Wall St. Rises on Fed Official's Comments

NEW YORK (Reuters) - Stocks climbed in late-morning trading on Tuesday after a Federal Reserve (news - web sites) official said there is no question the U.S. economic recovery is under way, raising hopes for corporate profits.

Web equipment maker Cisco Systems Inc. (Nasdaq:CSCO) gave technology stocks a boost after the company, seen as a benchmark for the health of U.S. companies, said its order backlog is on the upswing.

"We've got positive comments out of the Fed -- they're talking about the economy and that's what the stock market is worried about," said Tom Schrader, head of listed trading at Legg Mason Wood Walker. Cisco is helping techs "without a doubt," he said.

Expectations that lower interest rates and a business-friendly U.S. Senate will help corporate profits also underpinned gains, a day after shares had tumbled following defiant rhetoric from the Iraqi parliament on a U.N. resolution to disarm Iraq.

"In the very short run, episodic news announcements can give us a bounce," said Jon Brorson, Director of equities at Northern Trust Co. "The market's been thumped in last few days and we're seeing a little bit of buying here."

The Dow Jones industrial average (^DJI) was up 105.77 points, or 1.27 percent, at 8,464.72. The broader Standard & Poor's 500 Index (^SPX) was up 10.95 points, or 1.25 percent, at 887.14. The technology-laced Nasdaq Composite Index (^IXIC) was up 30.43 points, or 2.31 percent, at 1,349.62.

Cisco climbed 56 cents, or 5.4 percent, to $12.81 and was Nasdaq's most-active stock after the company said its backlog was up from September. Analysts use order backlog data to gauge future sales.

Also firing up stocks were comments by Minneapolis Federal Reserve President Gary Stern, who said economic expansion from the fourth quarter of 2001 through the first three quarters of this year has averaged an annual growth rate of roughly 3 percent.

"That is not magnificent for the early stages of an economic expansion, but it is not terrible either, so the economy does appear to be moving ahead. In my judgement there is no question that an economic expansion, an economic recovery, is under way," Stern told the La Crosse, Wisconsin Economic Summit.

The Fed on Nov. 6 slashed its benchmark Fed funds rate by a half-percentage point to 1.25 percent -- a reduction double the size of what most private economists expected. Rates are now at their lowest levels in more than four decades.

In corporate news, Motorola, the No. 2 maker of wireless telephones, rose 40 cents to $8.78 after saying at a telecommunications conference on Monday it still plans to meet earlier fourth-quarter financial forecasts, good news for some investors who have been worried about a slow spending environment.

Oracle Corp. (Nasdaq:ORCL) rose 30 cents to $9.35 after Chief Financial Officer Jeff Henley said he sees a turnaround for the technology industry in 2003, forecasting a return to growth in 2003 following two years of revenue declines.

"During the first half of calendar '03, we'll start to see this thing turn around," he said at an Oracle-hosted technology conference in San Francisco.

Hahahaha. You are right. As Carnegie said, "I put all my eggs in one basket and watch that basket."

Seriously, I'm not a "stock picker." I do not sit all day reading analysis of company P/E ratios or following investment bond ratings. That is why I have a broker. My job is writing, and that's where I put my energy.

Moreover, my investment strategy when I do pick is not anything I would necessarily recommend to others. Basically, it is divine inspiration. Doesn't happen often, which is why I won't join some silly bet on who picks the best stocks. But the last two that I had in this way were

*Zenith, which I purchased at about $1 and some cents per share, and sold about a month later for more than $3 per share. I don't even want to tell you how I was instructed to purchase this stock---you'd have me committed.

*early-1990s, America West Airlines, in bankruptcy of all things. I "knew" this company would make it. I bought, again, at about $1. As soon as the company came out of bankruptcy, the stock tripled, then went to about $20, then split, then went to $26. I sold at about $20, the second time.

Ironically, the one time I used my "common sense" and read the market reports, etc., I bought Southwest Airlines, a profitable company, the best rated airline in America for a number of years, and sat on the stock for years. It barely moved, and didn't pay much dividends, because the company was Carnegie-like---reinvesting, reinvesting. I don't know why the stock never moved. To this day, it is still one of the few---if not the only---profitable airline in the industry.

Re #32

When faced with a painful hit now, people tend to postpone it even if the later one will be much worse, hoping that something will happen to save them, however slim that hope might be. With each passing day, they have to cling to a slimer and more outlandish hope while the eventual pain would become bigger and bigger and the chance of getting out of this crisis will be smaller and smaller.

It is a human nature. The fear of reckoning drive this process. The latent panic is the dominant factor among these big boys, and in the market as a whole. They try to plug a breaking dyke, holding more water in the process, and making the eventual flood even bigger.

They are like an army which refuse to surrender even if they lost a war. In a so-called "rational" market, this should not happen. Because there are so many indenpendent players who only follow their individual interests without any explicit coordination with others. But in the current financial markets, there are many kinds of coordination among players, big companies, big financial firms, FED, and governments and central banks of major countries. They all join hands to make untimately futile efforts to stem the adverse tide.

I think that they will do it until they completely run out of any options for stalling. This is the flip side of many intelligent and well-coordinated actions by big players. Such a sophistication will be great when they are guided by a somewhat detached mind, so-called "rationality". But when the sophistication is employed by raw panic, it could make things much worse by trying every possible option to attain impossible goal, and making matters much worse in the process.

" Reality is that the economy is OK, getting better . . . "

I do not want to get very involved in this topic tonight--most of this discussion took place early in the day following which, as everyone presumably knows, the stock market sold off fairly significantly--most of the technicians are now reading the sell off, coupled with the decline in the dollar and the run up in gold as an indication that the current rally has probably topped out.

However I read LS's comments and want to suggest that LS consider a few questions.

First is addressed to your initial point that the economy is improving--that is wrong, the economy is deteriorating fairly rapidly at this point. The data is significant employment reductions in every geographic area and in every industry coupled with declines in capital spending, and valuation declines in every asset category in which there is measurable data.

The third quarter GDP number is not a number yet, it is an initial estimate. And GDP, even when measured accurately, can be a little misleading--for example, when F and GM build cars at a loss, the production goes into GDP but I don't view it as the "economy getting better"--I think it is evidence of things getting worse.

Most important, earnings of publically traded companies are going down--they are making less money--that is a clear sign things are getting worse, not better. You get those numbers from any decent national brokerage firm.

You say "GM is making profits now without refinancing." That also is not correct. GM is losing money building cars at an increasing rate. GM has labor contracts that require it pay its floor labor whether they are making cars or not; so some smart finance jock has concluded they lose less money making the cars than they would lose if they didn't make the cars--so they continue to make cars at a loss. But that again is not a sign of an improving economy at all.

Further, as Richard correctly points out, this analysis of GM is all without any consideration of the fact that their net is further overstated (manufacturing losses are understated) because they have not accrued Pension Benefit expenses which they are obligated to pay as a result of current operations--actual labor costs which under GAAP ought to be in the P & L.

"Do you want to make a bet---and let someone else hold the money---that unemployment will even get to SIX percent in the next year? I thought not." Now I don't think much of getting down to this level on line--no one has time to negotiate an escrow agreement much less pay attention to this kind of a proposal after it comes home to roost although I think probably sooner than you expect. But facts are unemployment, even the phony reported numbers, is going to get over six percent well within the next year.

And it is not unreasonable to question the numbers either. The reported employment and unemployment numbers now are based on a survey--somebody gets on the phone and calls people up and takes a sample. That does not produce reliable numbers in any setting. Facts are that these hundreds of thousands of published and reported layoffs in every industry in every geographic area are not reflected by the reported employment numbers under circumstances where the people doing the reporting have a clear bias and objective to understate the degree of unemployment. So like Richard, I don't believe the employment numbers either.

Now about the gold. What is happening to the dollar is widely misunderstood. The reason the dollar was so strong in the context of the trade deficit is because the overseas trading partners were bringing the dollars they received back and investing them in the US investment markets (including the stock market). However perception is getting through that the US stock market is no longer a reasonable investment so they are starting to take their dollars back. That is a tough call for them because the take it back to is not very attractive--the euro and the yen are backed with economies in Europe and Japan that are in worse shape than the US market. So the dollar has gone down a little against the Euro (which is also suported by a significant interest rate advantage) and a little more against the yen--but not much.

That leaves the person holding capital in dollars with few places to take the dollars--gold is historically a store of value and is real money and you can spend it anywhere--so people are converting their dollars to gold. That is probably not a bad call--however it is a bet that the Fed can and will pursue policies that will cause the dollar to lose value (inflation) which may or may not work out.

I could go on but I think you get the idea. The S&P is priced at about 60 times trailing 12 month GAAP earnings--really difficult to see how that can continue. I don't see any reason to believe your view that real earnings will go up, so I have a lot of difficulty seeing the stock market doing anything but going down.

You certainly can be right.

On the overall numbers: I agree that GNP is not always a good sign. But I have argued this for years in the other direction---that the market had UNDERSTATED the value of U.S. companies (this is supported by research in 1) stock vs. corporate valuations in the 1980s; 2) IRS data concluding companies had understated their income and net assets; and 3) the hugely uncounted "rents" that accrue from patents and "monopoly" positions which are never accounted for). If you looked at the numbers through the 1990s, estimates were that U.S. KNOWN corporate assets (more on that in a minute) were about $40 TRILLION, which was in no way captured by the equities markets.

The most remarkable phenomena of the early 1990s was a response to regulation, which was the rise of the "microbusinesses," 5 employees or fewer---often family---which could stay below the regulatory radar screen and IRS inspections. These made up the VAST majority of job growth in the 1990s, and, while I don't have any post-2000 numbers on them, I certainly think still do.

Yes, be base the "health" of the economy on the stock market evaluations of the "biggies." But this was as wrong in the 1990s as it is now. For every big company that you claim (possibly correctly) is "overvalued," there are a dozen microbusinesses not being counted at all. This is why GNP #s in the 1990s were likely low.

While I realize that you can have growing productivity and a shrinking overall GNP, you can't have BOTH going up and be constricting. Say's law, you know. Our productivity #s have been good to excellent. I have maintained for five years, often alone, that the money supply was not keeping up with these measurements I cited above. This, not the interest rate, is part of the key to getting the economy back on track.

You certainly know much more than I about dollar-to-yen-to-gold flows. Nevertheless, standard economics says that we certainly don't have "too much money," as Jim Puplava keeps hinting, because of all the barometric indicators---not just a steady (and relatively low) price of gold, but also energy, interest rates, and general price level (which, again, economists pretty much agree the CPI was probably overstated for the last 30 years.)

Just for the record, seldom do I state that either Richard or Rohry or even Puplava are specifically WRONG: what I do state is that no one has accounted for any of these other factors, while harping on the "unfunded pensions," the "housing bubble," and other such things.

Here in Dayton, I deal with a lot of GM/Ford/Chrysler parts and machinery suppliers. We have Frigidaire, Delco, and many others. Word from the managers that I talk to (admittedly sporadically) is that while things certainly aren't rosy, they are nowhere near the catastrophic levels claimed on this board.

Finally, I have argued that 9/11 and other political factors are every bit as key to returning "profitability" to the market as anything else. The airlines are in the dumper due to 9/11, which puts Boeing and other aircraft parts mfg. in the dumper, which puts Hughes electronics and other electronics firms in the dumper, which puts chip/tech companies . . . . well, you get it. The moment the American public senses that SOME level of security has been reached, whether with Bin Laden's body/DNA or the collapse of Iraq, many (not all, but many) of these "profitability" issues will vanish.

This is a reply to LS's response to me #52 here. I do this for two reasons: LS's numerous prior posts on this thread and this one state a restate a number of propositions that just will not stand any kind of factual analysis; and, under the circumstances, everyone who relies on the debate on these threads to formulate their own view of the investment markets and the future ought to have access to responsive views.

LS starts with point one which is a common falacy that there are trillions of dollars of uncounted wealth in the form of public company assets not on their balance sheets (because of proprietary rights and created technology) that does not wind up as an asset book entry.

Now that's wrong. Here's why. To some degree, some of this kind of stuff is on balance sheets because the corporate entity that owned some of it was sold to another corporate entity and under purchase money accounting, was required to book the purchase price as "goodwill" to the extent they really paid for something other than hard assets. Most of this has now long since been written off because in fact it does not have value even equal to what was paid for it and analysts don't assign any value to it whether or not it is on the books.

Reason why double entry accounting analysis is so helpful is because we report assets and earning capacity in the form of numbers, reflecting in units of the fiat money system (dollars) what the historical data is--here, what LS is arguing is that numbers that were expensed in earlier periods to create these rights should have been capitalized and that there is a further profit element that will at some point be turned into a bookable return. Problem is that none of these enterprises can get anything for any of this: They can't get it into a retail price (in fact, for the most part, they can't charge a high enough retail price to cover real hard costs that are in fact on their balance sheet and P&L); they can't sell it for anything; no bank will loan against it. Problem LS is that there is no evidence of any nature anyone can see that it exists and since there is lots of evidence it does not exist, I tend to view it as fiction.

The IRS position is a little different. These enterprises hire people like me to tell them what the black and white letters of the law tell them to do about reporting their income and expenses and tax liability; we do that; the IRS then says well we don't like the result because you are not complying with the spirit of this black and white; we say well it is a black and white system, if you don't like it, you have more influence with Congress than we do, you fix it. Most of the time we win this argument. The IRS analysis is directed to a different issue having no relevance here and generally wrong.

The stuff about small business has some merit--but not as an investment proposition. Anyone who can figure out how to get down to the dirt level and create an enterprise that makes a product people want or provides a service they will pay for, ought to do that--mostly, the people who are doing that are not buying new Lexius's and $50000 SUV's (some are); as you suggest, many get paid in cash and don't pay tax; so their costs and returns are different. So maybe the GDP numbers were understated because of these enterprises--but when their customer base runs out of cash and credit to pay them, they too are out of business--and their business is presently shrinking just like everyone elses'--because the economy is in fact in really bad shape.

Understanding the money is an important problem--there is in fact way too much money supply in the system. In our fiat money system, the money is just credits, much created initially as "loans"--debits (or debt) on the books of the lender. The essential problem of the moment is that as Doug Noland is attempting to point out, there is no theory about future economic activity in which enough future money assets are created or realized to pay those debts. We have now reached and passed the point, where existing debts can be serviced out of historically reasonable income levels. That is why the default rates on every kind of debt are up sharply. You are right--there is not enough money supply in the hands of debtors; but that is because they are overobligated with respect to their commitments--the fed could solve that problem by running the printing press and handing debtors cash to pay debts; but when it does that is when it destroys the dollar as a monetary unit--risk of that is why gold is going up.

The airlines are not in the dump because of 9/11; they are in the dump because they don't provide a service that has value in the current market equal to what they charge for it. Their business plan didn't work for a long time before 9/11; does not work now; and isn't going to work in the future either. Fundamentally, takeoff is the most expensive part of any aircraft operations; landing is the second most expensive; moving bags from one airplane to another is almost as expensive as both combined; and the business plan makes you do this twice for every trip which adds value to the customer only once. This system won't work because competative transportaton that costs less is available (cars) and because new competitors (Southwest, Great Plains and others) that only do the work once are coming into the market.

Gold is an artifical market. Probably in a free market setting, the price would be somewhere between $550 and $850. But it is a very narrow thin market. And at some point in the early 1980's, monetary authorities decided to eliminate the monetary role of gold and significant financial power was employed to sell borrowed and paper gold to get rid of all the buyers and force the price down to the $250 range. That has proved an unsustainable level--as George Soros has regularly pointed out, market interventions of this character seldom are effective over the long term. But, gold prices do not provide much evidence of true price levels for that reason.

The rest of this stuff is an ad hominum argument that the problems are overstated. Numbers in fact suggest that the Midwest economy based on the auto industry and its suppliers is doing better than the rest of the country. The North American auto industry in this period will provide doctoral thesis material for generations of economics students. The continuing manufacture of cars by Ford and GM at a loss because the loss is a lower loss than closing the plants is a classic unsustainable economic series--and it affects the entire market--look at the buildup of inventory of lease return cars in the hands of financing institutions and their affiliates at lease return prices that are well in excess of market. What do you think will happen to all of these suppliers when this comes to an end? In your particular case, the end is likely to be worse that the worst case Papulva-Noland sceanero. In my view, the end is likely to be that both Ford and GM (as well as Delco and all these currently continuing suppliers) are no longer in business.

Papulva's language is a little overstated--he views it as justified in an environment where the cliff is just ahead and no one seems to recognize it. Reason the perception understates the future reality is because you are right, we have not yet gone over the cliff--but we are about to.

You raise good arguments---something that some other people usually won't address. The problem is that the study I was thinking of referring to corporate values was a late 1980s or early 1990s Harvard study. I don't recall all the details, but it was NOT as you say, essentially "fluff" retail value. Rather it had to do more with very real values provided through patent rents and monopoly positions that in fact can generate revenue.

Second, the criticism of the microbusinesses is that we don't have any evidence that microbusinesses are collapsing; and quite a bit (yes, often anectdotal) that they are not. One of the main strenghts of these businesses is that they resist capture by government statistics . . . deliberately.

Third, there ARE studies out there from the late 1980s to the mid-1990s on corporate valuations. I suggest you check almost any issue of the American Economic Review---hardly a "conspiracy" journal. There are numerous papers supporting the position that American corporations were undervalued, everything from stock valuation studies to asset undervaluation studies. Now, you can claim all these guys are "egghead" economists, and what do they know? But that doesn't change the fact that the studies are out there, and that overwhelmingly they are in the same direction---that U.S. corporate assets are and have been undervalued.

Fourth, the money thing is nearly unprovable. I point to real world price indicators---gold, oil, interest rates---and in almost every case someone can come up with an "artificial market" answer. But if an "artificial market" is applicable to the price of gold, then it is also applicable to the patent/monopoly rent benefits that you dismiss earlier. At any rate, Puplava has his "bubbles" that supposedly show inflation (except we just can't find any, and have no actual price data on such a thing), and I have these "artificially" affected markets. I find it interesting that I am in the position of the traditional goldbugs, who used real goods prices as superior indicators of value than estimated (often government) numbers.

Fifth, I agree to an extent on the weaknesses of the airlines. The interesting thing was that prior to 9/11, Southwest was basically flat. To an extent, though, you are arguing that in the 1920s, farming was going to collapse anyway, and thus the "Dust Bowl" only accelerated it. Maybe, maybe not. My point is that regardless of what originally caused it, the vacation/tourism/airline downturn is a HUGE drain on the economy, and that this is substantially (though again, not entirely) related to security concerns, not market forces per se.

I do take issue with your notion that the propositions "will not stand any kind of factual analysis." Quite the contrary, unlike many posters and Puplava, I constantly review and try to digest the most recent genuine economic studies available from Journal of Money Credit and Banking; American Economic Review; Quarterly Journal of Economics. Since I'm a historian, not an economist, I don't obsess about these or run regressions to check their conclusions. But I CAN detect trends in the scholarship, and it is in favor of the propositions that I have advanced here.

I agree everyone should have access to "responsive views." It is interesting that I am about the only one here to challenge Puplava, and am SAVAGED because I don't toe the "gloomster" line. And usually, I only ask for fairness in reporting: if you are going to headline bad news as bad news, fine, but what I find amazing is how willing some people are to constantly try to "spin" any good news as more bad news.

This is EXACTLY the type of approach that I encountered in debates over Y2K. I may be totally wrong here. I was totally right then.

Reply to LS's #55 response to my #53:

Your first and third paragraph respond to my valuation position with some 1980-1990 Harvard B School studies about corporate valuations--I view the evidence on this issue as conclusive; the stock market collapse demonstrates better than much of anything I can say that they are wrong.

I have been hearing and listening to the "basis for valuation has changed" argument in various forms for almost ten years and at this point I view the evidence as pretty clear those kinds of analysis were wrong, for the reasons stated in #53. It may be that some fuzzball Harvard professor or his student assistant reached that conclusion but they were wrong.

Our capital markets turn on numbers and measurements in dollars of investments and returns. The numbers tell you that there is no additional value out there because there is nothing anyone can sell in any market for additional price. If this anaylsis were true, the market for the finished product including this technological asset would include additional value which the buyer would pay for in a competative market. We know the asset does not exist because no one is paying for it; in part we can tell that because these enterprises do not even have sufficient pricing power to recover their real costs plus a profit.

These are the kinds of studies that the big New York brokerage firms subsidize to support their position that retail investment customers ought to pay more for common stocks. The position you advance here has been abandoned by the investment community in favor of a new fairy tale--we ought to pay a higher multiple of earnings as a stock price because of bond returns and other facts. "The world has changed." That is also nonsense.

Although bankruptcies in the business community are up, we have not yet really gone over the cliff--we have a bunch of large business enterprises that are on the edge of adverse financial events and as they come to an end, we will recognize the signs.

There is in my mind no evidence anywhere that microbusiness is in any better condition that the overall business economy. They aren't collapsing either; but their customers, credit, and markets are in the same condition everyone elses are in; and they too are in contraction, diminishing profit conditions. I have a large body of anectdotal evidence but the point is, they are part of the overall business economy and there is no reason to believe they are in any better shape than the rest of the business economy.

These micro enterprises will perhaps suffer less because their overhead is lower, they pay less or no taxes; but they are living in the same world everyone else is.

There are clear factual distinctions in your points four and five that lead to obvious different results. The dust bowl was a long term continuing event leading to adjustments that lasted for a long period of time until the weather patterns changed. Airline traffic was trending down significantly long before 9/11 for the reason specified earlier--in a price competative market, they had lower priced competitors that were already making inroads by selling the same service for less.

Further, the large airlines could hold off competition by obstructing gate access--the abrupt adjustment caused by 9/11 limited their ability to do that.

The real problem is that travel, vacation, and a big segment of business travel was not necessary; and in a deflationary period of economic contraction, people don't buy or overpay for related services; so only the lowest cost providers survive--that is not United.

Maybe your position that the money issue is unresovable at this date has some support. The evidence is that over the last 200 years, there is a practical limit to debt service and we are way over that limit today. More evidence is office building vacancies; significant declines in profitability of corporate reporting enterprise; stock market price declines; interest rate declines and soforth.

How does a commodity (gold) go below the cost of production? It has no utility any more? When Putin came to the US to visit Bush, he paid all his expenses in gold coins. You can see the obvious market conditions in gold--no one denies that JPM is short ton's of gold--there is continuing debate about how much but the number is well in excess of 1000 MT. As the market goes up, they are under pressure to cover their shorts yet as the market rises to the $325 area that causes them concern, net sellers appear, not buyers. We view that as obvious facts demonstrating an artifically managed market.

No one denies that there are studies and documentary analysis out there to support your positions. Spitzer is putting some of the authors in jail; many of their employers are paying huge fines for having published the material. Question is why are you still arguing in support of their conclusions? The world is clearly passing all of this by rapidly.

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