*** Finally! We Can All Agree on Something ***
Weekly Changes
DOW 11124.37 -118.22 -1.05%
S&P500 1271.81 -8.46 -0.66%
NASDAQ 2071.74 -20.60 -0.98%
Despite the implications, there is something the bulls and bears agree on; the economy is slowing. The bulls see this as a good thing. After all, Bernanke has paused and now they are sure of his intentions and are confident in his ability at the helm. They have abandoned the Alfred E. Newman “What me worry” view of the economy and have adopted the “It’s going to be a soft landing” mentality.
We, and the mounting corps of bears, fail to comprehend this line of rationalization. The bull is dead and the bear, roused from hibernation, is ill-tempered and hungry, ready to feast at the trough of recession full of the bull’s untended and overconfident dollars.
The “soft landing” the bulls are banking on is the panacea du jour. For clarification we turn to Almanac Investor colleague and old friend John Downes. In his outstanding Dictionary of Finance and Investment Terms (Barron’s Educational Series, 1995) he defines soft landing as “a term used to describe a rate of growth sufficient to avoid recession but slow enough to prevent high inflation and interest rates.”
That’s right Goldilocks, Just Riiiight! For the silver bullet of a soft landing to manifest itself, the U.S. economy must avoid recession AND inflation AND high interest rates. If not, then what?
We already have inflation, albeit not recognized by the powers that be, as depicted by an experience at daybreak today. While grabbing a cup of Joe from the Runcible Spoon, our local coffee shop here in Nyack, NY the following sign graced the counter by the cash register:
Due to the rising costs of EVERYTHING,
there will be a price increase in some of our products!
We appreciate your continued patronage.
Thanks, The Runce Staff
I was quick to express my confusion to the finely trained barista behind the display cases. According to Bernanke and friends, “Readings on core inflation have been elevated in recent months, and the high levels of resource utilization and of the prices of energy and other commodities have the potential to sustain inflation pressures. However, inflation pressures seem likely to moderate over time, reflecting contained inflation expectations and the cumulative effects of monetary policy actions and other factors restraining aggregate demand.
“Nonetheless, the Committee judges that some inflation risks remain. The extent and timing of any additional firming that may be needed to address these risks will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.”
After a dismissing “Whatever” from the lovely high school senior to be, she recommended that I talked to Frank the owner. Frank, as blunt a man as you will ever meet, went on a blue diatribe that cannot be easily edited for this space, but in short, his costs are out of control and getting worse every week.
Maybe it is time for the Fed to stop relying on data and start relying on real world conditions. Just because you say inflation is in check doesn’t make it so.
But the bulls are quick to hearken back to February 1st 1995. Ah the glory days; when everyone was a financial genius. Sir Alan and his cadre of valiant economists steered the mother ship to a perfect jumping-off point for last century’s epic bull market. Mr. Greenspan nailed a grand slam, but alas that was then and this is now.
Then the economy was smack-dab in the middle of nearly two decades of non-stop expansion. Now it is on life support.
Then peace was breaking out all over the world; as Israel and the PLO signed the historic accord granting autonomy to Palestine and a peace pact was signed by Bosnia, Serbia and Croatia. Now the geopolitical situation is teetering on the brink in countless hotspots in the Middle East, South East Asia, India to name but a few theaters of conflict, while most of the West sits dove-eyed in the crosshairs. Terrorism is on the lips of our leaders and minds of all.
Then this country had at least an iota of faith in its leaders. Now Congress and the President have unprecedented disapproval ratings.
Then enabling nascent technologies of the PC and Internet were exploding into full bloom. Today practically everyone is wired and there is not a culture changing growth area on the immediate horizon. In short, it ain’t 1995.
The Dow has enjoyed a healthy bull market lasting from October 9, 2002 to May 10, 2006. During this bull-run, the Dow tacked on an impressive 59.8%. But all good things must come to an end. There is a confluence of bearish influences holding sway over the markets, and we are content to watch the carnage from the sidelines shielded in our armor of bonds, puts and cash equivalents.
Stock Updates
Pacific Ethanol (PEIX) closed below our Stop Loss of 18.00 on 8/7/06 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
