"Don't Worry, Be Happy" or the Arrogance of America
A recent AP article about Osama Bin Laden's recently released chart-topping audiotape is staggering in its insularity, hubris and ignorance. Instead of paying heed to the warnings from a man who has been amazingly successful in his evil efforts, this article downplays the threats from a world leader who has been remarkable effective at advancing his agenda. The fact that he has only been able to do it slowly and incrementally should be no solace to the leaders and people of the West, because the reality is that in the last three years, he has become stronger while the US has become weaker. Does anyone believe that our military is stronger today than it was on September 10, 2001? Does anyone believe that an economy whose currency has depreciated by almost 20% on a trade-weighted basis and almost 50% against one of our major trading partners is headed in the right direction? Is a government whose budget is out of balance to the tune of more than 5% of GDP running a fiscally responsible operation? Is a country whose trade balance is so out of whack that it must import (borrow) almost $2 billion each and every day to finance its profligate spending, while its saving rate hovers just above zero destined for anything but future weakness?
The rise in oil prices is a win for OBL and his fellow radical Islamists and a blow against the modern, Western economies. The US occupation of Iraq is another win for OBL, since it has brought the struggle to his "home field" and with it the advantage. So it is no surprise that he is urging his followers and sympathizers to pursue further attacks on the oil-pruducing states especially Saudi Arabia. What would the consequences of a radical, fundamentalist takeover of Saudi Arabia be? $100 per barrel oil? Western responses to such a development would be few and minor, since an invasion of the Arabian peninsula would ignite a global holy war that would make the outlandish prophecies of Hal Lindsey look like the Iowa State Fair. Most likely the Western powers would be forced to live with a perpetually high cost of oil. And with our administration's current policy of shoving a stick in Russia's eye, I doubt that they would be too willing to come to our aid and bail us out with cheap oil, ditto for Venezuela and forget oil production in Iraq. OBL says, "Targeting America in Iraq in terms of economy and losses in life is a golden and unique opportunity. Do not waste it only to regret it later." and "I address this short message to the Riyadh rulers and decision-makers...". Since it is inconceivable to me how anyone could contend that Saudi Arabia is a more stable place than it was three years ago, it seems obvious that the cause of the radical Islamists is winning. While it is true that here in the Homeland, we are secure that does not diminish the threat of OBL. Because contrary to popular perception, I do not think that OBL is a madman whose immediate goal is to detonate some WMD in the continental US. Rather, he is a long-term strategic thinker, whose more pressing goal is the weakening and overthrow of oil-rich Middle East regimes which he sees as "corrupt". For his vision is taking control of Saudi Arabia and its riches to give him a powerful new base to launch a much more ambitious global jihad. One that would threaten not only that region, but would threaten the Western nations and allow him to divide and conquer the "...US-Zionist alliance and those who support them and their agents."
In the markets, resistance at NDX 1630 has held as the market suffered two distribution days in a row this week. All the more astonishing since the volume figures of this rally have risen back to levels not seen since the bubble days. So have the number of IPOs, as activity is the highest since August 2000, with M&A activity the greatest since January of 2000. Simply astounding. I don't think that there could be anything screaming "Top!" louder than those figures, but then again, the unprecedented distortion that the Fed has engendered in the world's markets in the last few years is so irresponsible and wildly reckless that it is always possible, even likely, that something else will come along soon to set new highs for lunacy. The message should be clear: Corporate insiders are offering their product (equity) at prices which they think are advantageous (to them) and they are going to continue to do so until they are no longer able to do so; meaning, they are going to continue to offer stock in the form of IPOs, second offering, cashing out of stock options and selling personal stock until the market starts to decline and eliminates the incentive for them to do so. That, simply put, is the function of the market, at least the way that it is structured in our modern, corrupt society. It will only be years later when the debris is swept away to reveal the shady accounting and corporate shenanigans, that all of this will be obvious. But by then it will be too late, for the markets will be 50% lower, if we are lucky. So enjoy it while it lasts, but make sure that you start to sell some of your EBAY, OSTK, TZOO, FNM and BZH while the getting is still good. There is probably a month or maybe two left, but I am not sure that it makes sense to leave all of that money on the table for the sake of the final few points, although no knows how high is high in a market as crazy as this one where a stock like FNM is rebuked by the SEC for improper accounting and the stock ends about 0.5% lower after the announcement, this on a week day for the market in general. For some reason, having to restate earnings for the last four years and incur a $9 billion loss in its most recent quarter do not seem to matter. And that is the most scary thing about this market: no matter how bad the news, NOBODY CARES. Some would say that this is the definition of a bull market. Fair enough. If this were happening after a crushing decline had beaten the stock down to all time lows, creating compelling value, I would agree. But when this occurs with the stock about 12% off its 52-week high, I have to remain skeptical. With available cash of $340 million and an upcoming dividend payment requiring about 150% of that amount, forgive me for allowing my skepticism to give way to incredulity. The fact that this one company has $1 trillion of debt on the books is downright frightening. "Don't worry, that debt is backed by the equity of American's homes." That is precisely what worries me. It seems intuitively obvious that if the institution which holds the mortgage on the "American Dream" has trouble, the ripple effects could create a crisis of massive proportions. With 35 cents of cash on hand per share, I would suggest that is a more reasonable valuation, than the one which the "efficient market" has bestowed on it. More generally, the question that must be asked is whether the NDX and SPX will see 2005 highs above 1636 and 1210, respectively. It is certainly possible, as this market still has some liquidity and momentum behind it, but those props are fading and my guess is that any new highs will be modest. If they occur, they will probably be in the range of 1% or so. I am looking for further modest weakness in the days ahead followed by some strength in the traditionally strong early January period, but my guess is that by Februrary, we will be within days of a top, if one is not already in place by then.
In the bond market, volatility has picked up and I expect it to pick up further as the long end of the curve sees higher rates. I still expect the 10 year note to reach a yield around 5.5%, most likely in the first half of the year. This would be a punishing price decline. I expect it to be short and sharp, most likely only taking about three months. This looks like it is dead ahead and we will probably see these yields above 4.5% by the end of the year. There seems to be no reason to be long bonds at this juncture. Three months from now that picture will probably be different. In the meanwhile, earning 2% plus in a riskless account will turn out to be one of the best trades of the year.
The rise in oil prices is a win for OBL and his fellow radical Islamists and a blow against the modern, Western economies. The US occupation of Iraq is another win for OBL, since it has brought the struggle to his "home field" and with it the advantage. So it is no surprise that he is urging his followers and sympathizers to pursue further attacks on the oil-pruducing states especially Saudi Arabia. What would the consequences of a radical, fundamentalist takeover of Saudi Arabia be? $100 per barrel oil? Western responses to such a development would be few and minor, since an invasion of the Arabian peninsula would ignite a global holy war that would make the outlandish prophecies of Hal Lindsey look like the Iowa State Fair. Most likely the Western powers would be forced to live with a perpetually high cost of oil. And with our administration's current policy of shoving a stick in Russia's eye, I doubt that they would be too willing to come to our aid and bail us out with cheap oil, ditto for Venezuela and forget oil production in Iraq. OBL says, "Targeting America in Iraq in terms of economy and losses in life is a golden and unique opportunity. Do not waste it only to regret it later." and "I address this short message to the Riyadh rulers and decision-makers...". Since it is inconceivable to me how anyone could contend that Saudi Arabia is a more stable place than it was three years ago, it seems obvious that the cause of the radical Islamists is winning. While it is true that here in the Homeland, we are secure that does not diminish the threat of OBL. Because contrary to popular perception, I do not think that OBL is a madman whose immediate goal is to detonate some WMD in the continental US. Rather, he is a long-term strategic thinker, whose more pressing goal is the weakening and overthrow of oil-rich Middle East regimes which he sees as "corrupt". For his vision is taking control of Saudi Arabia and its riches to give him a powerful new base to launch a much more ambitious global jihad. One that would threaten not only that region, but would threaten the Western nations and allow him to divide and conquer the "...US-Zionist alliance and those who support them and their agents."
In the markets, resistance at NDX 1630 has held as the market suffered two distribution days in a row this week. All the more astonishing since the volume figures of this rally have risen back to levels not seen since the bubble days. So have the number of IPOs, as activity is the highest since August 2000, with M&A activity the greatest since January of 2000. Simply astounding. I don't think that there could be anything screaming "Top!" louder than those figures, but then again, the unprecedented distortion that the Fed has engendered in the world's markets in the last few years is so irresponsible and wildly reckless that it is always possible, even likely, that something else will come along soon to set new highs for lunacy. The message should be clear: Corporate insiders are offering their product (equity) at prices which they think are advantageous (to them) and they are going to continue to do so until they are no longer able to do so; meaning, they are going to continue to offer stock in the form of IPOs, second offering, cashing out of stock options and selling personal stock until the market starts to decline and eliminates the incentive for them to do so. That, simply put, is the function of the market, at least the way that it is structured in our modern, corrupt society. It will only be years later when the debris is swept away to reveal the shady accounting and corporate shenanigans, that all of this will be obvious. But by then it will be too late, for the markets will be 50% lower, if we are lucky. So enjoy it while it lasts, but make sure that you start to sell some of your EBAY, OSTK, TZOO, FNM and BZH while the getting is still good. There is probably a month or maybe two left, but I am not sure that it makes sense to leave all of that money on the table for the sake of the final few points, although no knows how high is high in a market as crazy as this one where a stock like FNM is rebuked by the SEC for improper accounting and the stock ends about 0.5% lower after the announcement, this on a week day for the market in general. For some reason, having to restate earnings for the last four years and incur a $9 billion loss in its most recent quarter do not seem to matter. And that is the most scary thing about this market: no matter how bad the news, NOBODY CARES. Some would say that this is the definition of a bull market. Fair enough. If this were happening after a crushing decline had beaten the stock down to all time lows, creating compelling value, I would agree. But when this occurs with the stock about 12% off its 52-week high, I have to remain skeptical. With available cash of $340 million and an upcoming dividend payment requiring about 150% of that amount, forgive me for allowing my skepticism to give way to incredulity. The fact that this one company has $1 trillion of debt on the books is downright frightening. "Don't worry, that debt is backed by the equity of American's homes." That is precisely what worries me. It seems intuitively obvious that if the institution which holds the mortgage on the "American Dream" has trouble, the ripple effects could create a crisis of massive proportions. With 35 cents of cash on hand per share, I would suggest that is a more reasonable valuation, than the one which the "efficient market" has bestowed on it. More generally, the question that must be asked is whether the NDX and SPX will see 2005 highs above 1636 and 1210, respectively. It is certainly possible, as this market still has some liquidity and momentum behind it, but those props are fading and my guess is that any new highs will be modest. If they occur, they will probably be in the range of 1% or so. I am looking for further modest weakness in the days ahead followed by some strength in the traditionally strong early January period, but my guess is that by Februrary, we will be within days of a top, if one is not already in place by then.
In the bond market, volatility has picked up and I expect it to pick up further as the long end of the curve sees higher rates. I still expect the 10 year note to reach a yield around 5.5%, most likely in the first half of the year. This would be a punishing price decline. I expect it to be short and sharp, most likely only taking about three months. This looks like it is dead ahead and we will probably see these yields above 4.5% by the end of the year. There seems to be no reason to be long bonds at this juncture. Three months from now that picture will probably be different. In the meanwhile, earning 2% plus in a riskless account will turn out to be one of the best trades of the year.
posted by Matt Butler at 1:23 PM
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