Almanac Investor Alert - 8/3/2006
*** The Economy Stinks – Hooray! ***
Weekly Changes
DOW 11242.59 142.16 1.28%
S&P500 1280.27 17.07 1.35%
NASDAQ 2092.34 37.87 1.84%
When will the bulls learn? Going long on the certainty of the Fed’s next move is fool’s folly. Moreover, the inflation doves have been dead wrong for about a year now. “One and done” and “bottom of the eighth” are as prescient as “the last throes” and “mission accomplished.” One-liners make great sound bites, but wrong, wrong, wrong and wrong.
GDP showed that the US economy is in the beginning of a downturn. But inflation metrics indicated acceleration. Maybe Bernanke and his cadre of equally confusing and publicly dissenting economists may pause, on the other hand, four fingers and a thumb. The point is that the bulk of the recent spikes up for the markets have been fed driven and based on the certainty that we are in the fourth quarter at the two minute warning or on the last lap of the race or some other pithy and invariably wrong analogy. The “fed is really gonna pause this time” rallies are met with no follow-through and heavy resistance; not a healthy and sustained up leg.
Moreover, Yes Virginia, the economy does indeed stink! This is not a cause for celebration, because after the Fed-pause-celebration confetti is swept up, Wall Street, Main Street and Pennsylvania Avenue will have to deal with the ramifications of a bad economy and dare we say recession. It doesn’t take a Wharton MBA to conclude that this does not bode well for the Street.
Another history lesson can be garnered from the Proving Grounds in the March 2006 issue of the Almanac Investor. Once the Fed Shifts their policy bias, Wall Street tends to get pummeled. As we approach the end of this current Fed Tightening Period we are especially drawn to the similarity between the present Period and the 1977-1981 Tightening Period. Though rates hikes started from much loftier levels in 1977, both periods are substantially longer than the other Tightening Periods and rate increases are also significantly greater. (More is expected from the current period even if Big Ben pauses next week.)
The end of the Tightening Period on May 5, 1981 was near the April 27, 1981 bull market top. A bear market followed with a bottom in midterm year 1982 on August 12—then came the longest easing period of the study and the super bull of the 80s and 90s. We anticipate similar market action this time around and have already assumed a defensive stance for 2006 and anxiously await the next major buying opportunity later this year.
Will it be a soft landing à la 1995? Not likely. In 1995 we had a superstar Fed Chair in his prime at the helm of one of the strongest economies in the history of this county. Now we have a rookie skipper and an extremely inexperienced fed cutting their teeth during one of the most precarious economies in history.
We have made no bones about our discomfort with the Fed’s “data driven” mantra. A recent survey polled 11,000 clinically obese Americans. Over 75% said they have healthy eating habits and about 40% claimed that they do “vigorous” exercise at least 3 times a week. This is a perfect illustration of how incongruous data and reality can be.
Prices for everything are rising sharply, but the CPI says there is no serious inflation. Refer to the Proving Grounds in the July 2006 issue for a more detailed critique of the Feds usage of the CPI, but at a layman’s level, things don’t seem quite right here. Either the data is wrong or the way it is being applied is wrong. Just because CPI says prices are stable isn’t going to make inflation go away.
On a positive note, we finally paid off the War in full! Before you get too excited, it was the Spanish-American War. There has been a 3% federally established luxury tax assessed to long-distance services in effect since 1898. The repealing is retroactive to 2003, so let your accountant know. The Treasury will refund the taxes paid over the past three years. You need to request refunds when you file your 2006 taxes. The treasury will even pay interest on refunds.
With the dog days thoroughly oppressing much of the northern hemisphere and tropical storm activity on the rise, we remind you not to get sucked into the usual summer rally hype. We are trolling the shores of Wall Street for investment ideas for the fall when the buying opportunity manifests. The upcoming issue will feature a basket of our favorites from previously closed positions.
In the meantime enjoy the view this summer from of our bear den. Wait for the talking heads to mention going short and those around you to begin asking “Should I sell?” after the stock indices are down 20-30%. That will be our signal to jump back in.
Stock Updates
8x8 (EGHT) closed below our Stop Loss of 0.85 on 7/28/06 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
