MarketVVizard's Market Thoughts

Top 730. Dec 22, 2003 9:38 PM

» Normxxx - Re: Re: Global Deflation?

In response to message posted by MarketVVizard:

China's biggest industry these days seems to be building wharehouses and stocking them with all manner of retail goods. That enterprise does not seem to have a happy future.

Solutia's business will move offshore-- but not necessarily to China, since their cost of oil is also going up. Canada maybe?

Thanks to the drop in the $US vs the Euro, the steel industry has some breathing space and some price flexability. We are currently sitting on Japan's attempts to saturate us with steel-- also the yen has gone up against the $US.

The shortage of coke points up the fact that the international economy came on strong in 2003 and will be roaring back in 2004 (see http://www.suite101.com/discussion.cfm/i... ).

-- posted by Normxxx

Top 731. Dec 22, 2003 10:11 PM

» F111Star - Re: Re: Re: Global Deflation?

In response to message posted by Normxxx:

The conventional wisdom says that Red China will be the "country of the 21st century." I'm not so sure. Their commies are not as likely to whither away quietly as did their Soviet counterparts (although comrade Putin is still hanging around). Red China's accounting practices (or lack thereof) are bound to ignite a few boom/bust cycles, and we don't yet know how well their system will react during the stress of the inevitable bust. Finally, the information age is barely penetrating the fog surrounding their rural poor. When the message gets out that coastal China is far more prosperous than the rural interior, who knows how the 1 billion poor folks will behave.

-- posted by F111Star

Top 732. Dec 23, 2003 7:44 AM

» MarketVVizard - Hussman

I do not remember Hussman making comments like this in the past (specifically I'm referring to the expectation for an abrupt increase in inflation and treasury yields.

Bold and italics added by me:

Bait & Tackle

12/22/03
John P. Hussman, Ph.D.
All rights reserved and actively enforced.

The quickest way to hook a fish is you give it some idea that it has an easy target. That's why fishermen use artificial minnows. You give them a little tug with the tip of the fishing rod as you reel them in, so it looks like the poor little fellas are injured and struggling against the current. That's what a trout wants. An easy, free lunch.

Many investors, unfortunately, are no different. As Richard Russell of Dow Theory Letters has often said, every bear market has a hook - some notion, often patently false, that keeps investors holding on despite their mounting losses.

During much of the excruciating 2000-2002 decline, the hook was Fed easings "in the pipeline." To that point there was a significant amount of market history suggesting that two easings by the Fed were quickly followed by stellar market returns. As I argued at the time, that pattern was not likely to hold in an economic downturn driven by overcapacity and a broad plunge in capital spending. This was particularly true given that banks were tightening their credit standards. Unlike most economic downturns, the recent one was a situation where companies were not particularly willing to borrow, and banks were not particularly willing to lend.

Even the recovery that has taken place has been driven not so much by new bank lending, but by "helicopter money" dropped onto consumers via tax rebates and mortgage refinancings. (In contrast, other economic downturns in recent decades were associated with relatively mild shifts in the mix of goods demanded, resulting in large inventory disinvestment in a narrow range of industries, but continued demand for loans elsewhere in the economy).

Despite evidence that there was no reliable mechanism to link monetary easing with increased lending, analysts adopted a common mantra about Fed easing being "in the pipeline." The more that phrase "in the pipeline" caught on, the more it became clear that those easings were already priced into the market, and the more it became clear that this was the "hook."

Spinners and Minnows

Well, in our relentless quest for ideas that are already priced into the market, we've found two new hooks: the "sweet spot" and the "synchronous global expansion." My guess is that you'll soon be hearing these phrases a lot.

The clear appeal of these hooks is that they make investing look easy. What investor doesn't want economic growth without inflation, especially when it is firing on all cylinders internationally? What could be easier than that?

Then again, what could be easier than eating that injured little minnow struggling against the current? If investors don't look for the hooks, they're likely to be reeled in like trout.

The basic idea of a "sweet spot" is that the economy is growing, but not by enough to produce inflationary pressures. It's actually a notion that briefly surfaced early in the 2000-2002 market plunge, but quickly went into hiding. The phrase has resurfaced, and once you're attentive to it, you'll suddenly notice how many analysts are parroting the idea as an argument to buy stocks.

As a fund manager, the whole concept of a "sweet spot" is disturbing. It suggests that stocks are simply a thermometer of short-term conditions and can be purchased without regard to the long-term stream of cash flows they represent. To promote stocks on the basis of a sweet spot -- without discussing or accounting for valuations -- reveals a short-sighted understanding of finance and a reckless tendency to jump on the bandwagon.

The idea of a "synchronous global expansion" is that since the recent economic downturn was global in nature, the ensuing recovery will also be broad, leading to much more rapid and sustainable growth than otherwise.

Examining the recent economic expansion, it is clear that is anything but normal. While an overlay of recent economic behavior over "typical" recoveries makes this expansion look fairly standard, that kind of analysis overlooks the enormity of deficit spending and mortgage refinancing required to attain it. These sources of growth were one-shot, lump-sum jolts to the economy.

There's no question that economic growth will propagate for a couple of quarters, largely due to inventory rebuilding. There's also little question that we'll see some growth in capital spending, offset by a downturn in housing investment. Employment will also probably improve as well, with the unemployment rate dropping perhaps a half-percent in coming quarters. But overall, the underpinnings of the economy - massive corporate and consumer indebtedness, huge fiscal deficits, and a record current account deficit - underscore the likelihood of further deleveraging of the U.S. economy in the next several years. As a rule, deleveraging (gradual reduction of debt - requiring slower growth in consumption and investment) doesn't lend itself to economic booms.

In my November 10th market comment, I argued that one of the key sources of the apparent "productivity boom" in the U.S. has actually been import growth. Growth in imports, coupled with strength in the dollar, was one of the main factors that kept U.S. inflation firmly in control during the late 1990's. The flipside is that as the U.S. dollar weakens and import growth slows, we're likely to see both higher inflation and lower productivity growth figures. We would already be seeing this, were it not for the continued appetite of China and Japan for U.S. dollar assets, which has prevented the current account deficit from narrowing despite significant weakness in the dollar. If that demand begins to weaken, and there is every reason to expect that it ultimately will, U.S short-term interest rates will be quickly pressured higher, Fed tightening or no Fed tightening, accompanied by further dollar weakness and inflation pressures. (As for the argument that rising short-term rates in the U.S. would help the dollar, the interest rate that matters is the long-term, real interest rate on dollar assets, and it's not at all clear that this would rise even if short-rates do).

Though it doesn't necessarily follow that a coordinated downturn in the world economy must be accompanied by a coordinated upturn, there actually is some evidence that a pickup in economic activity is occurring globally. Unfortunately, the main impact of this is not on U.S. economic growth but on commodity prices. The debt burden of the U.S. already ensures that future growth in U.S. consumption and investment will fall short of overall GDP growth, which is another way of saying that exports are likely to grow faster than the economy, and imports slower.

So there is a certain benefit that exporters will experience if indeed we get global economic growth, but particularly in the financial markets, this benefit is likely to be offset by upside surprises in inflation and interest rates.

Prices already reflect the economic outlook

Needless to say, many of the most overvalued stocks in the market are elevated exactly because they already price in the economic outlook. These include cyclicals like Caterpillar, Ingersoll Rand, United Technologies, MMM, and Deere, industrial metals stocks like Alcoa and Inco, and tech companies situated to benefit from additional capital spending such as IBM, EMC, KLA Tencor, Symantec, Adobe, Dell, Texas Instruments, Xilinx, and National Semiconductor. A handful of other stocks round out our list of most overvalued large stocks, including financials like American Express, Unionbankcal, Bank of New York, M&T Bank, and oddities like Allergan (maker of a diversified line of eye care products and Botox).

In summary, then, we can expect a number of developments in the quarters ahead:

1) A moderate continuation of economic growth, paced by inventory rebuilding;

2) A pickup in capital spending at the expense of housing investment;

3) A pickup in export growth at the expense of the U.S. dollar, and;

4) A modest period of stability in short-term interest rates, followed by an abrupt and larger-than-expected increase (particularly if foreign governments slow their accumulation of U.S. Treasuries), with an equally abrupt increase in inflation pressures.

Meanwhile, it's clear that stocks are unusually overvalued, and that while increases in short-term interest rates are already priced into the yield curve, bond investors may not be fully prepared for the speed and extent to which short-term rates will actually rise (an increase in Treasury bill yields toward 4% during the next 12-16 months appears likely in our work).

As usual, we don't base our investment positions on forecasts, but on the prevailing Market Climate that we identify at any given time. At present, stocks remain unusually overvalued, but they still display moderately favorable market action, which suggests that for now, investor's still have a willingness to take risk. That doesn't ensure further market gains, but we can't rule them out. In any event, however, further gains would be based on purely speculative merit, not on investment merit arising from "sweet spots" and "synchronous expansions." Despite the temptation to make a free lunch out of those minnows, investors might want to think carefully before swallowing the lines that Wall Street analysts are tossing out here.

Market Climate

As of last week, the Market Climate for stocks remained characterized by unusually unfavorable valuations and still moderately favorable market action. The Strategic Growth Fund remained fully invested in stocks that appear to have some combination of favorable valuation and market action, with just over half of that portfolio hedged against the impact of market fluctuations. We're also holding a modest "contingent" position in out-of-the-money put options. Though this position represents only a fraction of 1% of assets, our measures of market action are becoming increasingly "hot" -- it would no longer take a great deal of deterioration to shift the Market Climate to a fully defensive stance, and there is at least some potential for this to occur abruptly.

Recently increasing investor attention toward blue chips is actually something of a negative in that investors seem to be taking a more selective approach toward stock investments. As usual, this is not a forecast, and we're perfectly willing to allow our small put option position to decay if the market turns out to have more wind behind it. But again, at these valuations and with a modest increase in the selectivity of investors toward risk, we can no longer be confident that investors' risk preferences are robust. We remain positioned to gain primarily from market advances (and never take net short positions), but it's fair to say that we've modestly ratcheted up our level of caution.

In bonds, the Market Climate remains characterized by modestly unfavorable valuations and modestly unfavorable market action, holding us to a short-duration portfolio of less than 2 years (i.e. a 1% move in interest rates would be expected to affect the Strategic Total Return Fund by less than 2% on account of bond price fluctuations).

Precious metals stocks corrected last week, but the metal did not correct as significantly. As a result, the ratio of the gold price to the XAU is again above 4.0, which has historically been a reasonable level of valuation. The ideal conditions for gold stocks occur when, in addition to reasonable valuations, there is pressure on the U.S. dollar as a result of upward inflation pressures, early weakness in the economy, and falling nominal interest rates. This combination typically happens very early into economic downturns. We don't see that yet, so it is not appropriate to take a significant exposure to precious metals shares here. But valuations, combined with increasing pressure for revaluation in Asian currencies is enough to make us willing to buy very lightly into weakness in gold stocks. We did a bit of that late last week in a handful of issues. Again, however, overall conditions for precious metals are not compelling enough for us to take positions of significant size yet.

It's a Boy!

"Where your treasure is, there will your heart be also."

Merry Christmas.

_______________________________________________________
I echo that last part. Enjoy! Be back in a few days...

-- posted by MarketVVizard

Top 733. Dec 23, 2003 8:09 AM

» Kirk - Re: Hussman: VBMFX PTTAX HSGFX HSTRX

.
In response to message posted by MarketVVizard:

Hussman is kicking ass in bonds but pretty "defensive" in stocks of late. Probably holding on to gains made earier...

Funds http://www.hussmanfunds.com/theFunds.html

Hussman Strategic Growth Fund - HSGFX
The Fund invests primarily in U.S. stocks, with the objective of
long-term capital appreciation, and places added emphasis on
defending capital during unfavorable market conditions.

Hussman Strategic Total Return Fund - HSTRX
The Fund invests primarily in U.S. Treasury and government
agency securities with the objective of long-term total return, and
has the ability to take a limited exposure in foreign goverment
bonds, utility stocks, and precious metals shares.

-- posted by Kirk

Top 734. Dec 27, 2003 7:31 AM

» Austrian - Barrons Articles

I like this article. This guy knows his history and sees the credit creation process for what it is, a bubble. Like Mr. Hendry, I do not know how the future will unfold, I believe the opportunities are in things like commodities Gold and Silver. Take it for what you think it is worth.

Regards,

--Austrian

From Bad to Awful

A U.K. hedge-fund chief sees two possible investing scenarios, and one's downright scary
By VITO J. RACANELLI

An Interview With Hugh Hendry -- As you enter the Odey Asset Management conference room in London, you'll see a large painting of a fog-enshrouded skiff that a lone figure is piloting toward a dull and faraway light. It goes a long way to explaining the firm's attitude toward investing. Hedge-fund manager Hugh Hendry happily concedes that he's an apostate from fundamentalism, uses technical analysis liberally, and hasn't met with a company management in "five years, thank God." The Scotsman with Glasgow working-class roots admits to having no friends beyond the Reuters mini-terminal he carries in his pocket. He eschews the focused-fund approach and what he calls Taliban-like fundamentalism in the market.

Instead, Hendry believes that asset allocation is crucial. Choosing among a wide variety of asset classes that he considers promising, he populates the fund with hundreds of small positions. "We're like a centipede. You can lose 30 legs and you can still march forward," he says. And march he has: This year, his Odey Eclectica hedge fund, which has amassed $100 million in assets since its founding in October 2002, was up 45% through November.

Right now, a generally bearish Hendry thinks profit expectations are much too low for mining stocks, gold and many basic-resources companies, and he likes the return from Japanese property stocks. And, he contends, the bullish prospects for technology and big pharmaceutical stocks are significantly overestimated.

How much of a bear is he? Well, in his more optimistic scenario, the Federal Reserve reflates the economy and stocks essentially go nowhere from now until 2020. In his Armageddon scenario, the S&P 500, now hovering near 1,100 could drop as much as 80% from its all-time high of 1527, putting it at 304. For more, read on.

Barron's: What's your current view of the global economic picture and financial markets?

Hendry: What's happening today happened 300 years ago in the French economy when John Law, another Scotsman, was allowed to launch the first government-sanctioned bank, which replaced coins with paper money. Commerce boomed. Politicians recognized this correlation between issuing more money and people liking you. They issued more and more money, but it was a false promise. Nothing intrinsically was being added to the economy except promises, which could never be redeemed. Selling by speculators caused the stock market to correct. The correction encouraged the authorities to print more funny money. Ultimately, the continued pumping of liquidity destroyed the economy, the stock market and France's currency.

More recently, the U.S. came off the gold standard in 1971 and the Dow Jones Industrial Average bottomed in 1974. Over the next 25 years, the Dow goes up 20-fold because every period of economic anxiety brought forward an orthodoxy of generous liquidity. Money has to go somewhere. It seeks to perpetuate itself by going into a rising asset class. This time, it is financial assets. Just like the Mississippi stock scheme in 1720 and the South Sea Bubble in London at the same time.

Q: Today, liquidity is being pumped in by Greenspan, then?
A: Yes. The mechanism is the government-sponsored enterprise sector in America, the Fannie Maes and the Freddie Macs. The U.S. has nationalized the credit-creating process, previously the preserve of the banking sector. Freddie and Fannie can borrow money at almost the risk-free rate. At times of anxiety, they are profit-motivated to expand their balance sheets because government bond yields, the risk-free rate, fall during times of risk aversion. The spread widens between riskier assets like mortgage-backed securities, which Fannie and Freddie buy, and Treasury bonds. The combined balance sheet of Fannie and Freddie is $3 trillion, 30% of the U.S. economy. The annualized growth rate in September and October of their balance sheets was 50%. Now when people talk about M2 or the old monetarism, it hasn't kept pace with the disintermediation, which has gone on in the economy. It doesn't include agency paper. The money supply looks as if it's waning. It's not. There's enormous dollar creation. You can control the domestic price of money. Short-term interest rates have not gone up in America because of this economic Frankenstein. But you can't control the external price: The dollar is weakening versus everything, even versus the ruble.

The response to the crash since March 2000 has been to create even more money. Just as it was 300 years ago. We've created a tidal wave of liquidity, with the Dow back at 10,000. But in doing so, strange things have happened. Gold has broken its 25-year downtrend and has now established an uptrend. The CRB index is at a nine-year high. Oil prices didn't come down after the Iraq war concluded. Strange things are going on in the world at large. But not strange to a citizen of Paris in 1720.

Q: And this suggests?
A: The authorities have broken their trust with us. Middle-class society preserves its wealth in paper assets and the honesty of the paper asset is that the central banks will not dilute your financial assets by printing too much money. We're having to go to extreme measures to preserve our wealth by owning gold, a barbarous relic. Greenspan is the smartest guy on the planet, but you know what? Wise guys make mistakes. That's what LTCM [the Long Term Capital Management hedge fund] was all about. In 1998, the Fed made the same mistake it did in 1927, used an overseas agenda to determine its interest rates. The Asian economies are on their backs. Russia does the unthinkable and defaults. LTCM defaults. And Greenspan, acting like James Bond, saves the world by cutting interest rates when the U.S. economy is expanding at 7½%. In doing so, he throws petrol on the flames. Nasdaq goes exponential. He unlocks a bubble in domestic stock markets and we've been paying for it ever since. He knows the consequences are a period of prolonged economic weakness and that terrifies him because he's got so much debt in the economy. Debt today is 360% of GDP. Not just in America but elsewhere. We're ill-prepared for a rise in savings. And so he's done everything to prevent a rise in savings.

If the Fed succeeds in re-inflation, then the good news is that the Dow is going to be at 10,500... in 2020.

Table: Hendry's Picks and Pans
Company
Xstrata
Lonmin
Kanaden
Newmont Mining
Phelps Dodge
GrafTech International
Japan Real Estate Investment Trust
Nippon Building Fund of Japan
. . . And Pans
S&P 500
Big Pharmaceutical Stocks
Technology Stocks

Q: That's the good scenario?
A: The other scenario is that we can envisage a situation where it becomes possible that the tail can wag the dog. The stock market today is capitalized at 100% of GDP and debt is 360%. Here we are with the U.S. gross domestic product recently having shown 8.2% growth, a classic economic recovery. But history suggests that if growth continues, then 10-year bond yields will have to go to 6%-7%. But that debt level -- i.e., mortgage refinance-based consumer spending -- can't accommodate such high interest rates. That's why the Fed keeps saying that it will be putting the short rate up; it's desperate to control the long rate. This is a bear-market rally. They have never lasted more than 12 or 13 months in any asset class. This market bottomed on the ninth of October last year, so we're [generally] in that 12-month period. At this point, I feel very much like Jesus in the desert. I haven't eaten for 40 days, and I'm getting fed up with the juniper berries. The devil is saying to me: 'Look what I've done to the Nasdaq. Up 80% or so. Russian equities were up 100% a few weeks ago. All of this, this could be yours if you would give up on your disciplines.' If it rolls over, if all the bears are converted back into bulls, concluding it's a natural cycle, then this market will test last year's lows. If those are breached, then I believe you could lose 80% of the value of the S&P and the Dow from their peaks.

Q: You point out two scenarios. Which do you think is more likely?
A: Can I guess? I can't. What I can say is that gold seems to act well in both scenarios. People are speculating again this year in the equity market. They're buying things like Applied Materials. Why? Because from 1994 through 1999, the return from Applied Materials was 7,000%. Today, it is relevant to embrace the antithesis of the past. So I'm buying businesses that in the past 20 years have been so desperate, the view is they have no future.

Q: That's a natural lead-in to some stock picks.
A: I'm buying stocks with inelastic supply curves. That means as a producer, you can't produce more of the product in the short term. If demand rises, the only way you can ration demand is by raising prices. I see monetary inflation and I'm betting this money will bid up prices in the wider economy. So it takes me into mining companies. We have Anglo American. It's raised diamond prices three times this year. It also has gold. And you see what's going on with gold. Others I own are Lonmin, BHP Billiton, Rio Tinto, Phelps Dodge and Xstrata. Yet put them all together and the market cap is less than Vodafone's. There is an enormous reluctance on the part of institutional investors to buy these stocks. They've looked at the past 20 years, and they say 'You know what? They stink.'

Yet, these stocks are already performing. The valuations don't look remarkably cheap, but the analysts are pricing expectations by the absolutely awful 20-year prior history.

There's a better chance of these stocks doubling than any other stocks doubling in the marketplace. I own a zinc mine in Ireland called Arcon International, a tiny company. Zinc is at a 70-year price low versus the real economy when you've got China growing and you've got every other metal higher. If we are wrong, Arcon is [already] priced as if it has no future. If we are right....Arcon's on two times earnings. I'm going to make 10 times our money.

Q: Does this implicitly suggest that you believe in the 20-20 reflation view more than the super-bear scenario?
A: Yes and no. The reinflation scenario is manna from heaven for these stocks. But in deflation, it is ultimately an ownership of these tangible, finite resources if we have the depressionary scenario. Commodities had a very good relative performance in the 1930s. But in a deflationary scenario, you are going to lose money in all equities. You would lose less quickly with some of these. That's where you really want to be in gold. Gold's got nothing to do with mining. Gold works both ways. If we have the deflation scenario, it will be hoarded, on monetary demand rather than on economic demand. Gold is simple. You just buy something big, say Newmont Mining. It looks like a technology company if you look at the valuations -- six times revenue, which is very high. But it's predicated on the option valuation of its exposure to gold. Barrick Gold and Placer Dome are also picks. You buy Newmont at six times revenue because there is a possibility that gold may return to its previous high of $850 an ounce.

Q: Is that what you think?
A: It's more than possible. It's broken its 25-year downtrend. Because they're not making any more gold. Whereas [Japan's central bankers] have made a $150 billion worth of yen this year. They've done the same in Hong Kong, and Fannie Mae and Freddie Mac are growing their balance sheets of $3 trillion at a 50% rate. That's why the euro could go to $1.80. The pound sterling could hit $2.20 in 18 months. In that world, gold takes care of itself.

Q: So, the stocks could double?
A: Absolutely. A period which is very similar to today, where central banks of the world were intervening by creating money, was 1984 to 1987. The economy was rather moribund over that period and so the liquidity went into the stock market and the Dow went from 1200 to 2800 before the October 1987 crash. Over that period, Newmont went from $13 to $80. Newmont again bottomed at $13 in 1997. We are at $48. And I can see it being back at $80. If gold breaks the uptrend, then I never want to see gold again. But I don't think it breaks this uptrend. It's trading above all of its moving averages.

I own Phelps Dodge, Freeport-McMoRan Copper & Gold, and Sumitomo Metal Mining. I also own GrafTech International, which makes carbon rods for steel-making. It's an oligopolic market. There's a European rival with a euro cost basis, and a Japanese consortium of three companies, with a yen cost basis. GrafTech has no price competition. As the dollar weakens, it can raise prices because no one will offset that from overseas. This is an intrinsically good business. It doesn't grow enormously quickly, but the growth is being fanned by China. And it's not terribly expensive: 1.5 times sales and 20% margins.

Q: What about Japan?
A: Small-cap domestic Japan is like buying U.S. equities in 1976. An 8% dividend yield, a price-earnings ratio of 6, and you're going to make 20 times your money if you hold it for the next 20 years. Japan has had a bear market. Apathy abounds. Secondly, we have valuation. In February of this year, the Japanese market touched its 50-year moving average. For the Dow, that would be roughly equivalent to 2000.

We own Kanaden, an electronics-component manufacturer with 1.5% Ebit [earnings before interest and taxes] margins. Not a great figure. But here's a remarkable thing: Kanaden has a billion dollars in revenue and I can buy it for $30 million. You can't find companies trading on 3% of revenue. My bet is it won't even become a better business in the future, but that it will trade on 20% of revenue. The weakest business I can find in Europe trades on 20% of revenue. Kanaden has the misfortune of having endured a 12-year period of disinflation in its domestic economy.

In Japan, I like property shares, too. Property has fallen 80%, from peak to trough. There are about four or five Japanese real-estate trusts. We own them all. Their property portfolios yield 8%. Long-term government bonds yield 1.5%. Having fallen 80%, the expectation is that in 20 years time, the value of Japanese property will be zero. Well, I disagree. Just as it was absurd when the Japanese emperor's garden had the same value as California, it is absurd in the present day. So we hold Japan Real Estate Investment Trust and Nippon Building Fund.

Q: How about some companies that you think will go down?
A: The remarkable thing, in my hedge fund, there's not many people more bearish than I am, and I have no shorts. Which fills me with some discomfort.

Q: How can a bear have no shorts?
A: I've got put options predominantly on the S&P going out to June next year. As I said, it's a bear-market rally. My pan is the stock market. We've pretty much completed the process, the conversion process of bears into bulls. The greatest fear I have is that if I don't have shorts, you better bet no one else really has many shorts out there. Lowry Research calibrates turning points in the stock market by fleshing out the raw emotion of the marketplace. They express a panic date when 90% of the volume traded that day was associated with stocks that declined on the day. And typically, at turning points near the 1962, 1974 and 1982 bottoms, you had 16 to 17 of such panic days. The really odd thing was that, while we had the 50% drawdown in the equity market from March 2000 to earlier this year, we had one panic day.

Why? We have a mature hedge fund community that is profit-incentivized to buy equities when the market is down 3%-4%, which you didn't have in previous times. Because of that, we still haven't seen the true bottom. This time around if markets slide, there's no constituency ready to buy stocks to cover shorts because hedge funds don't really have shorts now. That concerns me. That opens up the prospect of a more immediate decline in valuations. This market has not been subject to intense selling pressure. If it were to be, I fear you might get a crash-like consequence. That's why I have puts on the S&P 500. I'm long the U.S. Treasury market and long index-linked U.S. bonds. Given that everyone has been converted from bulls into bears in the bond market, you've taken a lot of risk out of it.

Q: Because everyone thinks interest rates inevitably are going to go up next year?
A: Yes. One eventuality may be that the currency market precipitates a crisis. Currencies have a tendency to overshoot and quickly. The currency market says, 'Let's take it to $1.25 or $1.30...then let's go to the level where if the U.S. is concerned, it will start raising short-term rates.' At that point, you expose the Fed because the Fed will not raise rates. The Fed has taken a bull market in equities and put it into the housing market. The Fed can't raise rates. They have to say, 'You know what, 90% of our population don't have passports, but they have houses. Let the dollar go. You know what? We'll survive.'

The Fed needs to get the 10-year bond yield [now around 4.2%] back to 3% to keep refinancing moving. [Otherwise,] you might have to retrench your consumer spending -- 73% of the economy. Savings will rise, you become more deflationary in your outlook. Bonds work in that environment. The Fed probably can't succeed in getting yields back down to 3%, which is probably why I'm bearish.

Q: You mentioned big pharmaceutical stocks before. Why don't you like them?
A: Big pharmaceuticals have been horrible. That will continue. I invest in the generic drug makers. The stock market sees a bright future for cheap drugs. It sees a lousy future for expensive drugs.

Q: So you own some generic drugs?
A: Yes, Ranbaxy Laboratories. Stada in Germany. Teva Pharmaceutical likewise. In Hong Kong, we have China Pharmaceutical. These are all generics and they are all trading at all-time highs at a time when you see the travails of American big pharma. Investors have looked at big pharma, and said 'For the last 20 years, they've been great companies and, on that basis, they look incredibly cheap.' You know what? Maybe the last 20 years are not the most relevant benchmark and maybe the next 20 years are going to be rather unpleasant. They're all in downtrends. This is still very, very early for them. They are massive companies in the indexes and everyone owns them.

Q: Sum up your views for me.
A: I feel hungry. I want to go out and have a steak. I want to go out and buy Nasdaq stocks. I want to believe in the future. But I don't. The thing that concerns me is that we're just a few percentage points higher today on the Dow than we were on the 17th of June, which coincided with the bond market peaking, and we've had such a torrent of good bullish news. There's something wrong. It's not just me.

Q: Thanks.

-- posted by Austrian

Top 735. Dec 27, 2003 9:03 AM

» Normxxx - Re: Re: Hussman: VBMFX PTTAX HSGFX HSTRX

In response to message posted by Kirk:

I don't think Hussman trades his stocks all that much. But he has been about 50% hedged for over a year, so assuming his stocks do at least as well as the market, he still will do only a little better than half what the market does.

-- posted by Normxxx

Top 736. Dec 30, 2003 12:46 PM

» MarketVVizard - VOIP

VOIP is starting to really hit "mainstream" news... traditional long distance companies are going to get killed by this.

Homes Getting High-Speed Internet by the Millions
by Bob Bicknell

Many of us spent the year 2003 getting connected to the Internet more quickly than ever.

A new government report suggests the number of people using high-speed cable or DSL connections to the Internet is rising quickly.

According to a recent Federal Communications Commission report, the number of high-speed Internet lines rose 45 percent in the 12-month period ending in June to at least 23.5 million lines.

The report says connections using phoneline-based DSL systems rose equally with cable lines -- about 50 percent -- but there are almost twice as many cable Internet users.

In 2004, look for broadband users to be faced with a choice that could replace their standard wall telephone: "Voice Over Internet Protocol" technology offers broadband users telephone service through Internet lines by connecting a standard telephone to a specially designed cable or DSL modem.

Cablevision is already offering the service, which features unlimited local and national calls -- for about $35 a month on top of your existing cable rates.

Comcast and AT&T will begin offering their VOIP service in 2004.

-- posted by MarketVVizard

http://www.nytimes.com/2003/12/31/busine...

Top 737. Jan 1, 2004 5:18 AM

» Austrian - Corporate Pensions Again

My position on corporate pensions or defined benefit contribution plans has been and continues to be that pension promises will be broken screwing the little guy to "save the system".

Several conclusions from the below article can be reached regarding corporate pensions:

1. Companies are still using accounting to make their company earnings look better than they are when all expenses are recognized.

2. If companies are using pension calculations to grow earnings (by limiting real expenses dropping those dollars to profit), what other games are they playing?

3. The major behaviors of the last bull market are still in play. This could take a book to explain like “Bull” by Maggie Mahar.

4. The Fed Pension Insurance Agency is in big trouble, and will most likely need a bailout sometime within the next decade.

5. Public company profit growth for 2003 was significantly overstated.

6. The economy and company balance sheets are significantly weaker than conventional wisdom.

Happy New Year,

--Austrian

December 31, 2003
Corporate Pensions Face Pressure Despite Rally
By MARY WILLIAMS WALSH

This year's stock market rally has added more than $100 billion to corporate America's depleted pension funds, but even that has not been enough to offset forces that continue to weaken the funds.

If all of America's 500 largest companies had to make good on their promises to workers and retirees immediately, they would have to plug a $259 billion gap in their pension funds, according to a study by Standard & Poor's which will be published soon. A year ago, even though stock prices were lower, the same companies were considerably closer to meeting their obligations, being only $212 billion short.

That is because their obligations to their workers have spiraled up at an even faster pace than stocks have risen. One obvious reason for this is that as the baby boom generation ages, many more people are starting to claim their money. Another factor is that many pension calculations incorporate several years' worth of data, to smooth out sharp fluctuations, so the market shocks of the last three years are still working their way through the system. Finally, an otherwise positive economic development, low interest rates, is an albatross on the funds because they magnify the value of future pension obligations in today's dollars.

Whatever the reasons, for the nation's corporate pension funds to have lost ground in this year's bull market suggests that the troubles that flared up in the bear market will not be easily cured, and almost certainly not by market gains alone. But after more than a year's search for solutions, officials with responsibility for the $1.6 trillion sector remain sharply divided on what to do.

Some companies have found ways to bring their plans up to full funding, including General Motors, which started the year deep in the hole. But others, like UAL, the parent of United Airlines, remain burdened with woefully underfunded plans and lack the cash to make even the minimum contributions required by law. They are lobbying for changes in the rules.

Most retirees continue to get their pension checks, to be sure. The pension system is not out of money, nor is it expected to run out in the foreseeable future. But over all, companies' pension assets are slipping further behind their obligations, renewing questions about whether enough money will be there for all of the 44 million Americans who have been promised pensions sooner or later.

The nation's pension predicament has major implications for investors. For starters, it is difficult for them to calculate how much cash any given company's pension liability will pull away from the business. About three-fourths of America's 500 largest corporations, as well as tens of thousands of smaller businesses, offer traditional, defined-benefit pensions and are required to set aside money to pay them. While the companies are required to make good on them, these debts are rarely stated clearly on corporate balance sheets.

"The investor has to figure out where the money's going to come from, and how it's going to affect the growth of the company," said Howard Silverblatt, the Standard & Poor's analyst who is compiling the pension study. The Financial Accounting Standards Board will begin requiring more disclosure of pension data starting in 2004, but not enough to satisfy the many critics of pension accounting.

Even if the cash problem were solved overnight, another uncertainty would remain: where exactly should all the pension money be invested? For years, fund managers have collectively parked about two-thirds of their assets in stocks. But with the population aging and more and more pensions coming due, some specialists say a larger share should be shifted to safer investments like bonds. If that happens, the implications for the markets would be huge.

As for solving the current cash crunch, Bush administration officials say recent events show that the current pension law is not enough. In two of the most destructive recent pension failures, Bethlehem Steel and U.S. Airways both followed the funding rules but ended up with huge deficits anyway, costing steelworkers and pilots more than $1 billion in lost benefits when the plans finally defaulted.

Earlier this year, administration officials pushed for an array of amendments to tighten the law. They called for making companies take the looming costs of older workers into account when calculating pension debt, for example; for fuller disclosure of pension information; and for higher pension insurance premiums for companies with high-risk investments.

But none of the administration's ideas have attracted much support in Congress, which must enact any amendments. Business groups and some unions have argued that the pension law is outdated and punitive and needs to be relaxed, not tightened. Unable to agree on a solution, Congress let a temporary relief measure that has reduced pension obligations for the last two years expire today. As a result, companies will suddenly owe substantially larger contributions - about $35 billion more in 2004, according to government projections.

Companies expected to owe big pension contributions in the next two years include the Ford Motor Company; Delta Air Lines; AMR, the parent of American Airlines; ChevronTexaco; Delphi; DuPont; Hewlett-Packard; Halliburton; and Goodyear Tire and Rubber. For some, like Goodyear, scraping together the cash will be very difficult. For others, like Halliburton, it may be easier because military contractors are often able to pass through pension costs to the federal government. The companies have until April 15 to produce the cash. Members of Congress have promised to take up the pension issue when they come back late in January, and say they can enact pension relief retroactively. But companies say the uncertainty is meanwhile making planning difficult. Delphi, for example, has estimated that Congressional action could save it at least $750 million over the next five years.

Some companies are biting the bullet and making big contributions. A few, including General Motors, 3M, Honeywell International, Continental Airlines, Delphi, Maytag, Duke Energy, Boeing and ITT Industries, have even put in more than the legal minimum in recent months, reducing or wiping out their deficits.

G.M. raised about $18 billion by issuing bonds and selling its Hughes Electronics subsidiary, partly to reassure investors alarmed by its disclosure earlier this year that its total worldwide pension shortfall had surpassed $25 billion, more than the company's entire market capitalization.

The move is considered a big factor in the nearly 50 percent run-up of G.M.'s stock price since the company began to lay out its plans last June - even though the company still has billions of dollars of debt to repay, to bondholders, rather than retirees.

Other companies are trying to decide whether to follow in G.M.'s footsteps. Delphi recently sold $400 million of trust preferred securities to raise money for its pension fund, and combined that with cash on hand for a $1 billion voluntary cash contribution. It says it will pump in another $600 million in 2004.

Some companies on tight budgets are turning to noncash assets to pump up their pension funds, though these contributions must often be approved by the Labor Department. U.S. Steel recently proposed putting the timber rights to 170,000 acres in Alabama into its funds, for example, and Northwest Airlines put in 13.3 million shares of stock in a subsidiary airline.

Companies get tax deductions and increased profits due to a controversial accounting rule when they contribute their pension funds.

Other remedies are also being pursued. At least half of all companies surveyed by the Fidelity Management Trust Company said they had been considering a radical restructuring of benefits. They are not allowed to retract benefits already earned by their workers, but they can "freeze" their plans in ways that prevent some or all employees from earning additional benefits.

Companies can also close their pension plans to new employees, and gradually shift their work forces into new, less generous plans that exert smaller claims on corporate cash. The CSX Corporation, a railroad, took these steps at the beginning of the year, and Treasury Secretary John W. Snow, CSX's chief executive when the changes were devised, has held them up as a model of fairness.

Other companies, like General Motors, Ford, DaimlerChrysler and Verizon, have given workers a bonus rather than a pay raise this year, a potential brake on pension obligations that are often based on wages or salary. And Verizon says it has extinguished its pension debts to more than 20,000 employees this winter by persuading them to accept lump-sum payments instead.

The General Accounting Office spent several months this year trying to find out how many companies have frozen their pension plans since 2000, but concluded that the task was impossible because companies are not required to divulge the information. (They are required to tell the government when they cancel pension plans entirely, however, though such cancellations are uncommon at the moment.)

Some companies, especially those like airlines that offer very rich benefits to some employees, have reached the point where they can no longer comply with the pension law and are requesting exemption from this year's contributions. The Internal Revenue Service declines to divulge the names of the companies that have sought such waivers, but it says their number has increased sharply this year. A few companies, like Northwest Airlines and United Airlines, have disclosed their applications for the waivers in their filings with the Securities and Exchange Commission.

These financially strapped companies have also been lobbying Congress to reverse a 1987 law that requires them to make quarterly catch-up contributions, which United alone says would cost it $4.8 billion over five years and impede its struggle to emerge from bankruptcy. The House voted overwhelmingly to suspend those payments for the airlines, but the measure has stalled in the Senate, and the Bush administration has expressed firm opposition to such relief.

"Giving a special break to weak companies with the worst-funded plans is a dangerous gamble," said Steven A. Kandarian, executive director of the agency that insures pensions. "The risk is that these plans will terminate down the road even more underfunded than they are today. If that happens, workers will lose promised benefits and the pension insurance system will suffer additional multibillion-dollar losses."

-- posted by Austrian

Top 738. Jan 1, 2004 8:25 AM

» MarketVVizard - Happy New Year

10 technologies to watch in 2004
By David Pescovitz
Business 2.0
Thursday, December 25, 2003 Posted: 12:54 AM EST (0554 GMT)

(Business 2.0) -- No, they're not quite ready for prime time. But in the year ahead, these promising innovations could start to hit the marketplace.

Home networking
Ultra-wideband: Imagine a television that can wirelessly send three different programs to separate monitors. Low-power, low-cost, and with roughly 45 times the data transmission speed of run-of-the-mill Wi-Fi, this wireless technology is finally ready to debut in the living room.

Supply chain
RFID: While they've been talked about a lot, radio frequency identification tags have yet to appear in a big way in the supply chain. Wal-Mart is making it happen: All its suppliers must use the tags for pallets and cases of merchandise by 2005.

Wireless broadband
802.16: WiMax enables wireless networks to extend as far as 30 miles and transfer data, voice, and video at faster speeds than cable or DSL. It's perfect for ISPs that want to expand into sparsely populated areas, where the cost of bringing in DSL or cable wiring is too high.

Energy
Micro fuel cells: Japan's largest wireless phone carrier, NTT DoCoMo, plans to introduce cell phones powered by miniature fuel cells -- which run on hydrogen or methanol -- late next year. Look for them to also show up as expensive add-ons for high-end laptops.

Household products
Gecko tape: Lizards climb walls using the mechanical adhesive force of millions of tiny hairs on their feet. A synthetic version of those microscopic hairs allows gecko tape, developed at England's University of Manchester, to stick to almost any surface without glue. Applications include gloves that allow a person to climb a glass wall, the ability to move computer chips in a vacuum, and new bandages.

Software
Antispam software (that works): If you've tried filters, whitelists, and blacklists, chances are you still receive plenty of junk e-mail. "Challenge/response" technology may be the answer; it requires senders to manually verify their identity before e-mail is passed along to the intended recipient.

Consumer electronics
OLEDs: Organic light-emitting diodes are brighter and use less power than normal light-emitting diodes. (They rely on carbon with nitrogen, oxygen, and hydrogen elements -- thus, the "organic" tag.) They're perfect for screens on cell phones, digital cameras, and camcorders, and even for a new crop of affordable flat-panel monitors.

Lighting
LED lightbulbs: LEDs will outrun obsolescence by moving into the home. Philips is already pushing its Luxeon line of LED lightbulbs, which can last 10 to 50 times as long as incandescent bulbs while consuming 80 percent less energy.

Computer memory
MRAM: Magnetoresistive random access memory is (in theory, anyway) more than 1,000 times faster than the fastest current nonvolatile flash memory and nearly 10 times faster than DRAM. "Nonvolatile" means it retains memory when the power is off. Add in its low power consumption, and it's perfect for use in an upcoming crop of computers and cell phones.

Medicine
Bioinformatics: Researchers, such as those at IBM Life Sciences, are finally getting a handle on building complex protein models to aid in drug discovery. The new, computationally accurate models mean that potential drugs can be identified more quickly and stand a better chance of working.

-- posted by MarketVVizard