Tuesday, March 15, 2005


Those who have bemoaned the falling dollar may have gotten all they want and more today. There were three things up, long-term interest rates, crude oil and the US Dollar, and most everything else was down. Sure there were a few individual stocks trading up, TIVO and QCOM to name two, however, large and small stocks in most categories took a beating.

The past few months, we have been in a sideways market. It is a market that is wearing out the traders. The most successful stock traders try to catch a trend after it is established. They try to ride the trend for as long as they can. The current market struggles to establish any trends--with the exception of oil and other "material" based companies; every thing else is slopping around.

The big question concerns the dollar. US imports continue to grow quickly but the latest liberalization of textile trade has skewed the numbers. Exports are growing at a 15% rate! The strength of the US economy has seemed modest relative to the boom in China, but we actually are in a booming economy. Job growth has been understated for three years. There are literally millions of Americans working very hard to build small internet related businesses. Many of these folks are not making large amounts of money but they may become very successful and few of them show up in jobs reports.

The nominal GNP grew at 6.2% last quarter! Even after adjusting for inflation the number was about 4%! Our economy is very strong, but it does not "feel" strong. Folks are focused on too many side issues to appreciate the good life. Some folks besmirch the wonderful rise in real property values. They say they will just have to pay more taxes. Papa John was one who rightfully did not mind paying taxes. He always figured if he was paying lots in taxes he must be making lots of money.

It appears that the world wide economy has kicked into the expansion phase. Capital spending is on the rise. Long-interest rates are being pushed and supplies of oil and other raw materials are tight. The risk is that Greenspan will need to tighten short rates more or at a faster clip. My outlook for the BIG BULL BOOM BUBBLE BUST has not changed; the starting point of the next run may be pushed back, but it should start before November.

One can only guess what the catalyst for the next move might be. Few folks know that the start of the second phase of the 1960's Bull started the day the market re-opened after President Kennedy was shot. The market made its biggest move in 24 years on that day and the market hit all time highs within two weeks.

Who knows, the dollar may make new lows, strengthen for a while and then continue on its long-term downward trend later. The long-term trend has been down for as far back as I can find a chart. However, the US is a powerful economic machine. Yesterday, Condoleeza Rice reported the possible sale of 149 F-16's to India and Pakistan. The sale would wipe out 10% of the current account shortfall! Parts and servicing would add to US exports for years to come. Indians have to sell us a lot of socks to purchase one of these planes. We really do not need to be overly concerned about competition from the Far East, if the US will continue to reduce the drag on our economy from excessive taxes and regulation. Reform of Social Security as a major benefit to the American worker would be a good step in this direction.

To complete the pattern that started in the late 1940's in regard to interest rates and inflation, the dollar must make new lows, interest must make new lows and inflation must make new lows. One could get dizzy going back and forth and forth and back. It takes patience to do well in the market. Now is the time to be patient. Stocks will out-perform other investment classes in the second half of the 2000 decade. The break-out stampede of a couple of weeks back has been corralled. The oil and bond markets are holding tight reigns. It is a matter of time before a something good happens. If the market were to get a sniff of progress in passing an energy bill, it could be off to the races. I have written a couple of times that the break-out will come by November, which seems like a very long time away. I had better stay ready because at any moment I may get what I have been wishing for.