MARKETS

For the Small investor 5K to 25K

Never do I comment mid-week but this week deserves comment now.

First the warning: California. This is serious because of the threat of bond default, continuing deficit spending, the looming ogre of tax increases including those on stock transactions if they can get away with it. The California economy is heading toward the rocks and there is no will to repair it. You may even have to separate the data from California and the rest of the country, it is that bad.

NOW THE GOOD STUFF: Japan looks to have turned around. The second largest economy in the world may finally have turned the corner with growth exceeding 4% in two straight quarters. Japan is roaring. Their stock market is up from 7,400 to more than 10.000. There is no way the world economies won't take off if both the U.S. AND Japan start growing at 4-5%. Computer sales in Japan are up 20%. Asia in general has shaken out of the doldrums and the entire area is hot. Japan has a zero cap gains tax and almost zero dividend tax.

Europe APPEARS to be growing, or at least their stock markets show growth. All markets are up between 27% and 40% (France). This is also a very positive sign. Their cap gains and dividend taxes are low (lower than ours but only slightly) which encourage investment.

HERE: There isn't a sector that doesn't look good. Those HORRIBLE TAX CUTS that the Democrats insist are bad for us are now in the market. Disposable income is up 10% due largely to the tax cuts, productivity is up another 4%, profits are rising again (10% each of the last two quarters) which means that corporations have raised prices without raising them due to productivity gains. Actual profit gain as calculated by the economist wonks is up around 20%. Consumer spending is going through the roof. Stocks are more attractive than bonds because even at 4.5% the Treasuries PE is 22-1 and stocks are about 18-1; unlike bonds, stocks rise in value as they pay a dividend. The dollar rally, which I'll discuss below makes stocks even better. Short term rates are low, housing starts the highest since 1994, every indicator for big growth is up; base metals, lumber, materials, everything. Keep in mind that all these new houses will need carpeting, refrigerators, TV sets....the works. This is a huge recovery. Add to that the replacement of older appliances in homes which have been on hold for two years will explode as well. Sales in Home Depot and other home centers are flying; same for retailers in general with the biggest back to school buying in years. Anybody on the sidelines now is just not ready for anything other than CDs. Any way you measure earnings they are roaring. Only the media says they aren't, I guess because Microsoft won't pay a dividend (Gates is advised by Warren Buffett who doesn't pay dividends either). Some are calling for a profits rise of 15-20% second half. Add to all this, margin borrowing rates are very low.

JOBS MUST FOLLOW. It doesn't mean they will. Remember that you don't KNOW anything. Don't let dreams and data cloud your investing. The only numbers that count are the ones in the market. I have been involved in markets for almost 20 years and I can't tell you how many times the market failed to do what I "just knew it had to do." You never KNOW. I don't know how unemployment can go up again with the positive data out there, I only KNOW that it can.

WHY THE DOLLAR RALLY IS GOOD FOR STOCKS: Especially if you are a German or some other EUer you have bought U.S. stocks with a low exchange rate of let's say $.86 and even if your stock hasn't moved you will now get $.89 (the dollar is up almost 9% since June). The Europeans are piling into our market with cheap money. On the other hand if YOU purchased when the dollar was low and you sold now, even though the stock hasn't moved, you would be able to buy more with the same dollar return. Super BULLISH for our market.

CONSUMER CONFIDENCE: Again the most useless stat there is. It's done by the University of Michigan and all they survey is the labor force, the most uninformed segment of the society. They get their info from network TV and don't read at all (The Globe and Enquirer don't count). There is another poll HERE that measures both the labor force and the investor class. This is the only poll that is accurate. He measures both the investor class (45%) and the labor force (55%) and he does it every day and measures it against a month ago each day. His figures have been rising for quite a while. Keep in mind that the investor class gets their news from cable news, the web, the Journal, IBD, and the major daily newspapers. This class is well informed and usually ahead of the curve.

The stock market measures the confidence of the Investor Class, the Michigan survey measures only the labor class. Each taken alone is not a correct measure. I hope you are IN the market.

TRADER??? The cheap way is spyders SPDR; Materials (XLB) and consumer staples are hot (Symbol XLV). Day trade the shit out of them but watch liquidity.