Monday, 11/18, Market WrapUp (Financial Markets React to Increasing Threats)

Financial Sense Online ^ | 11/18/2002 | James J. Puplava

[rohry]

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Weekday Commentary
from Jim Puplava

Chart courtesy www.stockcharts.com 

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Monday Market Scoreboard  November 18, 2002
Dow Industrials		92.52	8486.57
Dow Utilities		2.11	198.23
Dow Transports		42.56	2290.64
S & P 500		9.47	900.36
NASDAQ		29.85	2361.59
US Dollar to Yen			121.04
Euro to US Dollar			1.0088
Gold		1.5	319.40
Silver		.04	4.537
Oil		1.20	26.71
CRB Index		1.08	228.21
Natural Gas		.28	4.263
All market indexes	11/18	11/15	Change
HUI (Amex Gold Bugs Index)
Close  YTD	120.15	122.90	4.36 84.27%
52week High	147.82	06/03/02
52week Low	59.86	11/26/01
XAU (Philadelphia Gold & Silver)
Close  YTD	67.64	68.97	1.33 24.26%
52week High	88.65	05/28/02
52week Low	49.23	11/19/01

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 Market WrapUp for the Week 
Monday  l  Tuesday  l  Wednesday  l  Thursday  l  Friday

Week in Graphs Storm Watch Geopolitical News Energy Precious Metals Raw Materials

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^{Monday, November 18, 2002}

Circle of Threats
Saddam threatens his neighbors. The U.S. and Britain threaten Saddam and Osama threatens the U.S. It is becoming a vicious circle of threats that is making the markets uneasy. The U.S. intelligence agency has authenticated last week’s audiotape of Osama bin Laden. The war drums are beating louder with each side vowing dire consequences. The U.S. is committed to disarming Hussein who is equally committed to inflicting damage on either the U.S. or it’s neighbor, Israel. The Washington Times has reported that Iraq has boosted the range of its surface-to-air missiles. The Chinese have provided Iraq with fiber-optic communications system to enhance their air-defense network. Iraq’s air defense unit continues to fire regularly at U.S. and British warplanes. The countries air defense network now employs 1,500 surface-to air missile launchers. It isn’t quite clear whether firing on patrolling jets is a violation of the U.N.’s resolution of forbidding hostile action against U.N. member states. The U.S. and British patrol jets have been operating in the region since 1991 to prevent Iraq from attacking opposition forces in other parts of the country. Most recently allied warplanes have stepped up their attacks against Iraqi air-defense systems. Coalition warplanes are now attacking larger air-defense targets in what may be a prelude to war.

In response to the possibility of an attack, Iraq has now threatened to launch strikes against Israel. Deputy Prime Minster Tariq Aziz warned that any military action against Iraq would endanger not only Britain and America, but also Israel. When questioned as to what kind of threat or danger, he simply said that ”the consequences will be very bad for them and their friends in the region.”

While the U.S. and Britain threaten Iraq with consequences if they don’t comply with U.N. resolutions, al-Qaeda threatens the U.S. and Britain with spectacular terrorist attacks. Last Friday, the FBI said the organization is planning a “spectacular” terrorist attack. Intelligence sources say that the al-Qaeda attacks would be designed to achieve three objectives: high symbolic value, mass casualties, severe damage to the U.S. economy, and maximum psychological trauma against the American people. An alert has been posted on the FBI’s web site after news of a possible major attack was reported by The New York Times and Associated Press. A weakened al-Qaeda may use conventional explosives and low-technology platforms to deliver their attack such as truck bombs, commercial or private aircraft, and explosives that could be easily concealed Federal authorities have issued warnings for specific industries, especially energy and power, and national landmarks. Concern is growing because of increased chatter that is being picked up through intelligence channels. The risk has heightened recently because of the Muslim holy month of Ramadan, which started last Wednesday and ends on December 5^th. Last Wednesday the FBI warned authorities in Houston, Chicago, San Francisco and Washington to be aware of threats against hospitals.

Last Friday, the same day of the FBI warning, Russian officials announced that small amounts of weapons and reactor-grade nuclear materials have disappeared from the country's nuclear facilities. Russia’s nuclear security has long been a high concern in the last decade. Suitcase nuclear weapons are missing and now it is reported that nuclear material is also missing. There was an article published on Asian Times Online that al-Qaeda has gotten a hold of nuclear devices. That story has since been pulled and has been declared as a hoax. But the chatter and the rumors continue to surface. And last Friday Russia acknowledges, in addition to missing nuclear bombs, we now have missing nuclear materials. The inferences and the whereabouts of those materials have now become a high stakes intelligence game. The stakes keep getting higher as each side threatens each other with dire consequences of its action. Over the weekend al-Qaeda made yet another threat against New York city and Washington D.C.

It has not yet dawned on the financial community and many U.S. citizens that we are now at war. It isn’t going to be a traditional industrial age war fought in the Clausewitzian traditions with armies lined across from each other as in times past. The new war is asymmetric and more in the tradition of Sun-tzu. To quote Sun-tzu, 

"The place we have chosen to give battle must be kept from him. If he cannot anticipate us, the positions the enemy must prepare to defend will be many. And if the positions he must prepare to defend will be many. And if the positions he must defend are many, then any unit we engage in battle will be fewer in number… The ultimate skill in taking up a strategic position (hsing) is to have no form (al-Qaeda today). If your position is formless the most carefully concealed spies will not be able to get a look at it. Just as the flow of water avoids high ground and rushes to the lowest point, so on the path to victory avoid the enemy’s strong points and strike when he is weak.” Sun-tzu

There you have the playbook for asymmetric warfare. To win against it requires all out war. To beat such an enemy, you must fight war like the Romans. This is against Western traditions -- at least for now unless unrestrained attacks against the U.S. push it towards a militaristic state. The U.S. has always been a reluctant combatant, but when pushed to fight, it fights to win.

Financial Markets React to Increasing Threats
As war threats heighten on each side, the financial markets headed to the downside. The main beneficiary of these new threats of war was the price of energy. Natural gas prices rose 7 percent to $4.263. Heating oil rose 5 percent and crude oil rose almost as much rising 41.20 a barrel to $26.71. The CRB Index rose 1.08 to 228.21. Behind the day's gains were a run up in energy prices, cocoa, cattle and grains. The index has risen from a low of 186.93 on January 30th of this year to today’s close of 228.21. Since its low in January, the CRB has steadily risen 22 percent. A rising CRB Index may be one reason, besides a falling dollar, that the bond market has been running into trouble lately.

Besides a falling dollar and rising gold prices this year, rising energy prices pose a threat to the markets. Industry groups within the natural gas market have warned FERC not to interfere with the pricing markets. The industry warns that market prices are needed in order to build the natural gas infrastructure. Price controls or regulation would inhibit this building, which is badly needed to meet the country's future energy needs. At debate within this country is the issue of energy production decline. Government officials and academics believe that world oil production won’t decline for decades. Most geologists in the industry take a different view. They believe that oil production will peak sometime in this decade. Many feel that the peak in production in the western world will be sometime between the years 2005-2006. If the geologists are right the world is going to face a severe energy crisis. Four-five years isn’t enough time to ramp up energy exploration and development, which has a long lead-time from the time of discovery to the time you fill your car's gas tank. Add to this equation the uncertainties of war and it isn’t difficult to see why the price of oil is rising again. The fact is that we have run out of $10 oil, and it appears now we may be running out of $20 oil. Now the question is, how soon will it be that we start to run out of $30-$40 oil? The sooner we start facing that issue, the further out we can push the time reckoning.

Today's Market
Looking at today’s casino results, the markets had difficulty holding on to gains earlier in the session. Typical of today’s news was Wal-Mart reporting that same store sales are lagging forecasts, thereby raising concern over a slowdown in spending by a debt burdened consumer. There is a growing feeling that earnings this quarter are going to be weaker than forecasted. Financial shares fell after Fannie Mae reported a slow down in its growth.  Defense shares sold off as short-sellers increase their short positions in defense contractors in the belief that war is less likely. Defense, energy, and the metals remain the most attractive sectors within this market. The herd is trading tech stocks again in the hopes of another boom to recoup their heavy losses. While the individual fund manager and day trader load up on techs, the pros are increasing their tech short positions. The latest Commitment of Traders report shows that the smart money commercials hedgers have increased their net short positions to 38,857 contracts net short. Bullishness is running high as investors seem to have abandoned all caution, and worry now about missing out on all of the action of the market's rise. As the CBOE Put/Call ratio falls, a number of newsletter writers turn bullish. The VIX has fallen to 31.11 and the VXN has dropped below 50 to 48.09. This is about the level they reached during this past summer's rally before the September selloff.

Outside the earnings warnings, business slowdowns, bankruptcies and scandals, there was nothing out of the ordinary to focus on. Most of the news was geopolitical in a vicious circle of threats. One trader put a positive spin to it all by saying, "Despite war threats and the numerous bad news stories, the markets have managed to rise." In this trader's view, the markets have already discounted all the bad news so there is nowhere else to go but up in this low interest rate environment. In other words, with interest rates at 1 percent, where else are investors going to go but stocks?

Volume came in at 1.2 billion on the NYSE and 1.7 billion on the Nasdaq. Market breath was negative by 4-1 on the NYSE and the NASDAQ.

Copyright © James J. Puplava
November 18, 2002

[rohry]

Here is Jim's latest take on the market (in detail):

http://www.financialsense.com/stormwatch/update.htm

"Today's popular opinion with policy elites is that the U.S. economy’s fundamentals remain sound. In fact, they have worsened. Growing government budget deficits, rising trade imbalances, declining business investment, zero savings, and record levels of debt on consumer and corporate balance sheets are not fundamentally sound. The current boost to the economy by the sharp drop in mortgage rates created additional bubbles in consumption and housing that will end when long-term rates begin to rise. A stock market bubble eliminated the need for savings by the end of the 90’s. Now a real estate bubble is being used to extract additional equity from an inflating asset to feed consumption. What happens to all of that debt when real estate prices deflate? One cannot help but think that consumer bankruptcies and mortgage defaults will soon join the weekly headlines of sovereign debt defaults and corporate bankruptcies. It may be one reason why financial stocks have been in a freefall and that credit spreads have widened rather than converged."

[rohry]

Market WrapUp is delivered...

[RightWhale]

What happens to all of that debt when real estate prices deflate?

That is when inflation would become an economic tool. At some point the money itself will be devalued, 10 cents on the dollar. Repeat as necessary.

[dalereed]

"What happens to all of that debt when real estate prices deflate?"

When the forclosures become rampent will be the time to steal real estate form banks that are going under. When it happens there won't be too many banks that will be able to stay afloat.

[RightWhale]

Who will end up with title to all that real estate?

[dalereed]

Thieves with cash like me!

[RightWhale]

What would a person do with all that real estate when the market is dead and local property taxes must still be paid?

[dalereed]

I only buy it when I can really steal it from banks, put in 30 days or less work and turn it for at least 100%.

When the banks are loaded with distressed property you can make cash deals with them for 50% or less than market.

A bank can only hold a forclosure for 18 months and they have to get rid of it.

[AdamSelene235]

What would a person do with all that real estate when the market is dead and local property taxes must still be paid?

Why buy feudal land? We need to find ways to re-allodialize as much land as possible in the US.

[rohry]

"We need to find ways to re-allodialize as much land as possible in the US."

What the heck does that mean?

[AdamSelene235]

What the heck does that mean?

There are two types of land, feudal and allodial.

Feudal land belongs to you on the condition you support the political system. For instance, property taxes are used for the socialist indoctrination camps that masquerade as "schools" these days. The entire point of government schools is to support the status quo by preventing independent thought.

Allodial land is yours and is one of the pillars of a free society. Homesteaded land, for instance, is allodial. The owner receives a "land patent". Allodial property rights in Britian and America were the very foundation of political freedom. In the Middle East the feudal property system is used to squash dissent and reward compliance. Feudal property is one of the primary reasons the ME is such a mess.

Most modern ownership documents have "color of title" but are not actually documents of ownership. Most residential property is leased from the government. We call the lease "property tax". If you don't pay your lease, you lose what you had mistaken for your land. To make the situation even more amusing most residences are now owned by Government sponsored enterprises like Fannie Mae which have provided excessive liquidity for the housing market. By driving up the price of homes they have allowed the financial classes to gain more and more access to the income streams of average Americans.

Convincing people to paying 30% of their income to a quasi-governmental agency for land to which they don't even have a proper title is one of miracles of public "education". There is a reason economics and history are not properly taught in government schools.

[Moonman62]

I only buy it when I can really steal it from banks, put in 30 days or less work and turn it for at least 100%. When the banks are loaded with distressed property you can make cash deals with them for 50% or less than market. A bank can only hold a forclosure for 18 months and they have to get rid of it.

Do you pray for human misery every night before you go to bed?

[dalereed]

Making a profit on misery sure doesn't keep me awake at night.

[B4Ranch]

Please don't degrade fellow Freepers. The banks are the ones who take these homes away from the suffering families, not repurchasers who relieve the banks of their overloads of foreclosed property.

[B4Ranch]

Here's an email from FreeRealTime.com It doesn't look like they think everything is hunky-dory either.

Dear Investor,

Everything's hunky-dory, right?

Alan Greenspan says the economy is "in recovery." All the corporate big-wigs are rushing to claim, "There's nothing wrong with OUR books." The market's made some tremendous 400-point upswings...and many market pundits are once again urging you to buy "before the next run-up".

Don't do it. Don't get suckered this time around. We're not headed back to the glory days again just quite yet.

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"XYZ company beat earnings estimates," the financial press will announce. And everyone will get excited and tout the stock. What a great buying opportunity, right?

WRONG! That's when I get really steamed by investment "gurus" who convince individual investors to put their money into stocks that are GOING NOWHERE FAST at best, and may actually be dangerously overpriced.

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I snipped off the disclaimer

[grania]

Allodial land is yours and is one of the pillars of a free society. Homesteaded land, for instance, is allodial. The owner receives a "land patent".

This is something I never even heard of. I guess my house and property would qualify as "allodial land"...it is mortgage free and it is homesteaded. I still have to pay property tax, though. So, how does the homesteading and clear title stop me from supporting the government?

I've never understood the appeal of second mortgages to pay for other things. I've never understood people living in houses that they couldn't afford if they were to become unable to work, when that isn't necessary. Most people are totally clueless (or in denial) about the advantages of full title to their property.

Your take that when (and if) housing prices crash, home owning will become concentrated makes sense. Then, you'll have government control over where people live, mini-mansions will become condos, and people will be completely drained by perpetual rent and fees.

I'm just not as sure as you are that housing prices will crash. There's just too much demand. Sane people will do everything they need to (including renting rooms) to keep their houses. Why? If they have one of these low interest rates, they'll never get that god a deal on financing again...giving that up would be insane.

[grania]

Sane people will do everything they need to (including renting rooms) to keep their houses. Why? If they have one of these low interest rates, they'll never get that god a deal on financing again...giving that up would be insane.

I want to amend this sentence in my response to you. There will be consumers who will be convinced, if housing prices fall, to get into a deal with lower principal and a higer interest rate. Why? The income tax deduction!

I don't agree with that thinking, but it's the same reasoning they use when putting credit card or automobile debt in a mortgage.

[Lion's Cub]

Let me throw a couple more reason in here why I don't see anything particularly positive going on.

One is outrageous cigarette taxes that are siphoning off any consumer buying power for 20% of the public. I figure my family alone (3 of us are smokers) pays well over $500/mo just in cigarette taxes. (But only until I find another source than the normally accepted ones)

With the new pentagon computer that will be tracking all of my purchases, my cost-of-living is about to skyrocket. I will pay cash for everything I buy, and I will no longer be able to use my grocery discount cards, or shop at places like Sam's Club, or BJ's. Nor will I buy anything over the internet. I certainly won't be using my gas card, either--which was just a convenience anyway.

It's none of the pentagon's business whether I buy whole wheat or white bread, or how often I fill up my gas tank--and where.

I realize that most Americans will not feel like me--but I suspect that enough will that retail stores will see their profits from interest and sale of data bases go down.

[whipitgood]

Looks to me like a lot of the housing demand is coming from illegals. My parents live in the Rocky Mountain region and their neighborhood is now almost 50% Hispanic. My own neighborhood in Texas has nearly half Hispanics in the local school system, mostly new within the last few years. With zero debt, they might easily qualify for home loans. I'm not sure whether it is legal for illegals to own property in the US. But they can sure pay rent!

[AdamSelene235]

This is something I never even heard of. I guess my house and property would qualify as "allodial land"...it is mortgage free and it is homesteaded. I still have to pay property tax, though.

So, how does the homesteading and clear title stop me from supporting the government?

It doesn't. Income tax, state income tax, gas tax,sales tax, auto registration tax,capital gain tax,etc,etc. still support your government.

If you still have the original land patent you may wish to investigate the possibility that you are not liable for property tax as this would constitute a claim on the land that trumps your ownership.

Do you have the original land patent or was the land homesteaded and then transferred to you? Or was the land homesteaded then sold.

I want to amend this sentence in my response to you. There will be consumers who will be convinced, if housing prices fall, to get into a deal with lower principal and a higer interest rate. Why? The income tax deduction!

Yes the income tax distortion distorts the housing market (according to the WSJ by about 15%) and is one of the primary obstacles to tax reform.

I would point out that even 0% interest rate can be a de facto high interest rate in a deflationary enviroment. Witness the cars that sell with 0 interest but immediately lose half their value upon sale.

Check out my profile for an explaination of Fannie Mae's effect on the housing market.