Rally Cats Cash In

Investor’s cashed in Friday on the Fed-inspired market boost, taking profits and driving all indexes down. The Dow dropped 113 to 10,579; the S&P 500 slipped 10 to 1242; and the Nasdaq fell back 18 to 2163.

But what a week… what a couple of weeks… the Dow and S&P have now gained 13% since achieving their lows for the year. The Nasdaq is up 32% since it closed at a low of 1638 on April 4, and ends this week firmly back in 2000 territory.

Have we seen the bottom? Are we ready for a new bull? Not likely. In the past 2 weeks, the money supply has skyrocketed. MZM – the broadest measure of the money supply – is up an annualized 45%… up 40% annualized in just the past month. That money is just finding its way right back in the market.

“This money surge is equivalent to those that accompanied the Fed’s Y2K credit expansion, or the late 1998 LCTM bailout,” says the DR Blue Team’s Michael Belkin.

“Something happened about 3 weeks ago that unnerved Easy Al and the Fed,” observed Bill King on Thursday. Our bet is the pending announcement of the largest single-month decline in the trade deficit since records have been kept on the subject… more below.

Markets Around The Globe: All but London down…the Nikkei in Tokyo – 0.7%; the DAX in Frankfurt – 0.9%; the CAC-40 in Paris slid – 0.6%; The ‘footsie’ rose, but slightly +0.1%.

The Russell 2000 fell 5 to 466 Friday, but finished the week up 2.6%.

ADD’L PRICES FOR THE WEEK: Gold and commodities up… dollar down

Gold: $265

Crude Oil: $27.58

Natural Gas: $5.12

CRB Index: 216

Dollar Index: 114

The Sad, Sad Euro: $.90

British Pound: $1.44

Japanese Yen: $.82

FLOTSAM AND JETSAM: Code Blue: The Fed Fights A Losing Battle

– from The DR Blue Weekly Update of the Daily Reckoning Investment Advisory

“…so the Fed cut rates again – the fourth time in the last 15 weeks. And so the Nasdaq was up 8%. Has anything really changed?

No. You don’t create wealth by printing more money or re-inflating bubbles. The Fed is trying to pull a Dr. Frankenstein – reanimating a U.S. consumer who is tapped out.

The most significant news this week, and the real motivation behind the rate cut, was that the Commerce Department announced the “trade gap” shrank by the largest one-month percentage since records have been kept. A 4.4 percent drop in imports in February indicates consumers bought less, and (what’s this?) saved more… and businesses expect the slowdown to last well past the second quarter. Foreigners are making fewer dollars now, which means they may be less inclined to hold the ones they already own.

Foreigners have been using surplus trade dollars earned from selling goods to U.S. consumers to invest in high- yielding U.S. financial assets – to the tune of $1.5 billion a day. “That rate,” wrote Dean Baker of the Center of Economic and Policy Research early in 2001, “of accumulation of foreign debt cannot be sustained long.” Especially when those U.S. assets ain’t so high-yielding. It looks like the trade deficit is finally coming home to roost.

Americans are spending less. And as the Fed lowers rates to make them spend more, the dollar gets less attractive to foreign dollar holders. The next big story – and maybe the biggest this year – will be the fall of the dollar. This weeks events only accelerated the day of reckoning.

This is a sucker’s rally if we’ve ever seen one. It could be a long one though-long enough to convince you to be long stocks going into the spring. Don’t do it yet. Or better yet, see what we’re recommending for riding out the bear market rallies and setting yourself up to own the strongest companies with the best balance sheets.”

Enjoy your weekend,

Addison Wiggin
Paris, France
April 21-22, 2001

P.S. In case you missed it, the Daily Reckoning Blue Service is a “rubber-meets-the-road” investment advisory designed to help you take advantage of the ideas and insights you read regularly in The Daily Reckoning.