To OTC Journal Members:
 

From Sir Greenspan To Code Orange- A Wild Week Indeed

We were assaulted with economic and geopolitical information by the news media this week. However, the markets continued grinding lower on anemic volume as investors remain frozen like a deer in the headlights awaiting the outcome of Bush's war threats. This market is amazing in that no one seems to be willing to make a serious bet- potential buyers are afraid of a long war, high oil prices, deficit spending, and a shortage of investment capital for expansion. Short sellers are afraid of a quick resolution to geopolitical conflict, leading to lower oil prices, smaller deficits, and a resurgence of long overdue economic expansion in the US economy.

Alan Greenspan's testimony before Congress was unique. He virtually admitted the Fed's economic stimulus package, focused on lower interest rates and an increasing money supply, is simply not working in the backdrop of this massive worldwide uncertainty. Greenspan has never seemed this frustrated, and his views are directly reflected in the quote we have at the top of this edition.

The long awaited economic recovery seems to be totally derailed by geopolitical paranoia. Business expansion is at a stand still, with budgets tightened down to the nub. High oil prices, a consequence of potential war with Iraq, are acting like a tax increase from which the government gets no revenues. Has it occurred to anyone that Middle Eastern oil producers, some of whom are financing the terrorist activities that have killed people world wide, are enjoying windfall profits from absurdly high oil prices?

Filled your car up lately? A year ago what cost $25 now cost $40. Fill up the car on your way to buy a valentine's day gift for your spouse and you will spend less because you will feel less wealthy. This is one way high oil prices trickle down to hurt the entire economy. Mr. Bush- try not to forget that voters tend to vote their pocketbooks.
 

Code Orange Creates Irrational Hysteria

Osama Bin Laden resurfaced this past Tuesday for the first time in months with a statement calling for solidarity and support for Iraq in it's potential fight against an ever shrinking US led coalition.

Many experts believe public statements by Bin Laden could be disguised signals to terrorist cells commanding them to execute previously planned operations. The Bush administration responded by upgrading our alert status to Code Orange, which resulted in mass hysteria, fueled by a media blitz of insanity. Here are some examples of the media madness fueling absurdly high levels of paranoia:

• New York Daily News: "CYANIDE ALERT" – "What should you do to protect yourself and your family?"
• CNN: "Preparing for Terror/Red Cross Tips"
• Minneapolis Star-Tribune: "On guard and braced for attack."
• Baltimore Sun: "Attack alert sends some scrambling to the store."
• Rochester Democrat & Chronicle: "Locals prepare for terror."

Does anyone else feel this reaction is excessively irrational in light of the thousands of terrorists who have been identified and put in jail since 911? Is Osama Bin Laden and Al Queda still a force that should strike terror in our hearts every time we hear their names? Should we live our lives everyday as if another disaster equal to 911 is just around the corner?

The answer is NO. The media has blown this entire event way out of proportion, and most citizens of the United States have rationally dealt with Code Orange by changing nothing in their lives.
 

Mr. President- Just Close The Markets Until You Decide What To Do

Appropriately, Monday is the President's Day Holiday and the markets are closed. Mr. President- with volume no where to be found while investors hold their collective breath waiting for your attack, why not simply close the markets? This would prevent the daily grinding while everyone waits to place their bet on world events.

In fact, why not take the New York Stock Exchange and turn it into a "Duct Tape" Exchange until you decide what to do? After all, duct tape has become a commodity to be traded like any other. Why not use the infrastructure of the NYSE to facilitate trading until there is renewed interest in stocks? 
 

The Bullish Case

The market bounced a little Friday on benign comments from Hans Blix in front of the UN Security Council, but bearish sentiment is widespread and pervasive.

If you subscribe to the theory that the majority is usually wrong, now would be an outstanding time to go long your favorite stocks. This market is a contrarian's dream come true. Pessimism is nearly universal, not unlike the optimism we all felt in March of 2000. 

The current disbursement of capital in the Rydex funds provides compelling evidence for the contrarian bullish camp. The Rydex Titan fund, which is designed to go up 2 for 1 in an inclining market, currently has $77 million invested. The Rydex Tempest Fund, which goes up 2 for 1 when the markets go down, currently has $648.8 million invested. Another words, there is eight times as much money betting the market will go down than betting on a move up in these Rydex Funds.

Here's some other compelling bullish data for those concerned about significant deficit spending to finance a long global conflict:

David Herskowitz of Technological Forecasting says there were two periods in American history in the past 70 years when the national debt grew much more rapidly than GDP: during World War II and during the 1980s and early 1990s, the Reagan-Bush years. This could be the case if we have to finance a major war effort.

"In both cases, interest rates fell during the period of high deficit spending, and these periods were followed by real economic expansion that was previously unexpected," says Herskowitz.

Is this the light at the end of the tunnel, or a train coming at us? As eternal optimists, we like the bullish scenario, always remembering that you can find data to support any point of view.

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