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Three cats and a dog
Charting a course through the doldrums
by Christian DeHaemer
I came across an interesting dilemma in Lost Horizon, a book I picked up the other day. The world's first paperback, as it turns out. It's the classic tale of Shangri-la, which asks the question whether it is better to live in an isolated, benign-but-totalitarian paradise without worries, or in a reality of conflict and freedom and choices.
 It's an old question. This ancient theme spans the centuries, from Adam and Eve to the ever-popular Don Johnson flick, "A Boy and His Dog."
Now, most popular references to Shangri-la imply that it is an escape rather than a prison; but the hero in these tales always opts to rejoin humanity in all its glorious, sticky, reeking chaos.
What struck me most about Lost Horizon, though, is that the main character, a bankrupt financier, chooses to stay, while at the same time professing scorn for the investors who gave him their money to lose.
Paradise of fools
Life is full of choices and experts are often wrong. The definition of an expert is an individual who can convince a number of people that he knows everything about something they don't want to think about.
The experts have been wrong about the market for the past three months. The general opinion on Wall Street was that the U.S. economy is slowing down and earnings for Q2 would come in fantastic. In retrospect, that was the wrong bet — though, ironically, in terms of share prices the result is the same. The truckloads of recent revised numbers speak for themselves.
The consensus is always wrong
Unemployment numbers fell sharply in late July after bouncing off their bottoms. Recent revision of the Social Security laws should increase the number of elderly workers and loosen the inflationary tendency a bit.
 New orders for durable goods jumped 10% in June, after already having been on an upward trend in recent months. Retail sales weren't as weak as expected.
The unstoppable shopper continued to spend; consumer confidence continues to hover around an all-time high, after a brief energy-related hiatus.
It turns out I was wrong in seeing a GDP slowdown last week. Revised numbers report that the real GDP grew 5.2% in Q2 2000. That's a full percentage point above the 4.3% average over the past three years!
Drums or ABS?
The pundits, wonks, and wannabes would have us believe that Greenspan has been slamming on the brakes — raising interest rates 175 basis points incrementally over the past year-and-a-half. But the fact is that Alan has been using the coaster brakes on his banana-seat Huffy, not stomping on the all-wheel ABS power-assisted hydraulic discs.
A full 75 of those basis points can be explained by simply removing the cuts the Fed made after the Asian crisis, and the other 100 are offset by the jump in headline inflation. The CPI jumped from 2.2 % in 1999 to 3.4% in 2000.
Ergo, the resulting higher inflation equates to a neutral 3.0 % level in the Federal funds rate — the number Greenspan likes to use as an economic barometer. In effect you have the same macroeconomic circumstances that you had three years ago. Since then, the NASDAQ has gotten ahead of itself.
The rapid increase in stock prices has created a virtuous-cycle, wealth-effect, Goldilocks economy — you know the drill. The downside of this is an overheating economy and inflation: thus the rate hikes over the past year. The question of the summer is, which side is winning?
Side show geeks
The irony is that while every Wall Street prig was pontificating about a decelerating economy and one last quarter of fantastic earnings, the exact opposite happened. The economy grew and earnings came in lower than expected.
Nokia warned about Q3, Ericsson came in low, Amazon announced growing debts and slowing growth, even Cisco — the king of kings — sold off. Granted, two of last year's Fantastic Four came in strong: AOL ("The Thing") and Yahoo! ("Stretch"). Intel, Sun, Oracle, Arriba and Motorola were also winners. We sold Oracle on management questions, but we are holding Sun. I believe we're up more than 200%, thank you very much.
The question for the fall will not be whether the tech will rise again, but when.
The mixing bowl
Every morning, I wake up to the DC traffic report, which usually starts out by declaring that the "mixing bowl," a particularly ill-designed stretch of beltway, is covered with twisted metal and broken glass. Cars back up for miles waiting for some solution. Should they take this exit now or wait ten minutes (or two hours) for the wreckers to clear the path?
Of course, by the time you make the decision, it's already too late. Any decision will be wrong. So you sit in an inconclusive quagmire. Some folks switch lanes over and over in a febrile attempt to get five cars ahead. Some wait patiently.
This is exactly where we are in the market. It is without direction and stagnant, going nowhere fast. Even the leading indicators are flat.
It is grand to make choices free and clear, living on your own grit and resolve. It is perhaps slightly less attractive to wallow in a cozy womb, protected from the cruel winds of reality.
Conway, the hero of Lost Horizon, could stay in the relative peace of the mountain retreat or return to society, but investors at this point in the lazy, hazy summer market cycle must halt, crouched down on the shoulder of the mountain, neither betwixt nor between, and wait for direction.
If the NASDAQ market falls to 3,200, I would be a big buyer. If the market breaks out of its current trading range and heads higher for more than ten days I'm a buyer on the following selloff. But right now, I'm content to sit here, selling the rallies and buying the dips.
So click here to find out what you should do this month with the money you have riding in my current recommendations...
In addition to his duties at Taipan, Chris DeHaemer is the editor of The Hammer.
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