A Self-Fulfilling Prophecy?

The Daily Reckoning
Weekend Edition
November 2-3, 2002
Paris, France
By Addison Wiggin

It’s all bad.

The litany of economic reports that came out yesterday reads likes the opening scenes a Stephen King novel. The carnage hasn’t taken place yet, but any reader worth his salt knows what’s coming.

The victim? Well… in this case, the US economy: The number of people looking for work but unable to find it climbed to 8.2 million; overall unemployment inched it’s way back to 5.7 percent; manufacturing numbers dropped to the lowest level in a year; and consumer spending – the key ingredient in the Fed’s favorite recovery recipe – dropped six tenths of a percent in September despite an increase personal incomes.

Like a frat boy who’s downed one too many beers, it appears the American consumer said ‘no more’ in October … and headed off to a different part of the house to find a toilet. Zero percent financing can’t even lure the bloated to consume any more. Ford sales fell 34% in October. GM’s fell 32%. Chrysler’s dropped 31%.

“The consumer response to incentives,” Lehman Brother’s economist Joseph Abate says a little more politely in the Washington Post, “appears to have gotten weaker with each re-introduction of interest free financing.” (You think?!)

Strategic Investment’s Dan Denning sees the slowdown as a self-fulfilling prophecy. “Spending on cars typically makes up for 25% of consumer spending,” Denning explains. “A car is a ‘big ticket’ item. People wait to buy them until they can afford them. And once they’ve bought them, demand slacks off. By frontloading the year’s car sales over the summer, the carmakers guaranteed an anemic fall. “Now that cars are no longer driving increased consumer spending, and powering GDP growth, consumers are more aware than ever the economy is weak and getting weaker. And in a self-fulfilling way, anyone who WOULD consider buying a car will put it off until economic conditions look more promising.”

“With momentum flagging,” Lehman’s Abate suggests, “the rapid erosion in confidence and the pickup in uncertainty are likely to severely restrain consumer and investment spending over the next three to six month… Likewise, a sharp pullback in durable goods orders in September suggests that businesses are not yet ready to expand capacity.”

Yet… after all these numbers hit the fan… the stock market rallied.

Huh?

The Dow gained 120 points to finish the week at 8517. The Nasdaq scooted ahead 30 points to 1360. The S&P 500 climbed 15, to 900. In fact, October 2002, in what will no doubt be one of the more spectacular and befuddling bear market rallies in US economic history, posted one of the best months on the Dow in 15 years.

How do you make sense of it?

The standard theory being debated in the mainstream media on this fine Saturday is that “all the bad news, is really good news” because it will prompt the Fed to cut rates (again) when they convene next week. Okay…

If you’ve taken leave of your senses, and you attempt to follow their reasoning, you’ll be left with the impression that the only important question unanswered is whether the Fed will shed another 25… or 50… basis points. We here at the Daily Reckoning have another question: have they forgotten what happened after the last 11 cuts?

We continue to warn readers not to get too excited about a market that by some accounts is trading at 48 times earnings (S&P 500). Nothing saying you can’t still enjoy your weekend, though, is there?

Cheers,

Addison Wiggin,
The Daily Reckoning
November 2, 2002

P.S. While this market is nothing to write home about for long-term investors, it’s been a boon for some options traders. “We’ve been on fast forward with a three month winning streak,” writes a rather gleeful Amy London, publisher of Options Hotline. “Average potential gains on our recommendations August through October have been 176%… achieved over an average of only 18 days.”

These results, Amy tells me, included gains of 212%, 158%, 17%, 88%, 898% (no, that is NOT a typo), 76%, 250%, 55%, and 2% on a stopped position. If you’re interested in learning more about trading options through the bear market rallies.

Options Hotline

— Daily Reckoning Book Of The Week —

EDUCATION OF A SPECULATOR
by Victor Niederhoffer

The legendary and controversial futures fund manager had compiled an amazing record – 32% compounded annual return for 14 years before his fall from grace. Here he defends the vital role of a speculator, assuming price risks and providing liquidity for markets.

He analyzes market action, surveying 108 panics and crashes, and offers practical advice to investors and speculators. He shares his own fascinating story and draws on his knowledge of games, ecology and music to affirm 15 fundamental principles of successful speculation.

EDUCATION OF A SPECULATOR

THIS WEEK in THE DAILY RECKONING

11/01/02 CLEAR CUTTING AHEAD
by Sean Corrigan

“…The Fed has doled out too many logging permits in this forest of an economy…and instead of recognizing the error of its ways, continues to spread its ‘generosity’. All this can do is make worse the shortage to which our bad practices of forestry have already given rise…a dearth encouraged by the effect of too many State permits in issue at planting time, allowing the credulous (and the crooked) to take up too much suitable land and to plant too many of the wrongspecies…”

10/31/02 IN BED WITH THE RIGHT PEOPLE
by C. Alexander Green

“…Several months ago, I picked up a copy of “In Bed With the Right People” by Frederick M. Weissman, M.D. It sounds like a manual for swingers, but the book has very little to do with sex. The subtitle is “How I Made Millions on Wall Street.” And – trust me – if Dr. Weissman can do it, anyone can…”

10/30/02 BORROWING CHAOS
by Fred Sheehan

“…Expansion of credit isn’t the same as expansion of money. A bank might loan the village idiot $10,000, but the bank doesn’t reserve $10,000 to back the loan. While heady booms spark expansive loan policies, says Fred Sheehan, like: “Here, idiot – go start a fiber optic company”…bad times raise caution…”

10/29/02 ASSET IMPAIRMENT
by Porter Stansberry

“…Over the last 100 years, the U.S. dollar has lost perhaps as much as 90% of its purchasing power through the government-led debasement of the currency. Paper money is the bridge between politics and reality. But it’s not just the government’s money that’s regularly debased by the elite in order to maintain control…”

10/28/02 THEY HAD IT IN THEIR GUTS
by Kurt Richebacher

“…Blind faith is overwhelming bad and worsening facts, confirming our long-held suspicion that the American consensus does not understand the extraordinary excesses of Mr. Greenspan and the consumer. One would think that such a horror picture of grossly ineffective record money and credit growth would provoke some critical questions about underlying causes. But we see nothing of that kind. Few, if any, people seem to havenoticed…”

HEADLINE, NEWS And INSIGHT: A Contrarian Opportunity Arising For Global Investors…

The Hidden Pension Fund Problem
by John Mauldin

“…Having relied on phantom pension fund profits to beef up their ‘earnings’, American companies are all hoping the market will come back and save their bacon. They still make return assumptions that are unrealistic in a secular bear market environment. They still keep talking about the long run, but GAAP rules say the long run may come in the next few years, and then the weeping will begin…”

Eight Myths About International Investing
by Mark Nestmann

“….in the wake of the Enron scandal and the debate over U.S. corporations ‘expatriating’ to Bermuda and other low- tax jurisdictions, the media bias against international investing has reached an all-time high. It’s time to debunk the myths…and show you why international investment is one of the best – and most profitable – ways to diversify your portfolio…”