries.

"'I consider it my duty to do this,' he told the Times,
referring to his purchase of the Faberge treasures and his
intent to return them to Russia. Thus do the Czars' Faberge
eggs travel full circle.

"Sold off to foreign interests by the Communists and what
few members of the Romanov dynasty who survived, these
articles are now returning home, courtesy of a contemporary
Russian tycoon.

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

The Daily Reckoning PRESENTS: If you believe, as we do,
that we're in an historic secular bear market, these five
indicators will help you measure the level of stress in the
system... and determine when to head for the hills.


FIVE SIGNS OF FINANCIAL RECKONING DAY
By Dan Denning

The direction of the stock market is difficult, if not
impossible, to predict.

All you can really try to determine is how likely a given
scenario is to come true. Right now, for instance, the
financial economy, or"fictitious economy," is most likely
running out of steam. The stimuli of low interest rates and
tax cuts have almost certainly lost their potency, without
leading to major new job creation.

But what, specifically, do I look at to draw these
conclusions? There are five major indicators I use. In
deference to Bill and Addison's book, I jokingly call them
the"Five Signs of Financial Reckoning Day." But I'm only
half joking.

What these indicators DO represent is how close we are to a
sudden massive shift away from"financial assets" and into
hard assets, or out of the dollar and into gold. In other
words, they tell me how likely it is that Financial
Reckoning Day is close at hand.

First, I look at the Volatility Index (VIX). The VIX is a
gauge of investor sentiment, mostly fear. The lower it is,
the more complacent investors are. And right now, it's
about as low as it's ever been. It did creep up a little
earlier this month... but last Friday, it opened at 17.7 and
closed at 16. Fear in retreat. Greed on the march. Stocks
on the rise.

Next, I look at investor appetite for speculation. If
investors are feeling lucky and bullish, it tends to show
up in the put/call ratio. Bullish investors buy calls.
Bearish ones buy puts.

Of course, a bullish investor may buy puts to hedge his
bets. But generally, the put/call ratio is a good measure
of speculative sentiment. Last Friday, the put/call ratio
fell to 0.63. If you look closely at the numbers, though,
you'll see that the put/call ratio for indexes was 1.72,
while the put/call ratio for individual equities was 0.46.

I prefer to look at the put/call ratio for individual
equities to get a read on what speculators are feeling. The
indexes are traded by institutions and firms looking to
hedge big bets. And while companies may speculate in their
own individual options, the equity put/call ratio tells you
more about how strongly bullish or bearish individual
investors are.

I also prefer this to general surveys about bullish or
bearishness... because it's what people are doing with their
money, not what they're saying. It's one thing to say
you're bullish. Quite another to put your money on the line
behind it.

The first two indicators I look at tell you about investor
sentiment and the strength of that sentiment. The next
three tell you more about the overall direction of market
and the perception of systemic risk.

To get a grip on these factors, you have to look for clues
as to whether money is moving out of one asset class or
sector and into another. In today's market, what you're
looking for is an indicator that tells you how close the
financial system is to a major shift away from financial
speculation and toward hard assets.

If you don't believe that we're in an historic secular bear
market, these indicators won't mean much to you. If you do,
however, they'll give you some idea of the level of stress
in the system... and whether the levee is poised to break.
Let me explain...

First, you must look at the state of the 'financial
economy.' When I say 'financial economy,' I mean the S&P
100, or OEX. The OEX is made up of the stocks driving this
bear market rally. It's the most powerful concentration of
stocks that gain the most from low interest rates, and have
the most to lose when interest rates rise.

The OEX has a market cap of $5.7 trillion. That's 55% of
the S&P 500's market cap of $10.2 trillion. To put that in
perspective, it means that less than 100 companies make up
over 50% of the S&P 500's total capitalization. If you're
looking for a concentration of stock market wealth, this is
where you'll find it.

What's more, the two sectors that have most benefited from
low interest rates (the lynchpin of the financial economy)
make up nearly 40% of the OEX. There are 27 financial
stocks and information technology stocks in the S&P 100.
They have a combined market cap of $2.27 trillion.

Finally, the OEX is driven by financial and tech stocks.
And the companies on the OEX represent the most actively
traded stocks in America, in terms of dollar volume. Keep
in mind that the OEX companies are listed on the three
major exchanges, (NYSE, AMEX, and NASDAQ). This truly is a
cluster of the most actively traded stocks in America - the
ones critical to a new bull market, or an even worse bear
market.

If you're looking for a broad indicator of where the stock
market is headed, you look to the OEX. It's a pure proxy
for the financial economy. And here's what the OEX is
telling us: the S&P 100 began what I believe is a new major
downward leg in the bear market on January 26th. On that
day, these stocks reached a peak... which they have yet to
regain. The financial economy follows, by extension.

Nothing notable happened on the 26th that would single it
out as the day the second big down leg of the bear market
began. But stocks did achieve some technically significant
advancements that day... from which they have retreated.

If the OEX tells us what the financial economy is doing,
the Commitment of Traders (COT) report and the BEDspread
tell us what's going on behind the scenes.

First, I use the COT report to judge the"smart money's"
interest in gold. If large speculators and commercial gold
companies are bullish on the future price of gold, it can
mean one of two things (or both): first, that a general
bull market in commodities is underway; or second, that
gold bulls are acting as"financial bears" - that is,
fleeing from financial assets to gold, the ultimate hard
asset.

I believe both readings are accurate today. And the more
bullish large speculators are on gold, the more dire the
prospects for OEX and the financial economy.

The truth is, as long as the dollar keeps falling, the gold
price will rise. I believe there's a great deal of upward
pressure building under gold right now... ready to pop. I'm
keeping my eye on the COT report to gauge the intensity of
this pressure.

Finally, there's the BEDspread. The flip side of gold
bullishness is dollar bearishness. And the ultimate
measurement of dollar risk, in my view, is the spread
between U.S. debt and emerging market debt, as measured by
my proprietary BEDspread.

In short, the BEDspread tells you how close the market is
to bailing on the dollar and forcing interest rates up.
It's the difference between the yield on GVT and EMD, two
indexes that represent U.S government debt and emerging
market debt, respectively.

The BEDspread has been hovering around 4.5 for a month now.
Emerging market debt yields went up on sell-offs in the
last two weeks, driving the yield on GVT to 9.25%. Some
would describe this as a flight to quality. I would not.
With an annual deficit of $521 billion and cumulative
Federal debt over $7 trillion, the U.S. government is
hardly a"quality" borrower.

But for now, the market is content to punish the dollar for
the government's spending sins while sparing the bond
market. For now. When the yields start converging, with
GVT's rising and EMD's falling, we'll know a seriously blow
has been dealt to the psychological health of the bond
market. The dollar pain will begin to have bond
consequences.

These five 'Signs of Financial Reckoning Day' lead me to
believe that the financial economy is on its last legs.
There is only so far the combination of low interest rates,
easy credit and tax cuts can propel it... sooner or later,
as financial debt swells, these stimuli cease to be
effective.

That the financial economy will soon run out of steam is
not certain. But it is highly likely.


Regards,

Dan Denning
for The Daily Reckoning

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gesamter Thread:

• The Daily Reckoning - Five Signs of Financial Reckoning Day (Dan Denning) - Firmian, 11.02.2004, 22:17
  • Dt. Fassung vom Investor-Verlag - Firmian, 11.02.2004, 22:19
    • Schöne Warnungen heute - Danke! Gruss (owT) - Tofir, 11.02.2004, 22:56