Recovery or Not?

If the economy is in such a slump, why are so many people buying cars? This was the question as the Dow Jones Industrials surged back above 10000 with the announcement that auto sales increased by almost 3% as General Motors finally led the boost in the auto sector. However, the rise was hardly uniform. While GM popped up 13%, Ford declined more than half as much...about 7-1/2%. Overall, one can hardly call the latest figures overwhelming encouraging.

Unfortunately, the "new market" seems to be an expression that will eventually encompass all stock behavior which has clearly become a series of knee-jerk reactions to news tidbits that are distributed on a daily basis. Good today, and bad tomorrow, stocks imitate a ping-pong match that is becoming increasingly discouraging for "Joe Investor." While stock pundits insist we have suffered the mildest and most short-lived recession in modern history, troubling economic signs remain. There is an understandable denial of poignant indicators of ill economic health.

Consider two less emphasized measures; tax receipts and advertising expenditures. Perhaps I am old fashioned or old rules have been replaced with market exuberance, but tax receipts have traditionally been viewed as a measure of overall income. Today's Wall Street Journal reported that the Treasury is up against the proverbial debt ceiling...you know...the one Congress used in an attempt to discredit the Regan Administration when the stand off shut down the economy. Yes, it is the same debt ceiling that Congress used to take our current president's father out of office. Yes, we're back to that, again!

The implications should be clear. Uncle Sam needs to go into serious debt to make up for weak tax receipts. Weak tax receipts mean low income...corporate and personal. Combine this obvious clue with the astounding decline in marketing budgets and you have a formula for a continuing recession rather than a burgeoning recovery. Which scenario is correct? Was the last quarter GDP growth a clear indication that the worst is behind us, or are we just at the beginning of a long and painful economic malaise?

Certainly, all of us want to believe the former is the case. We like prosperity and happy faces. We want stocks to boom and retirement accounts to balloon. But, if such is not in our immediate future, defensive measures become necessary. As mentioned last week, the Argentinean monetary crisis is cause for concern because it mirrors problems Japan wrestles with as I write this Report. For the second time since the world abandoned gold, the system has caught the hiccups. Understandably, uncertainty is currently reflected in the U.S. Dollar's recent decline and gold's mysterious strength.

No, investors are not fleeing paper in favor of precious metals. There is no stampede into hard assets. We continue to have faith that the green and black engraved paper in our pockets has some value and can be used to exchange goods and services. The problem is that our faith and the faith of other citizens around the free world is being tested. The saying, "Fool me once, shame on you. Fool me twice, shame on me," is beginning to surface among the general investing population...not to mention disgruntled workers who watch their 401K plans dissipate along with their job security.

For those seeking a reminder, the NASDAQ 100 weekly chart is displayed to illustrate the two-year carnage. Does this look like a market poised to recover? For technical comparison, observe silver's performance during the 1980's. Notice how the market formed two post traumatic rallies in 1983 and 1987. See how the NASDAQ 100 has made similar attempts to regain upward momentum. Admittedly, silver and high-tech stocks are not directly correlated. The fundamentals are dissimilar. However, technical patterns are supposed to transcend fundamental differences. This is why technical traders insist that they do not need to reference fundamental developments or influences.

Where is silver today? Most commodity traders know silver has never regained its upward momentum. Absent inflation and in the face of increasing production, silver has been stalled for two decades.

The corollary of this comparison is the fact that both suffer from the same fundamentals. Silver's lack of demand and overproduction is like the drop in high-tech sales and progress. Consumers are saturated with PC's as are businesses. Improvements in speed are not considered valid enhancements for applications that run fine under older technology. Hey, you can only type so fast...no matter what computer you happen to be running Word or Word Perfect on.

Unless and until the complexion of the NASDAQ changes, I do not see a significant recovery. As Baby Boomers around the world seek solutions to age-related health problems, the bio-tech sector is likely to be the next great salvation for those of us who are addicted to high stakes returns reflected by the latter 1990's. For the rest of us shell shocked investors, anything that looks like a consistent return above the measly money market rates offered today will do just fine.

This attitude surfaces with increasing frequency as more news of shady accounting hits the media. Price Waterhouse's treatment of K-Mart is another example of Enron-link accounting. WorldCom is on the brink of disaster and has been forced to raise MCI telephone rates in one of the most competitive service markets in the world. This could make them easy fodder for the other carriers were it not for equally dismal performances at AT&T, Quest, and Sprint.

As if the telecom industry isn't bad enough, AOL Time Warner just choked down a $54 billion write off and the energy majors are being accused of price fixing gasoline through a series of devious production slowdowns. Insiders maintain that any Congressional scrutiny will be brief because Big Oil is so politically correct in Washington. From the President and Vice President right down through the ranks, nobody really wants to alienate the domestic Energy Boys. If you need proof, just look at the rise and fall of Enron!

In the meantime, crude oil recovered from the public relations bottom established by Saudi Arabia after 9/11. For a brief moment, the pumps were turned on to appease an angry America. With the focus skillfully shifted to Israel's Palestinian conflict, Arab producers feel more comfortable allowing prices to recover. The "rounded bottom" preceded the February breakout. The problem OPEC faces is the erratic behavior and relative instability of its members. Venezuela is one example while Iraq represents another potential situation.

Strategies

From January forward, traditional markets have exhibited volatile non-direction. Grains have been tossed between South American rumors of plenty and fears that Argentina will default on export commitments. Meats slid to new lows as I predicted, but have turned in response to Russia's presumed change of heart in accepting U.S. poultry. Oil responds to Iraq's saber rattling and the never-ending conflict.

Along these lines, I attempted to generate profits from short strangles in corn, soybeans, T-bonds, and crude oil. Out of these four attempts, we were able to execute short June soybean 480 calls and 460 puts for 14¢.

We were able to achieve our objective because soybeans conveniently jumped above 4.80. The present consolidation suggests a range between 4.60 and 4.80 regardless of the upward sloping highs and lows. As expected, July beans hit powerful resistance just above 4.80 and are challenging 4.60! This permits us to safely cover the 4.80 calls to eliminate upside exposure...although I do not expect any surprises! The past four days have formed a downward flag that implies another rally.

Unfortunately, the time value on the other strangles has rapidly deteriorated. This means we must look at the July expirations. Since crops are already subject to weather scares once July rolls around, I am not sure the premiums reflect the full exposures and risks. These options expire in June. By the same logic, the Middle East could easily explode into a widespread conflict if President Bush decides it's time for preemptive action.

The rhetoric being planted in newspapers looks like a prelude to invasion or some other extreme intervention. The United States faces the interesting problem faced by Israel since 1952...total hostility among the United Nations Security Council. Now that the shoe is on our foot, we see the fit is overly restrictive and our feet are beginning to swell. Even those sympathetic to the Palestinian cause admit that the UN exhibits an obvious bias. With the U.S. still supporting Israel, we are increasingly standing alone.

In particular, Japan is fearful that it could lose desperately required OPEC oil. They are forced to take a pro-settlement position to comfort Arab suppliers. China is heavily involved in stirring the boiling pot. By aligning with Arab states, China sees a way to form a new anti-West alliance...just in case.

All of this maneuvering confirms my belief that crude oil will remain within a wide trading range through June. Iraq threatens an embargo while the U.S. threatens a boycott. Yet, each needs the other to sustain economic stability. A Congressional gasoline price investigation cooled wholesale prices and added to uncertainty. Why is gasoline so high relative to crude oil when it was not as high in prior years? The spread is wide because oil companies are building an earnings cushion. If the world goes to heck in a basket, they'll need it!

The same price containment may exist in Treasury bonds. If we do need to raise the debt ceiling, we will have fresh supplies of government paper. Presumably, this will adversely impact prices unless we're all switching from equities into "safer" bonds.

The uptrend is likely to meet resistance at 10400 as indicated by the prior January/February channel. With 23 days left until expiration, I am looking for the 104 call/101 put strangle at 45/64ths or better. Who knows...this week may prove more successful!