Oh Boy! Things Are Looking Up!

The Daily Reckoning

Weekend Edition

June 30-July 1, 2001

Paris, France

By Addison Wiggin

MARKET REVIEW: Oh Boy! Things Are Looking Up!

“The week-long tech rally owed itself to an improving outlook for the economy,” USAToday tells me this morning. “The fact that blue chips traded lower Friday was also encouraging, because it could be a sign that investors were favoring battered tech shares over relatively safer stocks such as pharmaceuticals and financial companies.”

How buying overvalued companies with falling earnings constitutes a sign that things are looking up – is beyond me. But, hey it’s USAToday. If they printed it, it must be true.

Computer problems Friday cut the week’s tech rally short. Tech investor’s spent the better part of the week “celebrating” Microsoft’s win. The Nasdaq rose 35 to 2160 closing the week up 125… or 6.2%. The Dow fell 63 to 10,502 on Friday down a percent for the week. The S&P 500 barely moved for the day or the week.

ADD’L PRICES FOR THE WEEK: What’s up with the dollar?

Gold: $271

Crude Oil: $26.25

Natural Gas: $3.09

CRB Index: 205

Dollar Index: 119

The Sad, Sad Euro: $.84

British Pound: $1.40

Japanese Yen: $.80

THIS WEEK in THE DAILY RECKONING
By Bill Bonner

06/29/01 MAKING A DIFFERENCE

“…looking to the left these students find claptrap about government, Rousseau’s noble savage cavorting in their mind’s eye with pilgrims of Plymouth Rock and the Democratic Platform of the Roosevelt Administration in 1948. To the right, lies the Labor Theory of Value, which – no one bothered to point out – is complete rubbish. But there it is, next to Keynesianism, monetarism and Greenspanism. No matter what direction they look they see only the detritus of a dozen years of expensive instruction…”

06/28/01 PRISONERS OF THE AVERAGE

“…In paradise, dear reader, perhaps a man can drink all he wants, and stay happily drunk forever. But in this world, a binge of inebriation comes at a price…a headache, or perhaps only a period of quiet repose. We are all prisoners of the average. This is not merely an intuition…it is based on observations too varied to try to organize by genus and phyla. So I will just heap them up in front of you: darkness and light…yea and nay…heat and cold…good and evil…sickness and health…wealth and poverty…beauty and ugliness…subjective and objective… positive and negative…big, little…high, low…just, unjust…you name it…”

06/27/01 A FED CELEBRITY DEATH MATCH?
Wednesday Guest Essay by grantsinvestor.com’s James Padhina

“…It smells like a fight to me… Fed Chairman Alan Greenspan v. Fed Governor Larry Meyer. Being neither prizefighters nor kings, these guys aren’t battling for money or for a come-hither woman named Helen. They’re central bankers – so, of course, they’re fighting about inflation. Ladies and gentlemen, are you rrready to rrrumble?…”

06/26/01 THE NEW NEW ECONOMY?

“…There are many new things about our economy. But what if the most important new thing really has nothing to do with technology…and everything to do with aging populations? What if Japan’s deflationary economy, rather than America’s recently booming one, represents the wave of the future… the NEW new economy?…”

06/25/01 TURNING JAPANESE

“The Fed’s number one objective,” to repeat James Stack, “is to prevent a Japan-style scenario.” But how will it do so? Lower interest rates did not work in Japan, why would they work here? Perhaps they will not…”

* * * * * * * * * * * * * * * * * * * * * * * * * * * *

HEADLINE, NEWS And INSIGHT: Lots of questions: Real Estate Peaking?… The Bear Just Getting Started?…Global Deflation Setting In?… Coal Making A Comeback? Qui sais, mon frere, qui sais…

House Afire
by Eric J. Fry

U.S. home prices have been rising like, well, a house on fire, for more than five years. The hottest markets, predictably enough, were in the Northeast corridor California, Florida, Georgia and Arizona. Not so predictably, prices in Kansas, Minnesota, Michigan and Washington state leapt ahead, too. But recent evidence shows skyrocketing U.S. housing prices may have reached their zenith.

Why The Bear Market May Just Be Beginning
by David W. Tice

A strategy of “buy and hold” worked well for investors over the past 20 years. Since 1980, the Dow advanced every year but four. The Year 2000 was the first down year for the Dow since 1990. Similarly, the Nasdaq had an enormous run over the past decade. Even at 1,900, the index sells for five times its 1990 level.

Global Economy: The Cavalry Won’t Be Riding In This Time
by Marshall Auerback

Investors and pundits alike have taken the explosion in money growth as virtually de facto proof that the Federal Reserve has succeeded in engineering a monetary reflation and, ultimately, an economic recovery. If only it were that easy – this time.

Suffocation, War or Coal
by John Myers

Coal has been a crucial source of energy since the time of the Pharaohs. It has been used extensively for fuel since the Industrial Revolution (not much need before then, was there?). Now carbon black is coming back into vogue.

Derivatives: The Risk Of Systematic World-Wide Failure
by Dr. Marc Faber

Every major invention or innovation leads first to a boom,then inevitably to speculative excesses and a viciousdownturn for the revolutionary new sector. Why should thiswell-established pattern only apply to industrial and techinventions and not also to financial innovations? Given thecomplacency and the intellect of the central bankers, it isa question of when – and not if.

* * * * * * * * * * * * * * * * * * * * * * * * * * * *

DR BLUE HOTWIRE – Investor’s Intelligence From Around The Globe

Perversions Of “Strong Dollar” Logic

From Dan Denning,

The Daily Reckoning Blue Team

“…A strong dollar helps prop up the stock market. When the dollar is strong relative to foreign currencies,foreign exporters sell their goods at fatter profits while U.S. exports take a competitive blow by having comparatively higher prices overseas. A strong dollar is good for the financial markets because it draws foreigners to dollar denominated assets, like stocks and bonds.

But there are two perversions to the strong dollar logic. First, it disguises the fact the U.S. continues to consume more than it produces–to the tune of $1.5 billion a day. As long as the dollar remains strong foreigners agree to subsidize this over-consumption by agreeing to hold dollars. But the moment the dollar weakens, the floor comes out from under the current account deficit–which is already dangerously in the red.

The second is that a strong dollar erodes U.S. corporate profits. When U.S. companies are less pricecompetitive overseas because of the divergence between the dollar and euro, profits get eaten up. Talk about getting it coming and going. Stock prices go up because foreigner own U.S. assets. But the only reason foreigners own U.S. assets (the strong dollar) is also the same reason U.S.corporate profits are eroding.

Will the dollar give soon? Who knows? Sooner or later it has to, simply because this is the nature of markets. In the meantime, look for big U.S. businesses to put more pressure on the Bush administration and Treasury Secretary Paul O’Neill to devalue the dollar to give a boost to corporate profits.”

Enjoy the 4th…

Addison Wiggin,

The Daily Reckoning