GREENSPAN TO THE RESCUE!

Jun 30, 2003

GDP & Confidence erode... Dow 9,000 "Toppy"... $347 Gold ("Good time to BUY!")... Japanese Borrowers Paid... Greenspan "still blowing bubbles"... Coins advance!

MARKET NEWS DIGEST

Fed Cuts Rate to 1%; Deflation, Growth View Split - Bloomberg

June 25 (Bloomberg) -- Federal Reserve policy makers reduced the benchmark U.S. interest rate to a 45-year low of 1 percent, in an effort to boost economic growth and prevent a further slowing of inflation.

Members of the Fed's rate-setting Open Market Committee voted 11-1 lower the overnight bank lending rate a quarter percentage point from 1.25 percent. Fed Bank of San Francisco President Robert Parry dissented, preferring a half point cut. Going into the meeting analysts were divided about how aggressive the Fed needed to be, with many calling for a half percentage point cut.

The reduction was the central bank's 13th since the beginning of 2001, and brought the overnight rate, also known as the fed funds rate, to the lowest since an average 0.68 percent in July 1958. The last time the Fed lowered the overnight rate was on Nov. 6, 2002.

``Recent signs point to a firming in spending, markedly improved financial conditions, and labor and product markets that are stabilizing,'' the Fed said in a statement accompanying its decision. ``The economy, nonetheless, has yet to exhibit sustainable growth.''

The central bank has been battling to boost an economy that's lost 324,000 jobs over the past six months and that grew at just a 1.9 percent annual rate in the first quarter.

Today's rate cut will affect the cost of borrowing for everything from corporate bank loans to home mortgages and credit cards, although business leaders say the psychological impact will likely be more important than a marginally lower lending rate.

``I really don't think the problem in the economy at this point is around interest rates or monetary policy,'' Eaton Corp. Chief Executive Officer Alexander Cutler told Bloomberg News in a television interview. ``I think our issue at this point is people gaining confidence.''

http://www.bloomberg.com

Fed Set to Cut Rates to 45-Year Lows

WASHINGTON (Reuters) - The U.S. Federal Reserve, seeking to rev up a slow recovery while keeping price deflation at bay, is universally expected to cut interest rates to 1958 lows this week The sole mystery surrounds whether the 13th in a long line of rate reductions, expected to be announced on Wednesday, will be a quarter or bolder half percentage point.

A Reuters poll of 21 top Wall Street bond dealers on Friday found all anticipate a rate cut, with a slim majority of 12 forecasting a half percentage point slash and the remaining nine opting for a smaller quarter percentage point.

Fed Chairman Alan Greenspan set the wheels in motion for a rate drop before Congress on May 21 when he talked about "taking out insurance" against deflation and weak demand.

Economist Rajeev Dhawan of Georgia State University's Economic Forecasting Center questioned whether a rate reduction was warranted. "I think what they really need to do is to save this rate cut for real contingency situations and not just cut because of a belief that financial markets expect them to," Dhawan added.

http://www.reuters.com

Bond prices may be in for a long tumble - USA TODAY
By Adam Shell and John Waggoner, June 22, 2003

NEW YORK — The bull market in bonds is looking tired, and that worries some bond experts.

Treasury bonds are super expensive right now. Some say the current froth is looking like a bubble. The Lehman Bros. long-term Treasury bond index has soared 45% the past three years — a huge gain for the bond market. In contrast, the Standard & Poor's 500-stock index has lost 28%.

Low yields are another measure of the bond rally's strength. Bond yields fall when prices rise. On June 13, the yield on 10-year T-bills, already at 45-year lows, nearly dipped below 3% for the first time since 1958. But bond prices have fallen four of the past five sessions, boosting the yield on the 10-year Treasury to 3.37%. That could signal the best days are past. "Looks like a top in bond prices to us," says Don Straszheim of Straszheim Global Advisors.

Odds are Treasury prices will tumble in the months ahead — even if the Federal Reserve cuts short-term rates in an effort to revive the economy, experts say. Lower bond prices would hit investors who have fled into bond mutual funds to escape the fickle stock market. Investors poured $53 billion into taxable bond funds the first four months of this year, vs. $35 billion the same period in 2002. They put in about $9 billion more in May.

The big question is when prices will start tumbling, says Bill Hornbarger at A.G. Edwards.

http://www.usatoday.com

Stock Market Valuation - Crestmont Research
June 23, 2003

The general direction of our stock market research has concentrated on perspectives of the market over the past century. The research relates to the secular bull and bear cycles, their patterns of returns and volatility, and the relationships between the market and the economy. Please peruse the charts and analyses listed below; we welcome your insights and challenges as catalysts for furthering our research.charts

Long-Term Returns

Returns depend upon the starting and ending point. This series of charts presents the compounded annual returns for an investor that began investing during any start year since 1900 and ending with any subsequent year. The versions presented reflect those for taxpayers and for tax exempt or deferred investors, as well as returns on a nominal and real (after inflation) basis. The charts are scaled for printing on a single sheet of 11x17 paper or on two 8 ½ x 11 pages for subsequent alignment. See the assumptions and legends for important details.charts

Secular Cycles

The stock market has demonstrated longer-term secular bull and bear cycles. Secular cycles are extended periods with a common trend. In the stock market, these secular cycles are driven by trends in the P/E ratio. This chart presents the secular stock market cycles since 1900 based upon Crestmont’s research and analysis of P/E ratios, inflation, and other factors. The cycles correspond with peaks and troughs in P/E ratios, often over extended periods of years. The P/E ratio cycle appears to correspond with inflation cycles as they move toward periods of price stability (low inflation). charts

Significant Swings

Although the compounded average annual change in the stock market is near 5% over the past century, the range of dispersion in annual returns is dramatic. This chart presents the distribution of yearly index changes within the single digit range of -10% to +10% during the past century overall and during the secular bull and bear cycles. In addition, a second range was determined to include half of the years within the range and half of the years outside of the range. More than 50% of the years ended with changes in the index exceeding +/-16%, either less than -16% or greater than +16%. charts

Distorted Averages

Investors only can spend compounded returns, not average returns. This chart presents the difference between average returns and compounded returns for investors. The two issues assessed are the impact of negative numbers and the impact of volatility, as measured by the variability within a sequence of returns. Both issues can devastate the actual returns realized by investors compared to the average. The first issue—negative numbers—is demonstrated by this example: an increase of +20% and a decrease of -20% may average zero, yet the net result is a loss regardless of the order in which they occur. The second dynamic—volatility—is illustrated by another example: the compounded return from three periods of 5% returns is greater than any other sequence that averages 5%. charts Generation Returns

Even an extended period of 20 years does not ensure positive cumulative returns in the stock market. Returns appear to be dependant upon the stating level of P/E ratios. When P/E's are relatively high and above the average, investors' returns over the subsequent 20 years have been below average or negative. When P/E's are relatively low and below the average, investors' returns have been above average and rewarding.

It's Not The Economy

Despite the general contention that the economy and the stock market are inexorably connected, the facts get in the way of confirming common wisdom. This chart presents the average stock market return and average GDP growth by decade and by secular bull/bear market cycle. Economic growth is not the primary driver of stock market returns; stock market returns are driven primarily by a cycle in the P/E ratio (see the Secular Cycles chart above). Although economic growth does increase the denominator in the P/E (earnings), actual returns are generally the result of trends in the P/E ratio. This and other research that Crestmont has conducted dispels this conventional notion. charts

* as presented by Crestmont Research CrestmontResearch

Keys, Walkers, Morgans advance - COINWORLD
6/30/2003 - By Mark Ferguson, COIN WORLD Trends Analyst

Key coins continue to be the blue chips of the coin market. These are the scarcest and highest priced coins of a series, generally in all grades, rather than just the high grades, including examples like the 1877 Indian Head cent, 1909-S Lincoln, V.D.B. and 1914-D Lincoln cents, 1916-D Winged Liberty Head dime, 1938-D Walking Liberty half dollar and the 1893-S Morgan dollar, to name just a few. These and other key coins are continuing to make steady price advances, some substantial.

For example, the 1856 Flying Eagle cent pattern in Very Good has increased from $4,400 last fall to $4,600, then $5,000, and has taken a big jump this spring to $7,000. The 1893-S Morgan dollar in Very Fine was $2,100 last summer then advanced to $2,250, but has now jumped up to the $3,000 area.

Semi-key coins are those moderately scarcer and higher priced than the rest of a series. Examples are a 1931-S Lincoln cent or an 1895-O Morgan dollar. Of course, semi-key coins have been on a steady rise also, along with just about everything else in U.S. coinage.

Many experienced numismatists have advocated over the years that budget-minded collectors purchase the keys first, because if one waits until the end of completing a collection, which may take a few years, chances are the key coins will cost substantially more at that time, whereas the more common coins usually advance more slowly.

http://www.coinworld.com

COMMENTARY

DEAD MEN LAUGHING - Bill Bonner, Daily Reckoning
June 26, 2003

Yesterday, two...no three...no four...fascinating things happened. First, in the 32nd year of the Dollar Standard, the U.S. central bank decreed that its key lending rate would be reduced to 1%...only 100 basis points were left on the way to zero. Second, did the investment markets leap for joy? Did businessmen sign up for new spending projects in anticipation of the boom? No. Investors sold off stocks and a poll of CFOs said they were still cutting expenses, not adding to them. Then came word not of inflation...but of deflation...in fact, the unkindest price cut of all: Reuters reported that the New York Time's best-seller lauding Alan Greenspan, albeit in simpleminded fashion, had been marked down to just 99 cents by Amazon.com's used-book affiliate.

Last, but not least, it turns out that the Fed has more than 600 points to work with after all. Yesterday, the interest rate on overnight loans in Japan fell below zero to minus 0.001%. Meaning, borrowers paid back less than they borrowed. Talk about something for nothing; wait until America's auto dealers, homebuilders and mortgage brokers hear about this!

Zero percent financing? Forget it...we'll pay you!

Ah, what a wonderful, dizzy world we live in...When people suffer from too much debt - give them more. Lure them in deeper with easier credit terms...keep the printing presses turning...what could go wrong?

But what's this?? A response to our "Dead Men Talking" column of last week...An email from the nether world...a dead letter...from the Great Beyond: "Ha, ha, ha..." it begins, "you puffed-up fools. You thought we had nothing to teach you. You thought you invented the printing press...and paper money...

"Well, we're waiting for you...there's special little corner of Hell reserved for central bankers. We're stoking the fires for you...so that they may scorch your fat, arrogant derrières..."

Is the letter authentic? Here at the Daily Reckoning, we're optimistic enough to believe it. (We will give you the full text of this remarkable message...tomorrow...)

http://www.dailyreckoning.com

Still Blowing Bubbles - PAUL KRUGMAN, NY Times
June 23, 2003

The big rise in the stock market is definitely telling us something. Bulls think it says the economy is about to take off. But I think it's a sign that America is still blowing bubbles — that a three-year bear market and the biggest corporate scandals in history haven't cured investors of irrational exuberance yet.

Or, to put it another way: it's hard to find any real news to justify the market's leap. Instead, investors seem to be buying stocks because they are rising — which is pretty much the definition of a bubble.

Meanwhile, the average stock is selling at 31 times earnings, twice the historical norm. And if you take into account pension liabilities and the cost of stock options, that number goes above 40.

FULL STORY

Endless Bubbles - STEPHEN ROACH, Morgan Stanley
June 20, 2003

The biggest difference between my bearish view of the world and the more sanguine views of others can be traced to the bubble. More than three years after America’s equity bubble popped, there is an understandable temptation to believe that it’s time to move on. A massive dose of fiscal and monetary stimulus, in conjunction with a sharp rebound in the stock market, adds to that conviction. As I see it, however, the legacy of this monstrous bubble endures -- not just in financial markets but also in the form of the excesses that it has fostered in the real economy and in its balance-sheet underpinnings. Until those excesses are purged, I maintain my view that America still needs to be seen through the lens of a post-bubble workout. As one bubble morphs into the next one, the moral hazard dilemma only deepens. And the endgame -- including the risks of deflation and a dollar crisis -- appears all the more treacherous."

FULL STORY

Fed vs. Deflation. Who will win? - Martin Weiss, SafeMoneyReport
Cut debt and build cash now! June 25, 2003, CBS.MarketWatch

PALM BEACH GARDENS, Fla. (WeissRatings) -- We are now witnessing one of the greatest economic battles of all time. On the one side is the powerful US government, mobilizing every economic weapon at its disposal - the 13th interest rate cut, massive federal deficits, even a de facto devaluation of the US dollar.

On the other side is one of the most feared of all social and economic forces -- deflation -- falling prices, wages, and asset values.

In the past half millennium, deflation has typically reared its ugly head only once or twice every 100 years. It's a rare phenomenon.

Problem

Each time deflation comes, governments naively believe they can stop its advance. The less experience they have with deflation, the more they try to fight it; and the more they fight it, the more they prolong the agony.

Right now, we have clear signs of deflation in the U.S. and Germany. We have four years of deflation in Japan, despite near-zero interest rates. And we see China, a $1-trillion economy, exporting wave after wave of deflation to Asia and the West.

That's the three largest economies in the world -- plus the most populous nation -- all threatened by deflation.

Meanwhile, nearly everyone in Washington and on Wall Street insists that "a little deflation" won't hurt us.

I have news for them: In a high-debt economy like ours, having "a little deflation" is no more likely than being "a little pregnant." Once deflation begins, it can snowball in a series of vicious cycles:

Vicious cycle #1

Falling wages!

When companies cut prices, they also cut revenues. The less they charge, the less they make. To stay alive, they have to cut their own costs.

Vicious cycle #2

Consumers will cut spending.

The more prices fall, the more consumers postpone purchases in anticipation of lower prices to come. And the longer they delay spending, the more manufacturers and retailers must slash prices to attract new business.

Vicious cycle #3

Plummeting prices mean disappearing profits.

When a company is forced to slash its prices and it can't increase its sales volume, there's only one possible outcome: Its profit margins are crushed, forcing still more price cuts.

Vicious cycle #4

States and cities slash spending.

Forty-nine of the 50 states have passed laws that force them to balance their budgets, regardless of the economic consequences. And right now, the nation's states -- and cities -- are being hit with deflation below the belt: Their welfare costs are rising. Their tax revenues are falling. And their deficits are going through the roof.

The states alone are facing budget deficits of some $159 billion -- $79 billion for the current fiscal year that ends June 30, and another $80 billion for 2004. These figures are in addition to the $50 billion funding gap states faced last year when they passed their 2003 budgets.

Problem: The more they cut, the more they hurt the local economy, forcing still more cuts.

Most dangerous vicious cycle of all

When deflation collides with debt.

Debt by itself does not kill an economy. Deflation by itself is not necessarily a killer either. It's when you put the two together that the big danger arises.

The more incomes fall, the harder it is for companies and consumers to pay their debts. The more the debts go bad, the more incomes fall.

Worse, they sell assets at fire-sale prices to avoid bankruptcy ... or they file for bankruptcy and then have the fire sales. This drives the value of nearly all assets down and makes it still harder to pay debts.

My advice

Step 1 Use the latest stock market rally as a selling opportunity. I'm telling my subscribers to start by selling the stocks with the worst Weiss Investment Ratings.

Just four of MANY: Sprint PCS, Gateway , Rite Aid, and Lucent Technologies.

Weiss Investment Ratings evaluate the risk/reward trade-off of an investment. In stock ratings, the company's stability is an important component in this evaluation, but the focus is on the investment -- not the company itself.

Step 2 For your savings, do your best to avoid any financial institution that's shaky. Although lower interest rates are now perceived as a benefit for many banks and insurers, deflation could ultimately hammer their earnings and capital.

Weiss Safety Ratings assess the future financial stability of an insurer, bank, or broker as a way of helping investors to minimize the risk of loss due to bankruptcy.

Stick with institutions that merit our Weiss Safety Rating of B+ or better. Examples: such as Washington Federal Savings & Loan (Seattle, WA), Farmers & Merchants Bank (Long Beach, CA), Teachers Insurance & Annuity of America (NY), or State Farm Life (IL) -- all rated A+ (excellent). (For free lists of the strongest and weakest institutions, check weissratings.com.)

Step 4. Get rid of as much debt as you can, as fast as you can.

Step 5. Most important, build cash!

http://www.cbs.marketwatch.com

Bull Market or Bear Market Rally? - John Mauldin, FLT
June 21, 2003

Now, let's turn our thoughts to the future of the US stock market. Are we in a new bull market or in a series of bear market rallies? As part one of this series suggests, this rally has a lot of precedents for short term gains, but long term index investors are likely to be disappointed.

"As we look further into the conditions affecting the return profile, we note a strong relationship between the change in the P/E ratio over the twenty-year period and the total return for the period. None - not one- nada-zippo - of the periods of strong gains occurred without rising P/E ratios."

P/E ratios have never risen from the levels at which we are today. Thus, as we will see, the historical data suggests bear market rally. Enjoy it while it lasts.

This series will be adapted from two chapters in my book-in-progress. There are several charts you may wish to view at www.CrestmontResearch.com , although you can get the gist of the concepts without doing so. When you get to the site, click on "Stock Market" on the left hand side and you will be able to scroll down through several charts and tables. You will need Adobe Acrobat. Be sure to increase your view size. I do recommend that you do look at them if you have the time. Here is Part One:

Secular Bear Markets By The Numbers

The next two chapters are co-authored with Ed Easterling of Crestmont Holdings. His research into stock market and economic cycles will give us insight into how secular bear markets actually work. It will also give us a clue as to how to invest in stocks even in a bear market cycle.

These are very important chapters. If you can understand the implications of this material, I believe it will make you a better and more confident investor.

We will make the case that it is more useful to analyze secular bear markets in terms of value than as traditionally done in terms of price; that volatility and frequent large rallies are the norm and not the exception, thus giving the astute trader some terrific opportunities. Finally, we will make a connection between inflation, interest rates and stocks, which will give us further indications of the direction of the stock and bond markets in the coming decade.

If the cycles of the past century continue to repeat, most of the first decade (or more) of this century will experience a secular bear market-an extended period of generally sideways and choppy stock market conditions. The subsequent decade (or longer) should experience a secular bull market- an extended period of generally upward and exciting market conditions.

These periods in the past have been the result of market valuation cycles represented by the P/E ratio. The valuation cycles have resulted from generally longer-term trends in inflation toward and away from price stability. The short-term, somewhat random, market gyrations are the result of then current circumstances and market forces wrestling stock prices around the gravity line of the broader cyclical trend.

These cycles generally take a generation to work their way through the investor public, have significant magnitudes of becoming undervalued and overvalued, and have significant implications for the way that investors should approach each of these periods.

http://www.frontlinethoughts.com