Inside the Velvet Rope

Last Saturday night, your editor found himself on the chic
side of a velvet rope…

Escorted by a well-connected friend, he strolled unmolested
past the series of velvet ropes that bars the V.I.P.
entrance to "Mansion," one of the trendiest nightclubs in
Miami’s South Beach. As one well-tanned bouncer after
another waved us along, we shimmied through a sea of
beautiful bodies until we reached a lounge table marked

Here in the eye of "Hurricane Hedonism," we seated
ourselves beside ice buckets full of Dom Perignon and Grey
Goose vodka…

Clearly, we had arrived.

The U.S. capital markets used to be almost as fashionable
as Mansion, but something has changed. Mansion is still
hot; the U.S. capital markets are not.

There are really only three ways to gain access to Mansion,
or to hot spots like it:

1) Genetic endowment – "Beautiful people" are always
welcome. In other words, if you’re a "smokin’ hot" fashion
model, you’re in.

2) Connections – Knowing the club owner is the best
ticket to entry, although knowing one of the bouncers is
usually good enough.

3) Cash – Unglamorous, but effective. When all else
fails, the path to a reserved table may be paved with

The U.S. capital markets, by contrast, are far more
egalitarian. They are open to money of all denominations.
Our $600 billion current account deficit testifies to the
fact that foreign investors can’t seem to get enough of
U.S. stocks and bonds. But the allure of U.S. assets may be

The nearby chart tracks the net purchases of Treasury
securities by foreign investors, relative to the yield on
10-year Treasury yields. An inverse relationship is
immediately apparent. In other words, as foreign investors
increase their purchases, yields tend to fall, and as they
decrease their purchases, yields tend to rise. Cleary,
foreign investors have been dramatically scaling back their
bond purchases over the past few months. Thus far, yields
have increased only slightly. But if this worrisome trend
continues, yields will likely head much higher.

Reputation and buzz are the lifeblood of chic, whether in
finance or in fashion. And hard-won reputations do not die
overnight. For decades, foreign investors have been
flocking into the U.S. stock and bond markets looking for a
good time. Usually their expectations were rewarded. And
even on those occasions when returns failed to measure up
to expectations, the money continued to saunter in U.S.
markets like the cigarette-wielding fashion models into
Mansion. But for the past five years, the U.S. stock and
bond markets have performed far worse than most of their
global peers.

Are foreign investors beginning to tire of the abuse?

Perhaps foreign investors have begun to notice what Alan
Greenspan, himself, finally noticed yesterday:  That the
record U.S. budget deficit is "unsustainable" and that
spending cuts are needed before costs balloon for Social
Security and other benefit programs.

Or perhaps they are recalling that past investment returns
are no guarantee of future results. Or perhaps they have
merely tired of gorging themselves on U.S. financial assets

"As of the end of 3Q 2004, the foreign community owned $4.5
trillion more in U.S. assets than did the U.S. own of
foreign assets," Contrary Investor reports.  "The U.S. has
miraculously transformed itself from a net creditor to the
largest net debtor on the plant in 35 short years."

"We have no immediate bias as to whether this is all right
or wrong," ContraryInvestor concludes.  "From the
standpoint of maintaining investment flexibility, it’s
neither.  It is what it is.  How it will impact financial
markets ahead is our only concern."

Like the hottest nightclub in Miami, the U.S. capital
markets were once the place to be. Everybody – that was
anybody – wanted to be inside the velvet rope that offered
access to the gorgeous returns that seemed to frolic
everywhere one looked.

But "Alan’s Café Americana" seems to be losing some of its
cache, in which case U.S. bond yields will be heading
higher, as U.S. share prices drift lower.

[Ed. Note: Commodities are the place to be…these are the
assets that are most likely to out-perform in the coming
years. And taken with Kevin Kerr’s skill as a trader – his
last 16 consecutive trades were winners – and we have a
money machine on our hands.

Right now, the money machine is discounted – but hurry,
this special offer lasts only one more day…

Resource Trader Alert

Did You Notice…?
By Eric J. Fry

The Dow rallied about 40 points yesterday, briefly touching
a new 4-year high at 10,870, before reversing course and
tumbling to a 20-point loss. Options pro, Jay Shartsis
predicted as much in a missive to his clients yesterday

"There has been a lot of talk lately about whether the Dow
will break out above its double top near 10,850, or whether
it will fail and create a triple top," Shartsis wrote. "The
S&P 500 is, of course, in a near-identical configuration,
while the now severely lagging Nasdaq – which is about 120
points shy of its own early January peak just under 2200 –
has been largely left out of the debate. So why does anyone
have the license to point to the strongest market segment
and declare ‘the market’ is about to ‘break out,’
especially when the weakest segment, the Nasdaq, has
leading tendencies in the opposite direction?

"One scenario that might unfold is the Dow and S&P could
move above their early January peaks, and be widely non-
confirmed by the Nasdaq, and then turn around and fall back
after trapping the bulls in a false breakout. Imagine the
TV hype machine banging the drums about a ‘new high’ for
the market. That should help suck in plenty of people, who
may end up being sorry soon after."

The nearby chart illustrates the phenomenon. The Dow is
rallying while the Nasdaq is fading. In other words, the
Nasdaq is failing to confirm the Dow rally. Normally, such
striking "non-confirmations" are not a healthy sign.

And the Markets…



This week

















10-year Treasury





30-year Treasury





Russell 2000


























JPY 104.73

JPY 104.41



Dollar (USD/EUR)





Dollar (USD/GBP)