The Supermarket of Dreams

The Daily Reckoning – Weekend Edition
October 14-15, 2006
Baltimore, Maryland
by Chris Mayer

MARKET REVIEW: THE SUPERMARKET OF DREAMS

“The supermarket of dreams.” That’s what Max Gunther calls the stock
market in The Zurich Axioms. Indeed it is. Especially when the market is
going up – but there’s more to the story when you start to look at it a
little closer.

As we make new highs on the Dow, people start to dream again. Early
retirement. Little house by the sea. Chilled wine in slender glasses and
warm sunshine in a bright blue sky. Nice cigar. Leisurely meals. No
financial worries.

As author Charles Bukowski observed: “It’s easy to fall into this kind of
thinking when men hand you large bills at the cashier’s window.” The
market’s been handing out lots of bills lately.

But let’s look at it differently. Let’s look at the market as we look at
the produce section. No one buys the produce section. You buy potatoes and
melons and onions – and not just any potato or melon or onion. You look
over each carefully before you put it in your basket. You consider the
price and the condition of the produce. So let’s look at the market in the
way we look at melons and broccoli – with a discerning eye.

See, the big picture misses a lot of detail. People talk about “the stock
market” as if all the stocks danced to the same routine, like a line of
Rockettes. But that’s not really true most of the time.

These people miss the better stories that lie beneath. There is a lot of
movement in varying directions. The market is more like a freeway, with
some cars turning off and new cars zipping on. Not everyone is going to
the same place.

There are trouble spots in today’s market, sure – warning signs of a
slowdown in the highly cyclical semiconductor market, building inventories
among PC manufacturers and electronics retailers, vulnerable housing
related financial stocks and more.

And there are always broken restaurants and busted airlines lying around,
like shards of shattered dreams. Even as the market makes new highs, there
are pockets of horrible performance. Over the last seven weeks, coal
(-18%), maritime (-16%) and Canadian energy (-16%) have been among the
worst performing industries in the market.

The bright spots? Interestingly enough, they are names you probably
wouldn’t guess off the top of your head. The best performing industry over
the last seven weeks was the shoe business (+15%), followed closely by the
tire and rubber group (+14%). We’ve made bets in both of these sectors in
K-Swiss (KSWS:nasdaq) and Bandag (BDG:nyse). I wrote a few weeks ago that
the bottom was in on Bandag after its strong earnings report in July. The
stock is up more than 30% since. Granted, we’ve had to wait awhile — but
we’ve collected dividend checks as we’ve waited.

So you can see there are lots of crosscurrents even as the Dow makes new
highs. The fact that the Dow made a new high is the least useful part of
the story. It really doesn’t tell you much about what’s happening in the
market.

The more and more time I spend studying markets and investing, the more
and more I harden in my view that trying to figure out what “the market”
is going to do is a waste of time. The rewards are always richer when I
focus on the smaller stories and dig into the details. Any nitwit can have
an intelligent sounding opinion on the market. Don’t be fooled.

The great investors don’t spend a lot of time trying to figure out what
the market is going to do next. They do something simpler than that. They
go through the market as if it were a produce stand and turn over a lot of
fruit and veggies looking for the good stuff at a price they like.

Those dreams – that house by the sea and the life of leisure – are
achievable. But you have to know the right way to go about getting there.
Investing well is part of it.

Chris Mayer
for The Daily Reckoning

P.S. At Capital and Crisis, we’ve found our own little pockets of value,
too, that have done exceptionally well in a short amount of time so far.
We’ve recently added SJW Corp. (SJW:nyse), up 27%; Northwest Pipe
(NWPX:nasdaq), up 18%; and Horizon Lines (HRZ:nyse), up 29% in only a
matter of months. Most recently, we’ve added water rights and Argentine
real estate. I expect these stocks will deliver good gains, too.

— Daily Reckoning Book Of The Week —

Empire of Debt: The Rise of an Epic Financial Crisis – Now available in
paperback!
by Bill Bonner and Addison Wiggin

“Watching the news is a bit like watching a bad opera,” say best-selling
authors Bill Bonner and Addison Wiggin. “You can tell from all the
shrieking that something very important is supposed to be happening, but
you don’t quite know what it is. What you’re missing is the plot.”

After a generation of being spoon-fed reality by media, it’s
understandable that Americans are confused about the state of their
nation. In their newly released book, Empire of Debt, Bonner and Wiggin
wield their sardonic brand of humor to expose the nation for what it
really is – an empire built on delusions.

Americans are rapidly facing a choice: recognize these dangerous delusions
and take steps to avoid their collapse. Or remain ignorant of them and
risk losing all of their wealth when the house of cards comes crashing
down.

Daily Reckoning readers can purchase their copy of the book that The
Economist called one of the top ten books that will “tell you what’s
really going on” – at a discount – by clicking here:

“The Most Feared Book in Washington!”

THIS WEEK in THE DAILY RECKONING: Out celebrating Columbus Day and missed
and issue of The Daily Reckoning? Never fear, we have all of this week’s
issues catalogued for you, below…
The Late Great Helmsman, Part II  10/13/06
by Bill Bonner

“Today, Bill picks up where he left off in last Friday’s essay – with our
sordid protagonist, Mao Tse-tung, lolling in his sedan chair, with
scrawny, skin-kneed porters hauling him all around China. Read on…”
The Paris of South America   10/12/06
by Chris Mayer

“Investors have been wary of putting their money into Argentina since the
country’s financial meltdown in 2001. But Chris Mayer explains that five
years later the Argentine economy is quickly growing – and there are many
opportunities to profit. Read on…”

The Coming Correction   10/11/06
by Bill Bonner and Addison Wiggin

“Now that the housing market has gone soft, what’s next? Well, despite a
stock market rally and high consumer confidence, a correction is headed
our way – and it won’t be pretty.”

False Signals and Unrealistic Hopes   10/10/06
by James Howard Kunstler

“The basic insanity of a system that presumes vastly increased wealth
where none will occur, has led to further distortions in finance.”

Something Strange in the Neighborhood   10/09/06
by The Mogambo Guru

“There’s a chill in the air…and it’s not just the change of seasons. The
Mogambo’s economic nose is twitching…find out why, below…”

FLOTSAM AND JETSAM: Natural gas projects gone awry…ancient ice…and the
Planet of the Apes? Justice Litle has all the news that shapes the global
resource world, below…

Global Briefing
by Justice Litle

Flood of Mud

Thanks to a natural gas project gone horribly wrong, 10 square miles of a
heavily populated Indonesian island have been covered in hot, stinking
mud. As many as 10,000 residents of eastern Java were forced to flee.
Factories, homes and highways have all been buried. The mud pours forth
from a 2-mile deep exploration well, forming a large, gray, bubbling lake
20 feet deep in places and nearly 140 degrees at the center. Indonesian
villagers are up in arms regarding the government’s inept response. Angry
accusations of incompetence and corruption have been hurled at Aburizal
Bakrie, the government minister in charge of disaster response, and a
wealthy investor in the project. The disaster is another not-so-subtle
reminder from Mother Nature: Man does not have as much control over the
environment as he might think.

Climatologists Tap Ancient Ice

Scientists have found a way to study the relationship between carbon
dioxide levels and climate shifts as far back as 800,000 years. The novel
method for doing so involves extracting air bubbles trapped in ancient
Antarctic ice cores. Over the long (very, very long) term, pockets of air
habitually accumulate in piles of frozen snowflakes. Because it’s
Antarctica, these piles never thaw – they harden into ice, instead. Over
time, the layers of trapped air in this ancient ice serve as a sort of
time capsule. Concentrations of CO2, methane and hydrogen isotopes in the
layers give an indication of past temperature shifts. News from the core
is disconcerting: Over the past two decades of fossil fuel use,
acceleration of CO2 parts per million has matched what nature took a
thousand years to do.

DOE Has Too Much Time on Its Hands

The Department of Energy is apparently concerned about a Planet of the
Apes-type scenario, in which generations thousands of years hence have
completely lost touch with the 21st century. The “Waste Isolation Pilot
Plant,” or WIPP for short, is a sci-fi posterity project dedicated to
warning future busybodies away from a huge cache of radioactive material
buried in the New Mexico desert. Among other goofy measures, WIPP
scientists plan to erect monolithic, Egyptian pyramid-type warning
structures. (The best way to stay on message for thousands of years, WIPP
asserts, is to carve that message in stone.) WIPP researchers are also
busy testing out pictograms and warning symbols on various non-English
speaking subjects, for fear that existing languages will be completely and
irrevocably lost. If we somehow revert to hunter-gatherer societies,
future diggers might be grateful for all this.

Sorry, We Need the Money for Pyramids

When is a technology mature? For U.S. entrepreneurs focused on hydropower
and geothermal energy, this is not a trivial question. The Department of
Energy has decided to zero out research funding in both areas, making a
request that Congress let it drop the axe. The justification is that these
technologies are no longer in need of support, which has energy advocates
shaking their heads. Geothermal power, for example, currently generates
less than 1% of the nation’s electricity; though geothermal has vast
untapped potential, serious development has barely begun. The DOE hopes to
save or divert a miniscule $24 million a year by killing off this
research; ironically, it is happy to spend more than that on pyramids.
(The WIPP program detailed above is expected to cost $1 billion over the
next 30 years, or approximately $33 million per year.)

Editor’s Note: Outstanding Investments is positioned on the strength of
underlying conditions that will play out for years if not decades. The
weak hands almost always get washed out before the big crescendo, so times
like these are no surprise. You want to trade the swings in oil and gold,
that’s fine – then trade them. But from a long-term investment
perspective, the type of action we see here provides bargains. It allows
the patient investor to scoop up assets from the weak hands without
staying power… to profit from those who are neither traders nor
long-term investors, but conviction less cannon fodder caught in the
middle ground.