10/31/2003

THEME: RECOVERY

Brad Sullivan, founder of Chicago-based Group 6 Trading, believes the momentum will "spill over big upside" into the first quarter of 2004, predicting the S&P could trade to as high as 1200 before consolidating thereafter.

This is illustrative that more extreme readings in sentiment are appearing.

THEME: MUTUAL FUND SCANDAL
Flows into stock fund have been heavy at $50bn since March.
This is still not enough to reverse the $70bn that was redeemed last year.
Flows have gone into small-caps & international funds.
Large cap & technology have actually not been hot.
Clearly individuals & institutions have been picking up the pace since the war ended.
Mutual fund scandals have not impeded flows. It is more important for people to hold their mutual funds & participate in the rally rather than redeem & suffer the consequences due to “principle.”
Also, witness the reluctance that jurors of Quattrone & Koz trial have shown. This may signal that investor outrage is old news.
The key to monitoring is how Putnam redemptions play out. Mechanically how is it done? Do managers buy puts? Do they buy calls as they are selling?

THEME: CHINA/COMMODITIES
Howard Schultz announced that China will be their most important market going forward. More evidence that China mania is getting old.

Barron’s:

It is working out very well, for the time being. Their imports are growing faster than their exports. Their imports are up 40% year over year. Mind boggling. Chinese imports represent almost one-third of the increase in imports globally. A country with an official GDP that puts it No. 7 or 8 in the world is accounting for 30% or so of all the growth in global importing. Stunning beyond belief. If it keeps rolling a lot of things are going to change in the world.

"We were recently in Beijing, Xian, Shanghai, and we were just amazed," said Tim Halter, head of Halter Financial Group. "I was at an intersection in a cab, so I just start counting; there were 14 high-rise cranes at one intersection that I could count. It's unbelievable the growth going on and people's optimism and understanding of what's happening to them. They're living in a historic moment, and they're aware of it."

"They need oil, copper and steel to build all this," said Holmes. "Steel prices especially have gone through the roof. All of our waste is their product."

More talk of Chinese demand driving commodities boom.

MEME: SELL IN MAY, GO AWAY

Speaking of seasonal patterns, the old saw 'sell in May and go away' until October "presupposes an October shakeout in which to buy into," RealMoney.com contributor Jeff Cooper observed.

But note that this year the old, dog-eared seasonal patterns haven't exactly worked too well. Not only did September and October fail to put a scare into investors, but those who heeded the famous advice to "Sell in May and go away," is now returning to find they have forgone some nice profits. From Barron’s

People are running out of excuses not to be in the market.

THEME: RUSSIA SCANDAL

"A lot of hedge funds have done very well investing in Russia this year [and] there could be major fallout" from the unrest in Russia, he said. "The political risk in these markets has gone up a lot." Scott Curtis, managing director of equity trading at Kinetics

Need to monitor if Russia looks to be diving.

MEME: PRESIDENTIAL CYCLE

A: It is the third year of a presidential cycle. The presidential cycle is enormously important. The presidential cycle for me starts in 1932. Before then, the whole idea of stimulus hadn't sunk in. Keynes explained the concept and in Franklin Delano Roosevelt he had a very interested listener.

From then on, administrations understood it is a good idea to stimulate the economy in year three, so that in year four unemployment -- and this is key -- is dropping. It's fine to have a strong economy, but it is unemployment that really drives the vote, our research shows. The third year in a presidential cycle is not just a bull market year, but one with a bubbly flavor to it where growth wins. It's the only year in the cycle that growth wins. The speculative stocks outperform the quality stocks and small caps do very well.

This is from Barron’s. People are starting to believe.

THEME: DEMOCRATS ARE SHORTS
Barrons:

Our old pal and Roundtable member, Barton Biggs, in a fey mood recently mused to us that Alan Greenspan,who during the bear market and recession had been in the investment doghouse, was ripe for a rebound in line with the economy and the market; if he were he a stock, Barton speculated, he'd be a buy. And so would George W. Bush, we might add, off those sterling third-quarter GDP numbers -- except for Iraq; that makes him a hold. The Deans, Clarks, Kerrys etc. all would be short sales, especially Mr. Dean, who brings the added qualification of being, well, short.