Simplespread

This week we'll veer away from the selling-of-options motif to confront a longer term problem which will affect not only your investments but also the way you will live over the course of the rest of your lives.

The following link comes from that establishment-type repository of economic research and reportage - the Federal Reserve Bank of St. Louis (July-August 2006 publication). Before you click there and have a heart attack, let me first warn you to remove all sharp objects from your immediate vicinity, pour yourself a strong shot of Jim Beam, and find a soft spot in the corner of the room to lean up against in case you feel faint.

Of course this is not the first time some supposedly "anti-American revolutionary, nutty gold bug, desperately short-the-dollar speculator (read George, Bill, or Warren)" weighed in with some bearish comments on the US financial situation. (This report is an update of Dr. Kotlikoff and Scott Burns' recent The Coming Generational Storm: What You Need to Know About America's Economic Future (2004).

I can remember back in 1973 when the Bank Credit Analyst declared the US bankrupt at its annual conference in Bermuda. I think it was 1973. But it could have been shortly after Nixon severed the ties between gold and the dollar in 1971. Either way, it was a long time ago. And let's not forget Harry Browne's warning as early as October 1970, in his best seller, How You Can Profit from the Coming Devaluation. I read it two months after publication and didn't believe it could happen. But it did; and right on Harry's schedule, too.

However right these predictors of catastrophe may have been, life went on as if nothing had happened. Since the dearly departed Harry Browne issued his first warning, the Dow Jones Industrial Average is up some 1300%. Planes got faster. Cars got safer. Houses got bigger. Food got better. So, what happened?

Not to be outdone by irrelevance, we've had additional warnings. In 1985, Dr. Ravi Batra gave us The Great Depression of 1990, and CEO Harry Figgie, penned Bankruptcy 1995: The Coming Collapse of America and How to Stop It. More recently John Rubino and James Turk have offered us The Coming Collapse of the Dollar and How to Profit From It. Bill Bonner and Addison Wiggin have even sent copies of their Empire of Debt to each member of Congress, and demonstrated their creative flare by pasting billboards of their book on DC Metro buses.

Now you might write off these warnings as the psychotic rantings of delusionals, regardless of their economic or financial credentials. But when the Federal Reserve Bank of St. Louis (the last time I looked, it was part of the FED) asks the question Is the United States Bankrupt?, and answers "in the process of...," maybe we all ought to sit up and take notice, and maybe take the aforementioned writers a lot more seriously.

I, for one, do not care to have to live through their scary scenarios, or listen to what happened to Argentina just a few years ago. I can remember looking out onto the the depressed cityscape of our nation's capital in 1974 from my office at 1776 K St. as Nixon was drummed from office and Kissinger flew his on-again off-again Arab Oil Embargo talks. The mood of the country resembled something worse than the streets of Buffalo after they lost their 4th Super Bowl in a row. And I can also remember the October meltdown of 1987 as I watched traders hang their heads and shuffle off the exchange floor as securities prices plummeted in unbelievable panic. No, I don't really want to have to live through any of the messy undersides of history that happen when societies collapse.

(Hello, folks, this report is essentially from our government. Sit up. Take notice. This is not a test. The government is warning itself - and its citizens - that it is in the process of going bankrupt. What does that mean for the rest of us?)

Reactive - first thing - digest the offerings of the writers mentioned above. Their advice can be prescient. Take the necessary precautions they advise as is applicable to your situation...if and when. Forewarned is forearmed. Also check out our Book Review page on similar subjects.

Proactive - next, buy a copy of Alvin and Heidi Toffler's recently released Revolutionary Wealth. Read it. Underline sentences; highlight passages; dog ear the pages. Take notes.

The Tofflers have been in the prediction business since 1970 when Future Shock first came out. They followed that up with The Third Wave (1980), Power Shift (1990), War and Anti-War (1993), and Creating a New Civilization (1994). Detractors complain that some of their foresight has been off the mark. Well, Duh! Nobody is 100% that I know of. But, they've got a better track record than anybody else you can find.

I won't even try to condense their concept of the future, but one thing from the book stands out that must be absorbed by our society if we are to survive and grow: wealth is a creation. It's not manna from Heaven. It's not what is in your neighbor's bank account. It's not what got stolen from your ancestors. It is created by our bodies and minds. And we'd better rev up our wealth-making machinery fast if we want to continue on as a First World Nation. I don't know about you, but I've never found outhouses and growing all your own food that enjoyable.

The great Richard Russell of Dow Theory Letters fame has said for over 30 years that the only way out of our increasing mess is to default, inflate, or grow (pay off debts). Tragically, most governments throughout history have chosen either door number one or door number two when confronted with dire circumstances. The Tofflers are here to offer us what's behind door number three.

The natural path of humanity is the creation of wealth except where and when it's stymied - which is usually all the time. Hernando de Soto's The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else shows that it's there if only we search for it, label it, legalize it, protect it. But the Tofflers have journeyed beyond capital...to knowledge. Knowledge is the new wealth. It may have been the basis of old wealth too but we didn't always recognize so clearly as we do now that knowledge could be created.

The Tofflers make the very good case that capital is basically nothing until knowledge is applied, and that knowledge will overtake capital as the main ingredient of future wealth.

The Tofflers show you how to enter this new world that's just around the bend. It's a world without bounds because knowledge knows no restrictions. So what stands in the way of increased knowledge that can grow ourselves out of our current problems?

It's something few of us relish. In the screenwriting world, the standfast character mitigates against movement. Stasis is his god. He likes things as they are, and his intransigence is the problem to be overcome. In society, it's an entrenched elite who become fat, dumb, and happy with the status quo. Laws, regulations, and guidelines decree that "This is the way it's done. Period." Bureaucracy, whether governmental or corporate, stands in the way of growing ourselves out of our predicament. How can that change? Simply by enough citizens acting to push for the creative solution at every opportunity - at home, at the ballot box, at work. Revolutionary Wealth is a good place to start. Maybe it won't give you a roadmap, but it'll give you a compass.

Problems with energy, pensions, trade, education, health care, poverty, crime, geopolitical upheavals, etc. - they've been with us forever. We've found our way before; we can do it again. Our greatest resource is the individual - the only source of creative ideas. And we've got a wealth of potential creators.

So, can we do it? Change, this is? Revitalize ourselves? Embrace the Third Wave? Leave the past behind? Create our way out of this potential landmine that more and more voices are warning us of?

Or do we sink into oblivion? Get replaced by who comes next? Become a two-hundred-year side note to history? Stand in line for foreign aid?

Unfortunately, all the solutions to our indebtedness that I've seen over the past few years revolve around increasing our savings by cutting our spending - which of course means a diminished economy and increased unemployment. (Sounds like a rift on the old Chinese proverb of either increasing your means or decreasing your wants. Rank-and-file media says, "Decrease your wants - forget about increasing your means.")

The true solution is the Toffler's - increasing our wealth-making ability and thereby increasing the size of the pie for everyone's betterment.

So, for Simplespreaders, what does this mean? It means that very likely we are going to have quite a few rough days, weeks, and even years ahead. You can smell it. You can feel it. All's not right. Change is in the air. We're moving from Toffler's Second Wave to the Third Wave as we go. Disruption is the name of the game, and nobody's knows how it'll come out. That's why we enter the market only when an opportunity presents itself. We follow the investment to its conclusion, then exit the market and wait on the sidelines until the smoke clears. We can't predict what the next strong industries or sectors will be, but we can see them when they move. All we have to do is keep our eyes on the charts.

The ancients knew a few things about timing.

     Ecclesiastes: "...A time to get, and a time to lose; a time to keep, and a time to cast away..."
     Shakespeare: "There is a tide in the affairs of men, Which taken at the flood, leads on to fortune. Omitted, all the voyage of
          their life is bound in shallows and in miseries."
     Victor Hugo: "It was the best of times, it was the worst of times..."

Indexers, regular mutual fund companies, and buy-and-hold long-termers like to pull out the grossly misleading statistic that "if you missed out on the 40, 20, 10, or whatever best days of the market over the past 30 years, you'd have missed out on X% (a big part) of the holding period's gains." Therefore, their advice is to stay fully invested at all times because you don't want to miss out on those few days that produce most of your return. What they don't want to tell you about is that other sticky statistic - the one showing that if you missed out on the 40, 20, 10 or whatever worst days of the market over the past 30 years, you'd be XX% (read: many more) times ahead of not only the market, but also of the buy-and-holders. In other words, it pays more not to lose big time that it pays to gain big time.

How do you miss out on the big losers? By being on the sidelines when the train wrecks occur.

We warned about what could happened since the middle of May with our Confirmations and Non-Confirmations issue on May 5, 2006. Warring factions in the Middle East have now been labeled as the cause of our meltdown, but readers know the market was on shaky ground already, and any tremor would send prices spiraling downward. Additionally, we've talked about the 4-year presidential cycle which should bottom later this year. Investors of all types have had sufficient warnings to not be too surprised about current happenings.

It is interesting to note that when JFK was assassinated, the market barely skipped a beat. On that fateful Friday afternoon in September (why does everything happen in September and October?) of 1963, the Dow Jones Industrial Average dropped about 3% before markets were closed upon hearing the news. JFK's funeral was held on Monday; the markets were closed. On Tuesday, September 26, the Dow shot upward by 4 1/2%. Total damage from the assassination of our president = +1 1/2%! Why? Because investors were in a positive mindset and nothing was going to deter them.

A couple months after Pearl Harbor (December 1941), the market reversed its 5-year decline after topping out in 1937, and rallied throughout the rest of World War II. Investors were obviously taking the Axis Powers threat to conquer the world in stride. In 1990, the market sold off prior to the hostilities of Gulf War I, then rallied when the fighting began and peace returned quickly.

Lingering troubles in the Middle East are a horse of a different color. Today's markets look eerily similar to 1973. The Dow had topped out in January at 1051, then went horizontal while the rest of the market was weakening throughout the summer. That was the end of what was famously known as "The Nifty Fifty," yesterday's idea of indexing. A strong rally into October coming off a September low was halted on the 6th when the Arabs attacked Israel. The market hung around for a little longer, then plummeted 25% in the next month. Access to, and the price of, oil was the problem. The market didn't bottom until December 1974. It was long cold winter and long hot summer before stability returned. But growth didn't reappear for another 7 years.

9/11 hit us also during a weakened market with the public in a sour mood. NASDAQ had crashed and the Dow was marking time, listing slowing rightward and downward when the hijackers hit. Stock prices suffered for an additional year before bottoming out during the winter of 2002.

Timing, and taking into consideration the market's internals (as expressed through public sentiment), tells us much about what the reaction will be to extraneous shocks. As someone remarked a couple of days ago, this week's actions must be the tipping point for all the unsolved problems that have been piling up.

We Simplespreaders know the markets rise and fall. The reasons don't become clear until after the fact. That's why we follow a strategy that buys when prices slip, and sells when prices rally. It's always worked in the past and it will continue to work into the future because human nature, not earnings or interest rates or product break-throughs or management changes, are really the final determinants of stock prices. It's psychology mapped out on a chart, clear and easy to see...and follow. Fundamentals are for the talkers. Buying and selling is for the profit-makers.

Timing means that you raise cash when prices rise, and put cash to work when prices decline. Unless you have a bottomless pit of reserves, new investments must come from positions previously closed out. Listen to the ancients; they've stood the test of time.

Metals & Mining retained its #1 position, rising a good 19% for the year so far. And while we're at it, the S&P 500 and the indexers are down about 1% for the year. Since the beginning of the new millennium, the indexers are down 15%. Six and a half years of going nowhere but down. Makes you wonder why anyone would seek or champion average returns, doesn't it? Especially when there is so much more to be had.

Our old bear market standby, Tobacco climbed into the #2 position, as investors scrambled for safety. With war in the wind, Aerospace/Defense came in at #3. Transportation, which has held out gamely in the face of rising energy costs hung tough at #4. Energy, up a mere 10% since its September 2005 high, is definitely having troubles gaining traction even though West Texas Intermediate Crude has risen over 20% since its August 2005 high. The breakout of hostilities evidently made investors question whether paper was worth holding in the face of a potential stock market panic.

Food & Beverage climbed up to #6, its highest ranking since the end of 2003. Utilities are still flatlining. But by not declining they show up as strength when everything else is flat on its back. Real Estate managed to maintain its #8 position even as most other things connected to buildings continue to crash. The #9 slot belongs to Automotive. Want to take bets on how much longer this sector can reside in the Top Ten? We round out the list with Banking's strong showing for the week which gets it into the #10 position.

We all know how this is going to work out. Sooner or later, and at maybe significantly lower prices, peace feelers will be announced. Shorts will rush to cover. Bottom fishers will jump in with their "value" catches. The market will rally a little. Rumors of peace will be denied and another whack will hit the market. And so it goes, up and down, back and forth, until eventually all sides get worn out and some kind of a settlement can be reached. Then the market can get back to its main business - rewarding investors who buy low and sell high, while punishing other investors who buy high and sell low. And so it has always been.

Sector	14Jan06 to 14Jul06	Week of 14Jul 06	Visual Chartist Commentary
Metals & Mining	+11.91%	-3.06%	Still in the grips of a potential head-and-shoulders formation. Yes, I know. Those things fail as often as they confirm. But since it's forming one, we very well ought to keep that in mind. The gold stocks need to make a move up now or else get caught by a pack (?) of bears.
Tobacco	+8.55%	-1.22%	Since bottoming in March 2003, the smokers have been rising at close to a 45 degree angle. But too little volatility to be of much use to Simplespreaders.
Aerospace/Defense	+8.06%	-0.62%	A few good looking stocks but the volatility is so low it would rival utilities.
Transportation	+8.01%	-5.19%	Bad week. Strong sector, but a series of lower lows and lower highs is raising warning flags.
Energy	+5.08%	+0.38%	Much like the Metals & Mining, either go and go now, or else the charts threaten to turn into heads-and-shoulders. Both metals and energy should be benefiting from Middle East rumbles, but the actual product is one thing; paper ownership of said is another. And both have had tremendous runs that have certainly overstayed their welcomes. Seldom do sectors lead for more than a couple years at best. Is it different this time?
Food & Beverage	+3.71%	-0.85%	As a matter of fact, a lot of charts are tracing out heads-and-shoulders, including this supposedly bear market refuge. Reason to even be more cautious. Only bright spot here is the Beverages.
Utilities	+2.82%	-1.21%	Water Utilities bounced off supports two weeks ago. And that is interesting. Nothing else is.
Real Estate	+2.52%	-1.61%	REITs forever! Gravity defiers. Too bad their options are duds.
Automotive	-0.10%	-4.14%	Questionable looking charts, but still-strong sector. Go figure.
Banking	-1.37%	-3.82%	Another case of getting stronger by not going down as much as others.
AND THE REST...
Chemicals	-1.74%	-2.69%	Not much of any interest here.
Dow Jones Industrial Avg.	-2.03%	-3.17%	As we said last week, it wouldn't be healthy if it went down this week. So much for our advice to Mr. Dow. We are now in tenuous territory. If it breaks 10,700 decisively, well, that would stick a fork in it because it would be done.
Manufacturing	-2.18%	-6.21%	Very disappointing. And it had been doing so well. Still, some fairly good looking charts around. Good options are much harder to find.
Conglomerates	-2.59%	-4.45%	Whatever good looking charts there are, no options correspond.
Media	-2.62%	-3.44%	And just when you were looking so much better. Still, if it can hold in here, there are good vibrations in the making.
Drugs	-2.80%	-2.65%	Holding above supports and looking better. Could be some hope in the making here. Needs more work.
Leisure	-2.97%	-4.83%	Right at supports. Must hold here. Probably one of the best looking sectors around. Must show some leadership to attract buyers.
Consumer Non-Durables	-3.01%	-2.91%	It's just fascinating how poorly this sector has done. Disappointing, to say the least.
Insurance	-3.85%	-2.60%	Not much to look at there. Plus the options are dirt cheap.
Diversified Services	-3.96%	-3.37%	Many disappointments here. Nothing much to attract attention.
Telecommunications	-4.41%	-3.90%	Had its chance several weeks ago to hold supports. Didn't do it. Oh, how the mighty have fallen.
Retail	-5.01%	-3.97%	Drug Stores are the only half-decent looking stocks around. If Wal-Mart breaks $40, we'll have to write the consumer off and bury him because that would indicate Sam & Co. would be heading downward for a l-o-n-g time.
Wholesale	-6.71%	-2.42%	Nothing of interest here.
Financial Services	-7.51%	-3.85%	Overhead resistance. Support a little lower.
Specialty Retail	-7.71%	-3.91%	As with Retail, a lot of worrisome stories here.
Computer Software & Svcs	-8.05%	-3.78%	See no reason to spend any time here.
Health Services	-9.26%	-0.89%	Could things actually be looking up? Let's not hold our breath. But maybe, just a little bit.
Consumer Durables	-9.73%	-5.05%	Danger! Disaster zone.
Electronics	-13.57%	-4.46%	So much potential. So little worth.
Materials & Construction	-15.32%	-6.74%	Come on, now. Even the shorts have to panic sometime and produce a rally. For a sector that's fallen 23% since April, it's due. No, it's overdue. But surely not the place for more than a bounce.
Computer Hardware	-16.41%	-6.50%	One of the worst looking areas of the market. Period. What's happening?
Internet	-19.17%	-4.04%	Like the rest of the bottom feeders, it's bound to rally sometime. Only problem is it'll take a lot of work to get this sector and the next several ones above to ever start looking healthy again. And that's a shame because the options here can explode into great buy/writes.
Statistical Data: TeleChart 2005