ContraryInvestor - Market Observations

Given the holiday shortened trading week to follow, we'll publish just once next week on Wednesday night, July 5th. Splitting the difference, if you will. For all of the skeptical and sarcastic comments we make regarding the financial markets of the moment, we are truly blessed to live and work in a country where we have the freedom to speak independently. Our best wishes to you and your families for a wonderful holiday weekend.

Take A Hike...So the Fed passed on raising rates. Ho hum. Perfectly within the consensus realm of thought. Although it often serves as fodder for our commentary, we recommend not getting bogged down in the details or events of the moment when it comes to Fed actions, singular economic statistic reports, etc. Step back. Relax. Look at the big picture. Rate hike or no rate hike, the process of deflating possibly the largest financial/speculative bubble this country has ever witnessed is far from over. Does a June pass on a rate hike change this?

The sanguine Fed decision by the governors to sit back and rub their tummies for a while changes nothing regarding the structural imbalances existing in the current financial markets and real economy. M3 growth continues to chug along, albeit much more slowly than last year. The Fed is conducting repo's in a fairly regular fashion. ($3 billion just earlier this week.) The Treasury is buying back bonds. Liquidity remains in ample supply, despite the fact that the price of that liquidity has risen. It sure appears to us that the Fed believes it can deflate the bubble in what it hopes is an orderly fashion. Step on the brakes, tap the accelerator. Brakes, accelerator, brakes, accelerator, brakes,... Given the near proximity of the elections, sensitivity to a monetary tightening overshoot that would result in financial asset market pain is high. We will pay down the road for the Fed's current (and previous) complacency. We'll gladly pay you Tuesday for a hamburger today. Ugh, ugh, ugh, ugh, ugh.

We would strongly expect the June CPI, PPI, and employment numbers to exhibit a significant upward bias relative to the "adjusted" May numbers seen earlier this month. Pressure may build for another tap on the monetary brakes in August. Crazily enough, the next FOMC meeting on August 22 comes just days after the Democrats will have "officially" chosen Gore as their candidate for "fearless leader". Democratic political rhetoric by that time will be focused squarely on the strength of the economy. As you know, Gore is currently in the middle of his summer "Progress and Prosperity Lollapalooza" tour. Maybe Greenspan and friends can hide under the cover of the strong economy that Gore will be crediting himself with having created, if, indeed, they tighten the monetary screws another notch in August. The bottom line is that the Fed's job is far from over. We expect the heat to be turned up substantially post the election - come hell and high water.

Down Memory Lane...We know it's different this time, but in the second half of both 1998 and 1999, the economy accelerated. Have a look:

	Real GDP Quarter over Quarter % Growth (annualized)

1998 2Q	2.2 %
3Q	3.8
4Q	5.9

1999 2Q	1.9
3Q	5.7
4Q	7.3

Admittedly, the Fed was not tightening. It was accommodative in both periods by way of crisis based liquidity injections (LTCM and Y2K). The counter argument to the tightening in the current environment is threefold. First, liquidity is currently sneaking through the back door in terms of repo's, Treasury buybacks and M3 growth (albeit slowing in rate). Second, credit creation in the non-banking financial system (the greater capital markets) is alive, well and thriving. Last, the current administration has a big vested interest to maintain a strong economy going into the election period. (After all, Gore seems to have hit his Nadar and can't gamble on potential negative action by Reno. At this point, he's simply doing everything he can to get in shape for the summer political Olympics poll vaulting championships.) Interesting set of counterbalancing forces, don't you agree?

Bank On It...We've been yammering the past few discussions about the credit risk flames heating up in the banking sector recently. So far Wachovia, UBOC, and First Union are serving stock price penance for having been early to the confessional box. There's most likely a good bit more to come. The following bank index chart sort of tells the near term story:

Here's another potential curve ball for the big players in the group. Let's again take the bull case and assume the economy is slowing just perfectly. We already know consumer spending is twitching a bit. Let's also assume that the trade deficit is just no big deal and that it will cool down as the domestic economy slows ahead. Sounds perfect, right? Maybe not so perfect for the banks. Remember, the big money center players in the industry have big exposure to foreign lending. Citigroup is king of the hill. In our minds, a slowdown in the US spells some degree of economic trouble for foreign economies. As you know, we have been buying their "stuff" like there is simply no tomorrow. Clearly if we slow, export sectors of foreign economies will likewise suffer. Could that be a good thing for the foreign lending operations of money center banks? Before you jump on the bandwagon cheering for the banks as strong beneficiaries of the end of the Fed monetary tightening cycle (because the domestic economy is slowing), you might want to take a closer look at the asset side of money center bank balance sheets. Despite the American financial market's myopic preoccupation with itself and the presupposition that we are insulated from anything that happens away from Wall and Broad vis a vis the Fed bailout mechanism, we are not alone on this planet. Money center banks are fully aware of this. Foreign debt and currency risk is going higher in a slowing US economic scenario. That's why the money centers are fully loaded with derivatives that will cover all contingencies, right?

Speaking of Derivatives...Y2K1 is fast approaching. Y2K1? Yes, it's the Year 2001 problem...for those that play in the derivatives sandbox. FAS 133 mandates that companies with exposure to derivatives must begin directly reporting that exposure starting 1/1/01. As you know, this has been coming for a long time, but has been successfully thwarted by a tremendous corporate lobbying effort over the last few years. Starting with corporate 10Q's for the period 3/31/01, we expect a good deal of detailed info on individual company exposure to derivatives. For regular readers, you know we document existing bank derivative disclosure information emanating from the OCC on a quarterly basis. We can hardly wait until this type of information will be found in every 10Q that passes our way. Most banks and financial institutions are well along the way in putting systems in place that will document and price global corporate exposure to derivatives. After all, they are the heaviest users. It will be most interesting to see what is happening at tech companies such as Dell and IBM who are very active in their own stocks. This may be a pure long shot, but we would guess that some derivatives practices will stop cold when disclosure is a requirement. There has to be a certain amount of anxiety on the part of corporate treasurers regarding the perceptions of their derivatives actions. It will also be interesting to see what the Wall Street analytical community either does or doesn't make of this new information.

Ramazon.con...For a minute there, we were wondering whether Jeff Bezos had thought he had returned to the hedge fund community as we found him verbally pumping his stock into the quarter end. And here we thought only mutual funds, hedge funds and Wall Street analysts practiced that skilled craft. Now it's corporate CEO's? What's this world coming to? Bezos was the keynote speaker at the PC Expo conclave in NYC, appeared on a financial TV show, and was a guest on Charlie Rose (all w/in two days). As you know, Amazon was highlighted late last week by a few Wall Street analysts who questioned the company's ability to someday generate profits, near term cash flow and the need to raise capital in the not too distant future. Mr. Bezos promptly responded that "maybe they'll call the company next time." To our way of thinking, "calling the company" these days is exactly the problem with so-called modern Wall Street analysis. In the current world, listening to company spin is the reason most analysts downgrade stocks to "neutral" after they have already imploded. Certainly not all management's are hypsters, but enough to cause a huge perceptual problem. Crazily enough, the one analyst who spoke most negatively of AMZN noted that his report was based on information found in the company's SEC filings. Imagine. The nerve of some analysts actually reading SEC statements. Now that has to stop! (The sad part is that for a whole lot of analytical coverage out there, it already has.)

The Ramp That Wasn't...We admit it. We were suckered in. After all of the shenanigans we have experienced at quarter end periods over the last few years, we would have thought that a quarter as rotten as this one would have called for special window dressing SWAT teams. Maybe the real lesson here is that it was too widely expected. Too many sellers waiting in the wings to take their sales curtain calls into any ramp attempt. The first quarter of this year was one big number for the NASDAQ. Less so for the S&P and Dow. It is somewhat interesting to see that 1Q also had no ramp experience. Maybe it just wasn't needed after a great quarter, although the NASDAQ was already initially headed off a cliff by the time 1Q drew to a close. The following charts depict the quarter end action of three short months ago. We all know what happened next....