Summertime, and the markets are hoppin'
Bill Bonner
*** Bonds down, stocks up, gold down, dollar up...up, down...and so on, back and forth...whee!
*** The Oracle is back! It's like old times...tech stocks are hot...fixing bikes...How to profit...and more!
Summertime and the livin' is easy... Fish are jumpin' and the cotton is high.
Eric Fry is at the beach...and Addison is on his way to the hospital, where his wife is expecting a baby.
Here in Paris, the sun is shining...the weather is warm. Sidewalk restaurants and cafes are full...and even our local oracle - a wiry little alcoholic who lives on the rue de la Verrerie in the summer months - is back. We saw him this morning on our way to work, stretched out on the pavement like a plague victim. But it was yesterday's triple-digit gain in the Dow that put a bounce in our step and a song in our hearts. It was like old times...1999 to be exact. It made us feel a little younger...and even a little wiser. For whenever the sun shines longest and hottest, we know what happens next: the days get shorter.
While the Dow rose, the Nasdaq soared - up 3.4%. Morgan Stanley's tech index rose nearly 4.5% and internet stocks rose even more, 4.7%.
Everything had a retro look yesterday. Gold fell below $350. And the dollar even rose against the euro; it was up to $1.13 by the close of business yesterday.
And even though the nation has just gone through its longest period without growth in the number of jobs since WWII, USA Today thinks it sees improvement coming. "Several signs hint at recovery in the job market," says its headline.
The good times rolled all around the world. The French are enjoying a mini-boom in the bourse. German stocks look good, too. And in Japan - where stocks recently achieved a 20-year low - the Nikkei seems to be heading up. Yesterday, it reached an 11-month high.
Is it time to get back into Japanese stocks, asked a Daily Reckoning reader, as if we would know.
'Maybe,' is our answer.
"I believe we are approaching a major low in the Japanese stock market," was Marc Faber's guess in May. Now it looks as though the low may have already come and gone.
"Sometime this year," Faber continued, "investors will have to be long Japanese equities and short Japanese bonds. It is only a matter of time before investors will pull out money from the ridiculously priced bond market (yielding less than 0.6%) and buy equities."
Yesterday, Japanese bonds dropped. So did U.S. bonds. And the bonds of practically every other nation.
"Mexican bonds post biggest one-day loss in 4 years," Bloomberg reports.
After seeming to promise a 50 bps. rate cut, Alan Greenspan disappointed bond investors with a piddling cut of half that amount. Then, on Thursday, Wim Duisenberg of the European Central Bank announced no cut at all.
Failing to cut rates would not normally be good news for the cause of inflation, but such is the dizzy world we live in that bond investors sell off bonds for fear that the central banks may not drive rates lower...and that a Japan- style deflation lies not right around the corner...and that it may be summertime in the world's financial markets longer than they had thought.
All the world's central bankers, of course, are on the side of inflation. They do not merely tolerate it, but insist upon it. Currently, both bond and stock investors are betting that they will get what they want.
We are not so sure.
We spent much of the weekend repairing bicycles. Checking tires for leaks, we noticed that if we put too much air in the tube, it would bulge out in unpredictable places. For amusement, we kept adding air. The bubbles multiplied; the tube grew hideously deformed...until, finally, one of the bubbles popped and the whole thing deflated.
"Hey, Dad, what are you doing to my tire?" Edward wanted to know, bringing us back to the point of the exercise...which was not to study the effects of too much air, but to give the kid a working bicycle.
And so, we rushed into town and got a new tube, put it in the tire...and off Edward went with his friends, Adrien and Otto.
Predictably, we began to think about the way Mr. Alan 'Bubble' Greenspan has continued to pump more and more credit into the entire world economy, despite grotesque deformations. Pretending not to notice, he allowed the biggest stock market bubble in history to develop. Then, when it popped, he quickly applied a patch and began pumping again. This time the bond market bubbled out. Just as investors had come to believe that the Maestro wouldn't allow anything bad to happen to stocks in the late '90s, by the early '00s they were sure that he wouldn't, nay couldn't, permit a collapse in bond prices.
Last week, a hissing noise started coming from the bond bubble. Investors with sharp ears should listen carefully. Because the refinancing bubble may have also sprung a leak. Long-term mortgage rates have gone up since Greenspan's latest 25 bps cut. If homeowners can no longer 'take out equity' from their homes...what will they do? Will not the whole bubble economy finally blow up in our faces?
How can you profit from the bond bubble's collapse? From our colleague, Dan Denning, comes this advice:
"Here are two investment ideas, if you think the bond bubble has been pricked but still has plenty of leaking to do.
"First, check out the Goldman Sachs iShare Corporate Bond Fund (LQD). It's the simplest way to be 'short' the entire corporate bond market in one investment and it trades just like a stock (meaning you can buy options on it too.) The fund mimics the performance of the Goldman Sachs InvestTop Index. 32% of its holdings are bonds in the consumer sector, 19% in technology and telecom, and 26% in financials. In other words, the bulk of the fund's holdings are in sectors that have directly benefited from low interest rates and have a lot to lose if and when rates rise.
"Or, if you believe, as I do, that interest rates on long- term U.S. Treasuries will rise (unless the Fed actively intervenes), you can buy puts on Lehman's 7-10 year Treasury bond index (IEF)."
Bill Bonner
Ed note: Bill Bonner is the founder of The Daily Reckoning ( www.dailyreckoning.com ) and the author of "Financial Reckoning Day: Surviving The Soft Depression of The 21st Century" (John Wiley & Sons) due out in September.
8 July 2003
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