Market Review: Statistical Adonis, Real-World Elephant Man

The U.S. stock market struggled all week, as gold prices soared. The stock-buying lumpeninvestoriat is finally beginning to notice that daily Iraqi explosions and daily dollar implosions are un-bullish phenomena for the stock market…especially when share prices are already quite expensive.

For the week, the Dow slipped half a percent to 9,769, while the Nasdaq dropped 2% to 1,930. Meanwhile, the gold market hosted the week’s most exciting trading action, as the increasingly precious metal jumped toward the $400-mark for the first time since 1996. Gold gained nearly $15 for the week to $398 an ounce.

Gold derived its strength from the usual source: dollar weakness. The greenback continues to succumb to the powerful forces arrayed against it – falling nearly 2% last week to $1.178 per euro.

Trying to pinpoint the exact causes of the dollar’s weakness is like trying to pinpoint the exact causes of President Bush’s declining popularity – there is no single reason. But one of the reasons – both for the dollar’s struggles and for the President’s waning popularity – is the intensifying crisis in Iraq. The terrorist attacks against coalition forces are growing increasingly frequent and fatal.

Meanwhile, back here at home, the misguided policies of Chairman Greenspan and Treasury Secretary Snow deserve at least partial credit for the dollar’s weakness. Whatever the exact cause or causes, the results are the same: the dollar’s purchasing power plummets. Next thing you know, commodity prices soar, the gold price edges higher and – eventually — producer prices jump unexpectedly.

Friday, the Labor Department reported a shocking 0.8% jump in producer prices during October. We suspect that this latest inflationary augury is not a "one-off." After all, commodity prices and gold prices have both been climbing for more than two years already…And they are still climbing. Natural gas jumped 8% last week, while crude oil gained $1.52 to $32.37 a barrel. But most consumers aren’t worrying about the rising cost of heating their homes and driving their SUVs…not yet anyway.

The University of Michigan reported consumer sentiment strengthened to 93.5 in early November from 89.6 in late October.

"For months, [consumers and] investors have been wallowing in the warm fuzzies of a recovering economy, while ignoring the cold realities of escalating violence in the Middle East,"  we wrote mid-week.  "A steady stream of bullish economic headlines here at home has made it much easier to ignore the steady stream of bearish headlines from ‘over there.’  [But] we suspect that the stock market’s ‘disillusionment phase’ is about to begin "The problems in the Middle East are probably worse than they appear, while the strength of the U.S. economy is probably less than it appears."

Just ask Wal-Mart.

Thursday morning, Wal-Mart announced somewhat disappointing earnings for the third quarter. America’s largest employer fell short of Wall Street’s consensus earnings estimate for the first time in seven years. The company’s earnings report wasn’t really so bad, it just wasn’t so great.

"I don’t think consumer spending is slowing," said President and CEO Lee Scott, "but I also don’t see the strength that many of you in the investment community appear to see."

Forgive us our cynicism, but we would tend to trust Wal-Mart’s assessment of our economic condition over the government’s assessment.

"The best quarter of America GDP since the Reagan Revolution did not turn heads at Wal-Mart stores," writes Jim Grant, editor of Grant’s Interest Rate Observer. "Gains in same-store sales, which had been running at 6% in August and September, subsided to the neighbor hood of 3% to 5% in the first three weeks of October.

"The ‘paycheck-to-paycheck customer,’" a Wal-Mart spokesman tells David Lane of this staff. "Always has been, always will be."

But clearly, this archetypal American consumer is not spending money with the abandon that a 7.2% GDP would imply. "As a rule," Grant relates, "working people come into funds on the 15th of the month or at the end of the month…Wal-Mart has devised an elegantly simple calculation to measure the liquidity of Homo americanus. It calculates the difference between sales on the 14th, when people are dry, and the 15th, when people are liquid."

Currently, this simple indicator is flashing red. According to a couple of Wall Street analysts who monitor Wal-Mart’s consumer-liquidity indicator, "The consumer’s liquidity crisis is the worst that Wal-Mart has seen and is the most pronounced in the last five to seven years."

We repeat what we observed last week, "The economy may be a statistical Adonis, but it’s a real-world Elephant Man."

Have a good weekend,

Eric Fry,
The Daily Reckoning

November 15-16, 2003

P.S. In case you hadn’t heard, Bill and Addison’s book hit the NYTimes Business bestseller list this week, too… bravo! See the Weekend Edition Floastam & Jetsam section below…

THIS WEEK in THE DAILY RECKONING

BEYOND NIETZSCHE  (11/14/03)
by Bill Bonner

"… Nietzsche identified two different kinds of knowledge. There are the things you know from personal experience and observation, which he called ‘erfahrung.’ There are also the abstractions you think you know – the kind of thing that is reported in the paper and discussed on the editorial pages – which he called ‘wissen.’ Today, we expand Nietzsche’s insight. Not only are there two forms of knowledge, there are also two entirely different ways of reasoning…"

THE PSYCHOLOGY OF CREDIT AND DEBT (11/13/03)
by Wendy Raffel and Robert Folsom

"…We are a nation of consumers who live beyond our means. Our consumption exceeds what we can afford…hence the overuse of credit, and the debt extremes that come with it. The public’s willingness to submit to the servitude of credit is a direct measure of their optimism – or pessimism – about the future, and a reflection of mass psychology and social mood…"

TOO MANY TREASURE HUNTERS (11/12/03)
by Marc Faber

"…Shares do not always go up in the long run. The reality is that most companies go out of business in the long term, and investors must continuously look for new companies, regions, sectors, and asset classes within the investment universe…For my taste, the Western financial markets are too large compared to the real economy and will have to be deflated at some point much further than has already happened since 2000…"

ARMISTICE DAY (11/11/03)
by Bill Bonner

"…Over the four years of the first World War, one by one, the people back at home got the news…the telegrams…the letters. The church bells rang. The black cloth came out. And for years after…at 11 A.M., the bells tolled, and even in America, people stoodsilently…recalling the terrible toll of four years of war. Now it is almost forgotten…"
UNCONVENTIONAL METHODS (11/10/03)
by the Mogambo Guru

"…In case you are wondering, the gigantic increase in GDP was the result of morons, like you and me, but not you and me, and not nearly as good looking as us, well, you anyway, borrowing money that they cannot pay back to buy things they cannot afford and should not be buying. The 7% rise in GDP does not come at any price – it comes at an astronomical price. And we, that is, you and me, are paying very, very dearly for it…"

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FLOTSAM AND JETSAM: From our friends at Newsmax.com:

Saturday, Nov. 15, 2003 1:43 PM EST ‘Financial Reckoning Day’ Hits NY Times Bestseller List

A new book that challenges the idea the U.S. is in a full-blown economic recovery is getting big notice — and just hit #7 on the New York Times Business Bestseller list. Maverick investment authors Bill Bonner and Addison Wiggin make these and other claims in "Financial Reckoning Day: Surviving The Soft Depression Of The 21st Century."

Don’t believe the latest economic numbers, they say, adding, "History shows us that investing has less to do with raw economic data and statistics-the domain of most other investment books-and more to do old rules, metaphors, and experience."

"Financial Reckoning Day" offers new revelations:

* Why the "Information Age" stock boom went bust, with sobering insights into such companies as Amazon.com, Cisco Systems, and Global Crossing

* Why high-spending, high-borrowing consumerism "leveraged" the US economy and what you might expect from the "soft, slow depression" in the decade ahead

* Why Japan’s "miracle economy" unexpectedly collapsed and why a decade of monetary stimulus – similar to what the US is trying to do now – failed!

"Financial Reckoning Day" warns that depressions are not necessarily a thing of the past. And that’s why it’s so vital to have an essential, wide-angle resource like this on hand… to get through the current crunch-and put profits back into your portfolio.

Irreverent and eye-opening, this "big picture" investment book will "thoroughly entertain you for hours" says Barron’s Roundtable member Marc Faber, and help you safely chart your financial destiny in today’s precarious investing climate.