Into the Valley of Death

The Daily Reckoning
Weekend Edition
Saturday, July 24, 2004
New York, New  York
By Eric Fry

It’s a war zone out there…U.S. stocks collapsed one on top of another Friday like doughboys charging into enemy machine-gun fire. Wave after wave of rally attempts failed to advance the major stock market averages, as a hail of sell orders halted every bullish charge in its tracks.

By days end, the wounded greatly outnumbered the able-bodied, as 22 stocks fell for every 8 that advanced. The Dow retreated from the fray with an 88-point loss to 9,962, while the Nasdaq ducked for cover after losing 40 points to 1,849 – the bloodied index’s lowest level in nearly 10 months. General Greenspan rallied the troops during his Congressional testimony on Tuesday by declaring the economy safe and sound, but the sorry souls who trusted his reconnaissance quickly found themselves on a kind of financial suicide mission. The Nasdaq composite shot up 50 points in 24 hours as Greenspan was addressing Congress, only to tumble 83 points thereafter. For the week on the whole, the Dow and the Nasdaq both fell 1.8%.

"Microsoft, Amazon.com and Coca-Cola became the latest bellwether companies to post earnings disappointments and cautious outlooks for the remainder of the year," CBS Marketwatch somberly reports. All three stocks suffered steep declines yesterday.

In this market, all news is bad news. Microsoft shares fell nearly a buck after the software giant reported better-than-expected quarterly revenue, but fell short of earnings estimates. The company also forecast higher-than-expected revenue for 2005, but lower earnings than analysts were expecting. Amazon shares fared even worse, tumbling nearly 13% after the Internet icon reported second-quarter earnings and revenue that missed analyst estimates.

As we survey the battlefield and assess the grisly aftermath of the recent clashes between buyers and sellers, we find sellers holding the strategic advantage. For the month to date, the Nasdaq has tumbled a staggering 10%, while the Dow and S&P have both fallen nearly 5%. The July carnage brings the year-to-date losses to more than 7% for the Nasdaq, 4.7% for the Dow and 2.3% for the S&P 500. The intrepid financial foot soldiers who once courageously screamed, "Buy!" are now screaming, "Medic!"…if they are still able to scream at all.

Curiously, gold tumbled in lock-step with the stock market, while the dollar soared. The widespread anxiety on Wall Street failed to stir up demand for gold, as the theoretically precious metal logged a total loss of $16.20 an ounce for the week to $390.50 an ounce. Meanwhile, the dollar soared 3% to $1.212 per euro. Gold, striding into battle girded with the armor of safe-haven status, fared no better than a common stock. In this war zone, nothing is safe from the assault of sellers, not even gold, the Red Cross of investment assets.

But crude oil continues to defy the skeptics by clinging stubbornly to prices above $40 a barrel. Crude futures closed with a 1% gain for the session and the week, as the price rose to $41.71 a barrel. U.S. Treasury securities posted a microscopic loss for the week, as the 10-year Treasury ended the week about where it started, yielding 4.43%.

Interest rates are higher than they were one year ago, but still not high enough to dampen activity in the nation’s red-hot housing market. Sales of new and existing homes advanced to record high levels in May.

"[But] as the Fed taps the monetary policy brakes," says Northern Trust economist Asha Bangalore, "the housing market is likely to take a hit…The downward trend of housing starts is offering hints that the housing market boom is shifting to a lower gear…After the sharp increase in home construction in December, housing starts have declined in four out of the first six months of the year…Stay tuned for home sales numbers next week."

So far, the housing market has thrived despite the harrowing conditions in the stock market. Like cigar-smoking generals in a lavish HQ far from the front lines, the housing market has continued to live large, even while the stock market suffers. But this disparity cannot continue indefinitely. Ultimately, the generals of the losing side fare no better than the infantrymen.

If the stock market continues to sustain casualties, the housing market will as well.

Eric Fry,
The Daily Reckoning
July 24, 2004

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— Daily Reckoning Book Of The Week —

The Education Of A Speculator by Victor Niederhoffer

"In statistical terms, I figure I have traded about 2 million contracts…with an average profit of $70 per contract. This average profit is approximately 700 standard deviations away from randomness, a departure that that would occur by chance alone about as frequently as the spare parts in an automotive salvage lot might spontaneously assemble themselves into a McDonald’s restaurant."

– Victor Niederhoffer

Okay, there are traders and then there are traders. Victor Niederhoffer is better than any of them. How can we say this? Because he went broke. He blew up. He lost the lot. And that was after he’d already founded what used to billed as one of the most continuously successful trading operations ever seen on Wall Street. These are lessons that just can’t be learned any other way. Of course, he bounced right back…

Read the full story: Education Of A Speculator

THIS WEEK in THE DAILY RECKONING

RES IPSA LOQUITOR                         7/23/04
By Bill Bonner

"… At issue was the incident that we reported more than 2 years ago. A colleague, Porter Stansberry, had discovered a uranium processing company he thought for sure would go up. He even interviewed an official of the company. The spokesman told him to ‘watch the stock on May 22,’ when a new arms agreement with the Russians was supposed to be concluded…"

ODDBALL INVESTING                          7/22/04
By James Boric

"…Think of it like this…if you went to a flea market and saw a rare three-legged 1937D Buffalo nickel selling for $900, you would buy it – knowing that the real value of the nickel was somewhere between $3,000 and $4,000. In other words, if you sold it later and ONLY got the nickel’s fair value, you would still make about 233% to 344% on your investment…"

THE POET OF FINANCE                        7/21/04
by Chris Mayer

"…Such a system, only loosely tethered to gold, allowed considerable inflation. As Rueff noted, it was ‘probably one cause for the long duration of the substantial credit inflation that preceded the 1929 crisis in the United States…’"

KOMRADE KAPITALISM                        7/20/04
by Dr. Steve Sjuggerud

"…Until Putin claimed he didn’t want to push Yukos into bankruptcy, the oil giant was either a zero or a home run. Now the prospect of a zero has been taken away. The 30%-plus move in the shares was a reflection of that. I expect Yukos to have an Argentina-like run from here…"

CELSIUS 9/11                                          7/19/04
starring The Mogambo Guru

"…This fabulous documentary explains that the banking system is the one to blame, just like it always is. Using newsreels, tapes, congressional testimony, candid photographs, gossip and rumors, vicious innuendo, bogus interviews, outright lies and fabricated evidence, it captures, wonderfully, how all throughout history, in every country, in every time and space, economic crises are always caused by bankers…"

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HEADLINE, NEWS And INSIGHT:

The Material World
by Byron King

"…The world is in the early stages of what some people call a "commodities boom." In the short term, and because the monetary system of the West is rigged in favor of the West’s own self interest, the West will simply inflate its currencies to enable its purchasers to obtain what they need. But as aggregate world demand races past the peak points of material-energy production, and the developing countries and peoples accumulate Western currency reserves, the "boom" will accelerate into hyperinflation of prices as more and more dollars chase the same quantities of goods…"

Back To The Past
by Richard Russell

"…In WW II we used to drop 100 and 500-pound bombs and incendiary bombs, and they did one hell of a lot of damage. But now I understand the Air Force is going to make a 30,000-pound monster bomb that will even kill people who are hidden deep in concrete bunkers. I mean, is this progress or what…!"