THEME: FREE TRADE

In an October Christian Science Monitor/TIPP poll, for example, only 43 percent of Americans say free trade is "good for the economy," down from 52 percent when a similar question was asked in May 2002.

Greg Mankiw, Pres. Economic Adviser, was on Kudlow & Cramer basically saying that we need to engage China, and that a booming Chinese economy would be good for our imports. This is the stance that Republicans want. Treasury Sec. Snow's show on the Hill was just a bone tossed to the voters that the Administration wanted to get tough with China. If we go into 2004, and jobs start to slip again, expect Dems to really push this theme hard.

Even the pro-free-trade Bush administration is taking China to task. "America's patience is wearing thin," Commerce Secretary Don Evans wrote Wednesday in the Wall Street Journal. He criticized China for a "loss of momentum" in moving toward compliance with its WTO obligations.

How do the Bushies think we are going to have any pull at WTO with our steel tariffs, lumber tariffs, not to mention pulling out of Kyoto agreements. Bushies have no international credibility. Even BBC show "Dead Ringers" has a scathing parody of Bush as a regular feature (and the Brits are our allies). You'd never see anything that harsh on US networks.

THEME: TECH

In an effort to shake things up, Vanguard fired the original skipper in June 2001, commissioning Alliance Capital as the replacement. Unfortunately, performance went from bad to worse. Despite promises to the contrary, there has been little improvement. Alliance, in a letter to Vanguard chairman Jack Brennan last year, wrote that "underperformance for U.S. Growth is behind."

It appears that they were looking backwards when they made the pledge, because underperformance continues. I doubt they'll be sticking their necks out making any such promises again.

Since Alliance took over as adviser, U.S. Growth has dropped 28.3 percent over the three-month period from June 1 through Oct. 3. This compares to a 10.5 percent loss for the S&P Barra Growth Index (SGX: news, chart, profile) and a 17 percent drop for the Russell 1000 Growth Index (RLG: news, chart, profile), the fund's benchmark.

U.S. Growth, which ballooned to $22.3 billion in assets in August 2000, has shrunk, through losses and shareholder defections, to just $7.1 billion. Investors pulled $170 million out of the fund in 2003 alone. Contrast that with the $85 million or so that has flowed into Vanguard's Growth Index (VIGRX: news, chart, profile) fund, which is a passive, $8.4 billion fund tracking the same large-cap growth stocks.

Alliance cites several reasons for the fund's poor performance in their August annual report, writing "The underperformance of our portfolio is a product of our unwillingness to chase ... extremes in investors' risk tolerance."

Calling their positioning prior to March 2003 "insufficiently defensive," it may be that they abandoned a higher-risk strategy for a more conservative stance just when taking risks might have paid off.

Alliance's poor stock-picking in the health care sector (accounting for between 25 percent and 31 percent of holdings during the August to August period addressed in their letter) caused the biggest drag on performance, with that portion of the portfolio losing 3.2 percent compared to a gain of 6.6 percent for health care stocks in their benchmark.

Fund managers have been desperately trying to keep up with the market without buying tech. At what point with they capitulate?
When they capitulate:
1. Buy healthcare laggards (big pharm)
2. Financials
3. Energy

THEME: DEBT BUBBLE

"Usually consumers repair their balance sheets during a recession," said Dan Dekar, chief investment officer at Smith Breeden Associates. "But this time, consumers have been encouraged to take on more debt."
But with the easing cycle now believed to be at an end, economists argue households will need to start cutting back. Quarterly data compiled by the Fed shows that the ratio of household debt payments to personal income has risen steadily over the past decade and remains at near-record levels. "Eleven per cent household debt growth in a stable interest rate environment is not sustainable," said Jan Hatzius, senior economist at Goldman Sachs.

This shocking tidbit from UK...

"The biggest problem amongst individuals in the spiral of debt is credit cards," said Mike Gerrard, personal insolvency expert at Grant Thornton, the accountancy firm. "Typically, an individual with serious debts will have a mortgage in the region of £50,000 to £100,000 and commonly credit and store card debts of £50,000."

Debt bubble, even if it is gingerly deflated is likely to sap the strength of any rebound recovery. Incremental rises in income are likley to go to debt repayment rather than extra spending.
Trade: buy credit debt vs equity.

MEME: JOBLESS RECOVERY

"We can finally put the nail in the coffin of the jobless recovery," said Ken Mayland, president of ClearView Economics. "We are back on a rising job track."

"The jobless recovery is over," Wells Fargo economist Sung Won Sohn declared in a report.

"We have lift off," said Naroff Economic Advisors president Joel Naroff. "So much for the continuing dirge that we are in a jobless recovery."

The last fortress of doubt in the minds of the economic pundits has fallen: JOBS. Without a "jobless" recovery, we have an old fashioned recovery. This means that:
1. Buying bonds = insanity
2. Shorting stocks = insanity

THEME: AGING BOOMERS
Carl Camden is the President and Chief Operating Officer of Kelly services, one of the largest temporary staffing and placement companies in the country:

We never slowed down in health care. All through this recession, there was a tremendous demand for health care. Financial services are still strong in spite of the slowdown in the mortgage area. And for most of the staffing companies, manufactured-related staffing already climbed back in a stay at pre-recession levels. It's not growing much any more, but it's at pre-recession levels.

MEME: PRESIDENTIAL CYCLE
Donald Luskin, Smartmoney:

My friend Fred Goodman - the dean of technical analysts who writes a daily technical report for my Web site - has been focusing on it a lot lately. Fred has paid particular attention to the fact that the market tends to do well in the last two years of a presidential term - in other words, during the run-up to the election (which is right where we are now). But he's already beginning to look ahead with trepidation to the first two years of the new term: With the election over and done, the market tends to do poorly.

So what do we do with this information? For the short term, it's simple: Get ready for a great year ahead, not only because the market tends to turn in above-average performance in the fourth year of the cycle. Take a look at the chart, and you'll see that the fourth year has also been the least risky of them all. It's the one with the narrowest range between best and worst performance (which means that if past is prologue, there's less uncertainty about the exact result you can expect). And it's also the one with the least-bad worst case. The worst fourth year ever was a loss of only 10% - all the other years have had worst-case losses that were multiples of that.

More people are talking about the Presidential cycle because it looks more likely that Bush will be re-elected. Bring it on!!!

THEME: EASY FED (?)

``If the economy gets a full head of steam,'' interest rates ``will have to rise,'' Jack Guynn, president of the Federal Reserve Bank of Atlanta and a voting member of the policy-setting Federal Open Market Committee, said yesterday.

This is the 1st official salvo that I've heard.

THEME: PRODUCTIVITY
WSJ:

For more than 200 years, "The Marriage of Figaro" has been performed with a full orchestra. But when the Opera Company of Brooklyn stages the Mozart opera in January, the pit will be occupied by only 12 musicians -- and one technician overseeing a computer program that plays all the other parts.

As the U.S. enjoys explosive growth in productivity, with an 8.1% third-quarter gain reported Thursday, the effects are reaching into far corners of the economy. The low-budget opera company in Brooklyn saves enough money on musician salaries with its high-tech orchestra that it can offer more performances per season.

Once confined to the computer sector and a few technologically savvy companies, productivity gains have spread into the nation's vast service sector, from airports to pet stores and package deliverers. Moreover, companies now are reaping the benefits of not just their technology investments in the 1990s but of organizational changes that made the technology work for them.

"It took a while for businesses to learn not only how to use information technology, but how they needed to organize themselves," says Robert Solow, a Nobel Prize-winning economist at the Massachusetts Institute of Technology known for his work on productivity.

MEME: TEN-BAGGER
From Motley Fool:

"Any piece of moderately good news may be enough to drive the stock to multi-bagger returns in 6-12 months." -- Zeke Ashton, March 2003

Bull must be back because they are using Peter Lynch's "bagger" terminology again. The question is when will greed get dangerous? The bubble is being blown, can the Fed keep it from popping?
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