Upbeat Investors & the Money Supply

“Upbeat investors sent stock prices sharply higher Friday,” reports an article in USAToday, suggesting investors were buying in response to the release of GDP numbers, which rose over 2% – higher than expected.

The Dow did, in fact, gain 117 on Friday to close at 10,810 – up a big 230 for the week. What’s more, three of the last four weeks have produced positive closes on the Dow… for a huge 1017 point rally, helping the blue chip index close in positive territory for the first time since March 8th of this year.

Coincidentally – or not – the money supply during those weeks has reached historic levels of expansion. M-1, for example, is up $12.6 billion, six times the average 4-week rise.

“The only plausible explanation,” says Greg Weldon, “is that the Fed fears a deflation tsunami is rolling towards the U.S.” Meanwhile, Fed Chair ‘Easy Al’ Greenspan was back on his beat, assuring readers that gains in the markets are the result of the continued technological revolution in the work place.

The Nasdaq gained 40 to 2075 on Friday, ending the week down 87… tech earnings are apparently still an issue to some well-intentioned investors. The S&P 500 eased up 18 to 1253 on Friday – up 10 for the week.

Do the GDP numbers bode well for a fabled “Second Half Recovery”? The DR Blue Service: “Three themes – layoffs, capital spending, and debt – suggest to us that the market will be getting a lot worse before it gets any better.” (See: Flotsam & Jetsam below)

Markets Around The Globe: The Nikkei dipped 0.3%. But Britain, France and Germany all rose – 1.4%, 1.7%, 0.8% respectively.

The Russell 2000 inched up 6 Friday to close out the week at 483 – 17 points higher than last.

ADD’L PRICES FOR THE WEEK: Gold making a move…

Gold: $264

Crude Oil: $28.27

Natural Gas: $4.86

CRB Index: 213

Dollar Index: 115

The Sad, Sad Euro: $.89

British Pound: $1.43

Japanese Yen: $.81

FLOTSAM AND JETSAM: Cracks In The Facade

– Excerpt from The DR Blue Weekly Update

“…three themes this week – layoffs, capital spending, and debt – suggest to us that the market will be getting a lot worse before it gets any better.

1. Unemployment is rising.

Not only is the stock market not delivering income, the economy is not producing jobs – Lucent is laying off 16,000 workers; Motorola 22,000; Nortel 20,000; Ericsson 15,000; Verizon 10,000; Cisco 8,000 and JDS Uniphase another 5,000.

Even Old Economy companies are getting into the act undefined Daimler-Chrysler is enclosing pink slips with 26,000 of its workers’ paychecks…Proctor & Gamble is laying off 9,000. Whirlpool 6,000. And J.C. Penny – 5,000.

Jobless claims for last week totaled 408,000 – the highest level since ’92. How will consumers spend when they don’t have jobs?

2. Debt – personal and corporate – is a ticking time bomb.

Telecoms in particular have a mountain of debt that now has to be serviced out of declining (or negative) earnings. The FDIC reports that over the last two years, median expected default rates on telecom loans have climbed 170%. Telecoms raised $160 billion in the debt markets in the last two years.

And banks extended over $300 billion in syndicated loans to the industry. If the telecoms start defaulting on that debt, look out. The banks could be left holding the bag.

Fortune magazine points out in its April 30 issue that ‘…a series of big defaults could shake investors’ faith in financial stocks. We won’t have to wait long to see how the scenario plays out. Anyone feel a tremor?’

3. Capital spending continues to decline.

Capital spending – business investment in income-producing assets – leads to higher profits and higher wages. Cost- cutting and layoffs work in the short term. But for the long term, the aggregate effect is that the economy gets poorer if all firms resort to cost-cutting and layoffs to restore profitability, rather than capital investment.

The big picture? Debt, capital spending, and layoffs spell a gloomy picture for most investors. But the good news is there is a bull market developing in our favorite reserve currency: gold…”

Enjoy all your weekend,

Addison Wiggin
Paris, France
April 28-29, 2001

The Daily Reckoning