Market Review: Moping Market
Mr. Market must be a Red Sox fan…
He moped around all day long yesterday, despondent over the Boston baseball team’s heartbreaking loss to the indomitable New York Yankees. The hard-luck Sox have been disappointing their fans by losing critical post-season games, even longer than the gold market has been disappointing its long-suffering fans been by failing to breach $400 an ounce.
A prediction: Gold will top $400 an ounce before the Red Sox win a World Series.
The Dow Jones Industrial Average slumped 70 points Friday to 9,722, but still managed to close out the week with a modest 47-point gain. The Nasdaq fared worse, as the tech-powered index dropped nearly 2% Friday en route to a three-point loss for the week to 1,912.
During the week, two high-profile tech companies — Intel and IBM — treated investors to positive earnings reports for the third quarter and upbeat pronouncements about the fourth quarter and next year. IBM wowed its fans by announcing plans to add 10,000 new employees next year. But the earnings-surprise euphoria faded very quickly. Intel shares closed out the week with a small gain, while IBM slumped 4% after its earnings release.
The tepid investor reaction to the good news from tech land leads one to wonder: Is a strong economic recovery already priced into the stock market? The unofficial Daily Reckoning answer is, "Oui." But we are also mindful that overvalued stocks tend to become much more overvalued on their way to becoming — eventually — undervalued once again.
It’s true that signs of economic recovery are plentiful, but so are signs of investor exuberance. For one thing, the lumpeninvestoriat continues to plow its hard-earned — and easily-borrowed — cash into the stock market. The lumps dumped a hefty $4.4 billion into stock mutual funds during the week ending
October 15, according to TrimTabs, even more than the $4.3 billion they poured into stock mutual funds the week before. They are buying stocks without regard to valuation, simply because the economy is showing signs of life. The lumps may notknow a PE ratio from an eggplant, but they know that a strengthening economy helps companies make more money, which makes their stocks go up… or something like that.
To be sure the economy is improving, so let’s take a small draught from the half-full glass that inspires so much stock-buying. For starters, the Federal Reserve’s Empire State Index of conditions at regional manufacturers jumped to 33.7 in October from September’s 18.4 in September. Meanwhile, housing starts rose about 3.4% in September, matching July’s blistering 17-year high, and consumer sentiment continued strengthening in early October, according to the University of Michigan.
These hints of economic vitality boosted both the dollar and bond yields last week. The 10-year Treasury yield jumped from 4.25% to 4.39%, just slightly below the high of 4.66% that it hit in August. "The path of least resistance is toward higher yields," one bond fund manager remarked.
The dollar also firmed a bit, rising more than 1% to $117.84 per euro. Despite the dollar’s resurgence, the gold price held steady all week. Gold for December delivery closed at $372.20 an ounce, down only $1.90 from last Friday’s closing price.
Signs of economic recovery are probably not the only phenomena boosting bond yields. Signs of economic excess may also be lending a hand. Specifically, the current account deficit in the third quarter soared to a record $138.7 billion, or 5.1% of GDP. America’s widening current account deficit means that it must attract about $1.5 billion per day in foreign capital to plug the gap. Someday, we imagine, the U.S. Treasury may need to offer higher yields to attract the necessary capital. But that’s a problem for another day.
As Addison Wiggin noted on Friday, the Fed’s "Beige Book," released mid-week, presented more contrasts than a Picasso.
The beige book is a survey of economic activity in the 12 regions that make up the Federal Reserve System. The latest edition reported business activity through October 7th.
On the one hand, according to the good book, "Consumer spending generally strengthened." On the other hand, "Most districts reported a recent pullback in auto sales." The Fed survey also stated that the housing market is red-hot in "virtually every district." But it also noted, "Most districts report sizeable declines in mortgage refinance activity." Lastly, the beige book reported that ten of twelve districts report economic activity is improving. Yet, "most districts continued to describe the labor markets as slack."
In other words, the economy is strong enough to excite stock market investors, but not strong enough to create any actual jobs. It is statistically robust, but functionally recessionary.
The beige book also reported a "steep escalation" in certain commodity prices such as those for lumber, plywood, cattle, steel and natural gas. A "steep escalation" in commodity price is just another way of saying, "steep decline" in the dollar’s value, which is another way of saying that a "steep rise" in bond yields is coming our way… and that may not be a great thing for our overvalued stock market.
The Daily Reckoning
October 18, 2003
P.S. Bubbles have been enticing and torturing investors since the advent of public markets. If you’ve got a few moments to kill this weekend, we highly recommend Marc Faber’s two-part "Lessons Of History" series… in This Week In The Daily Reckoning below…
THIS WEEK in THE DAILY RECKONING
BAT MEAT (10/17/03)
by Bill Bonner
"… Nationwide, houses have been going up in price at about the same rate as increases in the money supply… that is, about 8% per year. In certain areas, the increases have been far more resplendent, lighting up homeowners’ hearts with increases of 20% to 30% in a single year. Taken altogether, since 1997 total housing values have risen from $8.8 trillion to around $14 trillion…"
DYNAMIC MARKET THEORY (10/16/03)
by J. Christoph Amberger
"… Point is, all that money didn’t just ‘vaporize,’ as the perennial bears like to claim. A lot of it simply moved. Now money is flowing back into stocks again. But beware – the market is set to fool investors and separate them from their money yet again… "
LESSONS OF HISTORY, PART II (10/15/03)
by Marc Faber
"… for today’s investor, however, the most interesting effect of excess liquidity creation is perhaps found in commodity prices. In the future, just as during the Mississippi Scheme, a bull market in commodities is a distinct possibility and could exceed investors’ expectations. I have no doubt that the Federal Reserve Board will continue to flush the economy with liquidity, which at some point could spill over considerably into the commodities markets, in the same way that the excessive liquidity created at the time of John Law’s Mississippi Scheme, and also in the late 1960s, led to a sharp rise in the price of commodities
and real assets… "
LESSONS OF HISTORY, PART I (10/14/03)
by Marc Faber
"… ‘The Great Swindle’ is an excellent account of the events that surrounded the South Sea Bubble and the Mississippi Scheme. Although over the following 300 or so years the stage of investment manias repeatedly changed, the script, the accessories, and the nature of the actors participating in the bubble have largely remained the same… "
THE OTHER FEDERAL BUDGET (10/13/03)
by The Mogambo Guru
"… Wayne Crews, the director of technology policy at the Cato Institute, argues with unstoppable, iron logic, striding like a Colossus across the intellectual landscape because there is no way to argue the opposite, that ‘regulation is like an off-budget, hidden tax… .State and local governments, businesses and consumers have to pay – even though it doesn’t appear in the federal budget.’ In light of the massive evidence, it is amazing that government continues to pile on regulations to kill the economy…"
FLOTSAM AND JETSAM: Early Reviews and excitement for Financial Reckoning Day
A DANGEROUS READ
By Bill Bonner
After two weeks on various best-seller lists, your editor is beginning to flatter himself. "Maybe the book isn’t so bad, after all," he says to himself.
We have been making publishing history. It is almost unprecedented that a financial book from relatively unknown authors sold so well before it even reached the bookstores. But
the big day is here. The day of reckoning. This week, Financial Reckoning Day reached bookstores nationwide.
Our fingers are crossed so tightly we fear gangrene is beginning to set in. Our great fear is that we will make publishing history twice… and be the first Wall Street Journal best-seller to go directly into the remainder bin.
No serious author promotes his own book, so we only pass along the comments of others.
So, far the reviews — mostly from friends — have been very favorable. The author’s mother read the book from cover to cover and gave it her approval.
"Not bad," she judged it. "I don’t know if you’re right or wrong in what you’re saying, but it was fun to read."
His wife had a favorable comment too: "I laughed out loud," said she, not specifying what she was laughing at.
"I like the cover," said Maria. "That deep red is one of my favorite colors."
Outside the family, initial comments have been bad, good and inscrutable.
"Bill Bonner has developed a nice low-level sarcastic literary style, with a clarity that drives home complicated messages in an easier to comprehend manner," came one unsolicited remark.
"I finished your book over the weekend," said another "Actually I read the ending … oh … about 10 times over two days. I slept well for the first time in two years, woke up laughing.
Like you I believe the end of the world as we know it is near. Unlike you I was not confident of Gold as the answer; and I was fretting about the end of the world, with it being so close. The last two sections of the book answered those questions for me. Actually freed me is a better way of expressing the experience."
Still another remark came as follows: "I am writing to compliment William Bonner and Addison Wiggin on their book Financial Reckoning Day. I recently purchased it and I find it fascinating. It is a well written, well researched book that gives a most readable and understandable rational for the ebbs and tides of economic well-being and of emotional thought patterns throughout the ages, but most importantly and most directly, for our economic situation today.
"I read extensively," the reader continues, "but I have never so clearly realized the patterns and situations of our economic situation, as this book put together. It looks at the mass of
available information and translates that in a most rational form to explain the economic world that we have."
And yet another: "Loved your book, my wife has not had the opportunity to pry it out of my grubby mitts yet, had to go buy it off the shelf at Barnes and Noble, couldn`t wait to order it
"I love you guys… " another wrote. We’re not so sure about this last comment, but appreciate it and the others greatly.
"I would like to alert you," begins an extensive by David Bradshaw of the Swiss America Trading Corporation, "that Financial Reckoning Day is a very dangerous read, especially to those unwilling to face hard, financial truths of the 21st century head on."
"The authors skillfully paint a very different big picture of America’s present economic problems — as well as key solutions. They expose a much more precarious economic future than most Americans have ever been told (or at least been willing to listen to.)
"The authors have mastered the art of finding humor and entertainment while tearing the veil off of the commonly held deceptions of our age… ."
"Hint: don’t rush your reading. Like fine wine, this book is to savored and likely reread… "
Our friend the Mogambo Guru gave it Five Mogambo Stars this week."It is a fab-u-lo-so book that I could have written, if I had any talent," says the great one. He suggests: "You should get this book, and read it, and then periodically get it out and read a few random pages every day. And read the Mogambo Guru, too. Then, one glorious day, all that stuff will suddenly click in your brain, and you will suddenly realize, in your own moment of Transcendent True Enlightenment… "
Who are we to argue?
If you’ve been reading the Daily Reckoning for the last 4 years, you won’t find much that is completely new in Financial Reckoning Day. We write daily and don’t hold anything back. But writing the book helped us organize our thoughts into a coherent text. The pieces of the puzzle are put together for you in a way that, we hope, is as delightful to read as it was painful to write.
If not, well, it should be.
And even if you, dear reader, feel you have read it all before…you can always buy a copy for someone else. Why not? It makes a charming way to delight your friends, confound your enemies, and boost the U.S. economy. Please visit here …
The Daily Reckoning