Market Review: Poor Richard Defied

Eric Fry, lost in the wilds of New York’s financial district…

Stocks soared… Gold swooned… It was a wild week on WallStreet, as the financial markets thumbed their noses at PoorRichard’s dictum: "Moderation in all things." Stocks, bonds, gold and the dollar cavorted with one another all week, and theirbehavior was anything but moderate. To start the week, stockstumbled, then soared… bonds soared, then tumbled… the dollartumbled, then bounced a bit… while gold bounced a bit, thentumbled.

The Dow Jones Industrial Average closed out a losing September by falling a cumulative 40 points on Monday and Tuesday. But arevitalized Dow showed up for work on Wednesday, and seemed tofind the new month very much to its liking. The dividing linebetween September and October was as distinct as the old dividing line between East and West Berlin at "Checkpoint Charlie." OnWednesday, October 1st, stocks raced ahead like an escaping EastBerliner, and never looked back. For the week, the Dow piled on2.8% to 9,572 and the Nasdaq heaped up a 4.9% gain to 1,880.

The bond market played yin to the stock market’s yang, soaringearly in the week, then sliding steadily downhill through the end of Friday’s trading. Consequently, yields jumped sharply. The10-year Treasury yield, which touched a three-month low of 3.91%on Wednesday, finished the week at 4.20%. The dollar fared asbadly as the bond market, falling to $1.156 per euro from $1.144last week.

Despite the extreme volatility rocking the financial markets,gold struggled all week and then seemed to collapse in anexhausted heap on Friday afternoon. The yellow metal cratered asmuch as $16 on Friday, before recovering to end the session$13.70 lower at $370.00 an ounce.

Why? Why? Why? Gold investors want to know. Shouldn’t a weakdollar and tumbling bond prices have lent support to the goldprice? It should have, dear reader, it should have… but itdidn’t. Other, less bullish, factors were also at work, as we can plainly see in hindsight.

For one thing, speculative positions in the gold market hadbecome quite large. So, once the gold price started falling onFriday, the "specs" started unloading their positions, whichfueled additional selling and, before long, you’ve got awash-out. "Gold made a dramatic sell-off in just minutes Fridaybecause very large traders liquidated their positions andtriggered technical sell-stops in the market," one traderexplained.

It was a rugged week for gold, no doubt about it. But we suspectthe yellow metal will return to take another run at $400 an ounce sometime over the next few weeks… at least that’s ourguess/hope/wish/prayer/plea.

Triggering the coincident stock market rally and bond marketselloff Friday was the news from the Labor Department that theeconomy added 57,000 jobs in September. The increase in the labor force was the first such improvement since January.Unfortunately, the manufacturing sector continues to shed jobs.Manufacturers cut 29,000 jobs during the month, which was the38th straight decline in the manufacturing sector.

Forgive us our skepticism, but we are a little baffled by thepositive employment number. Mostly because we know that 400,000individuals are filing claims for unemployment insurance weekafter week. How is it that the economy is adding jobs, when somany jobs are going away?

And if the economy is improving as much as the stock market’srally suggests, why are Americans carrying more debt than everbefore?

"Households have been on a borrowing spree," observes NorthernTrust economist Asha Bangalore. "Household borrowing as apercentage of disposable personal income hit a new high of 12.4%in the second quarter. This measure of household borrowingreflects mortgage borrowing, credit card borrowing, borrowingfrom banks and the like… Household borrowing is not only at arecord high, but a new aspect has emerged – household borrowingadvanced during the recession unlike in every other post-warrecession when households reduced borrowing. The good news isthat consumer demand continues to advance with the support fromborrowing."

The bad news is that no economy has ever borrowed its way toprosperity.

Eric Fry,
The Daily Reckoning

October 4-5, 2003

P.S. If you’re close to a TV and have the inclination next week,you might catch your Manhattan correspondent on CNNfn nextWednesday through Friday (the morning show, "Market Call", runsfrom 9 to 11 A.M.).

A week in the Daily Reckoning lies below…

And finally – have you had a chance to order Bill and Addison’snew book, Financial Reckoning Day? We are still awaiting ourcopy, with increasing impatience. However, we’re told Amazon.comstill has stock and is shipping regularly…

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THIS WEEK in THE DAILY RECKONING

POOR HOUSE, PART I (10/03/03)
by Bill Bonner

"… Many are the reasons given why real estate prices mustcontinue to rise. On the other hand, we immediately see onereason why they might all be wrong: everyone believes them. Asthey say on Wall Street, when everyone thinks the same thing, noone is thinking. And so we began to think… and came to adisturbing conclusion. The average house, we believe, is adangerous place for your money. But since this little aperçu iscompletely at odds with the entire corpus of modern householdeconomics, clearly the burden of proof is on us. Fair enough… "

MYANMAR EXAMINED (10/02/03)
by Jim Rogers

"… Various armed separatist movements have dominated[Myanmar’s] politics over the last four decades. Nevertheless, in the ’90s, Myanmar slowly began to reopen its borders to bothpeople and capital – a process that continues today. Consideringthe wealth of natural resources and labor advantages aliberalized Myanmar could potentially offer, it’s worth taking acloser look at where the country is headed… "

THE GILDERED AGE (10/01/03)
by Bill Bonner

"… It doesn’t seem real. It doesn’t seem right. ‘Most of usknow,’ writes Malone, ‘intuitively, that these young webcompanies minted by the hour will not survive and prosper. In the coming reckoning, investors will lose money, retirement fundswill be erased and the valuations that rule the stock market will become rational.’ That seems to be the sentiment of Metcalfe andMoore too. It is as if they had come back to the Valley and found their tribesmen had turned the Internet Age into an absurd parody of the land of milk and honey they sought… "

THE MYSTERY OF WYNDCLYFFE (09/30/03)
by Addison Wiggin

"… The Fed and Treasury have lost their way altogether. Goneare the days when self reliance meant busting your gut to build a house, a factory… or even a fine piece of furniture. Now,credit lines grow ever longer and home equity loans moreubiquitous. Boobus Americanus – to borrow a phrase from HLMencken, by way of our friend Doug Casey – has regressed alongthe line from ‘know-how’ to ‘nowhere.’ And judging from thereader mail we expect to receive upon publication of this letter, they’re quite belligerent about it… "

THE FED’S FREE LUNCH PROGRAM (09/29/03)
by the Mogambo Guru

"… Bernanke says that he will be happy to achieve monetarypolicy objectives by unconventional means, and nobody gets allshook up, except me. So I figure that we bedeviled savers outhere ought to emulate Bernanke and his Fed, and commit‘unconventional’ acts of our own. We have got to get our moneyback here! We are suffering deflation in our discretionaryspending account! We demand the same rights as the FederalReserve! We demand the right to commit unconventional acts andget away with them!… "