Happy 75th Anniversary?

Only 17 days to go until the 75^th anniversary of what was once thought to be the pinnacle of protectionism, The Smoot- Hawley Tariff Act of 1930. I say “once thought” because legislation in the Senate threatens the denouement that the last 74 years of freer trade has brought us, making Smoot Hawley look more and more like the penultimate blow as every second ticks by without economic détente with Beijing.

The similarity is striking—after the collapse of great bubbles (1929 and 2000), two congresspersons (1930- Rep. Hawley/ Sen. Smoot, 2005- Sen. Schumer/ Sen. Graham) decide to petition the executive branch and proselytize to the masses regarding the economic dangers beyond our borders and how the country can best protect itself. Smoot-Hawley was directed primarily at agriculture and basic industry. Schumer-Graham is (potentially) targeting textiles, apparel and contract manufacturing--for Western Brands, i.e. outsourcing.

The only saving grace for free commerce is the Presidency and his trade negotiation authority. Unlike President Hoover who wanted to slightly increase existing tariffs and impose moderately-passive measures (before Congress reconciled in committee), President Bush has managed to exert pressure on China to take (intermediate) steps to float the Yuan while remaining vehemently opposed to any legislation threatening duties on imports.

Here is the point. Smoot-Hawley, with some help from “the beggar thy neighbor policy” and rampant speculation plunged the United States into the Great Depression. It would behoove Senators Schumer and Graham to brush up on their economic history and take a page from Canute the Great—the King’s (in this case the legislatures’) power has limits. Much like the waves in the sea, the ebb and flow of commerce cannot be commanded.

Price Stability, Cheap Money and Sports

The objective or single purpose of any central bank (The Federal Reserve, Bank of England, ECB, etc.) is price stability. Growth, inflation, deflation, disinflation and the yield curve should merely by symptoms of price stability, not the goal of any monetary body.

In this particular stage of the cycle in the U.S. the Fed is targeting inflation. A little more than two years ago it was deflation. In 2001-2002 it was containing the recession/stimulating growth. Previous to that it was reigning in the stock market bubble. Why is the Federal Reserve under Chairman Greenspan (and partially under Chairman Volcker) becoming increasing reactive to short-term trends (in many cases, i.e. deflation; which do not pan out) instead of its modus operandi?

In terms of the labor market, the invisible hand worked. Outsourcing to countries like India and China make demand side/ ratchet inflation stemming from the labor pool highly unlikely. In fact, savvy investors like Kirk Kerkorian and his GM tender suggest that the back of domestic labor may be broken as well.

The money supply side is where things get a little murkier. PIPE deals are all the rage. CDOs and bundling/repackaging/swapping/reselling of high risk debt transaction take place in the unregulated hedge fund world up to thousands of times per day by some estimates. In and of itself, this behavior does not necessarily constitute speculation and the last thing we need is any further regulation.

What should be really worrying is the world of sports. Yes, sports. Think back to the early part of the 1990’s and the corporate push into stadium sponsorship. CMGI, ENRON, 3 COM and every other company that is presently worth less than 5% of its all time market cap had their name on a stadium. In addition, several companies with nothing remotely to do with sports thought owning a team would be a great extension of their brand.

Now remember early part of the decade, it was a mad rush to the exit. Suddenly the new investment strategy was to short sell any company with their logo tethered to a ballpark. AOL-Time Warner and Disney could not sell their sports franchises fast enough. Such teams were felt to be no longer part of the core business of any company and the prices they received for their respective teams verified to many the initial purchase was a mistake.

The scariest part of this seems to be the lesson not learned here. One hedge fund in particular is looking to acquire the National Hockey League (NHL) for roughly $4 billion (in a tiered system designating major/mid/small market teams), raised from $3 billion (which was rejected) over the summer. Baseball and Basketball have the fans, the marketing, the merchandising and the wide following that made it possible for them to bounce back from their respective “lock-outs.” Does Hockey? No way. Most people are not even aware that the NHL season has been cancelled!

Malcolm Glazer, another fine example, to the dismay of football fans in the U.K. also used the backing of private funds (and debt) to purchase the most storied franchise in international sports, Manchester United. To his credit he has won a Super Bowl within one year of purchasing the Tampa Bay Buccaneers (NFL), but was paltry in comparison to his new venture in scale, history and dollar amount.

When hedge funds/ private equity funds began investing in art that should have sent off a warning signal, but hedge funds running sports teams and owning leagues? Look no further than cheap money and price stability…

The Markets

Major market indicies still in confirmed rally. June S&P Futures up roughly 6pts above fair value one hour before NYSE/NASDAQ open.

Who wants to be a Millionaire?

The Spectrem Group, a Chicago based company responsible for wealth management research, recently announced the number of households in the United States exceeding a net worth of over $1 million is at a record high. The 7.5million households that made the cut surpassed the 7.1million figure released in 1999, near the top of the stock market bubble (and largely attributed to stock performance).

So what gives? The easy answer is the real estate boom. After losing much of their wealth in the NASDAQ and internet related investments-- a flock to hard assets seems like a normal and logical progression. While some pundits are quick to make the “bubble” analogy and point to an unfriendly interest rate scenario as the proverbial pin that will pop it, the fact that it has been labeled a bubble is exactly the reason why it is most likely not.

In addition, Chairman Greenspan and the FOMC do not seem eager to stifle growth in the housing sector, as recent speeches and fed minutes point to a Fed content with plodding along 25 basis points at a time until somewhere in the 4-4 1/2 % range, very low by historic standards. While I would not be surprised to see some of the froth evaporate from the “hotter” sectors (Las Vegas, Southern California, Massachusetts, New York, etc.), prices nationally remain far from speculative.

The growth in millionaires in the U.S. should not be a cause for panic, rather a metric of the underlying strength and resiliency of the U.S. economy. Minority ownership is at record levels, interest rates/mortgage rates remain near historic lows and productivity continues to fuel low inflation output. Also, barriers to entry for small business have continued to shrink as the tax burden has shifted away from those looking to take entrepreneurial risks. These are the hallmarks of an efficient and industrious marketplace.

Dow continues to be the laggard of the three as yesterday was down almost 20pts. Needs to move decisively about 10600 to confirm a new uptrend is in order.



Another positive day for NASDAQ marking 7 white candles in a row. Continue to look for retracement/consolidation until 50 EMA crosses 200 EMA on daily chart.



S&P 500 with another close above the old short term top. While technical indicators continue to approach overbought levels, there is room for further upside. I would not get carried away though as some retracement/consolidation is likely in the next few days.

Keys and Locks

As our nation gears up for elections every four years, you can always count on one thing on Wall Street—the never ending saga in determining which party is best for the market. Some commentators point to the GOP, others the Democrats; but the pundits that get the most air time seem to be of the mindset that a “deadlocked” government, or one that is incapable of passing legislation is the “sure bet” for double digit market returns.

But as the old saying goes, “by the time you find the key, they’ve changed the lock” sums it up best. While we are still 3 years away from our next Presidential election, the battleground has shifted to the second branch of government; emanating from a fight over Judicial nominees. Very simply, we were looking at a congress willing to throw caution to the wind, with one side unfulfilling its designated role of “advice and consent” and the other threatening to enact the “nuclear option,” eliminating the judicial filibuster and most importantly, endangering the legislative integrity of the Senate.

Contrary to the popular “deadlock” theory, a fluid law-making body is in the best interest of commerce and our economy for this congress, thanks to the extremely pro-business agenda. A showdown clearly would have stymied Senator Specter’s (R-PA) efforts for asbestos reform and would make further tort reform a pipe dream. Another equally devastating result would have been an escalation in partisan rhetoric which could have easily found CAFTA in its sights, as well as the President’s exclusive rights for establishing and negotiating international trade.

Thankfully (for now), 14 moderates from both sides have come together for the greater good and bartered an agreement to keep both sides happy.

Looking at the market and the last 12 months, the keys and locks could not be clearer. Spend a few afternoons watching any financial news networks and you will be overwhelmed with a myriad of (now) meaningless phrases and phenomena: “Santa Claus Rally,” “the January Effect,” “sell in May and go away,” “the flattening yield curve,” “the housing bubble” and finally the never ending dispensation of useless tailored statistics aimed at de-mystifying the relationship between interest rates and the market.

In order to fully understand what Victor Niederhoffer refers to as “the law of ever changing cycles” I recommend you read his books The Education of a Speculator and Practical Speculation. But for simple analytical purposes, let’s have a look at the two most easily quantifiable clichés:

Saying Reality

Santa/January Effect Markets sold off 1/3/05

Sell in May and go away May is best month of 2005 (so far)

Which begs the question: which saying will be debunked next?

The Markets


S&P 500 Climbs close above resistance as technical indicators approach over-bought



NASDAQ has made largest move from the April low. Showing overbought on a short term basis, look for possible pullback to 2010-2020 level (old tops become new bottoms).

DOW is still under key resistance level. May has been a tough month for XOM which has pulled back from an all time high of 64, but still represents a hefty $345bil + market cap.