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Fed's Measured Moves

Wednesday, June 30, 2004 | 11:07 PM


click for larger chart
Source: NYT

Two good articles on the Fed from the New York Times.

Up, Yes. But How Much, How Fast?
NYTimes, June 27, 2004

The Phantom of the Fed
NYTimes, June 27, 2004

Wednesday, June 30, 2004 | 11:07 PM | Permalink | Comments (0) | TrackBack (0)
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Post Fed Increase Market Performance

Wednesday, June 30, 2004 | 02:15 PM

Ned Davis Research put out a piece in December 2003 titled "FED WATCH -- Much Ado About Nothing or Something?"

I really think the whole thing is much ado about nothing. As shown on table (below), after the Fed has raised rates the first time, the stock market has, on average, risen one month, three months, six months, nine months, and 12 months later, with the 12-month gain actually above the average gain for one-year returns. Moreover, the Fed funds rate at 1% is well below the 6% nominal growth for GDP. Therefore, if the Fed raises rates, they (and Wall Street) can argue that the rate is still very low and stimulating.
NDR's bigger concern stems from the belief that:
The Fed's main job is to protect the purchasing power of the U.S. dollar . . . The Fed is actually helping the dollar lose purchasing power both at home and abroad with its easy money stance. I worry that the dollar decline, while bullish if controlled, could turn into a dollar collapse, which could cause foreigners to dump bonds sending bond yields soaring, like they do in every currency crisis.


"Our research shows that the first hike the Fed institutes doesn't really mean anything. After one single hike, the market typically goes up for the next year. It is really only after a series of hikes that the Fed becomes a negative for the market. Normally, the first hike is seen as the result of stronger earnings, and that offsets any negative interpretation. But lately several Fed governors have said they thought a neutral range for the fed-funds rate [the overnight rate banks charge each other] is somewhere between 3% and 3.5%. We are not talking about a quarter-point hike. Once it looks like they have started down the road, the market is going to make the leap to the 3% to 3.5% range they are talking about. The Fed must hope the economic news is not quite as smoking as it has been so far this month."

Good stuff. Its supported by other research by James Stack of Investech, who notes:

"Shown in this table are the 10 tightening cycles undertaken by the Federal Reserve over the past 50 years. Along with the date of the first Discount Rate hike is the date at which a resulting bear market (or near-bear market in the case of 1960) began.

Note the following:

• Two of the tightening cycles (1977 and 1994) did not result in a bear market or significantdecline in the S&P 500 Index;

• Another (1958) resulted in a “mild” bear market that began over 15 months after the first rate hike;

• Four others (1955, 1963, 1967, and 1999) resulted in more bull market gains that generally lasted between 7 and 16 months;

• In only two cases -1987 and 1973- did the first rate hike occur prior to the start of the bear market.

So one might say that 80% of the time, the first rate hike did not lead to an immediate bear market. Those are not
bad odds in an election year (which is normally bullish in its own context).

Now let’s look at the associated downside market risk after the first Discount Rate hike. Of those 10 tightening cycles:

• Only one (1987) saw the S&P 500 Index decline over 6% in the 3 months following the first rate hike;

• However, three experienced double-digit losses after 6 months and after 12 months;

• Surprisingly, six out of ten experienced double-digit gains after 12 months. But out of those six, ALL still experienced a subsequent bear market as interest rates kept moving higher.

So while the downside risk of the “first rate hike” cannot be ignored (as evidenced by the 1987 Crash), there’s a dichotomy between expectations and historical reality. Based purely on past precedent, we should still expect higher stock prices over the next 6, and possibly 12, months. This is one reason why our strategy and allocation cannot be determined by monetary policy alone.

Contrarian Jitters
Barron's MONDAY, APRIL 19, 2004 
A master technician sees a yellow light flashing

Wednesday, June 30, 2004 | 02:15 PM | Permalink | Comments (0) | TrackBack (0)
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Clarifying the '5% Rule' and 'Mirror Image' Scenario

Wednesday, June 30, 2004 | 11:12 AM

I received a lot of questions recently about the same issues, mentioned both on the air and in a recent TheStreet.com column: Recapping the First Half of the Year.

So many emails make it obvious that I was unclear -- Allow me to resolve the confusion:

The first question had to do with what I termed "the 5% rule." Although I had mentioned it here previously, not everyone (horror!) reads my every last word. I discussed the 5% retracement rule back on March 11.

In brief: Rarely does the first 5% pullback doom a rally to failure. Historically, this initial 5% retracement on the Dow and SPX (but not the higher beta Nasdaq) occurs at -- roughly -- the 60% mark (i.e., the rally has achieved 60% of its gains and has another 40% to go). Note that this is just an average, and there will be occasions when the first pullback happens either sooner or later than that point. You can read more about it at the link above.

The second issue was what I meant by a "mirror image" of the first half of the year. Since 2004 started strong, peaked late in the first month and then reversed for the next five months, the mirror image would mean starting out soft, bottoming and then rallying for most of the rest of the year.

That's my expectation for the next six months -- we are a little overbought at present, the next major dip (in my opinion) should be a good buying opportunity, and then the presidential election year trends and the big M2 increases should power us higher the rest of the year.

My apologies for the confusion...

Wednesday, June 30, 2004 | 11:12 AM | Permalink | Comments (0) | TrackBack (0)
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A Journalistic First

Tuesday, June 29, 2004 | 11:29 PM
in Media

This has to be a first:

Altercation, Eric Alterman's fine blog on Media matters, ran with the F9/11: What political impact? today in his correspondent's section.

And as the previous post mentioned, National Review's Larry Kudlow picked up a quote from yesterday's "Do Over."

Altercation and NRO on the exact same day.

That has to be some kind of a record: simultaneous mentions in the most politically inapposite publications imaginable. (Too bad the comments in the Gay Financial Network were from Monday).

Small world.

Tuesday, June 29, 2004 | 11:29 PM | Permalink | Comments (3) | TrackBack (0)
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National Review picks up "Do Over"

Tuesday, June 29, 2004 | 03:55 PM
in Media


National Review picked up a quote from yesterday's "Do Over." (Hey, anyone else who wants to compare me to Sinatra should feel free to call, and I''ll give you good quote also):

World stock markets applauded the sooner-than-expected U.S. handover to Iraq. Energy prices fell significantly. Former Coalition Administrator Paul Bremer immediately took the next plane out of town. Things are looking up. Wasn't it Sinatra who sang "love is lovelier the second time around"?

Quoting from the Bayonne, New Jersey crooner is not as far fetched as one might think. Here is market strategist Barry Ritholtz on the surprise handover decision:

"The Neo-Conservative hawks who pressed for the invasion of Iraq failed to create an adequate strategy for a post-war period. This created an opportunity for insurgents to cause havoc and mayhem. With the handover to the Iraqi Ruling Council a few days early, the planners have gotten one right for a change."

Speaking to National Public Radio, U.S. Deputy Secretary of State Richard Armitage talked about the benefit of "somehow confusing the [terrorists'] plans, or what we believe are plans, to disrupt the proceedings." Ah, we are learning. The second time around.

It is lovelier the second time around

Cornering the Campaign Market
Larry Kudlow
National Review, June 29, 2004, 9:20 a.m.

Tuesday, June 29, 2004 | 03:55 PM | Permalink | Comments (0) | TrackBack (0)
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Bush Slipping Amongst Corporate America?

Tuesday, June 29, 2004 | 02:37 PM


Two recent polls/anecdotal surveys reveal disturbing realities about what should be near automatic support for the President amongst GOP voters in the upcoming election. They are not good news for the incumbent

The first is a 1H 2004 CNBC poll of 30 professional money managers. This group manages over $320 Billion dollars -- a third of a trillion bucks. They were questioned about the market, the economy and the upcoming election. While 92% of these pros thought the stock market would do better under Bush than Kerry, a surprising 37% of them were supporting Kerry anyway.

For the incumbent, this amounts to a very large vein of discontent running through what should be a heavily GOP stronghold. Republican presidents do not typically get re-elected when they are only polling a 63% support on Wall Street.

Adding support to this survey was an article from Tuesday's WSJ: "Chinks Appear in Bush Business Armor." Again, we see a strong vein of discontent amongst what should be a GOP stronghold: VCs, technology execs, and corporate executives.

The article took quotes from participants at the Wall Street Journal's recent "All Things Digital" conference of senior technology executives. "An informal show of hands revealed many more planning to vote for Mr. Kerry than Mr. Bush. Even "Undecided" beat the president." The audience included large and small company execs, Wall Street Analysts, and Venture Capitalists. In the high-tech sector -- a younger and less-traditional set of players -- is where the Journal suggests Mr. Kerry will find the most fertile ground for support.

This development is yet another example of a demographic voting bloc that should be a lock for a GOP President -- but isn't for this one. As we have seen in the recent past (Cubans, Arab-Americans, etc.), the incumbent should not lightly assume that traditional GOP voters will be fully behind him in November.

"Though George W. Bush has been a decidedly pro-business president, a few cracks are surfacing in what had been a solid wall of business support.

Those small cracks, some stemming from dismay with record budget deficits, others from fears that his foreign policies are clouding the global business climate, have grown wide enough for Sen. John Kerry to launch a behind-the-scenes effort to woo business executives. While the Democratic candidate has no chance of matching the incumbent Republican's business support, even a few notable defectors could help blunt Mr. Bush's advantage, raise doubts with swing voters and draw more money into the Kerry coffers.

Increasing Deficits Cause Exec Worry
Source: WSJ

The upshot is a mostly quiet but significant struggle over business's allegiance.

For Mr. Kerry, last week's endorsement by onetime corporate icon Lee Iacocca, the former Chrysler Corp. chairman, was only the first of what his campaign promises will be more such staged appearances with business leaders. Mr. Kerry already had won backing from Berkshire Hathaway's Warren Buffett and Apple Computer's Steve Jobs."

As we mentioned back on March 10 (Market Adapting to Ugly Realities), there is a brewing backlash against Corporate America to the foreign policy adventures of the present administration. I'm glad this meme is gaining traction in the mainstream media -- hopefully, before too much damage is down to US brands and reputations:

Brand America Damaged by Foreign Affairs?
Source: WSJ

"Among Kerry supporters is Eric Best, a managing director at Morgan Stanley, who says Mr. Bush's tax cuts go too far at the expense of mounting deficits. "I was raised as a fiscal conservative, and I think his fiscal policy is scary," he says. Mr. Best, who remembers Mr. Bush as an upper-class dormitory proctor at Phillips Academy Andover boarding school, says that what really motivates him to stump for Mr. Kerry is the hostility the global strategist finds as he travels.

"I can testify to the extraordinary destruction of 'American Brand Value' accomplished by this administration, from Europe to Hong Kong to Shanghai to Tokyo, and beyond," he wrote in a recent e-mail that he widely distributed. "If any CEO of a global multinational had accomplished this for his enterprise as quickly and radically as George Bush Jr. has done for the U.S., he would be replaced by the board in no time."

Fascinating stuff.

Chinks Appear in Bush Business Armor
Kerry, Sensing an Opening, Tries to Gain Political Capital By Courting Corporate America
June 29, 2004; Page A4

Tuesday, June 29, 2004 | 02:37 PM | Permalink | Comments (3) | TrackBack (1)
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Media Appearence: Kudlow & Cramer

Monday, June 28, 2004 | 02:08 PM
in Media


A quick heads up: I just got tagged for Kudlow & Cramer tonite, 5:10 pm, CNBC.

We will be 2nd up on the show, following a General who will be discussing the handover and insurgency. The subjects will be all the usual things: Today's comment, including Iraq, Presidential Elections, Economy, Interest Rates and the Markets.

UPDATE: June 28, 2004 8:55pm

Wow! That was quite a pleasant surprise. Larry Kudlow was beyond generous in his compliments for the Do Over! piece (Jim asked good questions, too) -- Larry's kind words were surprising, especially 'cause I've been so unrelentingly critical of the incompetent execution of the post-war occupation.

The funny thing is that I wrote the piece in question in all of 7 minutes in my head on the train. I got to the office and punched it out pretty quickly.

Funny how that works . . .

Monday, June 28, 2004 | 02:08 PM | Permalink | Comments (0) | TrackBack (7)
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Do Over!

Monday, June 28, 2004 | 11:10 AM

The year is nearly halfway over. As such, we thought it might be instructive to reflect on the progress, gains and losses so far in 2004. Much to many people’s surprise, the markets have made scant progress over the previous 6 months. Indeed, many of the key factors we observe closely are just about where they were at 2004’s beginning:

1) Major U.S. Markets: Most apparent are the major indices: As of Friday’s close, they are within a % (or two) of where they started the year – Its as if the first 2 quarters of the year never happened.
Do Over: The second half allows investors to (once again) try to catch an early part of a Bull leg up;

2) Economy: First Deflation, then Inflation. As the stimulus faded, initial fears were that a deflationary cycle was about to occur. When that failed to materialize, the new fear was that the economy was getting too hot to handle, with inflation rearing its ugly head, forcing the Fed to react;
Do Over: GDP, Durable Goods and Unemployment levels all have dropped to sustainable levels. The economy has entered, a not-too-hot, not-too-cold non-inflationary growth stage;

3) The Federal Reserve: Fed critics blame Greenspan & Co. for allowing the bubble to over-inflate, only to ultimately be forced to pop it in 2000 as the economy overheated. When the Fed started a rate hiking cycle four years ago, in our opinion, they raised rates too far too soon.
Do Over: The Fed will get it right this time, going only a ¼ point per meeting, allowing the markets to adjust;

4) Post War Iraq: The Neo-Conservatives hawks who pressed for the invasion of Iraq failed to create an adequate strategy for a post-war period. This created an opportunity for insurgents to cause havoc and mayhem;
Do Over: With the handover to the Iraqi Ruling Council a few days early, the planners have gotten one right for a change. The insurgents will be denied an opening to thwart sovereignty for Iraq;

5) Presidential Polls: President Bush has taken a battering in the polls over the past 6 months: Abu Ghraib torture scandal, Fallujah Insurgents, and other problems drove his approval rating to the lowest levels of his term;
Do Over: Bush has regained a slim lead in recent surveys, improving the odds against his being a “one-termer.”

Monday, June 28, 2004 | 11:10 AM | Permalink | Comments (2) | TrackBack (2)
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Chart of the Week: Nasdaq Breaks its Downtrends

Monday, June 28, 2004 | 11:00 AM

From when the Composite peaked on January 26, to the May 17 lows, the Nasdaq has been trying to fight through a stubborn downtrend line. It finally managed to break through last week.

Nasdaq Breaks its Downtrends

Source: StockCharts

With the down trend cleanly broken, the path of least resistance remains northwards. The next two resistance levels are 2055, and 2080 respectively.

Random Items:
Study Finds Housing Not a Bubble
Ready for $60-a-Barrel Oil? (not me)
U.S. Productivity Is Booming, with No End in Sight
Getting More Out Of Gmail
Making Torture Legal
Mistakes Loom Large as Handover Happens

Quote of the Day:
"Setting a goal is not the main thing. It is deciding how you will go about achieving it and staying with that plan."
-Tom Landry (Head Coach, Dallas Cowboys 1960-1988)

Monday, June 28, 2004 | 11:00 AM | Permalink | Comments (0) | TrackBack (0)
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CD installs virus/spyware

Friday, June 25, 2004 | 06:45 AM
in Music


Here's a different spin on the "DRM" story: The Register discusses a very different approach taken in the new Beastie Boys CD (as compared to the Velvet Revolver DRM). When the disc is inserted into a PC, the disc, "To The 5 Boroughs" surreptitiously installs a virus to prevent ripping the disc to MP3s.

This is an unauthorized hack -- an "executable file is automatically and silently installed on the user's machine when the CD is loaded," According to a recent thread at BugTraq.

No permissions, no disclosures, no authorization. It meets all the definitions of a virus.

The virus file is said to be a "driver that prevents users from ripping the CD (and perhaps others), and attacks both Windows boxen and Macs." Note that under fair use doctrine, a legal purchaser of a CD has every right to back up the disc or convert it to MP3s for their own personal use on an portable player or PC.

A least the Velvet Revolver CD (discussed here) asks permission before installing such DRM measures. Apparently, the new CD from the Beastie Boys doesn't bother with such niceties.

The great irony is that the Beastie Boys became so successful by very creatively sampling the works of other artists. Observers have noted that their 1980's albums (including their masterwork, "Paul's Boutique") couldn't even get made to day, due to all the newer copyright restrictions.

Of all people, for these guys to have drunk the DRM Kool-aid is the ultimate irony -- and sell out. No wonder their fans have been so angry.

Here is the Register's CD virus protection advice:

Autorun can be defeated quite easily -- to disable autorun in Windows, hold down the Shift key when loading a CD (each time the CD is played). You can also disable the autorun "feature" on your Windows machine permanently so that this and other CDs infected with viruses won't affect you in the future.

To do this:

go to the Start menu ==> Run, and type in the command regedit . Your registry editor will launch. Navigate to the following key, and edit as shown:

HKEY_LOCAL_MACHINE\SYSTEM\CurrentControlSet\Services\CDRom and set Autorun DWORD=0

It might be necessary to create the value, thus: Data Type: DWORD Value Name: Autorun Value: 0

As usual, you must reboot your Windows box for the changes to take effect.

Ahhh, but what if you have already been infected with the CD virus? The above procedure "assumes that you haven't previously installed a suspected Capitol Records virus, or a similar one from another fine entertainment conglomerate."

If you have, you will need to find and uninstall the malware first. The autorun.inf file on the CD will likely indicate the name of the relevant file(s), the locations where they're installed, and any registry changes made.

Armed with that information, go to the Windows 'uninstall' utility:

Start menu ==> Settings ==> Control Panel ==> Add or Remove Programs ==> Change/Remove.

Look for any program files referenced in the autorun.inf file and uninstall them. If no related programs are listed, you will need to launch the Windows Search Companion and search for any files named in the autorun.inf file and delete them manually. Be sure to activate the options in the "more advanced features" dialog allowing you to search the entire disk (search system folders, search hidden folders, and search subfolders).

Too much work to listen to a CD. My advice -- return the damned thing as defective . . .

Beastie Boys CD installs virus
By Thomas C Greene
Published Wednesday 23rd June 2004 11:18 GMT

Friday, June 25, 2004 | 06:45 AM | Permalink | Comments (14) | TrackBack (0)
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