Fattened by Hors D'Oeuvres

The Daily Reckoning
Weekend Edition
August 4-5, 2004
Baltimore, Maryland
By Addison Wiggin and Tom Dyson

"If we had kept our fiscal house in order and saved our money instead of squandering it on (overpriced) houses and (overvalued) stocks and bonds," writes our friend Paul Mampilly of Capuchinomics.com, "we would be sitting at a king’s buffet. Instead, we’ve fattened ourselves on hors d’oeuvres, before the entrée was served."

Mampilly is bearish on bonds…he thinks we have just witnessed a secular peak in the U.S. Treasury market. "Even if nominal U.S. economic growth averages 4% (2% growth + 2% inflation) over the next decade," explains Mampilly, "the American consumer will not be able to maintain the level of purchases to keep China and Japan invested in treasuries at current interest rates. Interest rates will rise significantly to maintain their attractiveness to foreign buyers."

10-year bond yields have gained 17 basis points in the last two days, closing Friday at 4.29%. On Wednesday, yields made a new 5-month low, trading as low as 4.08%. Could the turnaround mark another change in the tide? Might yields be starting the next upward leg of the bond bear market as sentiment swings once again from deflation to inflation? As ever, here at the Daily Reckoning, we’re not sure. At first glance, Friday’s payroll numbers were solid – 144,000 new jobs were added in August, roughly hitting economists’ predictions. Washington’s sigh of relief was palpable…in fact, we thought we could hear it all the way from Baltimore.

Of course, we don’t put much stock in the numbers. We received this note from an in-house number cruncher yesterday, "Just took a detailed look at the employment statistics. Of the 144,000 new jobs the BLS just reported, 120,000 are courtesy of the "net birth/death ratio. (That’s from that computer program Dr. Richebächer blames for distorting the economy’s health.)"

Regardless of statistical semantics, short-term interest rate futures traders in Chicago saw the report as confirmation of a September rate hike. Futures prices have now priced in a 96% chance of a 0.25% rate increase later this month.

While bond traders were busy pushing up yields with a flurry of sell orders, stock traders were pummeling tech stocks. The Nasdaq took a 29-point hammering after Intel – and other chipmakers – disappointed the market with less than cheery outlooks. The Nasdaq traded down to 1,844 for a 1% weekly loss. Intel shares fell 7.3% while Altera shares fell 6.6 percent; Cypress shed 8.9 percent; and Integrated Device dropped 5.6 percent.

But while the Nasdaq lags, the Dow and S&P continue their winning streaks. Despite mild losses on Friday, the Dow has now had 4 wining weeks in a row, up 0.6% to 10,260 this week. The S&P was up 0.5% for the week, closing at 1,114.

Contributing to Friday’s market malaise, the Institute for Supply Management reported yesterday that its non-manufacturing index fell to 58.2 percent from 64.8 percent in July, indicting that business is still expanding, albeit at a slower pace.

The U.S. dollar rallied in the wake of Friday’s news. The dollar rose 0.9 percent versus the Japanese yen to 110.46, and 0.9 percent versus the euro to $1.2058.Gold was bashed, pushing prices to their lowest levels since mid-August. December gold closed down $5.50, but still remains above $400 an ounce. The barbarous relic closed Friday’s session at $402.50.Crude oil also ended the session lower. Crude for October delivery closed down 7 cents at $43.99 a barrel in New York.

Don’t be fooled by bad economic news and a slowing economy, warns Mampilly. "Bond managers (particularly successful ones) will make the same mistake that equity managers made in the wake of the implosion of the equity bubble in 2000 – 2001…[they] are likely to believe that higher rates (or weak economic growth) represent a buying opportunity…"

Don’t fall into the same trap, dear reader…

Tom Dyson
The Daily Reckoning

September 4, 2004

— Daily Reckoning Book Of The Week —

The Mystery of Capital by Hernando de Soto Last week, Addison Wiggin called this book "the most important book of a generation." Addison should know…he once sat next to de Soto in a classroom presentation in Paris, and ended up operating de Soto’s overhead projector! He was so impressed by de Soto’s message, that he wrote an essay about ‘The Mystery of Capital’ the very next day, and published it in the Daily Reckoning.

Now he has persuaded Bill Bonner to read it – and Bill quoted de Soto in the Daily Reckoning.This is essential reading.

The Mystery of Capital


By Bill Bonner

"…But now, the national conventions are a disappointment even to insomniacs. The main TV channels have given up on them. Only the cable shows bother to carry convention highlights…"

CRACKUP CURRENCY                  9/2/04
By Dan Denning

"…The Bank of England (BOE) was one of the first central banks in the world to begin its tightening cycle and put the brakes on the tide of easy money that drove everything up in price in 2003…"

AMERICAN EAGLE                            9/1/04
By James DiGeorgia

"…You should never buy privately minted gold bullion coins. They sell originally for large premiums above the price of gold and later sell at a discount to their intrinsic gold value because they are NOT widely bought and sold by dealers, and therefore dealers will discount the coins when (or if) they buy them…"

THE OTHER YELLOW METAL                  8/31/04
By Doug Casey

"…To meet this demand, energy has to come from somewhere, and nuclear power is the only sensible choice. This conclusion is not mine alone…as I write, there are 30 new reactors in various stages of construction around the world…"

THIS INFLATION THING                               8/30/04
by the Mogambo Guru

"…Anyway, ignoring these unseemly domestic problems, foreigners bought another $9.3 billion for the week, which is higher than normal by quite some way, and stashed it at the Fed. This brings their total holdings at the Fed to (hit the "Total" button) $1.266 trillion, of which $320 billion of that was acquired in just the last 12 months…"



CEO Sells His Juniper Stock
by Porter Stansberry

"…You should keep in mind that these additional revenues came at a steep price. No, Juniper didn’t pay for them-but Juniper’s shareholders sure did. NetScreen cost $3.6 BILLION in Juniper shares…"

On the Next Greyhound Out of Town
by Byron King

"…I am no psychiatrist, but I have to wonder if deep down, W thinks that he has accomplished his goal of getting elected and now he can call it quits. At this stage, maybe he just wants to bring his presidency to an end and go back to Crawford and plow furrows in his fields…"