This Week's Perplexions

Friday evening seems to be happy hour at my home. So my husband is generally entertained or entertaining while I'm able to listen to Gary K without upsetting family harmony. Unfortunately, I spent about 20 minutes trying to find him as his show was pre-empted a couple of places on this Friday night. I found him at KBNP

The market eeked out a modest gain for today. Gary K is still quite pessimistic, and he is no perma-bear. I was not listening to him when he called the top in May of 2006. He's saying that the action is "the worst I've ever seen it," but he is quick to add, "and, if the market goes up on a follow through day of 100-150 ponts, we'll change our stance." He points out that volume this week has been weak, and the low volume bounce is what has him and other commentators, such as Rev Shark on RM, sitting on the fence. Gary believes that the market will tip its hand, but "if I had a gun to my head, I would say that we were headed for another leg down."

I like to listen to Jim Puplova's Financialsenseonline on Saturday mornings. He has a parade of guests and perspectives that I enjoy hearing. I will say, though, that they are a bit gloom and doom in their bias, but nevertheless, that can be instructive. Tim Wood is a technician, and he is looking for the 4-year cycle to execute this year, and is still looking for a fall. He, like Gary K, is not one to be biased downward DESPITE what the market technicals are foretelling. I certainly recommend listening to 03.10's broadcast. You can sort your mail and pay your bills while doing so.

I found the reaction to jobs report interesting. It was the weakest in two years, but the market reaction was fairly exuberant. I think largely because the ADP number of about 56K jobs was not realized. However, the revisions have been monumental, so I do not trust the report. Did you catch the 30+k increase in government employment?

I'm just not sure from where the upside lift for this market comes. I believe that there will be continuing downward pressure on new jobs, particularly with the job losses that will show up from housing. How can you have Walmart's numbers were weak, and I'm sticking with my thesis (no way provable of course) of undocumented workers first hit by unemployment in the construction sector will show up in curtailment of lower end spending instead of the unemployment. The people who have been telling us that the worst is over are not those with our best interests in mind, but rather with a "calm the masses" interests in mind. Interest rates are creeping up. That will only exacerbate mortgage concerns. Gasoline and oil are moving up. Corporate earnings are slowing, so I think that the current p/e ratios are high. But even mentioning p/e ratios, I'm still not sure that I understand what's in or out of the numbers in that calculation. So much stuff gets "x-ed" out, it takes lousy numbers and turns them into good numbers. It still hits the bottom line and affects organizational resource levels.

Bob McHugh [of "yawning jaws of death (broadening top)] states this very important point in J. Puplova's Sat. broadcast recently: "Recessions are never visible when they are happening." I know this to be true from my business experience. I'll entreat you to watch the office furniture folks for their next quarterly calls (Herman Miller-MLHR and SteelCase-SCS). Business furniture is a leading indicator of capital expenditure because the overall project lead times are long (6-12 mos) . So you want to look at the forward guidance, not the past and the amount of backlog reported. Note that looking at inventory for these companies is not a reliable indicator (if you're looking to divine trouble through inventory builds), because for the most part everything is custom made. The business mix may have changed, but for the barometer that I would be watching--backlog levels--those orders are never taken into inventory as it is 100% custom production. I've created a new page element called "Horizon Issues". That way I can put things on the list to watch or be mindful of. Of put these on it.

Now here's an interesting perplexion (I'm balling up a few things here, bear with me). Depending on what story is to be spun, there are different things that are trotted as as "things that matter" and then when the spin cycle reverses, suddenly these things do not matter. Remember when the market was going up and there was hand-wringing about a fall? The salve for the concerns was liquidity--central banks printing money, yen carry trade and the robust consumer. Gold is erratic, so who is to know what gold is "telling" us about inflation? If you are interested in hearing some sane comments on gold v. the market, do listen to Gary Dorsch on FSO this week.

With respect to retail sales (that were erratic depending on the retailer), I promise you that we'll hear the "Easter", "weather" parade of stories this spring season to explain the retail numbers (hits or misses) as we heard last year. In just the last month, we've heard that retails sales were lifted due to cold weather (and you know those were deeply discounted winter clothing people were buying) and dampened due to cold weather this month.

The yen carry trade which was lauded as a fountain of perpetual liquidity is now being downplayed. The current soft-pedaling of the carry trade that has been trotted out this week, particularly on CNBC, is quite strange to me. When the market was going up and the HW's (hand-wringers) were worried, the key word was liquidity, fueled by the yen-carry trade. Now it doesn't matter? This is a troublesome divergence, IMV.

Financial system shock is another fear that has been downplayed. Remember when the homebuilders and the s-p mortgage lenders were presumed to have bottomed? Well, they are still falling--precipitously this week. I'm not surprised, but think about the poor schmucks that thought they purchased the bottom some time ago (based on talking heads calling a bottom). Now, think for a moment what NO ONE is talking about.....any guesses? How about the contractors that have been borrowing to fund the building of these homes that are going to just sit. You have bank exposures there, and given that residential construction has been a big part of this recovery, don't think for a moment that there are not some bankers losing sleep at night.

It takes alot of courage, patience and discipline to go your own way in the investing world. What I've come to learn are these things:

• Educating myself and listening to divergent opinions are the underpinnings of my investor education. Understanding key market drivers is key to my educational foundation, and it will enable me to understand market risk and see when that risk increases or decreases. I've been able to do that with interest rates, sub-prime mortgages, homebuilders. I still see trouble ahead for ALL banks with significant mortgage exposure, and when that starts to get aired, you are going to see these financial institutions get hit.
  
• Courage is an absolute necessity: cultivating my own (informed) ideas about the movement of these drivers will insulate me from the spin created in the media. I'm finally beginning to trust my judgment about these things. It takes alot of courage to be outside the mainstream. However, there is an important caveat: It's one thing to see something coming, but do not make large bets until you see the writing on the wall. Being early is synonymous with being wrong. THAT, my friends, is the simple, but expensive, lesson that I have learned.
  
• Patience and discipline go hand in hand are two of the greatest virtues on top of your being a diligent and skeptical student of the market required. Patience will keep me from being "early".
• Flexibility will ensure that my biases are systematically tested. Listening to divergent opinions and thinking critically about each case and the risk/rewards will feedback into the "educating" part.