For those of you who reviewed Alan Greenspan’s testimony today, you may recall
his comments regarding how “home equity extractions” have benefited
the economy. Unfortunately, he ignores all of the negatives associated with
the corollary to these “extractions,” namely “home liability
accumulations.”

The only real way to extract equity from a house is to sell it. However, for
everyone who sells a house and extracts equity, another party buys that house
and replaces that extracted equity. Therefore there is no net benefit to the
economy from the extraction. However, most Americans have been “extracting” equity
from their homes by borrowing against it. In this scenario, no equity is actually
extracted, it is merely pledged as collateral. If a house rises in value from
$200,000 to $250,000 and the home owner borrows that $50,000 he hasn’t extracted
anything. All he has done is accumulated a $50,000 liability. What happens
if the value of the house falls back down to $200,000? Was anything actually
extracted?

To use the stock market as an example, if someone had margined Yahoo when
it was at $200 per share did he extract any equity? The only way he could have
extracted equity would have been to have actually sold the shares. However,
had he actually sold the shares, some else who have had to have purchased them,
so no net stock owner equity would have been extracted.

Subject: The markets, supported by geo-political uncertainty, ignore the worst
economic data I have ever seen.
Date: Thursday, February 20, 2003 9:44 AM

The data released this morning on international trade, wholesale “inflation” and
unemployment claims combined to create the worst one day release of bad economic
news that I have ever seen. Such a slew of overwhelmingly abysmal economic
data should have sent stocks, bonds, and the dollar plunging. They haven’t.
But why?

First, the data:

1. The December trade deficit widened 10.5% to a record $44.2 billion from
the $40 billion record it had set the month before. This result was a whopping
14.2% higher than the consensus which had estimated a narrowing of the deficit
to $38.7 billion. (Contrary to popular misconceptions, trade deficits are not
the sign of a robust U.S. economy growing faster than its trading partners.
They result from a mal-invested, saving-short, unproductive economy which is
incapable of producing the goods necessary to sustain its population.)

2. Wholesale prices rose 1.6 percent in January, with the core rate rising
0.9%, verses censuses estimates of.5% and.1% respectively. The PPI increased
at 3 times the consensus estimate, while the core rate increase exceeded consensus
estimates by a factor of 9! If those numbers are annualized, wholesale “inflation” is
running at 21%, with the core “inflation” rate running at over 11%.
(This comes despite Alan Greenspan’s myopic predictions last week that he saw
no signs of inflation on the horizon)

3. Unemployment claims for the week ended Feb 15th rose to 402,000 from an
upwardly revised 381,000 the prior week, exceeding consensus forecast by 17,000.
The four week moving average jumped to 394,750 and the number of people collecting
unemployment benefits rose to 3.444 million.

While the trade, inflation and employment news were all much weaker than expected,
the stock market actually opened positive, there was little reaction in the
treasury market, and the dollar only weakened slightly. What gives?

I believe the main reason that traders are ignoring such terrible economic
data is the geo-political uncertainly related to the Iraq situation. As unusual
as this may sound, I firmly believe that the geo-political uncertainty is actuality
the single most bullish factor supporting the stock market. Everyone agrees
that the market “hates uncertainty” and that once the “uncertainty” is
removed, the market is certain to rally. Therefore, traders are reluctant to
sell stocks aggressively for fear of missing the highly anticipated rally that
is sure to follow an invasion of Iraq. In other words, there is a lot of certainty
being priced into a supposedly “uncertain” situation. In fact the “Iraq
invasion relief rally” is quite possibly the most highly anticipated rally
of all time. As a result, it will most likely never occur. When the bombs finally
do drop and no stock market rally occurs, look out below.

I believe that the same factors are also at work restraining price increases
in the foreign exchange, oil, and gold markets, and that prices for all three
would be higher were it not for all of the “uncertainly” over Iraq.
Again, when the bombs finally do drop, and prices do not collapse, expect sharp
rallies in these markets.