Posted on 07/16/2002 5:13:03 PM PDT by rohry
Market WrapUp for the Week Tuesday's Stock Market WrapUp Green Thumb Losing Its Magic? Mr. Greenspan failed to restore confidence as the Dow Industrials closed with steep losses for the seventh straight session. News of additional earnings misses overshadowed any positive effect the Fed Chairmans comments may have had for the markets. Caterpillar missed its earnings estimates and Intel said its number would fall short of expectations. In the case of Intel, the company missed its earnings targets due to lackluster demand for personal computers. In addition to missing profit targets, Intel said it would cut 4,000 jobs or 5 percent of its workforce. The news from Caterpillar was followed by additional disappointments from Apple Computer and another SEC charge against Raytheon for giving profit forecasts to analysts before telling the public. The markets turned down with the Dow losing 1.9 percent. So much for the lasting effects of Mr. Greenspans speech and positive comments about the economy. The markets headed where they wanted to head, which was a continuation of its downtrend. One analyst commented that no one person, whether it is the President or Mr. Greenspan, could instantly cure what ails the markets. In fact if you read through the fine lines of todays testimony, there were hints of future rates hikes coming down the road. In his statement the Fed Chairman said, the Federal Open Market Committee has recognized that the accommodative stance of policy adopted last year in response to the substantial forces restraining the economy likely will not prove compatible over time with maximum sustainable growth and price stability. Translation --- we will have to raise interest rates. Dollar Crisis Looms This is the Fed Chairmans major problem. By attempting to keep one bubble from deflating, in this case the U.S. dollar, he risks deflating another bubble of his own creation, which is the housing market and consumer spending. The Greenspan magic, which worked so well in the past, isnt working anymore. In effect the Fed has backed itself into a corner. If the Fed keeps monetary policy loose and expands the supply of money into the economy, he risks a falling dollar. If he raises interest rates to hold up the dollar, he risks popping the housing and consumer spending bubble. Outside of government spending, housing and consumer spending remain the only sectors left holding up the economy. Bubble Troubles The Fed now confronts many problems of its own making. Unlike the past, when a crisis presented itself, the Fed would lower interest rates, flood the markets with money and the stock market would respond. The money went into the financial markets driving stock prices higher. It happened in 1995, 1997, 1998, and in 1999. This time around monetary stimulus has failed to revive the stock market bubble, but instead has found a new outlet in the housing market. So we now have a housing bubble, a dollar bubble, a consumer bubble and a bond market bubble to take its place. The financial markets have failed to cooperate. So instead of one bubble (stock market) to contend with, the Fed now has multiple bubbles which have yet to deflate. It looks like the Fed is running out of time and bullets. As todays graphs of the Dow and dollar indicate, we have two bubbles that are in the process of deflating while two other bubbles are still inflating: the housing and the bond market. In the meantime, all that can be done is for Washington and Wall Street to plead with consumers to keep the bubble going by spending more money and taking on more debt. This trend is unsustainable and it may be the dollar crisis, which deflates the housing and consumer bubble through rising interest rates. If the U.S. financial markets continue to deflate and the dollar continues to decline, foreign investors may begin to exit in mass out of U.S. financial assets. This would force U.S. interest rates up as foreign investors sell off part of their holdings of U.S. assets, thereby forcing down their price and raising interest rates in the process. As these graphs of our trade deficit, current account deficit and foreign holdings of U.S. Treasury show, foreign investors now may be the Feds most important constituency. (Source: Grandfather Economic Report by Michael Hodges.)
Foreign Confidence in Our Markets is Important Too To find a similar situation as we now face today, it is necessary to go back to the early 30s when dramatic monetary ease failed to initiate a response from a falling stock market. Back then, like today, all of the crucial monetary and fiscal policies had been put in place to bring the markets and the economy back. They didnt. Instead the Dow lost 90 percent of its value and the economy went into the depths of a depression. Like then and similar to today, the decade of the 30s had followed a decade of prosperity in the economy and the financial markets. The 1920s were hailed as a new era of prosperity for the American economy in many of the same ways as the 90s. What economists and analysts have failed to realize is that the monetary excesses of the 1920s were what fed the stock market and consumption boom of that era. The conclusions that the U.S. markets were some how different this time are in error. The same monetary policies of the 20s have been repeated in the 1990s and the consequences will be similar. The excesses in the financial markets have just begun to correct and it may be a very long time before they are fully discounted in the markets. As the graph from yesterdays Market Wrap Up indicates, bear markets can take a very long time to unwind. The profit squeeze now being felt by American businesses continues to take hold. Businesses face pricing pressures at the same time their costs for raw materials and labor are rising. The net result is profit margins are falling and businesses are cutting back expenses in response. Todays plethora of earnings disappointments and job layoffs from companies such as Caterpillar, Apple Computer and Intel are an indication that this vicious trend still remains in place. This makes the profit miracles that Wall Street is forecasting for the second half of the year less likely. Especially now if Congress moves to force companies to start treating stock options as an expense. The Message of The Markets Bond Market Foreign Markets © Copyright Jim Puplava, July 16, 2002 |
This is the Fed Chairman?s major problem. By attempting to keep one bubble from deflating, in this case the U.S. dollar, he risks deflating another bubble of his own creation, which is the housing market and consumer spending.
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Tue | 7:15pm | FNM | [external] Treasury backs full disclosure by U.S.-backed firms - at CBS MarketWatch | |
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THERE IS NO HOUSING BUBBLE, I TELL YOU. PAY NO ATTTENTION TO THAT MAN BEHIND THE CURTAIN
I can try to do it. Freepmail me the ping list and the account and login if needed, or the URL if not. Include any tips for formatting please.
Talk about a bubble!!
I am heading out next week for my annual fishing trip to Canada. No news or computers for a whole week.
Last year someone posted a graph of the 1990's market overlayed upon the 1929 era market. It would be interesting to see an update of that. I hope the lights are still on when you get back.
Is this something like it?
Yes. I just checked my broker and they had them listed.
I saw a chart of the spot gold prices today. Looked like it ran up to 325 and then tanked. Anyone else see that?
Richard W.
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