The Reaper Market Comments

Often the first rally after a significant drop off from a major top is a sucker rally, a bull trap. This is the way this so-called economic recovery feels after the post 9/11 economic freefall.

The retail stocks, which represent 70%-80% of U.S. GDP (consumer borrowing/spending) are turning toppy/bearish. The Dow Jones Transports, which are a proxy for the demand for goods moving through the economy, have put in an ominous head and shoulders top, peaking at 3,050.40 on March 4. Key economic commodities, such as cotton, lumber, copper, silver, and palladium are weak. The meats--pork and beef--indicative of consumer spending, have been in freefalls. U.S. manufacturing over the past two years has had the worst slowdown since the Great Depression.

In mid March more than 400,000 people were added to the unemployment rolls, a 19-year high. There are now over 3.76 million unemployed, the highest in nearly 20 years. Housing construction fell by 7.8% in March, the largest decline in two years. Building permits fell 10%. Advertising is still off, as is PR work. It has been consumers' willingness to take out home equity loans that has given consumers the ability to continue spending, offsetting somewhat their stock market losses. Jonathan Laing, however, recently did a feature article in Barron' s, talking about the imminent end of the U.S. housing bubble.

A U.S. stock market and a U. S. housing decline are a one-two punch U.S. consumers cannot withstand. Consumers' incomes are off anyway, as indicated by the sharp drop off in federal income tax receipts from individuals. And foreign investors have been supporting the U.S. housing market by buying a third of Fannie Mae and Freddie Mac government guaranteed mortgages.

Foreign investors have effectively financed 20% of the business and residential investments in the United States. But foreign investors are starting to repatriate their dollars into other preferred currencies, a negative sign for the U.S. Dollar and for U.S. interest rates. The U.S. Dollar is overvalued and gold, Euros, yen, Australian Dollars, and New Zealand Dollars are starting to be the favored. The huge U.S. trade deficit widening 11.6% to $31.5 billion in February did not help matters any. Nor does a median CPI at 4.2%.

The Federal Reserve flooded the U.S. financial system with over $1 trillion in credit last year. And MZM is growing in excess of a 20% rate. On April 17, when the June U.S. Dollar Index gapped down and registered a low close below 117, a major high in the U.S. Dollar was confirmed. ...Just imagine what could happen if this economy turns down in the second and the third quarter and the Fed simultaneously further boosts the money supply. Then we could see real inflation and commodities soaring, coinciding with our expected take-off upside from the 30 and 60-year lows already registered for commodities, as the U.S. Dollar weakens and interest rates increase. The flight to tangibles from intangibles, to real assets from paper assets, is already underway. We have seen that in the rush to oil, oil stocks, the stealth bull market in gold and gold stocks, and American consumers fleeing to real estate--their homes and real estate investments. This is an environment that could spell trouble between now and October 2002. There is presently high anxiety in the air.

The CRB Index should hold 190-195 support, and will only turn bearish on a weak close below 183. This is highly unlikely. The Goldman Sachs Cash Commodity Index should hold 175-185 support, and will only turn bearish on a weak close below 160. This is highly unlikely. However, commodities could chop sideways and/or move into swing markets over the near term. It is of concern that the Asian and European stock markets are overbought and showing signs of rolling over to the downside. Could we see another coordinated international decline in stock prices?