NEWS #74

From April 30, 2007 to August 17, 2007

August 17, 2007

I am passing along some thoughts that Richard Kolon sent my way.

"I thought yesterday (Thursday) was "panic", and the turnup close was just short covering before the weekend.

Big dips tend to lead to big short covering rallies.

Credit drives all economies, especially ours. If lenders get "conservative", that tends to bring on recession. That happened in year 2000.

The Fed lowering the discount rate now is acknowledging the problem. It does not solve the problem. The possibility of recession still exists because lenders are still nervous. (They should have been more prudent long ago. Bubbles indicate a misallocation of credit.)

So we'll get a rally now, but it should eventually fade, to allow the fund managers to buy the next bottom. I think this quarter is shot. Next quarter is the real potential rally. However unless lenders loosen up some, the recession possibility remains, which would not be long term good for stocks.

Do we go back down to 1% rates again? LOL .... Rich"

Ben Smith sent along a link he had already sent me earlier in the month. Ben was right to send along this link to 'Signs of the Times', by Bob Hoye of Safehaven.com. This article was posted on August 07, 2007. The beginning quotes are a hoot, given what has happened this week. I quote below a thought I found interesting.

"Lacking a comprehensive appraisal of its own limitations, the world of policymaking is confident that financial problems can be contained.

Essentially policy making is reliant upon faulty logic and faulty research. The notion that the Fed can keep a recovery going by expanding credit is based upon the observation that business expansions are accompanied by credit expansions. This is correct, but the assumption that credit expansion will force a business expansion is not.

Indeed, in logic it is a glaring example of a primitive syllogism that assumes that because two things occur at the same time they are causally related. The old example is a rooster crowing causes the sun to rise."

I think Kolon has it about right. We may see a weak rally here but really folks, it's still August and a lot of bad things can happen to a lot of stocks in this month. I am short BSC and DHI and I not bailing out of those positions just yet. What I would want to know now...what I'd like to ask the buyers of those two stocks today is: what has changed with these two companies? I think they are in the same old fix they were at the beginning of the month.

I picked up some ICE at my 'dream price' of $119. I will do that on occasion, particularly when the stock has been declining for a while. I look at the price I would consider buying and then I lower that price one whole notch and put an order in at that price. Once in a great while I get the stock at that price, usually during a panic, which describes what was going on Thursday.

I am still waiting for AOB and AAPL to 'come in' before I will buy them.

August 14, 2007

Duncan sent along this link to Bloody and Bloodier: The subprime-lending crisis is worse than you think, and could crush financial and real-estate markets for years, by the market pundit James J. Cramer on the New York Magazine site. This is an excellent read. I quote it below.

"If someone as savvy as Spector thought these bonds were still good when they were actually worthless, that tells you that thousands of other managers are simply dreaming if they think their portfolios are worth anything near what they claim they're worth. In other words, we're looking at the start, not the end, of the lending meltdown."

Cramer hits it on the head. The real problem for the markets is that no one knows how big this mess is. Cramer is betting that it is really really big.

Ben Smith sent along a link to Dreman Says U.S. Stocks 'Solid'; Faber Sees Recession, by Carol Massar and Michael Patterson. I am betting that reality lies in between these two positions

And now I am going to do something that I very rarely do. I want to warn you about one particular stock: Lee Enterprises (LEE, NYSE). These folks were my employer until January, so some of you might consider this to be sour grapes. But it is not. I am just looking at numbers you can find for yourself about this company and the indebtedness level compared to the capitalization is way too high. For me, this is a big red light. I will not be buying this stock, nor will I be shorting it. I will just stay very far away from it.

August 10, 2007

Jay Steele says that we have probably seen the peak in volatility and that markets will settle down into a 'boring bull'.

Duncan sent along this link to a story on the Economist.com site. I quote from it below. I caught CNBC over lunch today and one of their guests almost said the exact same thing word for word. I quote below.

"As standards are tightened, many of the reckless practices that have become the norm in corporate lending will be abandoned. We will now hear a lot less about firms getting 'covenant lite' loans, under which lenders give up their rights to monitor the behaviour of borrowers; or 'payment-in-kind notes', which allow borrowers to substitute more IOUs for interest payments. As investors steer clear of riskier debt, the takeover bids that have pumped this year's stockmarket froth will be curtailed and the most debt-laden borrowers may find it impossible to raise funds.

But most companies will be able to shrug off the credit squeeze. That is partly because creditworthy borrowers still have access to debt (albeit at a higher price), and partly because many firms don't have to borrow."

July 29, 2007

It is with great pleasure that I provide this link to Former Qwest chief Nacchio sentenced, by Dan Gallagher of Marketwatch.com. Old Nacchio Phone Company finally got his. As my brother, retired head engineer for the Wyoming Public Service Commission said: "It is truly a good day to be alive."

Here is a link to World is one "Bear-like' event away from liquidity freeze, Zandi warns, by Rex Nutting of Marketwatch.com. I quote it below.

"About 20% of the subprime loans written in the last half of 2006 will fail, with the peak of the defaults not coming until 2011. A "significant number" of these borrowers never made a single payment.

More than 2.5 million first mortgages will default this year and next year. Subprime borrowers will experience significant financial distress."

Here is a link that Ben Smith sent me to The Unholy Trinity, by Bob Hoye of 321Gold.com. I quote it below.

"Now it seems that an experiment in credit innovation, that would be scorned by earlier generations of bankers and financiers, has become the financial culture of Academe, Main Street, as well as Wall Street. As with any intense speculation, participants can ardently believe the most preposterous story so long as the price is going up. Then the inevitable speculative exhaustion is followed by chagrin.

Belief in the Unholy Trinity of central banking, derivatives and artificial rating of credit is dependent upon an always rising price. In one sector - subprime - this is not the case as the BBB bond has plunged from 95 at the first of the year to 54."

So, with all the gloom and doom out there, what do I think will happen. If you follow what I am doing with the Bender Paper Portfolio, which reflects what I am doing personally, you know that I think that housing and some financials are in trouble. But you also know that I put more money into the markets on Thursday. I am betting we the markets recover some here. Come fall though, all bets could be off.

July 26, 2007

Boy, could you see this coming! Early this summer I took a few steps back and told myself I did not want to be ambushed, yet again, this summer. Summer dumpers happen too frequently for an old trader like me not to anticipate. So I lightened up, and have been holding cash. Cash is not always a good place to be. But it beats getting gunned down by the bushwackers under the hot sun. Neat thing about cash....they can't take that away from you...to paraphrase an old song.

Here are some links from yesterday on Marketwatch.com.

Bond guru sees possible 5%-10% drop in stocks
Pimco's Gross says weakness in subprime, junk bonds is spreading

Chrysler 'misdeal' a sign of desperation

Price Action Trumps Perceived Risk When Investing

By Jonathan Hoenig

"The perception has completely changed. Back then, buying gold was considered to be risky. Now most would consider it prudent diversification."

Here is an email I got from Rich Kolon yesterday. He was thinking along similar lines as me.

"Today Tuesday the new lows expanded on the NYSE to 363. In the last 5 years there has been only two general time periods when new lows were at least this high.

July 19, 2002 was the first occurrence. It was followed by 3 more days of widening new lows. The stock market hit bottom on July 24, 2002 when 917 new lows were made. That same day stocks started a big rally that made up all the losses and more thru July 31st.

May 7, 2004 was the 2nd occurrence, with 706 new lows. The following day the S&P 500 finished even lower when 845 new lows appeared. The S&P 500 stabilized the next few weeks before starting a modest uptrend that lasted thru July 2004.

My guess is that we see an expansion of new lows Wednesday and possibly Thursday to over 600, then a big short covering rally.

I would suggest making a shopping list.

Today I bought back 3 stocks I sold: EWZ, CYNO, and NG.

I have lots of cash to put to work from that sale I made on July 6th."

Today I bought some YHOO and some more GMXR and COGT. I'm using some of that cash of mine.

July 18, 2007

The 14,000 mark has been made on the DJIA. A lot of it was gained on good news, and some pure hype. Instead of reading the way it did, the headline should have read: 'Inflationary dollars chase DJIA.' This could go on for a while folks. There are a lot more dollars out there to do some chasing of stocks. China's got 'em. The oil states got 'em. And we have an accomodating FED, led by Helicopter Ben, that keeps cranking out more dollars into our money supply. A new high on the DJIA can be celebrated as a sign of a growing economy. It can also be a sign of how many extra dollars there are out there that do not represent any additional production.

Readers should note that I sold my CMED on Monday. Early in the morning it spiked and hit my upper limit.

July 15, 2007

Here is a link to a commentary by Clive Maund on Oil and Gas sent by Ben Smith. Maund does not sound very cheery.

I have been wondering of late what real good it does for the FED to lower interest rates when all that extra liquidity does not go into the hands of the people who would need it the most. Instead, it goes to banks and to firms to do yet more leveraged buy outs.

Here are links to two of the chapeters from the book I am writing. Enjoy.

Chapter 11

Chapter 12

July 11, 2007

Ben Smith sent me a great link to Credit crunch will 'shred investment portfolios to ribbons', by Ambrose Evans-Pritchard of the London Telegraph. I quote the article below.

"The near collapse of two Bear Stearns hedge funds has lifted the rock on our 21st century mutant capitalism, exposing the bugs beneath to a rare shock of naked light.

When creditors led by Merrill Lynch forced a fire-sale of assets, they inadvertently revealed that up to $2 trillion of debt linked to the crumbling US sub-prime and "Alt A" property market was falsely priced on books.

Even A-rated securities fetched just 85pc of face value. B-grades fell off a cliff. The banks halted the sale before "price discovery" set off a wider chain-reaction.

'It was a cover-up,' says Charles Dumas, global strategist at Lombard Street Research. He believes the banks alone have $750bn in exposure. They may have to call in loans."

July 10, 2007

Ben Smith sends along his gold chart. Here is that link.

There was a lot of important news out today. I found none of it particularly surprising. It looks like S&P finally got around to pointing out that the emperor has no clothes. Here are links.

D.R. Horton's quarterly orders fall 40%, by John Spence of Marketwatch.com.

S&P may downgrade $12 bln of subprime securities
Rival rating agency Moody's cuts 399 mortgage-backed securities, by Alistair Barr of Marketwatch.com.

S&P finally says subprime is mostly junk, by MarketWatch.

Crude futures up as demand, output concerns grows, By Myra P. Saefong & Polya Lesova of Marketwatch.com.

July 9, 2007

Here is a word from Rich Kolon that I thought I would share.

"...Of course my QQQQ 20-week Signal is still very positive. My China stocks were going gangbusters. YZC, CMED, CTRP, MGO.TO, to name a few, bubblely good. I still collect market stats on a regular basis. One of the graphs I look at regularly is the Rydex Nova / Ursa ratio, adjusted for Net Asset Values. For the best view, click the 1 year button. For a detailed explanation of the ratio, click the Help button.

Simply, a rising ratio indicates bullish sentiment growing, and a falling trend indicates bearish sentiment growing. The rising Rydex Nova / Ursa ratio hit a peak in late December 2006. When it started a decline, the trend of the OEX (S&P 100) shifted to a less positive one. A divergence occurred between the OEX and the ratio, followed by a quick and steep drop in February.

A good bounce then occurred in both, but since May the two values are showing divergence again. Again the trend of the OEX has flattened near previous peaks, while the Nova / Ursa ratio has dropped to the February low.

My suspicion is that the risk in the stock market is now very high for another quick drop. The extraordinary gains in some of my China stocks is yet another indicator of a blow off here.

I still have a lot invested in foreign funds. And I still own a bunch of individual stocks. But now I'm sitting on a 27% cash position. So I'm not a big bear, just a baby bear.

Just as an example of this froth, here is a chart of Yanzhou Coal (YZC). It has been above the 20 day moving average for over 3 months, a real momo stock, and now it is trading well above the top Bollinger Band. I sold it.

Sellers beware, my opinion is sometimes wrong. But the weakest months of the year seasonably tend to be late August thru early October. And I think the bubble may burst soon."

The Orange Section agrees with Jay Steele. Here is a quote.

"I agree with his bond sentiment. Especially if the stock markets go into panic mode. In my opinion, the Fed is reaching an inflection point with rising rates and the benefits to inflation prevention they will yield in the current environment. If things start to head south they will be forced to cut rates and that means rising short term bond prices"

Readers should know that I nibbled at a few shares of OXPS and GMXR on the 5th. I am still mostly in cash.

July 1, 2007

I bought a little CMED on Friday. I still have a majority of my money on the sidelines.

Jay Steele sent along his most recent analysis. He believes we are at a short term buying opportunity for bonds, as rates will likely decline from here. He also thinks the global economy is healthy. He points out that the Morgan Stanley "3 sell rating", calling for a correction, has stirred anticipation for that correction making a it too well anticipated. Further, the CBOE put/call ratio has been too high for too long (spiking at 1.4). There's just too much panic out there for the correction to happen. Jay thinks we are seeing the end of a consolidation period, that the semiconductors have bottomed and may well lead tech stocks up and out.

Ben Smith sent me a link to Matthew Frailey's public charts page at Stockcharts.com. The first one really got Ben's attention. It shows some divergence going on.

Finally, I have a personal treat to offer. Here is a link to a chapter from a book I have been working on. The background you need is that this book is about a bunch of guys who work at a summer camp just east of Yellowstone National Park. There is a mystery about one of the main characters who went missing for nine months, and his friends on camp staff don't know how or where he spent that time. Enjoy. I will offer more chapters in coming weeks.

June 26, 2007

The Orange Section tells me, and NBC tonight confirms that the hedge fund industry is about to open the doors to millions more customers who are upper middle class, with a million to lose. I am not convinced that this will drive more money into any equity class. I think it will just change the management of that money.

Ben Smith sent me a link to a Yahoo Chat Room titled aaasurfergirl. This posting 23010 makes a number of telling points. I list some below.

U.S. Treasuries are overpriced because China dollars and petrodollars have been chasing them hard. I quote below.

"The surge in oilprices from $25 a barrel in 2002 to around $70 has brought a giganticwindfall to oil producers, raising export revenues from $251 billion in 2002 to $800 billion last year. As a result, the cumulative current account surplus widened from 5.4% of GDP to 25.5% over this period. In other words, oil exporters' cumulative current account surplus soared from 0.2% of global GDP in 2002 to 0.9% in 2006, dwarfing the Chinese surplus (0.6%) and even dwarfing what developing Asian countries accumulated altogether (0.8%)."

This excess cash has also fueled the buyout mania we have witnessed.

There are a lot of uncompleted buyouts out there. As foreign central banks diversify, that will dry up funds for these uncompleted deals.

"Three big ones to watch (over $20 billion apiece) are FDC, AT and TXU. If any of these, or others, fail to get the necessary financing, expect a sharp drop in the overall stock market as both arbs and those investors who own "potential buyout" stock portfolios dump their shares."

Beware, there be dragons there.

Here is an article that seems to confirm something I have been saying for a while now...that inflation is a lot worse that the Feds and the FED have been telling us. Here is a link to 'Wake Up And Smell The Inflation', by Niels C. Jensen, of Absolute Return Partners. I quote below.

"John Williams has made a career out of telling people the truth about inflation and other government statistics. He reckons that if you were to apply the same calculation methodology as in 1980, current U.S. consumer inflation is running close to 10% per annum--very similar to the levels reached around 1980 with the only difference being that the bond market was on high alert then whereas now it appears more relaxed."

June 25, 2007

ITS THE HOUSING, STUPID

Regular readers will not be surprised by today's links. The first is to 'Home Sales Hit Slowest Pace in 4 Years', by Martin Crutsinger, AP Economics Writer. I quote it below.

"Sales fell by 0.3 percent in May to a seasonally adjusted annual rate of 5.99 million units, the National Association of Realtors reported Monday. Sales now stand 10.3 percent below where they were a year ago.

The median price of an existing home sold last month fell to $223,700, down 2.1 percent from a year ago. It marked the 10th straight price decline compared with a year ago, the longest stretch on record."

The next link is to 'Avoid Home Builders, REITs and Banks Now', by Jonathan Hoenig of SmartMoney.com. This is advise after the fact but sound writing anyway. Here is a quote.

"Given the correlation of major markets these days, one has to be aware of the saga now unfolding in the subprime mortgage and banking sectors, where troubles at two large Bear Stearns (BSC: 139.10, -4.65, -3.2%) hedge funds appear to be catalysts for critical weakness in three sectors that most of us had become accustomed to as leaders."

The third link is to 'Inventory of homes for sale hits 15-year high', by Rex Nutting of MarketWatch.com. Here is a quote.

"'The only way we're going to chip away at this Mount Everest-sized pile of inventory is by price cuts, and so far, sellers haven't been aggressive enough,' wrote financial analyst Mike Larson on his blog. ... Many prospective buyers are reluctant to borrow money to buy an asset that's depreciating in value."

"Many prospective buyers are reluctant to borrow money to buy an asset that's depreciating in value." That is exactly the point I made in my May 6 commentary.

"And what happens if Ben does lower rates to get people to borrow more, and they don't do it, don't borrow more money for everything, but especially for houses? See, Ben's afraid that even by the time he gets around to lowering rates, lenders will have tightened credit standards. And people won't want to borrow more anyway if the house they own is worth less than it was six months before."

There definitely is a correlation between today's headlines and yesterday's link to the 'Hindenburg Omen'. What the Hindenburg tells us is that there is a strong divergence in the markets right now. That makes them dangerous. Some parts of the economy are doing fine right now. Other parts centered around housing and lending are choking, and it looks like the pain is going to get a lot worse there before it eases.

I once read somewhere that some seventy percent of all stock issues on the NYSE were either financials or strongly affected by financials. The problems of the subprime lending are going to ripple out through the rest of financial stocks and the rest of the seventy percent.

Hedge funds are going to be adversely affected because they operate on cheap borrowed money. Hedge funds still have to pay interest on borrowed money even as the value of their assets (stocks) goes down. Is it any wonder that one of the biggest hedge funds just went public. That's very good timing. As hedge funds assets shrink they will have to stop borrowing all that easy money made possible by an accomodating FED.

When they curb their borrowing and buying of securities, stocks go down. Yet, the world economies are still booming and those central banks are diversifying their portfolios...that is, they are going to start buying U.S. stocks instead of an exclusive diet of U.S. Treasury Bonds. Please read Investment Outlook by Bill Gross (May-June) on the PIMCO site.

So even while the coming hedge fund debacle is going to drive stock prices down, demand from foreign central banks is going to drive stock prices up. The hedge fund crunch is going to impact interest rates by driving them down. The foreign central banks will ease their buying of Bonds and that will impact interest rates by driving them up. The next two years are going to be very interesting times.

June 24, 2007

Ben Smith sent me this link to 'SELL, SELL, SELL from Morgan Stanley'.

He also sent along this link to 'The Dow Industrials Drop 185 Points Friday, the day after we got a Confirmed Hindenburg Omen', by Robert McHugh of SafeHaven.com.

Readers should note that while I have a couple of small bets in the market right now, most of my money is in cash on the sidelines. The Hindenburg Omen is not a sure thing. But it is a blinking yellow light. Proceed with caution.

June 21, 2007

WHAT TO DO WHEN A HORSE THROWS YOU

NVEC reached my stop-out price today. I was lucky enough to hold on a bit longer to let it regain some of its loss before I sold, so the pain is not as bad as it could have been.

But this is stocks, not a rodeo. One need not be brave and get back up on that horse and ride it. No, this is the second time I have been thrown by this stock in recent weeks and that's it. I won't buy it again for a while. Meanwhile I did buy a little RGLD and some COGT.

I have expanded the top stocks in my system by adding some of my thoughts to each one.

June 20, 2007

Ben Smith sends along this link to 'A Unique Era', by Mary Anne & Pamela Aden of 321Gold.com. This kind of commentary should always be preceeded by a disclaimer that would say something like this: "While everything in this article may be accurate, the gold market might not start rising for another two years." This is a good article, but don't rush out and buy after you read it. Caveat Emptor.

Rich Kolon sent along congrats on my pointing out CMED as a good buy. It was at the time, and I bought some. Yesterday I sold, close to what may be a short term peak. Sometimes the market turns your way. When it smiles at you, consider selling and clearing your profit.

Here is a link to 'Dell gets Nasdaq non-compliance notice over delayed 10-Q', by Gabriel Madway of MarketWatch.com. Whenever you see a headline like this, sell. Don't wait, just sell.

Here is a link to 'Stock Spam 2.0', by Andy Greenberg of Forbes.com. Beware of any unsolicited email, particularly if it promotes a stock.

My last link is to 'Deciphering the New Yeild Curve', by James B. Stewart of SmartMoney.com. I quote it below.

"Sooner or later higher borrowing costs are also going to impact consumers. How they're going to keep paying their gasoline and heating bills while adapting to a wave of adjustable rate mortgage increases remains to be seen, but I'm wary of consumer sectors, especially retail."

June 10, 2007

Here is an interesting link to a blog sent along by Ben Smith.

Here are some photos forwarded to me by a friend. These pictures are of Muslims marching through the streets of London during their recent 'Religion of Peace Demonstration.' Readers should note that while this group of muslims does not represent all muslims, this group does represent a large portion of muslims who share similar views.

If you can look at these photos and think we are not going to have more problems with like-minded muslims in the future, you have a much better imagination than do I.

June 04, 2007

Tis the season. I have been in the garden a lot lately and have not paid enough attention to stocks lately. I will do better in the future.

Here is a link to 'Bigwigs Favor Big Stocks', by Dimitra DeFotis of Barrons.

And here is a link to 'S&P hits record, but you'd have done better with a CD', by Irwin Kellner of MarketWatch.com. I quote it below.

"If you had bought the stocks in the S&P 500 back in the beginning of 2000, it would have taken you all this time just to break even. And this assumes that all stocks in the S&P 500 moved in tandem, and, like the index, are also above their levels first reached seven years ago.

But all 500 stocks in this index did not move together. Some are still below their record highs. By the way, this is true of the Dow 30 and the other indexes as well."

May 23, 2007

It looks like NVEC left the station without me today. I am not going to chase it. Sometimes you just plain miss the train. I might buy a little if the price comes back down a bit.

For the gold bugs out there, here is a link that Ben Smith sent me to 'Gold & Silver Market Updates' by Clive Maund of 321Gold.com. Maund is fairly pessimistic about gold right now. Here is a quote.

"The situation is clearly becoming increasingly tight which must force a breakout one way or the other soon, and sadly for the bulls, the latest COT figures show that the risk right now - or as of 3 days ago, as the COT figures are released 3 days late in order to give big money and insiders the edge - is to the downside, notwithstanding any brief rally."

May 22, 2007

I have not bought back into NVEC yet, still waiting for the pull back I think that stock is going to experience. Meanwhile, here is a link to 'Traders Profit Best by Ignoring Most Financial News', by Jonathan Hoenig of SmartMoney.com.

May 16, 2007

I got forced out of my NVEC position yesterday. I will wait for it to go lower in the next ten trading days before I reenter that position.

In our correspondence, Florida makes a case for there having been collusion between local realtors and appraisers all over the country. Plenty of blame is going around about sub-prime lending, the slick packaging of any and all kinds of loans. I'm still seeing Ditek's ad saying they will loan me 125% of the value of my home. That is predatory lending, pure and simple. Anyone who will loan you that much money neither expects nor wants to be repaid. But what about the realtors? I quote Florida below.

"May I ask where was your neighbor, the friendly realtor, those that advertise every day about their expertise in finding you your dream house? I want to know when the case will be filed against every local realtor. They are the first to qualify even showing a property. Then the realtor holds your hand through the down payment and signing process. I demand there be a class action suit of fraud filed against every listed broker in collusion with every appraiser, mortgage broker in every state (all 50) that encouraged an illegal activity to occur.

Everyone throughout the process had only $$ signs as their guide. We as a nation have yet even begun to feel the outcome of the over-leveraged, over-priced real estate parade. I am afraid that those who have chosen poorly over these past few years are on the path to loose all that they worked so hard to procure. For many years we have lived the fancy Madison Avenue belief that every thing could be yours today. Early evidence now shows that might not be the case. I will hold judgment till further, but the CHARTS indicate much pain is yet to be derived. Florida."

Realtors have their own national organization that advertizes how ethical they are. Where is the ethic in matching houses and buyers when they know the buyers can't afford the house? Every failed loan we are seeing had a realtor involved in the sale...every single one.

Beware folks who brag about their ethics. Beware of manufactures who boast about their products' quality. True quality is its own best advertizing. Ethics, if there are any, don't need to be advertized.

May 6, 2007

THE CASE OF THE MISSING EXPECTATIONS

I had just dropped into one of my favorite joints down by the financial district. I ordered a beer from Jimmy the bartender and was sipping it slowly there in the dark, when a familiar voice approached me from the rear.

"Hello Jake," she purred in a deep and throaty manner, "howya been doin'?"

I turned around on my stool and there she was, Market Marnee. She didn't seem to aged a second since I'd last seen her several years before. She was very vibrant and alive. Her blond hair seemed ablaze with vitality. Her dress showed off all the curves of her body. And she has curves that a train couldn't hold without derailing.

She took my hand and I gladly followed her over to an empty booth.

"I may have a case for you, Jake," Marnee told me breathlessly.

"You have a problem, Sugar?" I asked her.

"Oh, you wouldn't be working for me," Marnee said. "You'd be working for a friend of mine."

"Who would that be?" I asked.

"A guy named Ben," she said. "Sometimes his friends call him 'Helicopter Ben'."

"How do you know him?" I asked Marnee.

"Oh he comes into a place I frequent every time he's in town," she explained. "He used to come in often with a friend of his named Alan. But we don't see Alan very much anymore."

"So, you share drinks and conversation with Helicopter Ben," I surmised. "You do travel in elevated circles."

"Yeah, Ben's a great guy, a wiz at card games," Marnee went on. "When Alan was around, we used to play three-handed pinochle all the time. Anyway, Ben's been concerned lately. The Feds have been cranking up M-3 to stimulate the economy. But the economy has been slowing despite that. Housing, like everyone knows, is in the dumpster. Ben is thinking about lowering rates, but he says that's a sword that cuts several ways."

"How's that, sugar?" I asked.

Well, for one thing," Marnee explained, "lowering rates is an open admission that things ain't so hot. And what happens if Ben does lower rates to get people to borrow more, and they don't do it, don't borrow more money for everything, but especially for houses? See, Ben's afraid that even by the time he gets around to lowering rates, lenders will have tightened credit standards. And people won't want to borrow more anyway if the house they own is worth less than it was six months before. See, borrowing to play the housing market only works if house prices keep going up. If prices are falling, and have been for a while, will anyone even notice if Ben lowers rates?

It's a lot worse than throwing a party and having no one come. Expanding the money supply and lowering rates are the two main causes of inflation, Ben knows that. A lot of our inflation lately has been flowing into housing. How can the Feds keep all the balls in the air, if Joe Consumer does't borrow more because his house is in a deflationary price spiral? And if people don't keep borrowing for houses, and house prices just keep falling, into what new area will inflation flow? What can possibly take the place of housing as a source/stimulus of borrowing in our economy? And if super-stimulation of the economy does not work very well, what kind of effective controls will the Feds have left?"

"So, how is it that I could help Ben out of his dilema?" I asked.

"Ben thinks it all boils down to expectations," explained Marnee. "People borrow more if their expectations are rising. So what he needs you to find out is," and Marnee paused for effect, "how can expectations rise if people ever wise up to the fact that the reason they're in a financial fix is because they paid way too much for what is their main financial asset, that easy money in the past almost guaranteed they'd get stuck holding the housing bag now? What will that realization do to expectations?"

April 30, 2007

I just sold out of my two positions this morning. Not only did I not see much strength in those two stocks. It appears to me that we are at some kind of peak right now. Simple rotation might bring some stocks higher, but the average stock is done. Stick a fork in it.

Over the weekend Ben Smith sent me a must read article. Here is the link to ' The Last Bear Standing', by John Mauldin of SafeHaven.com. I quote this article extensively. Some sections I quote below are actually quotes from Jeremy Grantham.

"While euphoria sweeps stock markets here and worldwide, there are at least a few voices of dissent. One, unsurprisingly, is legendary value investor Jeremy Grantham - the man Dick Cheney, plus a lot of other rich people, trusts with his money. Grantham ... has been a voice of caution for years. But he has upped his concerns in his latest letter to shareholders. Grantham says we are now seeing the first worldwide bubble in history covering all asset classes.

'Everything is in bubble territory,' he says. 'Everything. The bursting of this bubble will be across all countries and all assets.'

'From Indian antiquities to modern Chinese art,' he wrote in a letter to clients this week following a six-week world tour, 'from land in Panama to Mayfair; from forestry, infrastructure and the junkiest bonds to mundane blue chips; it's bubble time!'"

So how can we have a rising stock market and a faltering economy? Here is Mauldin's answer.

"First, we are seeing large amounts of stock being taken out of public hands and going into private hands.

...We are seeing the broad money supply indicators (M-2 and M-3) rise not only in the US but all over the world.

...Finally, rising prices create their own kind of self-fulfilling momentum."

Mauldin goes on to comment on housing.

"Total home sales are at their lowest level in almost four years. New home sales are close to a seven-year low. Prices are falling in many areas where there was a bubble in prices. Even though we have seen a significant decline in new home construction, the number of homes for sale continues to rise.

The homeowner vacancy rate rose to a new all-time high, even as rental vacancy rates fell slightly. Overall home ownership in the US is falling and is now at a three-year low. Including new homes under construction, there are a total of 2.5 million homes vacant, which is well over 3% of the total of the US housing stock (77.2 million non-rental homes)."

On a related note, Florida recently had this to say about housing in his fair state.

"Florida real estate is in only the admitting phase to the hospital. Not only do they not know the cause of the ailment nor have any cure for the disease, no one admits to have ever been exposed to such a disease in known history."

The Orange Section writes that most new homes for sale in the Minneapolis area are running $350,000 and are far out of reach for the first-time home buyer. ... And they are not selling.

As to the ever-rising stock market, here is a quote from Florida, with whom I agree completely.

"I believe we have seen one of the most intense distribution phases that I have ever witnessed. There is no doubt in my work that those in charge have distributed and gone short all possible positions. Some times this can go on for a number of weeks as they get all the floats back to the yard. I will state the parade is over."

Remember readers that the DJIA is ususally the very last group of stocks to peak, and those thirty stocks have just done exactly that.

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