THEME: DOLLAR WEAKNESS

Here are some interesting tidbits:

At Washington Mutual, for example, 67% of loans were ARMs in the past quarter and of those, more than half reset in under a year. Here's the scary thing: ARMs produced much bigger savings a year ago. The short-term indices used to set adjustable rates have gone up much more because of Fed rate hikes than have the rates on long-term fixed mortgages, which ended the quarter about where they ended the third quarter of 2003.

"We are currently dealing with broad consumer uncertainty related to higher gasoline prices and a lackluster employment picture, which translates into uninspiring consumer confidence levels," Mattel's Chief Executive Robert Eckert said.

Kids today have more toys than I or my sisters ever had. Visit any Toys-R-Us and you'll see happy parents doting on their kids. But now parents are faced with tough choices for their discretionary income: toys or health care? Oh, and how about gasoline, heating oil, food, and education? All of these items are going up, and incomes and jobs are flatlining.

The structural indebtedness of the US consumer hangs on the price of real estate. Rising short-term rates will kill those real estate investors who borrowed to buy real estate in the last 3 years. Many of those investors did so banking with ARMs, interest-only loans, or other forms of debt leveraged to short-term rates.

The specter of inflation in items that we cannot live without (food, energy, healthcare, and education) combined with rising interest rates is a situation that can only be allowed by the Fed if it fears a scenario far worse: a currency crisis. Or if its senile.

Let's hope the Chinese, Japanese, Saudis, and all of our other creditors don't suddenly lose confidence in our system and pull the plug on our credit cards.

THEME: FED CREDIBILITY

Fed's Bies Says U.S. Growth `Solid,' Oil Not Fanning Inflation
is a headline for a Bloomberg story today. This strikes me as illustrating the number one underlying reason why the market is in an unhealthy state. The market is just not acting like the Fed's statements ring true.

We are not in the same kind of bear market that we had in 2000-2002. In that market, retail was long stocks in a highly leveraged, super charged beta fashion. The sell off during this market was due to a long period of liquidation, leading to a reduction in retail's leverage.

Right now, we are in a market dominated by professionals with high tech WMDs. The massive sell-off in insurance stocks could only be accomplished by computers. There are not so many retail customers who are daytrading insurance stocks! Basically, we've entered into a massive zero sum game, where the little guy is hugely disadvantaged if he chooses to play the same game.

However, the little guy can have an advantage if he simply lies low and waits for all those computers to make a mistake together. In other words, the market needs the little guy's liquidity because the big guys are all going the same way!

The market is confused because the Fed is confused. It is slowly losing its credibility. How can Fed Governor Susan Bies say that she expects "underlying inflation to remain relatively low" when we are all feeling inflation around us?

The Fed has been raising rates at a gradual pace to signal that the economy is better. At least that is the official story. What we suspect, but don't realize quite just yet, is that the Fed is so concerned about inflation that it is trying to raise rates just to prevent a disaster. We suspect that all the Fed's happy talk is to deflect blame from the incumbents who may lose the Election.

We are not in a normal recovery. Growth in the economy is not generating jobs and is beginning to generate inflation. The Fed is beginning to show a weak hand.

I think that the Election certainly is a frightening event. The specter of civil unrest due to controversy over the Election outcome could be a catalyst to tip the market over for good.

The problem is that with the Fed losing credibility, then a panic in the dollar is likely at some point. This would be a major disaster.

TRADE: Buy gold, short dollars.

THEME: THE DOLLAR

But senior officials say India's reserves, which have almost tripled in the past three years, are more than enough to cover any exchange rate shock, amounting to almost 20 months worth of imports.

In addition, India's record foreign exchange reserves represent a large “opportunity cost”, they say, since most of the money is invested in low-yielding US Treasury bonds. “We are subsidising the American economy,” said one official. “These are scarce resources that can be put to better use.”

India is not yet one of our top creditors. However, this view of the inherent unworthiness of the US dollar is a risky one because if it spreads to China and Japan, then we'll be in serious trouble.

The crashing dollar is a disaster scenario that will happen if our national leverage is not reduced. There is hope from the Kerry camp, and there is nothing but fear & despair from the Bush camp.

TRADES: UPDATE ON AAPL vs. AMZN

Hallelujah!!!

This trade has returned 34% since I recommended it on 8/26. Obviously Apple's earnings were a blow out. Analysts have been way too conservative on this one. At $45, the growth will slow. The play probably will still work going into the Christmas season. iPod is a monster brand value and rightly or wrongly defines what is cool for today's youths.

On the flip side, Amazon is acting very weak, and shorting it has been OK. I still expect them to warn that digital music sales will hurt them at some point. Borders warned two days ago, so maybe book sales are slowing. My sense is that Bill Miller may be exiting his positions too. AMZN and IACI has cost him dearly this year.

TRADES: UPDATE ON AAPL/AMZN & OIH
I have taken some profits on AAPL/AMZN. It has performed very well, with a 19% gain since I first mentioned it on Aug 26.

Also, I am seeing way too much bullishness on oil right now, so I have taken profits on OIH. Sentiment is getting out of control in this area. I am not short the sector or crude, but I am waiting for the right catalyst. I first highlighted this sector in February, way before the craziness.

My bullish call has performed well too. The momentum is very strong.

SENTIMENT: BULLISH
There is a shift in sentiment that augurs for further bullish action. Buying the dips is the right strategy. Also, I am detecting a top in OIL, so the cautious play is to dump oil longs, maybe even find short oil plays.

THEME: THE DEBATE & THE MONKEES PRESIDENT

The tide seems to have turned against George W. Bush after the first debate. Evidence of this is the cover of the The Drudgereport of as Oct 2. For the first time since I've been following the Drudgereport during the campaign, the spin on the cover of it has been positive for Kerry. It featured as its headline "NEWSWEEK POLL: BUSH LEAD GONE", and it had pictures of Kerry smiling and tossing around a football. Matt Drudge starting shouting about the Swifties book long before the networks, and has published every unflattering photo of Kerry that has been out there. So for him to actually put up a cover that almost represented Kerry as the leader to me is shocking.

Well, that was yesterday. Today's Drudge is trying to spark controversy of what Kerry took out of his pockets before the debate and whether this violated the rules of the debate. Hmmmm...smells like desperation to me.

The Republicans are certainly worried. Conservative investment pundit Donald Luskin is in fact comparing Bush's performance to Al Gore's in their first debate and raising the specter of a steep slide in the polls.

George W. Bush is the Monkees President. Karl Rove is like a CBS executive who was rolling in the ratings until Peter Tork, Michael Nesmith, Mickey Dolenz, and Davy Jones declared that they were no longer going to play the role of pretty faces strumming air guitars, but would actually write and perform their own music. W is his own worse enemy.

I felt quite lonely when I published a post about W's erratic RNC acceptance speech click here. The press apparently did not see the erratic behaviour that I saw. I tried to look beyond the scripted words and focus on the delivery. W was delivering a very conservative and staid performance up until the moment two protestors interrupted his speed. This interruption seemed to shake him up because his performance from there after was disturbing. He kept flubbing some very important lines, and almost all the lines that he couldn't make to sound natural were concerning the War in Iraq.

I was shocked to see almost no mention of W's erratic performance in the next day's press. It seems to me that this time, the press surely could not ignore W's erratic debate performance, and so they did not.

So, we are left with a clearer picture of the W caught "off camera." Anyone who saw Fahrenheit 9/11 has already seem some of the faces of W. If you missed the debate and want to see these faces click here.

TRADING IMPLICATIONS
The S&P500 responded to the debate with a 1.5% rally. Sentiment is confused by all of this. The prevailing wisdom was that W was good for the market, and hence Kerry bad. Certainly, there may be attribution error to now concluding that Kerry is good for the market, but one has to wonder. Perhaps the only thing the market wants is a strong credible leader, and W has failed in this regard so far?

Sentiment is shifting and being short the market is dangerous. I would advocated a neutral to slightly bullish position right now. If Merck and Fannie Mae and Kerry can't kill off this market, then it maybe stronger than we think.