Market Review: What the Chairman Said

Mr. Greenspan has been talking.

On Wednesday, testifying before the Senate Banking Committee, he said he couldn’t understand why bond rates were so low. The economy has strengthened, he pointed out, inflation is stirring up and I’ve made it clear rates are going to keep rising. His exact words were: "The broadly unanticipated behavior of world bond markets remains a conundrum."

His comments made the bond market dive. But the sell off didn’t end there. The latest reading of the PPI was announced on Friday morning, and bond prices gapped lower again. The reading showed the fastest rate of acceleration in wholesale prices for 6 years.

What is so remarkable – it that this time – it’s core inflation that is rising so fast. The core rate is simply the usual PPI reading minus energy and food. The wonks in Washington say the full-blown PPI is too volatile, so they watch the core rate instead. They got a shock on Friday…the core PPI reading for January was 0.8%, or 10% annualized.

The 10-year Treasury bond started the week with a yield of 4.09%. It ended the week at 4.26%. The week before last, 10-year yields dipped below 4% for the first time 4 months.

We come back to Greenspan. On Friday he testified before the House Financial Services Committee. He turned his attention to the housing market. "I think we’re running into certain problems in certain localized areas," he said. "We do have characteristics of bubbles in certain areas."

He once said he couldn’t spot a bubble until after it had burst, so this one must be a real corker. Maybe he’s noticed how expensive those trailers are on the coast in California?

In yesterday’s edition of The Daily Reckoning, Byron King reported how trailer parks in coastal California had transformed themselves from trash into treasure, and how some mobile homes there were selling for seven figures.

"The value of mobile homes within walking distance of the surf has shot up tremendously in the last few years, reflecting a dramatic change in status for these dwellings," said Byron’s reference, the Los Angeles Times. "Mobile homes with breathtaking views of the Pacific hover in the $1-million range in places such as Malibu’s Paradise Cove and nearby Point Dume Club."

Even if you buy one of these things, explained Byron, you still have to rent the land from the trailer park! Characteristics of a bubble indeed.

After his comments on housing bubbles, Greenspan turned on the GSEs. He advised them to trim their balance sheets…saying Fannie and Freddie shouldn’t hold mortgage portfolios totaling more than $100 billion to $200 billion apiece. "Enabling these institutions to increase in size – and they will, once the crisis passes – we are placing the total financial system of the future at a substantial risk," he said.

For comparison, according to Greenspan, Fannie’s current portfolio is about $905 billion, while Freddie’s is $654 billion. Fannie’s portfolio has more than quadrupled in the past decade, while Freddie’s has grown nine-fold.

Despite Greenspan’s effluvium and the sell off in bonds, the markets held up pretty well. The Dow lost 11 points over the week, to close at 10,785. The Nasdaq lost 18, or 0.87%, to end the week at 2,059.

Gold, silver and oil went up, while the dollar went down. [Ed. Note: For the market numbers in full, check out the new quotes box below.]

Regards,

Tom Dyson,
The Daily Reckoning

P.S. As you just read, Greenspan has finally spotted it – a bubble in real estate. When the Chairman joins the party, it’s probably time to leave. Do you live in a region where house prices have been rising? Have you thought about selling but the hassle of moving houses is just too great?

P.P.S. Your sometime weekend editor, Addison Wiggin, has contributed this week – for the first time in months! Scroll down to the section below we call ‘Flotsam and Jetsam’ for his piece…

— Market Data —

— Daily Reckoning Book Of The Week —

STAND UP TO THE IRS
by Frederick W. Daily

Information is often the key to survival. Despite all the horrible things the IRS folks can do to you, there’s also a lot you can do to fend them off…if you know how to exploit the rights, rules, and resources available to you.

This book by tax attorney Fred Daily offers practical advice on everything from protecting your assets to avoiding an audit by the dreaded IRS.

THIS WEEK in THE DAILY RECKONING

Tabloid Truths 02/18/05
By Bill Bonner

"The British press thrives on scandals of their citizen’s private lives, but is that really any worse than the force-feeding of opinions and other people’s politics that goes on in American papers?"

The Nation That Debt Built 02/17/05
By Dan Denning

"America has become a country of risk-takers – and it’s not solely homeowners and investors taking these chances…"trusted" government officials have made promises they can’t – and never intended to – keep…

Out Of Aces 02/16/05
By Chris Mayer

by Bill Bonner "A tale has been told over and over again throughout financial history: Overly confident businessmen and women that gulped at success and became drunk with power…only to be stuck with the aftertaste of defeat."

Saving Spree 02/15/05
By Gary Schilling

by Bill Bonner "Everyone involved in the financial world has been speculating on what is in store for the New Year…will the dollar rally vs. the euro? And when will the housing bubble burst?"

No Rest For The Retiree 02/14/05
By The Mogambo Guru

by: Bill Bonner "Remember the good old days, when people looked forward to retirement, thinking that their IRA or 401(k) would take care of them long into their golden years? Now inflation forces retirees to take on another job…"

FLOTSAM AND JETSAM:
By Addison Wiggin

We have a personal anecdote to recount today — one that, with any luck, will help you make some good money in the stock market…starting with as little as $200.

The story begins before there was The Daily Reckoning…Back when we were young, spry, full of vim and vigor and convinced that the world was still our oyster… I worked on a project with Dan Denning, now editor of Strategic Investment.

The project was simple. We wanted to prove that starting with as little as $200 you could pick good small-cap stocks before buy recommendations were issued by institutional firms… and compound your returns.

Being young and idealistic, we applied what economist Joseph Schumpeter called "creative destruction" to the small-cap market. The theory goes like this…

A capitalist economy is always in a state of flux. New ideas beget new companies…which displace and destroy old companies. And the cycle continues. If we could identify the new up-and-comers before Wall Street got wind of them… we could ride them to the top.

We discovered a system for identifying winning small-cap stocks that had growing sales, booming earnings, low multiples and rising profit margins.

Of course, it was 1996 and the absurdities of the stock market bubble weren’t even the figment of anyone’s imagination. Greenspan’s warning of "irrational exuberance" was taken about as seriously by young bucks like us as if you had just warned a teenage boy that teenage girls can be dangerous to his pre-pubescent psyche.

When the bubble began, I left the project and soon began documenting the absurdities of the stock market mania in Paris with Bill Bonner. Even Dan Denning left the small-cap world for Strategic Investments — but not before he brought James Boric on board.

Let me tell you something about James: he is one of the finest young minds this industry has seen in at least 15 years. James is not only smart and quick on his feet, but he also works like a dog. He’s bright, intelligent… eager. And most of all, he’s confident.

I wonder though, is he too confident?

Just this week, our ebullient, in-house small cap sleuth says he’s found the two best stocks you could possibly own in 2005.

James is so sure he’s found this year’s big winners, he’s willing to pay you DOUBLE the cost of a subscription to his advisory service – if he’s wrong.

Double the subscription price, eh?

Let me explain something. I’m James’ publisher. It’s my job to root out any hair-brained scheme he might come up with… before he gets a chance to send it to you. After all, I’m the one who has to foot the bill if he’s wrong.

So… I did a little digging myself. Not that I don’t trust James. But this is my business we’re talking about here. Here’s what I found…

The first stock Boric found trades for $3 on the NASDAQ. It’s cheap at 12 times earnings and has a Q over Q growth rate of 28.6%.

It’s a jewelry company that sells lots of gold. And it’s getting ready to open 120 stores in China. In 2005 its Chinese revenues alone will likely total $40 million. Not bad considering its total world wide sales amounted to $58.1 million last year. And by 2008 its Chinese revenue alone should swell to $120 million – more than twice its total revenues last year.

Okay, so far so good…

The second stock also trades for $3. It has guaranteed sales of $400 million in 2005, $373 million in 2006, $400 million in 2007 and so on. All the way to a high of $510 million in 2010. And it will continue to produce until at least 2013.

That means between now and 2013 you can buy stock in a company that will throw off billions of dollars in sales. That sounds pretty interesting…

But I remain skeptical. I love this guy, Boric. But having just moderated his debate at the World Money Show in Orlando with Dan Denning over whether there is any value left in The US market… I have to tell you, James has me worried.

He’s just so passionate about his ideas. Still his track record is hard to ignore:

Boric has led his readers to gains of 233.85% on SIRIUS Satellite Radio (SIRI), 65.6% on Drugstore.com (DSCM), 62.35% on Orbital Sciences Corp. (ORB), 146.67% on China Yuchai (CYD), 73.98% on Select Comfort (SCSS), 87.5% on Alloy Inc. (ALOY)

And his readers think he’s some sort of small-cap messiah.  See for yourself… Mr. Balboni, 72, wrote in to say…

"… I bought 4,000 shares of CDE on 7/10/03 at $1.57 and sold 3,000 today at $5.43 for 245% gains! Thank you. My devastated IRA is coming back. Another year like this and I will have recouped all my losses, which is great since I am retired (age 72).

Keep up the good work. I will never go back to letting "financial advisors" handle my investments… ."

And Gary [who] wrote in to tell us…

"Dear James,

"… A lot of talk about patience and holding on to a stock for the best returns. I bought (upon your recommendation) SIRUS stock back in April 03 at 66 cents a share and held on to it for my own reasons and in the long run I watched it go up (over $9.00) and down and now it is at $6.50 a share or 879% return. Thanks again. Here’s hoping that it goes higher still.

— Gary"

At the end of the day, we don’t know if James if onto something huge, or out of his mind. But I can tell you this… no one works harder to find quality investment ideas than Mr. Boric. And I’ve never seen him this hot and bothered about a couple of stocks.

Heck, he’s so sure of these two stocks, he’s offered to pay you back double the subscription price if he’s wrong.

He’d better hope he’s right… cuz now, his job’s on the line. To find out what has Boric so sure these are the two best stocks to own for all of 2005.

Warm Regards,

Addison Wiggin,
The Daily Reckoning
February 20, 2005 — Baltimore, Maryland

P.S. Anyone who knows Boric, knows he isn’t usually a cocky guy. But he’s so sure that he can help you make money in the small-cap market, he’s willing to make you the boldest deal I have ever seen. If you try his service and can prove he failed, Boric is willing to refund you TWICE what it costs to join.