THEME: OIL

Refining is hardly a model of pure competition. A merger wave has left ownership highly concentrated, and the big players know that any large increase in their output would push down prices and shrink profits. According to an analysis of corporate filings by Public Citizen's Energy Program, a liberal research group, the top five refiners controlled 51% of domestic capacity last year, while the top 10 controlled 77%. That's a sharp increase from 10 years earlier, when the top five had just 33% and the top 10 had 54%.

THEME: SCIENCE Graduates
Some troubling factoids...

According to the National Science Foundation, American universities awarded 220,000 bachelors degrees in science and technology in 1999, vs. 322,000 in China and 251,000 in India. As recently as a two decades ago, China and India were handing out only a fraction of that number of degrees.

Experts now say their lead will widen as the share of Asian students who go to college rises over next two decades from the current 4.6% to closer to the U.S. figure of 32%. "There's a risk that a couple of decades from now the numbers won't add up in terms of the basic skill sets our education system produces," worries Greg Papadopoulos, CTO of hardware and software maker Sun Microsystems (SUNW ).

For the first time in recent memory, foreign graduate students are accounting for smaller numbers of science degrees from U.S. universities. Traditionally, this group has received 30% to 50% of doctoral candidates in hard sciences such as chemistry, physics, and computer sciences. But a February survey by the Association of International Educators found that 47% of some 250 U.S. universities reported a decline in foreign grad student applications for the academic year starting in the fall of 2004. Among the respondents were 19 of the top 25 research institutions in terms of foreign student participation.

For now, though, some basic statistics point to continued success for India's outsourcing outfits. Consider that the country cranks out some 250,000 engineering and computer science graduates a year vs. the U.S.'s 140,000. And that recent India grads may earn as little as $5,000 a year. "The business case for offshoring is of an enduring nature," Thadhani says.

THEME: Market vs. Me
From Donald Luskin...

Now, on to the bad stuff. If "American Sucker" by David Denby were a cookbook, it would consist exclusively of recipes for how to poison oneself.

Denby isn't an investment pro — he's the movie critic for The New Yorker. His book is a memoir of how he — like probably many other investors — lost a substantial portion of his net worth investing in technology stocks following the market top in March 2000.

Unlike many investors, Denby wasn't just excessively hopeful, or greedy, or naïve, or even just plain wrong. Instead, in the midst of a painful divorce, Denby was so obsessively focused on his own inner life that he barely seems to have engaged his mind in the investment process at all. If anything, it seems to have been a kind of play-therapy for him, and a perfect example of that old maxim: "Wall Street is a very expensive place to find out who you are."

As a critic for a respected magazine, Denby had social entrée into relationships that could have made him a better-than-usual investor. In the book we hear about how he met with Securities and Exchange Commission chairman Arthur Levitt, how he lunched with superstar Internet analyst Henry Blodgett and how he attended parties at the home of controversial ImClone (IMCL) Chief Executive Sam Waksal.

But those were all missed opportunities for Denby. It's as though those people weren't even there — Denby has absolutely nothing to say about them, other than how his encounters with these extraordinary men affected his own emotional state. Reading "American Sucker" is like talking to a boor at a party who says, "But enough about me. Let's talk about you. What do you think of me?"

The thing I have always loved most about investing is precisely how little it has to do with me. An effective investor has to study literally everything in the world — because everything in the world affects the market. Nothing is out of bounds, except one thing: oneself. One's emotions, biases, hopes, fears — these things are irrelevant, and to the extent that one regards them at all except to extinguish them, they are enemies.

When you are the focus of your trading, you can never win. When you can become part of market and attain mushin, then you will empathize with it. Trading based on your needs or biases is like singing out of tune in a choir, they'll sing louder to drown you out.

THEME: SCEPTICISM to COMPLACENCY

"The earnings story is good and is likely to remain very good, and the economic conditions are likely to remain supportive," Blood added. "It's certainly not going to go straight up beyond this period, but I think we're about two-thirds of the way through this correction."

This quote pretty much typifies the reaction of the market to the stock sell-off and terrorism. In Nov. 2003, I wrote about increasing scepticism about the market's rise. Now, people are quite complacent. Also, the initial reaction of the news to the Spanish bombing was pretty mild. The fact that no terror alerts have been triggered since Jan. leads me to suspect that the Bush admin. feels that terror is bad for re-election.

This presents a basic conundrum: is terror good or bad for Bush's re-election?

Common wisdom would suggest good, as the electorate when threatened would err on the side of conservatism. Kerry is an unknown and un-tested quantity as President.

However, my suspicion is that if the administration starts playing the terror card, and the electorate does not believe it is credible, and the economy starts to detiorate because of this, then this is all bad for Bush's chances. I think that Karl Rove understands this and is keeping Tom Ridge on a short leash.

So, what happens?

The problem with this gagging of terror is that if another terrorist incident occurs, then the market will be very surprised. It has been lulled into a sense of complacency.

The most interesting tell about the market is that a year ago, when we had these volatility spikes, people were quick to jump on reasons why NOT to invest in stocks. Now, people are quick to say why NOT to panic and sell stocks.

This means that the market has already begun the bear mode. How long it will last is anyone's guess. Key points to consider:

1. The dollar is recovering which means that earnings stimulus from this has dissipated.
2. Energy prices are higher and people are starting to complain.
3. Lower interest rates may fail to stimulate as few are left to refi.
4. The shocking consumer confidence numbers may be a cry for help from a debt tapped out consumer.
5. The outsourcing debate is gaining steam as Lou Dobb's is scoring major points for his views.
6. Calpine's inability to roll over its debt may mean that the refi boom that gave a second wind to debt laden companies may be dissipating.
7. Technically, the market is long now, and the short-covering stimulus is gone.

THEME: ELECTION CYCLE
Here is a bit of a paradox. People argue that 2004 should be a good year for stocks because of the Presidential election cycle. The idea is that governments will throw every form of stimulus they can at the market to keep it up. The problem with this argument is that it presumes that governments exercise such extreme control of the markets that they can in fact time them. Well, if the governments could actually control markets then whey would we ever have a down year in stocks? I think that people who are falling for this argument are being too complacent.

THEME: TERRORISM
Today's terrible tragedy in Spain gives strong hints as to the market's complacency about terrorism. As I wrote last Thursday, terrorism barely registers any concerns with the market or with voters. In the morning, the terrorism report was not even the first item on NPR's news broadcast. The Spanish gov't's official finger pointing at ETA was swallowed whole by the market. In the past, the chatter about every terrorist event would be about the possibility that Al Qaida was responsible.

The fact is that the market does not want to go back to feeling bad.

That is why the market is unprepared for what is coming next. Technically, the SP trades very similarly to the March/April of 2002, right before summer's rout.

What may happen is that in a desperate attempt to raise election hopes, Bush & co. could try to trigger more terror alerts. Surprisingly, no terror alerts have been issued.

I think the market is in for a very difficult patch and the bear market will resurface.

TRADE IDEA: short GM/ buy TM

THEME: UNEMPLOYMENT
Interesting comment made by Alan Abelson of Barron's...

Last week the Bureau of Labor Statistics dutifully came out with its February jobs report. And once again, the consensus -- which in this case is heavily weighted with con over sense -- woefully overestimated the additions to payrolls. The going guess was anywhere from 130,000 to 200,000, and there were plenty of mutterings about the risk in the estimate being very much to the upside. In fact, a stingy total of 21,000 new jobs were created in February, and except for hiring by kindly government, not a single one would have been added at all.

OK, so we don't expect the errant Nostradamuses to indulge in a mass frenzy of self-flagellation at the corner of Broad and Wall. But maybe a tiny hint of fallibility? Not on your life. If their figures are wrong, then there must be something wrong with the figures. Why, of course.

In particular, the seers insist there's nothing amiss with their prophecy; rather, the rest of the world is looking at the wrong data. It isn't the establishment numbers, stupid, they scoff, but the household numbers that count. Need we say, the household numbers have been running substantially higher than the establishment numbers. (As you've doubtless surmised, the Labor Department does two surveys of unemployment, one a sample of 60,000 households conducted by the Census Bureau, the other a sample of 160,000 businesses and government agencies, collected from payroll records.)

For some reason, release of the February jobs report did not occasion the usual refrain. Perhaps it had to do with the fact that according to the household survey, the nation lost 265,000 jobs last month. We might add that anyone who makes even a glancing examination of the two surveys -- and, some years back, Barron's did a wonderful reportorial job on the nitty-gritty of how the data were collected for each -- is inevitably struck by how shaky, even flaky, the household polling can be.

What the sunshine crew can't blink is that on virtually every score this was a sorry jobs report. Making it all the glummer was that the payroll gains originally reported for both December and January both were shaved significantly. January's 112,000 rise was trimmed to 97,000; December's already feeble 16,000 was sliced in half. In other words, the job picture not only was gloomy last month, but also was dimmer than thought in the prior two months.

Manufacturing extended its long losing streak in February, dropping another 3,000 slots. Jobs in this beleaguered sector have now slid 43 months in a row, and counting.

The only reason the unemployment rate stayed at 5.6% was that the labor force shrank by a hefty 392,000 souls. As Wells Fargo's Sung Won Sohn observed -- after sighing that last month's paltry payroll additions were "a terrible number" -- instead of such pitiable increases, almost three years into recovery the economy should be churning out 200,000 to 300,000 jobs each and every month.

Beyond the headline numbers, the picture is even darker. The average stretch that workers losing jobs stayed idle hit a new 20-year peak in February. If you toss in the folks who quit looking for jobs because they've been searching fruitlessly and are thoroughly discouraged, plus those who are eager for work and have tried recently but failed to land a job, along with people who are working part time because they can't find full-time occupation, the unemployment rate rises to a formidable 9.6%.

Arguably, that's a truer measure of just how jobless this recovery really is.

THEME: INFLATION/INTEREST RATES
Here is an interesting view from Anirvan Banerji...

Most sceptics of the productivity boom acknowledge that technology has increased worker productivity, "the question is, how much?" said Anirvan Banerji, director of research at the Economic Cycle Research Institute.

One hole in the productivity growth story, as oft-noted by Stephen Roach, the chief economist at Morgan Stanley, is that the government's method of determining productivity is not accurate. For example, Mr Roach notes, the labour department says the average working week in the financial services industry has remained unchanged at 35.5 hours since 1988. It's hard to imagine anyone on Wall Street working a 35 hour week.

Supporters of the productivity miracle combat that the methodology has always been imprecise. Keep it simple, the argument goes: We have surging GDP growth with benign inflation and low interest rates - a big factor contributing to that is the productivity miracle.

Mr Banerji takes exception with this notion. His Economic Cycle Research Institute cross-references mountains of economic data from the US and around the world to divine the nature of the economic cycle. He raises a simple question that casts doubt on how large a role the productivity miracle played in the 1990s boom. "If we had strong growth and subdued inflation in the 1990s because of productivity, why did the Fed need to raise rates in 1999?"

While productivity may explain part of the gains, Mr Banerji believes something else was going on: rising import prices.

Inflation was largely kept in check during the 1990s because of the rolling nature of recessions around the globe over the course of the decade.

According to the Institute's research, the only two points during the 1990s when all leading economies were in expansion mode - what the Institute calls "a synchronous global expansion" - were 1994 and 1999. In both instances, import prices started rising and the Fed was forced to raise rates. Mr Banerji notes that with Germany and Japan emerging from recessions, the major global economies are just about at the point of another synchronous global expansion.

THEME: TERRORISM
The topice of terrorism has faded quickly from the national headlines. Today it was reported that NY subways broke down, but the market did not react and the usual rumours of terrorism did not surface.

I think the Bush Admin. will have a difficult time selling the "world is still dangerous" theme to Americans. Jobs are all people care about now.

Trader Talk

Energy continues to be a major play. Headlines are only beginning to trickle in. News about tensions in Venezuela supports this claim. I love oil service sector. Gasoline will hit $3 this year.

Stocks continue to have a bullish bias. But volatility is getting crushed. People are getting long so there is no major rush to the upside. This is very different than 1999-2000 when upside vol spikes killed option market-makers. Its difficult to make money in the indices, but individual stocks can pay off huge.

Dollar has a nice move up. Gold is responding well in spite of this.

Bonds remain a mystery to me. Vols are getting crushed so its a different beast from last year. It smells fishy. Asian Central Bank or Fed manipulation??? Offerings seem light. Again, low vol means its difficult for a trader to make money.