Well, well, well. Here we are again. Markets are looking ugly shortly after a rally that made it seem like the bear market would quickly become a fading memory. What made this latest false rally so much more painful is that it occurred right at the beginning of the year - right when hopes ride highest and desires strongest to put a less than stellar past deep into the cellar. But once again, this bear rally was predictable. It started with a rally of monster proportions: The Dow had its biggest year-opening ever I believe. And we should all know by now what follows such record-breaking rallies - they only serve to confirm that the bear market is alive and well. And again, the reason for this is that such rallies show that people remain too eager to buy, more afraid of risk to the upside than the downside. These same people are quick to sell once the tides turn, and thus, the rapid slides that follow the giddy rallies. Until prospects for the economy improve in actuality and not in theory or in fantasy, there will always be plenty of eager sellers ready to kill any bear rally.

Now, this litany must be a familiar refrain for most of you. And this is why it was difficult to write missives even as I watched the latest rally pop and fizzle. The patterns are broken records, and certainly you all know my stance pretty well. The even MORE interesting development is that I am finally hearing more and more pundits and analysts echo the same bearish thoughts that I espouse. This is a GOOD thing. The quicker the party-goers sober up, the quicker we can get about the business of fixing the aftermath of the bubble. And make no mistake about it, what truly ails this economy REMAINS the aftermath of the bubble. No war with Iraq, or even resolve to make peace with Iraq, will fix that.

So, before I continue and paint what I see as the current backdrop, let me dare to make a pretty complex prediction for the year. Since the October lows were made last year, I have been claiming that we would at least retest, if not break, those very same lows. At the time, I felt the inevitability of a retest because the rally was too easily and too quickly bought (not to mention my own sour grapes for not acting on my recognition of those temporary lows being set!). Regardless, the action that followed telegraphed that the excesses from the bubble had certainly NOT run their course yet. Now, with investors getting more and more nervous about the geopolitical environment, it seems I have to move up my timetable for this retest event to sometime soon! My previous prediction was for a retest and potential climactic low coming in the Spring once market players realized that a robust 2nd-half recovery would be a wicked fantasy for the third (even fourth depending on your perspective) year running. In other words, the recent market ugliness could be telling us that this re-test is imminent - sooner than later. This is something I had not considered enough. You may recall that I had claimed that the market was tired of worrying about Iraq last November or so because it was just listlessly bouncing around. This re-test would mark the final exit of those who are simply too nervous to wait out the final news on Iraq.

Once a resolution on Iraq happens, war or peace, we are then likely to see the biggest headfake of a rally yet in this entire bear market. The problem is that the bulls have an argument to buy regardless of the outcome. The logic reads something like this: 1) if we find a peaceful solution, the world becomes safe to operate businesses again and the weight on the economy's neck will be lifted. BUY! 2) if war breaks out, we should have a quick victory, and, regardless, the uncertainty that's been weighing on the market will be lifted. BUY! The false hopes that ride on that rally should set up a final climactic sell-off this Fall for all the typical reasons I have laid out in earlier missives why big sell-offs often happen in the Fall. The main problem I have is that I am relatively sure of where the highs of the subsequent trading range have been set (the December high), but I simply have no sense for just how low this market will go. I still have Nasdaq 1000 in my back pocket, but I see all sorts of reasonable arguments for final resting points all over the map. However, I do feel the next climactic sell-off will finally put in a bottom for this bear. Well, unless people proceed as business as usual...I hope to be able to justify this hypothesis in future missives.

I know, I know, it all sounds so dramatic and complicated, but it is really pretty simple. 1) the excesses from the bubble have not been purged, 2) the true burdens on the economy remain those excesses, 3) the economy will not experience robust growth until those excesses are purged, 4) the Fed and now the White House and Congress are doing what they can to prop up what is left after the bubble, 5) any intermediate events, even large geo-political ones, are most likely going to be distractions from the real storyline. As tragic as 9/11 was, it showed how ready people were to blame the economy's problems on anything but the bubble. The rally that ensued only set us up for an entire year of losses. The Iraq issue threatens to have the very same effect.

So what is the point of all this negativity anyway?!? Back when I started writing these in the Fall of 2000, I sought to counteract what I saw as the overly-optimistic, sometimes recklessly so, bubble-speak being fed through the mass media. As more people are finally catching on after three years of downside in the markets, true opportunity is closer than it has ever been (for example, investors for the most part have been withdrawing cash from their mutual funds - I hope it is not to service debt!). So, while I continue to wallow in the bearish story note how if my predictions even come close to being true, there will be lots of opportunities for intrepid investors who are seeking out investments that have ALREADY DISCOUNTED RISK. This has got to be your mantra if you are trying to go long-term, even intermediate-term. You do NOT want to pay a premium for anything when risk is everywhere around you. Why should you pay extra for the privilege of putting your hard-earned cash at risk? You shouldn't! The market owes YOU! J If done right you, we, can make decent returns even in a market trapped in a trading range. Time will sure tell. But it won't be easy because you will likely have to buy when all around you are selling, and you will have to give serious thought to selling when everyone is buying, happy, and giddy. And there will always be the risk that you will completely give up and sell at the bottom of one of these sell-offs and/or get swept up with dreams of miracles and sugarplums in the latest bear market rally. The ONE exception I am allowing for is a convincing, high-volume break and CLOSE above those December highs.

Also, the time is near upon us where there is no need to be blanket-negative against all things tech. I can finally see *potential* opportunities opening up, even in the semiconductor area, where stocks of good companies are finally getting discounted for hard economic times. I will write more on this in future missives. Earlier pieces I wrote on certain tech companies covered businesses that are doing well but most had expensive stocks. Those are not likely buy and holders.

Anyway, enough of the prognostication on the markets. Let's take a look at what is out there pressing against the market, and the economy's prospects.

First, an obligatory criticism of Greenie and his crew. Since Greenie continues to refuse to acknowledge a bubble ever existed, he feels OK issuing econo-babble like this after the latest Fed hub-bub: "Oil price premiums and other aspects of geopolitical risks have reportedly fostered continued restraint on spending and hiring by businesses. However, the Committee believes that as those risks lift, as most analysts expect, the accommodative stance of monetary policy, coupled with ongoing growth in productivity, will provide support to an improving economic climate over time." What a bunch of you know what! First, note how the Fed members now refuse to take too much credit or responsibility for any outlook on the economy. Note the use of the words "reportedly" and "as most analysts expect." Come one, Fed! Has three years of being dead wrong FINALLY made you too gun-shy?!?! Well, just in case they did something correct, this statement allows them to conclude in the end that it was "accommodative" monetary policy that fixed almost everything (let's not even mention the Fed's role in getting us here in the first place). Needless to say, with interest rates at historic lows, and the Fed desperately pumping money into the system and blowing more and more hot air to support consumer debt (and spending), there is little more help we can expect from these fine people. This statement shows to what extent they need to grasp at straws to come up with some kind of plausible scenario in which the economy truly recovers. "Over time" could be "anytime in the future" as far as I am concerned. Amazing what you can do with a few choice words!

Now, here are some quotes and snippets I have been collecting to share with you all (sorry I have lost most of the references and sources). I have chosen this format rather than craft a witty mosaic because there are a LOT of stories and side-stories that need to be tracked, and frankly, I have been remiss in not writing about them in real-time. I don't even consider this list complete, but for those of you who have read some of the articles I have sent out from various publications, some of it will not be new news - or at least not surprising. Since I think you all understand my economic viewpoints and biases pretty well, future missives could take more of a political tone. I will also be spending a bit more time talking about global processes and longer-term developments.

Be careful out there!

--- Duru

• Goldman Sachs' economic research department (Jan Hatzius): "It simply isn't plausible that households or firms are retrenching because there could be a war halfway around the world, a war in which the U.S. is expected to prevail quite easily. Instead, we think the ongoing balance sheet adjustments among households, corporations, and state and local governments following the equity bubble's demise are much more important. Consumer spending soared in the immediate aftermath of the Sept. 11, 2001, attacks, when U.S. citizens were more fearful for their personal safety. In addition, the increased business spending in today's fourth-quarter GDP report supports this contrarian view. While consumer spending rose just 1% last quarter, its slowest pace since 1993, nonresidential fixed investment rose 1.5%, its first rise since 2000's third quarter." (first seen in realmoney.com)

• The German, French, AND British markets are all careening to or THROUGH their respective October lows. So much for diversification! This is made all the more troubling since the dollar continues to lose ground to the Euro.

• AOL records the largest corporate annual loss in history: an incredible $100 BILLION loss! Wow! Will the record-breaking of this post-bubble economy ever cease!? These records are another indicator of the tremendous magnitude of the distortions we just went through.

• Mutual funds are reported to be at 4% cash levels. Typical bear market bottoms occur when these same spendthrifts are at 10-13% cash levels. It takes real hard Greenbacks to move the market. Now imagine that your favorite fund has already spent its wad chasing the last bear market rally...any wonder why all the selling ensued? Makes you wonder how long rallies can last anyway, eh?

• Bushie's dividend tax cut plan is another smokescreen. It seems all the branches and sub-branches of government are now focused on the stock market, except, perhaps, the Supreme Court! (Can they rule against the bear and bring it to justice and life imprisonment?). While I fully agree that double-taxation of dividends is downright inefficient and silly, to equate it with jobs and economic growth is also downright silly! Most of that money will go into either buying more of the same stock or into bank accounts. And most of the holders will be rich folks who are not plying that money into more factories and businesses to build more things that people will not buy or things they can barely sell for a profit! Unfortunately, we also have the Democrats working against us because a strong stock market will nearly assure Bushie a victory in 2004, almost no matter what happens in/to/around/with Iraq.

• An analyst recent upgraded tech-wreck bellwether Applied Materials (AMAT) based upon comparisons with the company's past trading and valuation ranges. Unfortunately, the company chose to turn on the poor guy soon thereafter which a huge sales warning. The whole episode served as a reminder of how unreliable these analysts remain. We should also be reminded that no amount of hand-waving about historical valuations and past economic cycles means much when so much of the last bull market was built on hype, smoke, and mirrors. Especially in the techonomy.

• My informal barometer of insider-buying has been failing pretty regularly (I am talking about the kind of insider trading that is legal and reported through the SEC). An increasing number of the trades I review these days show insiders paying much higher prices for their shares than where their stocks currently rest. If these insiders are getting creamed, what can you expect from the analysts covering these same companies? This activity tells me that depth of this economic "soft patch" continues to catch even the best off us off-balance. This is partially why companies were particularly cautious during January's earning season. It was probably the lack of a critical mass of good stories that encouraged all the selling in the 2nd half of January, rather than any real worries over Iraq.

• Finally some wise words from John Chambers, CEO of tech-wreck bellwether Cisco: This economy is the "...most challenging environment the information technology industry has ever faced. The economy hasn't changed at all. It's a show-me economy. The CEOs are just going to spend when they see their own business pick up."

• 2002 was the worst year for stock funds since 1974. Ninety-six percent of equity funds finished the year with losses (that's even after a strong fourth quarter).

• Under President Bush's $2.23 trillion budget proposal, a record $307 billion deficit will emerge in fiscal 2004. The doomsday Democrats are predicting Bushie will add another $1.7 TRILLION or so to the deficit by the end of the decade with all these tax cuts. The suddenly big-spending, big-government Republicans talk lightly about deficits and assume the economy will catch up to pay those IOU's off. The Republicans sound almost, so, uh, Democratic, when they talk so flippantly about busting the budget! My how times can change. Needless to say, I believe flirting with large debt burdens will come back to haunt to us quickly as long as the excesses from the bubble have not truly been taken care of. And, right now, few have shown the willingness to stand right up and be counted on this score! Note that these budget numbers do NOT include the costs of bombing Saddam back to the future. Assuming we are taking Iraq for an extended visit, estimates start at a "mere" $100 BILLION to fight the war, and, hey kick in another few hundred to rebuild what we destroy. And what in the world is going on in Afghanistan? How much are we willing to spend to fix THAT mess!? Regardless, Bushie is going to try to pull off an amazing hat trick that even big budget-busting, deficit-minded, former U.S. president Ronald Reagan would be proud of: cut taxes, increase spending, and start mega-billion war (or two). Any wonder that the dollar continues to sell off and gold just keeps going higher?

• Increased defense spending accounted for nearly two-thirds of the meager 0.7% economy growth in the fourth quarter, A surge in orders for military goods was the only reason orders for big-ticket factory goods rose in December. (Wall Street Journal, Feb 4, 20003)

• The techies are apparently as optimistic as ever. Hopefully, this is truly good news. I thought I would add this in as a half-hearted attempt to be "balanced" between bear and bull. This is from the Semiconductor Industry Association (SIA): "The SIA found that global semiconductor sales reached $12.5 billion in December 2002, bringing total revenue for the year to $140.7 billion, a 1.3 percent increase from the 2001 level of $138.9 billion...2003 will be a year of growth. The current forecast for the year 2003 calls for a sales increase by about 20 percent to $169 billion for the year. That goes on to another 22 percent growth to $206 billion in 2004, and then we expect it to flatten out as we go into 2005 when we have the traditional cycle rounding out at that point." It was hard for me buy into the reasoning behind assuming once again that this year would end with a bang UP.

• The consumer picture remains mixed, but it is at least not DIRE: "Personal incomes rose by 0.4% in December from the month before, after a 0.3% increase in November, the Commerce Department said Friday. Moreover, consumer spending accelerated as the final 2002 quarter progressed, finishing the year with a 0.9% increase in spending in December as consumers went back to car-dealer showrooms to take advantage of a new wave of auto incentives. Another recent government report showed consumer spending slowed to a 1% annual growth rate in the final three months of 2002, the slowest pace of spending in nearly a decade. For all of 2002, real disposable personal income -- which is income after taxes and inflation -- was up 4.5%. That compares with a 1.8% rise in 2001."

• In 2002, total institutional pension-fund assets plunged by about $1.4 trillion, or 12% (benefits consulting firm Watson Wyatt Worldwide). That means funds have about $10.7 trillion in assets -- the same level as five years ago. These institutions will be scrambling to get these pensions back up to their mandated levels. That means less profits for businesses and less cash available for capital investments - should they be needed.

• Why is the storied January barometer so important? Well, if you can't get people buying and holding stocks, there are few other better seasonal periods to encourage such behavior! Here is a snippet I found that does a good job explaining the dynamics: "January effects/barometer: companies tend to fund their pensions in January. January is normally the month that investors put Christmas bonuses to work in the market (though that's a smaller-than-usual pool of money this year, analysts say), and corporate payouts to employees' 401(k) plans also happen in January. Professional money managers tend to shape their investment strategies late in the year and implement them in January, which can bring fresh cash to the table." I will add that we should not forget that people tend to think in terms of a Jan-Dec year because of the tax cycle, not just New Year's resolutions to make more money. So, cash raised selling dogs in Nov/Dec gets put back to work looking for winners in January. Feeling hopeful, optimistic, and refreshed, people talk anew about rosy outlooks for the year and invest accordingly.

• And if you made it THIS far in this epic missive, then you were really optimistic about getting some money-making advice! J