After the carnage of summer, get ready for the turnaround:

6 profit opportunities for what's left of 2002!

by J. Christoph Amberger

They say September is usually a bad month for investors. This year, who can tell? June, July and August did their darnedest to make September look good by comparison, turning the markets into something resembling the Pennsylvania Turnpike in the process… small eternities of backed-up traffic haunted by unpopulated construction sites, rutted roadbeds, and billboards jeering: “Rome wasn’t build in one day, either.” And it’s not just the American markets. Germany’s DAX—which hitched a late ride on the late and lamented U.S. Internet bubble—has been losing value in 5% daily increments over the summer, dropping back to levels not seen since1998. France and Britain haven’t done much better. In Asia, Taiwan, South Korea and Hong Kong have been contracting steadily. And the Nikkei 225? Struggling to keep a few hundred points above the 19-year low it posted in August. If the old adage is true and 50% of any given economy is made up of emotion, the world’s in a serious funk. Even if there may not be much to be truly depressed about.

Perceptions of reality

Among my pet peeves in the day-to-day convulsions of the markets is the emphasis commentators put on the various monthly consumer confidence and/or sentiment indices and indicators. These are polls of average Joes deemed representative of the population by academics. The chosen ones respond to a given set of questions about how they see their place in the general state of the economy. For the past four months, the monthly levels of these indices have been declining. Consumers, the talking heads interpret away, are more and more distrustful of where the U.S. economy is headed. And since consumers drive two thirds of the economy, investors paying attention to the auguries of the pollsters jump on the bandwagon, selling stocks wholesale. The usefulness of these sentiment-based indicators for predicting actual economic (let alone stock market) movements has been debated—and they’ve proven to be without practical validity or merit in the past. But just consider the last quarter. While consumer confidence dipped each month, consumer spending rose proportionately. While Jane Sixpack was professing to be in despair about the future of the U.S. economy to the pollsters, her husband Joe was impatiently jingling his key chain, ready for a trip to the mall. And it wasn’t just shaving cream and a pair of socks that Jane and Joe were buying. Automobile sales, existing home sales, new home sales are all at record levels… and growing! Not all of this sales growth can be explained merely by the availability of low-interest, zero-down financing. If you’ve ever bought a house, you know how much analytic weighing and calculating is involved. Arriving at the decision that making the monthly mortgage payments for your new home won’t force your kids to wear Kleenex boxes for sneakers in itself represents a manifestation of optimism. Be it only the optimism that you will remain employed long enough to make next month’s mortgage payment…

Debtor’s prison

Much of U.S. consumer spending—and thus, economic expansion—is based on the easy availability of consumer credit. Accordingly, personal debt (especially credit-card debt) has been expanding right alongside consumer spending. (Maybe that’s what makes people depressed?) This is, of course, not a recent occurrence. I remember some of my esteemed colleagues in the investment advisory industry issuing dire warnings about the record levels of personal debt and bankruptcy back in the mid and late 1980s, predicting the collapse of the U.S. financial system for 1990, 1995, 1999, and 2000. And there are some indications that the American spirit has put down roots abroad, at least in Britain. Indeed, credit-card debt has increased by 16% in the last twelve months, according to the British Bankers’ Association (BBA). With 59 million credit cards burning holes in the pockets of Her Majesty’s subjects, credit-card debt outstanding totaled £43.7bn at the end of July, with average balances of £1,400. Credit-card borrowing now accounts for over 30% of all outstanding consumer credit and over 60% of all new lending. (This may indeed be the most compelling difference between Japan and the U.S.: Japanese consumers, by culture and demographics, are about as hesitant to go into debt as the Swiss and Germans were three decades ago. Which has limited Japan’s ability to work itself out of its decade-long depression by way of internal consumption.)

Great expectations

If Americans can’t be dissuaded from spending more than they earn on more than they need through market corrections of 30% annually, through rising unemployment, terror attacks and military campaigns, I wonder what could stop them once things start to look up again? Meanwhile, despite short-term setbacks and rumors swirling about the pending change of guard in Beijing, China is banking on Americans living up to their reputation as merciless spenders. Recent GDP growth projections for the next three years peg expected growth at 6% to 7% annually! (To give you the appropriate backdrop: the EU and Japan are expecting between 0.2% and 0.8% for the current year!) Even Toyota Motors, until last month the lone Japanese holdout, has finally decided to follow Honda’s example and set up shop in Shanghai. It’s an appropriate move: if Japanese domestic consumption shrinks, follow the growth! And one of the few regions around the world that seems ripe for another round of exponential growth is Asia. That’s where Chris DeHaemer, our own Taipan World Investor and editor of the popular Red Zone Profits, is going to take you in this issue. But not before Adam Lass arms you with an updated outlook on the imminent future of the Dow! The short term may indeed still have some downside opportunities—especially short-term speculations in oil-related stocks and options prior to any military action taking place against Iraq—but I believe that the investments we make in the next six months will be the cornerstone of our personal wealth in the decade ahead!

(By the way: if you’re not getting Adam’s intermittent updates on his outlook via our free 247profits e-Dispatch, it is high time that you do. This daily update on what’s going on in the investment world has really grown into the heart of Taipan’s subscription service. I urge you to make use of this free perk. The only thing you have to do is sign up for it, either at www.taipanonline.com when you check on our weekly hotlines… or simply go to www.247profits.com. We never rent your email address to anyone!)