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Its Déjà vu all over again

Its Déjà vu all over again

As usual, Wall Street has ignored a slew of negative economic news and has
ignited a market rally that defies logic.

Investors are downplaying today’s higher than expected.5% increase in June
PPI and are focusing on the core rate, which fell by.1%. This is similar to
focusing on favorable pro forma earnings while ignoring GAAP losses. The argument
that food and energy price increases should be ignored because of their greater
volatility is absurd. Sure, they may be more volatile on a month-to-month basis,
but their general direction is up. To ignore this fact is a farce. Year-over-year,
the PPI has risen by 2.9%, and year-to-date it is rising at an annualized rate
of 4.8%! Those are substantial increases, particularly in such a weak economy.

Investors also ignored the unexpected widening of the May trade deficit. For
the year to date the trade deficit is running at an annualized record rate
of $492 billion (so much for the theory that a weaker dollar would help exports).
The contention that this horrendous trade deficit results from the fact that
the U.S. economy is growing faster than those of its trading patterns is utter
nonsense. For the month the trade deficit with China widened to a record $9.86
billion, despite the fact that China’s economy is growing at five times the
rate of the U.S.

In addition, Investors ignored GE’s reduced guidance for 2003 earnings and
Juniper Networks’ cautious remarks regarding expectations for the third quarter.
The bulls are apparently so convinced that a strong recovery is just around
the corner that they simply ignore any evidence to the contrary. I believe
the psychological theory that explains this condition is known as cognitive
dissonance. When reality finally sets in, this bear market rally could easily
end with a spectacular crash, similar to the one experienced in 1987. The longer
these overly optimistic assumptions last, the more likely the crash scenario
is to unfold.

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