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End of an Era


I'm tossin' on my Bell Bottoms Baby!!!!


This week will likely be known as the week that two superstars retire while they were at the top of their games: Alan Greenspan and Jerome "The Bus" Bettis of Pittsburgh Steelers fame. We'll leave the Super Bowl analysis to the more qualified, but we will take our occasional stab at how the economy looks relative to what we see happening in the markets.

As Alan Greenspan leaves his historic term as head of the Federal Reserve, we note that the average consumer is at an extremely historic state as well. The consumer is extremely house and stock rich, but at the same time, cash poor.

Over the decades, the shifts in building permits have been in lock-step with the 12-month rate-of-change in the Dow Jones Average (see chart above.) This decade, however, Mr. Greenspan's historic cutback in interest rates helped foster home construction, and while the stock market took a spill into 2002, building permits continued to climb to heights not seen since the early 1970s.

Hmmm… early 1970s!

Yesterday's Wall Street Journal points out how cash poor the consumer is by contrasting heightened December spending with a drop in December savings rate to a negative rate of -0.7%. Indeed, the savings rate for 2005 brought the annual savings rate to lows not seen since the depths of the depression in 1933. Clearly we are not in an economic environment like 1933.

Savings rates have a lot to do with the level of interest rates:

The two charts above show a similar path over the long-term for both savings rates and interest rates. Along with the drop in mortgage rates, home prices soared, bank savings and money market returns dwindled to next to nothing, and the consumer wealth was re-distributed from cash assets into real estate, stocks, and commodities.

However, the recent drop in personal savings rate cannot be attributed to lower rates, because rates, albeit piecemeal, have been on the rise since mid-2004. So why has the savings rate been so poor of late?

Energy prices have sopped up a lot of cash from the consumer's pockets – especially in the last eighteen months – exactly when interest rates started to rise. This correlation of high energy prices to low personal savings rates has not been seen since the early 1970s.

Hmmm… early 1970s!

If the era ahead is indeed a redux of the 1970s, it's not exactly the end of the world – unless you have an aversion to bell bottom pants, long hair, flower children and trite love songs. From the stock market's point of view, the 1970s were marked by a stock market that could not break significantly above Dow 1000, with each hearty try followed by a vicious decline. We believe this decade is similarly in a secular bear trend, and that 2006 will at best bounce around a bit winding up where it began, and at worst dropping 10% to 15%.

Update on Gold and Other Commodities

Gold remains in an uptrend. Our weekly Type 1 screens have benefited from the few gold stocks that the bears have dared to short:

Energy prices are mixed, with crude rallying and natural gas declining. Base metals continue to surge. Livestock has been unable to punch through to new highs, while agricultural commodities are breaking out of their triangle pattern to the upside.

Light Sweet Crude is back into the high $60s. The former resistance level at $63.50 is now support.

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No positions in stocks mentioned.

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