Market Review: Falling on Deaf Ears

There’s something wrong with our left ear. It hurts, and we can’t hear anything through it. Yesterday we tried to ride a bicycle. It was nearly impossible – our sense of balance had been completely impaired.

Today we try to write the weekend edition. It is nearly impossible – our concentration has been completely impaired. Today’s edition will be brief as a consequence…

We witnessed an interesting divergence in the stock market last week…the Dow and the S&P both rose, while the Nasdaq fell. Dell and Cisco can take the blame. These two tech heavy weights represent 6.3% of the Nasdaq100 and, early in the week, disappointed the market with their earning reports.

Of greater interest is the fact that the Dow made a new 52-week high last week, spiking up to 10,865 and surpassing the previous high set late in December 2004. The Nasdaq did not.

The Speculative-investor.com, one of our favorite macro-digests, thinks this divergence may signal a market peak…this was written on Jan 31, 2005:

"An intermediate-term trend reversal in the NDX/Dow ratio (from up to down) has been confirmed, which strongly suggests that a major peak is either already in place or will be put in place within the next few months. Also, during recent weeks we’ve said to look for a lower low in the NASDAQ Composite Index combined with a higher low for the NASDAQ McClellan Oscillator (MO) to indicate that a short-term bottom was in place in the U.S. stock market…this situation occurred last week. In other words, we have evidence that an important peak is close-at-hand as well as evidence that some sort of rebound is going to occur in the near-term."

"As far as we are concerned, what would now make the most sense would be for the market to rebound over the next 2-4 weeks with the Dow Industrials Index perhaps making a new 52-week high while the NASDAQ Indices make lower highs. Therefore, a reasonable approach for those interested in betting against the U.S. stock market might be to take an initial bearish position if the market rallies over the next few days and to then add to this position if the rebound continues into early March."

In other markets, the dollar’s rally continues. Against the pound and the euro, the dollar has rallied 2.6% and 5.1% respectively this year. Yen was the laggard, but last week, it caught up, falling 1.64 to 105.7 for a 3.1% decline year-to-date. The euro and the pound only fell marginally last week.

Commodities had a good week too. Gold rose $6 to $420, silver was up 51 cents to $7.18 and oil up 68 cents a barrel to $47.16.

Finally, like a cyclist with an ear infection, bonds wobbled…30-year Treasury yields declined a basis point to 4.47% while 10-year yields rose a basis point to 4.09%.

Regards,

Tom Dyson
The Daily Reckoning
February 13, 2005 — Baltimore, Maryland

P.S. You may have been following the debate between James Boric and Dan Denning in the Daily Reckoning last week. Dan says U.S. equities are over-valued as a whole and should be avoided. James disagrees. He still finds plenty of value in the small cap market. Here’s the opinion of Dan Ferris, another highly respected stock analyst, and editor of Extreme Value.

"Anyone who’s done the work will tell you there’s nothing to debate: There’s plenty of value out there in small-cap land.

"I’ve got 50 names on a watch list for my own money. I own five of them right now. A typical stock I like sells for $8.50 and has $22 a share in cash and government bonds, no debt, is profitable every quarter, owns its whole market. Another one has $71 per share in cash and securities and a consistently profitable business, and it’s going for about $47 a share today. Another owns $20 million in real estate, holds no debt, plus is a business easily worth $30 million, the whole thing selling for about $35 million, and pays a regular dividend, too. One has $10 a share in cash, no debt, real estate worth probably $50 a share and a profitable engineering business. The whole thing goes for $24 a share.

"There are a couple dozen others similar to that. You’ll never, ever find them above $250-$300 million in market cap. Because they’re often closely held, there’s usually no option overhang, either.

"Not only is there value in small caps, but there’s more value there than anywhere else, and probably always will be."

James has designed a new strategy to harvest profits from the small cap arena.

This Week In THE DAILY RECKONING : Blah balh abllll

GREENSPAN’S WHOPPER 02/11/05
by Bill Bonner

"People take money out of their homes. With this source of spending power available to them, they see no reason to save. Instead, they spend – often on foreign-made goods. With no savings available domestically, America must look overseas for credit."

THE SPECIALIZATION OF INSECTS  02/10/05
By: James Boric

"…knows? My buddy Dan thinks I’d be a bumblebee that only looks for nectar in one kind of flower. Fair enough. But I assure you, I would not be a fly. I’d much rather hunt other bugs or even plants than fly around all day looking for piles of manure…"

The Big Loser 02/09/05
By: Marc Faber

"…In 2004, U.S. dollar holders may, however, have found solace in the fact that against the Zimbabwean dollar, the Greenback appreciated by 85%, and is up by 99% since 2000…"

No Trespassing 02/08/05
By Doug Horning

"…The Mystery of Capital, Peruvian economist Hernando De Soto tackles the vexing question posed by his subtitle: Why Capitalism Triumphs in the West and Fails Everywhere Else…"

Stocks bite The Big One 02/07/05
By: The Mogambo Guru

"…I know what you are thinking: "Wow! The Mogambo was right! When adjusted for inflation, stocks bite the big one (BTBO) from time to time, like all the other investments BTBO from time to time…!"