Almanac Investor Alert 7/20/6

Almanac Investor Alert - 7/20/2006
*** If “Ifs” and “Buts” Were Candy and Nuts Every Day would be Christmas ***

Weekly Changes

DOW 10928.10 81.81 0.75%
S&P500 1249.13 6.84 0.55%
NASDAQ 2039.42 -14.69 -0.72%

After yesterday’s release of the text of Federal Reserve Chairman’s prepared comments to the Senate Banking Committee the markets went gangbusters. Big Ben told the bulls exactly what they wanted to hear. Now we are most certainly in the bottom of the eighth inning. The brain trust of Mr. Greenspan and Mr. Bernanke appear to have coasted this economy to a soft landing that would make Buzz Aldrin proud.

Ah, but there is more to the story. For those who bothered to not only sit through the prepared comments, but listen to the cross-examination by the Senators, the hearing told a much different story.

The Fed’s projection is based on certain assumptions and is contingent on maintaining the trends indicated by the data they hold so near and dear to their policy. It does not take into account escalating geopolitical problems, the collapse of the housing market, and continuing increases in energy prices to name a few. The ifs and buts intermingled in his responses to the Senators’ questions sounded as if he was covering his behind and adhering to Blue Sky Laws.

We are staunch believers of the intertwined nature of geopolitical events and their effects on the Stock Market; some even consider us experts. The way the market is moving in response to the news lately is due to a weakening stock market.

Many a bull market has shrugged off international tension with out blinking an eye. When India and Pakistan almost went nuclear over Kashmir in 1999 the market didn’t give a hoot. Today traders are shocked, SHOCKED that there are escalating tensions between Israel and no, not Lebanon. And as far as North Korea goes, judging by the reaction of the markets and the media you would think that Slim Pickens just rode a nuclear tipped Taepo Dong 2 into the golden gate bridge.

Not to belittle all of the bad things that are happening in the world, but there are always bad things happening in the world. The fact that Wall Street is not only noticing, but reacting to every News Alert with a violent swing up for the good and down with the bad is indicative of a sickly market.

Exogenous events would indeed impact the markets if the economy and the markets were healthy, but the fear and loathing on the Streets (Main & Wall) is fundamentally due to the steady erosion of the U.S. economy; data be damned. The voracious American consumers are simply tapped out. The housing marketing is, judging by Wednesday’s Housing Starts data, worsening.

The cheap money that flowed like wine is gone. And now, as the piper comes a calling, there is little extra disposable income. Many have used up whatever equity they had built in their live-in ATMs and are now in debt up to their ears. Two point seven trillion dollars (according to someone responsible for making up such a number) in adjustable rate mortgages are about to reset.

Don’t buy this rally; sell into it. Any irrational upswing is also an opportunity to buy more puts. The economy in headed for a recession despite what the fuzzy dismal numbers reveal. Inflation is here. If you insist on exposure to equities on the long side, good luck, or consider our energy picks. There isn’t a plausible scenario that we can come up with that moves this market to significant new highs anytime in the short term.

Even if the markets don’t crash like 1987 (as many have suggested recently), a significant drop is possible if any of Bernanke’s ifs and buts come true. Today’s lack of follow-through makes yesterday’s rally feel more like a short cover during options week than anything else. Stay the course Almanac Investor, for when the time is right to pounce, you will have a war chest for the next huge rally.

Stock Updates

Conceptus (CPTS) closed below our Stop Loss of 12.00 on 7/18/06 and was sold.

Please trade carefully.
Those who study market history are bound to profit from it.

Sincerely,
Jeffrey A. Hirsch, Editor & Publisher
J. Taylor Brown, Vice President & Director of Research