The Tycoon Report

The Tycoon Report: Fear & Loathing in the Stock Market

Monday, March 17, 2008 | Editor in Chief

IT'S STARTING TO FEEL LIKE THAT MOVIE "FEAR AND LOATHING IN LAS VEGAS".

You know the one I'm talking about: Hunter S. Thompson, played by Johnny Depp, takes us inside his drug fueled binge while on a trip to Las Vegas.

In scene after scene, Thompson's world is dramatically altered by the acid he's been swallowing. People look like lizards as he sits at a bar. He imagines seeing bats while he's driving in the desert. Shadows on the wall of his hotel room remind him of airplanes on a bombing mission. My point is, the drugs have completely altered the way he views the world.

I'm beginning to feel the same is happening to America as a whole. But instead of lizards, we're seeing financial destruction. Instead of bats, we're seeing unemployment. You get the picture.

I cannot explain how important it is for you to realize that we've all seemingly entered an acid trip. Within the space of months, everything that was good has turned bad, and everyone that was bullish has turned bearish.

The key to being a successful investor is by not drinking the fruit punch. Realize that everyone around you is on some kind of "acid trip", and is seeing the world in a very warped way.

To them, everything looks worse than it is. Every headline grips them with fear. Every television broadcast grips them with loathing. They become paralyzed by indecision and get completely caught up in the hysteria.

Folks, If I hadn't been a victim of it before, I wouldn't recognize the symptoms. Right now, the entire nation has the worst kind of flu - the self-perpetuating and self-reinforcing "fear flu".

How do you make money in a market like this?

For starters, recognize that everyone is infected by the fear virus. Then make sure you inoculate yourself from it. Stop reading the newspapers. Stop watching CNBC. Stop doing whatever the masses are doing that keeps contaminating them. You have to be disciplined about this.

Just read the Tycoon Report every day in the morning, and the headlines of the financial markets at the end of the day. You cannot afford to get caught up on the emotional roller coaster that is Wall Street and catch the fear virus.

Once you realize that you're living a scene out of the movie "Invasion of the Body Snatchers", you'll begin to look at everyone around you differently. Instead of getting gripped by their fear, you'll be able to make decisions independently of it.

And that's the key to making money in the markets - staying mentally healthy enough to take advantage of people who are caught in the throes of a fear flu.

The markets will rebound. They always do. Businesses will shrink a little bit, but will not evaporate completely. They always do. People will sell into the fear, and smart investors will buy from them. They always do.

I remember back in 2001. The markets seemed to collapse each and every day in the wake of the dot-com boom. Company after company was announcing bad earnings and watching their stocks plummet in value.

And then it happened. September 11, 2001. I was literally down on Wall Street, and I saw everything with my own eyes. I was gripped by fear. I had to run away from the dust cloud. I knew the world had changed forever on that very day.

I also knew that the markets would be gripped by fear when they opened for business again. I remember everyone in the media banding together to calm people down. On the day before the markets reopened, 60 Minutes interviewed Maurice "Hank" Greenberg (then CEO of AIG), Jeff Immelt (then CEO of GE), and finally Warren Buffett of Berkshire Hathaway.

They went around the table asking each person what they thought about the markets. It was clear they wanted to calm the public. Jeff Immelt said he was bullish and stocks were cheap. Hank Greenberg said he was bullish and stocks were cheap. Both announced they would be starting big stock buyback programs.

Then they got to Buffett. Instead of agreeing to a massive buyback, the most they could get out of him was an admission that, "If stocks get much cheaper, I'll be a buyer." In other words, the market wasn't cheap enough yet - but he was a buyer.

It was clear that not only was Buffett not going to lie for the sake of the public, but his investment philosophy had not changed a bit. He was a long-term bull in America. Even after stocks had dropped in the wake of the dot-com boom, he was going to wait until they dropped to HIS PRICE.

Look folks, it's really easy to be scared when everyone else is scared. And it's really easy to be happy when everyone else is happy. The hard part is being the opposite of what the general public is.

Over the long-term, America will be fine. We have an economic system that allows capital to form in places that give it the highest return. We have low regulations for entrepreneurs to start companies that employ people. We have powerful capital markets that make it easy for people to create companies.

Sure, the world is changing around us in ways we can't easily predict. Sure, China and Asia will represent a bigger share of global GDP in years to come. And sure, the United States of America will have recessions.

But don't turn a simple cough into a full-fledged virus. Chill out. Take a deep breath. Relax. We've all been here before. We're not seeing anything new here. Trust the professionals, like Teeka Tiwari and Chris Rowe, who completely understand this.

Trust the Tycoon Report to guide you through this by inoculating you against the fear flu. Stick with us, and I can almost guarantee you'll be just fine. And who knows? Maybe you'll learn something in these pages that will help you make some SERIOUS MONEY.

And never forget: CAPITALISM WORKS, AND WILL ALWAYS WORK, BECAUSE IT CREATES A SYSTEM THAT CAPITALIZES ON HUMAN NATURE. Some years are better than others, but, over the long-term, you'll go broke being a bear on America!




Editor in Chief

The Tycoon Report


Economic Calendar for the Week of March 17 - March 21

Monday, March 17    

09:15 - Industrial Production

Release Details

Importance (A-F): This release merits a B-.
Source: Federal Reserve.
Release Time: 9:15 ET around the 15th of the month (data for month prior).
Raw Data Available At: http://www.federalreserve.gov/releases/G17/Current/g17.txt.

The index of Industrial Production is a fixed-weight measure of the physical output of the nation's factories, mines, and utilities. Manufacturing production, the largest component of the total, can be accurately predicted using total manufacturing hours worked from the employment report. One of the bigger wildcards in this report is utility production, which can be quite volatile due to swings in the weather. Severe hot or cold spells can boost production as increased heating/cooling needs drive utility production up.

In addition to production, this monthly report also provides a measure of capacity utilization. Though the rate of capacity utilization is seen as a critical gauge of the slack available in the economy, the market does not completely trust this measure. Capacity is very difficult to measure, and the Fed essentially assumes that growth in capacity in any given year follows a straight line. One can therefore predict the capacity utilization rate quite accurately based on the assumption for production growth. The 85% mark is seen as a key barrier over which inflationary pressures are generated, but given revisions to these data and the difficulties with capacity measurement, the 85% mark should be viewed cautiously. It would be appropriate to look for corroborating inflation indications from commodity prices and vendor deliveries.

Highlights

Briefing.com Forecast:   -0.1%, 81.2 capacity utilization
Market Consensus:    -0.1%, 81.3 capacity utilization

Key Factors

Flat manufacturing output expected given the drop in manufacturing hours, utilities provides a drag.
Moderate gains in total and manufacturing in annual growth, nearly flat over the last 6 months.
Capacity utilization rate expected to fall to 81.2%, manufacturing to 79.6% -- both well below the inflation danger zones.

Big Picture

Industrial production is slowing after the early 2007 lift that followed the deceleration in late 2006.  6 month growth is flat despite the moderate 2.3% gain from a year ago.  Strong export demand provides welcome support.  The risk ahead is that business capital investment stalls given the weaker economic growth outlook which feeds in to factory orders, production and manufacturing overall.   Capacity use stands at 81.5% -- below the level historically consistent with inflationary pressures -- as manufacturing reflects more excess capacity at 79.7%. 


Tuesday, March 18    

08:30 - Housing Starts and Building Permits

Release Details

Importance (A-F): This release merits a B-.
Source: The Census Bureau of the Department of Commerce
Release Time: 8:30 ET around the 16th of the month (data for one month prior).
Raw Data Available At: http://www.census.gov/const/www/newresconstindex.html.

Housing Starts are a measure of the number of residential units on which construction is begun each month. A start in construction is defined as the beginning of excavation of the foundation for the building and is comprised primarily of residential housing. Building permits are permits taken out in order to allow excavation. An increase in building permits and starts usually occurs a few months after a reduction in mortgage rates. Permits lead starts, but permits are not required in all regions of the country, and the level of permits therefore tends to be less than the level of starts over time.

The monthly national report is broken down by region: Northeast, Midwest, South, and West. Briefing recommends analyzing the regional data because they are subject to a high degree of volatility. The high volatility can be attributed to weather changes and/or natural disasters. For example, an unexpectedly high level of rain in South could delay housing starts for the region.

Highlights

Briefing.com Forecast:   980K, 1010K permits
Market Consensus:   995K, 1020K permits

Key Factors

The expected -3% decline leaves the lowest level since March 1991 -- a 17 year low.
Starts are less than half the pace of the January 2006 peak.
The downward trend in new home sales hasn't slowed yet and argues for a long wait for stability in new construction.
Moreover, the January high in new home inventories makes clear the current oversupply.
Tighter mortgage lending is also lengthening the wait for an upturn in housing sales and starts.
Winter weather conditions and the heavy seasonal adjustments provide added volatility over the near term. 
Permits to build expected to fall below January's 16 year low.

Big Picture

Housing starts reached a 17 year low in December with no sign of the fundamentals (housing demand) needed to turn the direction over the intermediate term.  The plunge has been a large drag on economic growth as further risk surrounds the defaults/foreclosures coming from sub-prime and other mortgage borrowers.  The upturn could be a long way off in early 2009.   The correction for the inflated housing market was expected (and needed) but with a more moderate decline as the poor quality mortgage lending has added strongly to the downturn.  Stability will have to wait for new home sales to tick higher and unsold inventory to significantly thin.  Continued lending to low risk mortgage borrowers is needed just to get the declines to decelerate.  Housing starts have fallen 55% since the January 2006 peak.

08:30 - PPI: Producer Price Index

Release Details

Importance (A-F): This release merits a B-.
Source: Bureau of Labor statistics, U.S. Department of Labor.
Release Time: Around the 11th of each month at 8:30 ET for the prior month.
Raw Data Available At: http://stats.bls.gov/news.release/ppi.toc.htm.

The Producer Price Index measures prices of goods at the wholesale level. There are three broad subcategories within PPI: crude, intermediate, and finished. The market tracks the finished goods index most closely, as it represents prices for goods that are ready for sale to the end user. Goods prices at the crude and intermediate stages of production often provide an indication of coming (dis)inflationary pressures, but the closer you get to crude goods, the more that these prices track commodity prices which are already available in traded indexes such as the CRB (Commodity Research Bureau).

At all stages of production, the market places more emphasis on the index excluding food and energy, referred to as the core rate. Food and energy prices tend to be quite volatile and obscure trends in the underlying inflation rate. Though the market reaction is determined by the month/month changes, year/year changes are also noted by analysts. The index is not revised on a monthly basis, but annual revisions to seasonal adjustment factors can produce small adjustments to past releases.

Highlights

Briefing.com Forecast:   PPI 0.1%, core 0.2%
Market Consensus:   PPI 0.3%, core 0.2%

Key Factors

Energy and food prices should about flat in February.
A 0.2% rise in the core leave annual growth of 2.1% -- below consumer core prices.
Given the removal of the strong year ago gain, annual PPI falls to 6.5% from the quarter century 7.4% high of January.
Core intermediate goods prices are at 4.1% yoy, core crude goods at 21% yoy.
But core producer pipeline pressures aren't making it to consumer prices where core commodities prices are flat from a year ago.

Big Picture

Annual growth rose to a quarter century high of 7.4% in January given the surge in energy prices.  Annual growth was just 2.3% in August before the acceleration in energy prices.   Higher food prices also weigh in as the core component has turned a bit stronger to 2.3%.   More important, to date core producer pipeline pressures are not providing any lift to core consumer prices.  CPI core commodity prices are flat from a year ago despite the rise in core PPI prices.  That is, core wholesale/commodity pricing pressures aren't yet pressuring retail prices as non-core energy and food prices are. 


Thursday, March 20    

10:00 - Philadelphia Fed Index

Release Details

Importance (A-F): The Philadelphia Fed Index merits a B.
Source: The Philadelphia Federal Reserve bank.
Release Time: Third Thursday of the month at 12 ET for the current month.
Raw Data Available At: http://www.phil.frb.org/

In Brief

There are many regional manufacturing surveys, and they tend to be ranked in order of timeliness and the importance of the region. The Philadelphia Fed's survey is first each month, actually coming out during the third week of the month for which it is reporting. Several smaller surveys are then released before the Chicago purchasing managers' report on the last day of each month. A few, such as the Atlanta and Richmond Fed surveys, are released after the NAPM and are of little value. The purchasing managers' reports are measured like the national NAPM - 50% marks the breakeven line between an expanding and contracting manufacturing sector. For the Philadelphia and Atlanta Fed indexes, 0 is the breakeven mark.

These surveys can be of some help in forecasting the national NAPM - particularly the Philadelphia and Chicago surveys which are more closely watched due to their timeliness and the fact that these regions represent a reasonable cross section of national manufacturing activities.

Highlights

Raw Data Available At: http://www.phil.frb.org/