ContraryInvestor - Market Observations

MARKET OBSERVATIONS

GREENSPAN SHRUGGED?

MARKET OBSERVATIONS - 3/30

Greenspan Shrugged...Increasingly, the weight of the bubble is weighing on Greenspan's shoulders. Unlike Atlas, from the famous Ayn Rand tome, Greenspan is supporting a bubble that at times must seem to weigh infinitely more than Atlas' planet Earth. Gradualist Al's job is far from over. We thought we'd review the quite simplistic reasons why.

Despite the fifth interest rate increase, a few of major indices "broke out" to the upside, clearly exacerbating the economic driver better known as the wealth effect. The last week aside, we're still selling at exorbitant levels.

And of course, this:

Conversely, the unemployment rate has broken out to a new low for the past 30 years:

What would clearly make matters worse would be if stock options were unavailable. Don't get us wrong, stock options are clearly contributing to the real inflationary pressures vis-à-vis consumer spending. It's just that in the make believe world of governmental economic statistical reporting, they are simply ignored. Imagine if they were actually counted as wages. If this were the case, wages increases would be nothing short of off the charts. Deep down inside, Greenspan isn't stupid. Wages are up big.

Where we do see pressure is in prices. The prices paid component of the NAPM has been steadily creeping higher. Increases in feedstock costs such as crude prices are right out in the open just waiting to be ignored by modern day "investors". The broad deflator gauge, although not sounding extreme danger alarm bells, has been decidedly on the upswing for almost 2 years:

Is there any doubt that the economy is accelerating? Estimates for 1Q GDP continue to suggest some pretty big numbers. Today's revision for 4Q put us at the highest number in 16 years. At 7.3%, it's well above what is shown below.

From the one hand is slapping the other hand department, Treasury department debt buybacks have caused a rally in Treasury yields really across the curve (except at the short end, of course). A complete offset to Fed tightening. Oops!

The only other explanation for what is happening is that someone is being bailed out by lower Treasury yields (Fed and Treasury engineered, of course). Couple this with recent repo's, coupon passes, and additions to permanent reserves by the Fed and it sure as heck seems a plausible, if not probable scenario.

Also, although the Fed is actively raising rates, money and credit growth are both accelerating. Household sector credit growth is certainly a sight to behold.

As you know, we gave you graphic representation of the margin debt explosion just last week. Likewise our recent review of the Fed Flow of Funds data regarding debt growth should still have you reeling.

Although the growth rate of M3 has slowed relative to the record rate seen late last year, it is still very high nonetheless. Even though it does not show up on the following graph yet, in the last few weeks, M3 has once again taken off to the upside. A response to the volatile financial markets (both stock and bond)?

Probably the broadest measure of money, MZM (money of zero maturity) mimics the trend in M3 over the last decade or so. Just maybe, now that we live in the new world of financial deregulation, Greenspan can't completely halt the growth in credit and money without taking more extreme measures. This will be tested/proven ahead.

Government spending is kicking into higher gear as of late. Another offset to the Greenspan belt tightening facade. In today's "minor" GDP revision, increased/revised government spending played a "major" role.

Lastly, foreign central bankers have been swift to raise rates. For example, we have lived through a succession of rate hikes in Australia in the last few months. More dramatically, the central bank in Switzerland raised rates by 75 basis points last week. Now that's what we call a decisive, no-nonsense central bank. Alan, are you watching and learning? (Unfortunately a rhetorical question, as you would imagine.)

Despite the outward appearance of calm and the continued lip service to the tech driven new economy, we truly believe these (and more) factors are weighing heavily on Greenspan. They are boxing him into a corner. They are provoking him to hit them harder next time. We dare you.

Another One Bites The Dust...It's not just one stock after another that are being carried off of the field, it's legendary investor after legendary investor that are also being taken out. A few months back, value investing institutional heavyweight Gary Brinson was forced to walk the plank at UBS Brinson. Sadly, Julian Robertson is now padlocking the doors at Tiger. Julian is a good investor we have come to admire over the past few decades, with a tremendous long term track record. As you know, it's simply no longer a game of investing. In fact, true investing has absolutely nothing to do with it at the current time. The real world anecdotes of the mania and its effect on real world investors continue to mount by the month. Just add Robertson to the list of luminaries such as Buffet, Templeton, Mobius, Biggs, Clough, Brinson, Neff and others who were dead right...too early. What a shame. See why it's so tough for the guys who've been around for decades? Either participate in the current "warped game", or lose your business. Now go ahead and take your pick.

Who Wants To Be A Millionaire's Partner?...Why it's little Maria Bartiromo. Despite the fact that she has already done this once in real life, Maria is gunning to take Kathy Lee Gifford's place on the Regis and Kathy Lee show. We kid you not. It was on the tape today. Sort of makes sense as she basically has the ultimate in soap opera, talk show experience - CNBC. Whether it's touting stocks, cooking ideas, fun crafts, who cares? It's all the same thing anyway. Hype. It's simply ironic that many stock market participants trade based on what Maria has to say in the morning. You don't think Maria wants out while the getting is good do you? After all, it's been rumored that Maria and Abby had lunch last week. Hey, wait a minute. Is there something we're not being told here?

If It Looks Like A Top and Walks Like A Top...Is it just another "buying opportunity"? Obviously, we're going to find out real soon. As we "guessed" over the last month or so, volatility is increasing in the big averages. Especially the NASDAQ. Tim's fine work could not be more clear:

Today's last ditch effort to save the NAZ worked...for now. Our question is, just how many more share of Cisco does Janus plan to buy? (Answer: As much as it takes, obviously.) Don't they own enough already? A this rate, Chambers better be ready to warm up another Board seat.

Tim's channel work on the S&P continues to be picture perfect. In fact, eerily right on the money:

The next few days/weeks in the market should prove quite interesting. A real study in human conviction, emotion, and possibly fear. (Or maybe the market will just quiet down and go up 10 points a day. WRONG!)