Market Review: The Party is Running Out of Hors D'Oevres

Is the party winding down? Or are the hosts merely running out of hors d’oeuvres and party favors?

Without any titillating new reasons to buy stocks this week, many investors called it a night and headed for the door. The Dowslumped 1.4% for the week to 9,582, while the Nasdaq dropped 2.4% to 1,866.

Miscellaneous chatter about our recovering economy continued tostream across the newswires all week. But these happy thoughts do not arouse the same sort of exuberance they once did. Perhaps the thrill is gone because the recovery is finally here, and it isnot as comely as expected. Our Greenspan-sired recovery is afreakish changeling – not the hardy, all-American variety that we are used to seeing. We are happy it’s here, but boy is it everugly!

To be sure, the recovery is statistically pleasing…Butsomething is not quite right with this thing. GDP boomed duringthe third quarter; and yet, many American workers are strugglingto find a job…and many of America’s blue chip companies areproducing noticeably un-boom-like earnings.Although most companies are meeting or exceeding Wall Street’searnings forecasts, very few are registering any meaningfulrevenue growth. We cannot say what the appropriate valuationought to be for the shares of companies whose sales are growingslowly, if at all. But it is probably not 30 times earnings.

The slumping stock market chased investors out of the U.S. dollar again last week, and into sanctuaries like gold and bonds.  Bothof these safe-haven assets enjoyed brisk demand, as the dollarfell to $1.1787 per euro from $1.165 per euro the prior Friday.Gold jumped $17 to $389.20 an ounce.

One week does not a trend-reversal make.  But it’s worth notingthat gold and gold stocks both outperformed the S&P 500 againlast week. The Amex Gold Bugs Index soared nearly 9%. Gold stocks have been dazzling performers ever since the bond market peakedon June 13th. Since that date, the Gold Bugs Index hasskyrocketed more than 50%, versus a meager 3% rise for the S&P500.

Is Mr. Market trying to tell us something? Is he hinting thatdollar bills and long-dated government bonds are dangerous itemsto own, and that the Fed’s reflation campaign is succeeding verynicely?

One thing is certain, foreign investors are enjoying very littleof the bull market in U.S. stocks, unless they happen to bebuying U.S. gold stocks.  The Nasdaq has tacked on 4.5% since the end of August…for dollar-based investors. But euro-basedinvestors have LOST 4.5% over the same time frame! When goldstocks dramatically outperform ordinary stocks and foreigninvestors suffer steep currency losses, it’s time to leave theparty.

What’s more, complacency is in a bull market…which means thatthe stock market might not be. Stock investors are about asbullish as they have ever been, which – from a contrarianperspective — is a troubling omen for share prices.

As we noted in this column on Thursday, the most surprisingaspect of this week’s stock market selloff was that it hadn’thappened earlier. "A ‘correction’ was long overdue, based on themost recent sentiment readings," we noted. "The nation’sinvestors have rarely exhibited such universal exuberance. Let’stake a quick tour of the latest investors sentiment readings. The four most widely followed gauges of investor sentiment — Bullish Consensus, AAII, Investor’s Intelligence and Marketvane — allregistered extremes of bullish sentiment as of Tuesday evening,immediately before yesterday’s trouncing.

In fact, as professional sentiment-watcher Christopher Cadburyobserves, all four of the gauges showed that greater than 57% ofthose surveyed are bullish. Never before have all for sentimentindicators produced bullish readings above 57% at the same time.The AAII survey, for example, which polls members of the American Association of Individual Investors, finds that 60.3% of itsmembers are bullish, versus only 13.8% who are bearish. Thesesorts of extreme readings often presage the end of stock marketrallies. At best, bullish sentiment does not reach an extremewhen the buying is good."

Don’t despair; the buying may not be good when bullish sentimentreaches an extreme, but the selling is very, very good.


Eric Fry,
The Daily Reckoning

October 25, 2003 — Paris, France

P.S. This week in THE DAILY RECKONING below. Be sure to check out Dan Denning’s BED spread indicator, in Thursday’s guest essaybelow… it may prove a useful tool in determining the market’s‘opinion’ of US government debt while deficits skyrocket and thedollar weakens.



by Bill Bonner

"…Many are the times we have railed against this injustice.That is the problem with democracy and popular markets, we havepointed out; only the living get to express an opinion. The poorcorpses lay mute, still, and lifeless as a senator…"

By Dan Denning

"…To get it, I established a spread between emerging marketdebt and U.S. government debt. If I’m right about the U.S. bondmarket losing its gold-standard reputation, the spread shouldconverge over time. U.S. government bond yields will rise as thedollar falls. And emerging market debt yields will fall, as itbecomes comparatively less risky than dollar-denominateddebt…"

By William Rees-Mogg

"…Early in the 20th century there was much fashionable concernin Europe about the decline of the West. Many observers thoughtthat the European lead in 19th century manufacturing would proveto have been a temporary advantage, that Europe was sufferingfrom long-term social decadence, and that Asia would become thedominant continent by sheer weight of numbers…"

By John Myers

"…It is a similar story for the adjusted monetary base, or thesuper money that the Fed lends to banks, who in turn lend it outin multiples. The surplus cash key component of the adjustedmonetary base is rising at an even more alarming pace than during the tough stagflation of the 1970s…"

by The Mogambo Guru

"…And in case you are at a loss to understand why the sirens in the Mogambo Bunker are blaring, why the klaxons are sounding, why all the bells are ringing, or why I have maps showing emergencyroutes out of town, the answer is that price inflation ishere…"


"The Borders in Brighton Michigan," Pat Cross writes in to say,"can’t keep Financial Reckoning Day in stock. I personally knowthey had 2 copies, then ordered 6 more… then 12 more then 20more! I still have not got mine. They sell out before I get homefrom work."

Mr. Bonner asked you Thursday if you wouldn’t mind being our"eyes and ears" on this project. He suggested sending an e-mailto let us know when and where you find the book in your localbookstore. The response has been incredible. We will write back,as soon as we can, but we wanted to give you a little sampling of the kind e-mails we’ve received:

"…read it cover to cover and enjoyed every minute…"
– Del Mar, California

"…I think you guys are great. The Daily Reckoning is one of the highlights of my day. Keep up the great work…"
– Las Vegas, Nevada

"…read DR each and every day. Thank you. It is a very different viewpoint that I get from CNBC…"
– Knoxville, Tennessee

"…Great book! I had a hard time putting it down, read it inthree nights…"
– Atlanta, Georgia

Some readers have the experience of Dave Schmidt in Ames Iowa: "I went to the local Border’s at lunchtime today. I did not findyour book displayed (Bill O’Reilly’s was), so I inquired at theinformation desk. The nice young lady checked her computer, thenwalked me all the way to the back corner of the store to thebusiness section. After a brief search, she located a lone copyon the bottom shelf of the corner-most bookcase…"

If the latter is your experience, too, we have a small request:go immediately to the sales counter and give ’em holy hell! ForPete’s sake, how are we going to start a revolution if bookstores are stuffin’ "a lone copy on the bottom shelf of the corner-mostbookcase"?!?

Thanks again, for your eyes and ears. We also received e-mailsfrom Singapore, Jakarta, New Zealand, South Africa, Australia,Austria, England… and far away Nova Scotia. (Never fear… thebook will be available in the UK, Europe and points beyondstarting this week!)

Regards and once again, THANK YOU!!!

Addison Wiggin,
The Daily Reckoning