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Forget about 9/11, Turn the TV Off, and go Fishing!
The markets often rally
when people least expect it.
The USD is also looking great against both the Euro and the Yen. It hasn't exploded yet, but I think it will. As US stocks begin to assert their uptrend after 9/11, the USD will come along for the ride. Investors are finally beginning to wake up to the idea that if the US economy is weak, that is no reason to buy the Euro or the Yen. If anything, it is all the more reason to sell the Yen. You sure as heck don't want to own Yen as and when the NDX plunges to New Lows. Japanese banks were on the verge of bankruptcies a couple of years ago when the media widely reported the BIS threshold levels as 14-16,000 area for most Japanese banks. Somehow we are now led to believe that the big banks in Japan are still above their BIS threshold levels with the Nikkei at 9000!???
The Japanese government authorities know their banks are technically insolvent, but hey, as long as nobody pays too much attention to the problem, maybe it will go away!??? This is not to say that Americans are paragons of virtue in contrast to the Japanese. Quite frankly the most alarming bit of news I read last week was supposed to be good news: Consumers could not buy electronic widgets at Best Buy and Circuit City because they blew their whole budget on a new car. Somehow the reporter writing that article tried to make it sound like good news!?? Even with the extra sales generated by the Zero Interest Rate Financing, GM managed to barely squeak out a profit last year. And Ford managed to lose over $5 billion on larger than expected sales? Hey what's wrong with the picture? What we are looking at is a "beggar-thy-neighbour" sales approach. GM stole as many sales from Best Buy and Circuit City as they did from Ford and Toyota because the consumer may finally be tapped out.
And if Ford can somehow lose over $5 billion in a great sales year, how much money will they lose when sales plunge in a bad sales year???
Strangely enough, this does not mean you should be buying Puts on the S&P just yet. Again, for the next 4-6 weeks the US stock market will rally nicely and the dollar will follow, but there is a very good chance we have an '87 style crash coming our way by late October/early November. Another rate cut on Sept 24th should keep the economy going steady and give the stock market a reason to rally, anticipating yet another rate cut in November, but as we approach the November 6th meeting the market may begin to anticipate the idea that we are at or near the last rate cut.
Oddly enough a final rate cut on November 6th may be the signal to sell stocks. Why am I so confident we'll get a couple more rate cuts? ....because neither the Bank of Japan nor the ECB are likely to shoulder that burden. The FED will be forced to cut rates precisely because nobody else will. The BOJ and the ECB have dug in their heels and won't cut rates. This will force the FED to act. Without the locomotive of US growth in the global economy the train will come to a grinding halt. The FED really has no choice but to cut rates. But just as car-buyers have grown addicted to "Zero-Interest Rate" financing, the economy is now addicted to more and more rate cuts. The boom in refinancing held a lot of consumers above water by reducing their mortgage payments. In many cases people imprudently took more equity out of their house to continue their "lifestyle needs" ---this craziness will disappear by year-end.
The anticipation of this change in course will cause the stock market to sell off in late October/early November. But hey let's party while the sun still shines! My advice is to turn off the TV and go fishing. I caught a 24 inch Striped Bass without any intention of doing so. I know the fish had been caught before because some other hook was in its mouth. It was quite a fighter because it gave me plenty of trouble reeling him in and he must have snapped the other fisherman's line to get away with the hook still in his mouth (kinda like the consumer who thinks he has escaped bankruptcy by rolling his credit card debt into his house and refinancing the whole thing, paying much less than before in interest payments).
Yep, this fish must have been feeling quite pleased with himself, having eluded the first fisherman's dinner table.
Just like that striped bass, the consumer will no doubt be "feeling fine" in October as the economy shows more signs of recovery and the latest "refinancing wave" puts more money in the pockets of the average homeowner. But with a very fragile recovery any number of things can tangle up and tie down consumer spending. The most obvious danger is a war with Iraq that causes the price of oil to spike to $40 or higher. Higher gas prices act like a tax on the consumer.
Even if the FED cuts rates, there is no guarantee that the extra liquidity will find its way into the average consumer's pockets. If banks refuse to lend out that money or consumers refuse to borrow more, it is like pushing on a string. But higher gas prices are guaranteed to take money away from other purchases. But who knows for sure, it may not be oil that tangles up the economy in its emerging recovery. It could be something we are not expecting. When the economy is still fragile, any bad news can act as a catalyst.
For the record my hook was not in the mouth of that striped bass. My 3 oz triangle weight wrapped my line round and round the other fisherman's hook which was poking through his mouth. Where was my hook? My hook was in his tail not his mouth!??? What a way to catch a fish. But hey, I'm not complaining. It doesn't hurt to be lucky. Now if stocks do rally into Mid to late October, I'll be a happy camper. I can't stop an '87 Style Crash from happening, but if the stock market rallies into Mid to late October and I buy some Puts......and we do get a crash......it will help pay for some more fish stories.
All of the charts in this article are produced on GannTrader, courtesy of GannSoft Publishing, Inc.
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