The Contrarian's View

Vol. XIX, #7, February 28, 2005

The Contrarian's View s published 11 times per year on a mostly-irregular schedule, and the views expressed are those of the author and editor, Nick Chase. Because nobody can predict the future, results of past suggestions or recommendations are no guarantee of future results. My own material in this publication may be freely quoted provided proper attribution is given to its source; quotes from other people are subject to fair-use copyright restrictions. Subscription rate: Selections are free on the Internet. Using your favorite Web-browsing program, open URL http://onashi.org. Mailed paper subscriptions, one year for $39 to The Contrarian's View, 132 Moreland Street, Worcester, Massachusetts 01609. There is a limit of 50 paid subscribers at one time; please check for availability before sending any money. Sorry, Visa and Mastercard are not available. Overseas subscription rate, U.S. $54. Unsolicited material sent to us by UPS or by courier other than the postal service is refused and returned to sender! ISSN 1536-4429       Phone: (508) 757-2881

THE BANK MAY EAT YOUR CHECK

Our local (Massachusetts) bank, which is part of a small banking conglomerate, told my wife it is not taking part in Check 21.... which I think means it will require paper (either original or photocopy) to be submitted to it by banks that take in our original checks, and these will then be passed on to us.

We also have a checking account with a very large Southern banking conglomerate which we use when we are in Florida (because merchants prefer checks drawn on local or regional banks, and for the convenience of local ATMs). When we are not in Florida she writes exactly one check per month on the account, for condo association fees.

The Southern bank is part of Check 21, and it notified us in September that under Check 21 we would no longer be getting either original checks or "substitutes". If we jumped through certain hoops we could get images of the processed checks printed on our monthly account statement. Well, for the few checks we write on this account, we guessed that would be OK. So we jumped through the hoops, signed up, and waited for the next statement.

When the September statement came (in early October, prior to Check 21), there was no condo check returned; nor was there any image on the statement (and there was also a maintenance charge we weren't supposed to have). My wife called the bank. Oops, somebody had made a keying mistake, and lost the fact we had signed up for images. They apologized and removed the fee; my wife asked for a photocopy of our original check, which arrived about a week later.

When the October statement came (condo check cleared in early October), same story; no check and another fee. My wife called again. Another apology. Another try at getting their computer system to have us entered correctly. And, (at her request) a week later, we received another check photocopy in the mail.

When the November statement came we did not expect to get a check and there was none. But there was no image, either, of any kind. Just a debit on the statement.

So my wife called a third time. The bank representative told her that no image was printed because they hadn't received one. Apparently somebody in the condo association, the rep said, had just keyed in our bank account numbers from the check and electronically debited our account. All the rep had, he said, was a one-line electronic debit entry (and, at my wife's request, he would mail us a copy of it).

Oh no, I said, nobody is authorized to electronically debit any of our accounts for any reason. My wife and I are both adamant on one point: We want either our original checks back, or pictures. A debit entry on an account statement is not sufficient, and the law (Check 21) entitles us to legal copies (originals or substitutes).

So we called the condo management people to find out who there had made an unauthorized electronic debit on our checking account. Not they, they said. They submit the paper checks they take in to their bank, and they passed on to us the name of somebody at their bank to whom we could talk. Their bank customer service representative did confirm that they received and processed.... and passed on into the system.... the paper checks submitted to them by the condo management. She wasn't sure how our check got "lost", but she would look into it and get back to us.

She never did, but about a week and a half later a copy of our check from our Southern banking conglomerate did arrive in the mail. So much for the "electronic debit".... a line of bull, or the bank can't tell the difference between a check and a debit.

The December statement arrived with everything correct.... no check, and an image (front only) on our statement. Aren't modern complex computing systems wonderful.... it took our Southern banking conglomerate only five months to finally get it right.

Whatever one might say about the "improvements" implemented by Check 21, they sure weren't done for the benefit of the consumer. Returned paper checks are a wonderful convenience.... relatively compact to store, with all of your (non-credit) financial history in one place, chronologically-ordered. Especially at income-tax time, it's easy to sit down and leaf through the checks one by one, toting up the itemized deductions.

Now, we have to retain: checks, substitutes, bank statements with images, and (with some institutions) electronic images downloaded from the Internet. And they also suck the money out of your checking account faster under Check 21. This is "progress"?

I would suggest that if it is important to you to have legally-acceptable proof of your financial transactions, you deal only with institutions that return checks or substitutes. Maybe you will be fortunate enough to find a bank, like our local bank, that declined to take part in Check 21 and thus will always return actual checks or legal substitutes.

By the way, four months after Check 21 became law we have yet to see an actual substitute check (as opposed to images of check fronts printed on the monthly statement). Very possibly the public is resisting the new system and it is slow to catch on.

QUOTES FOR THE MONTH

The Conference Board reported today [February 17] that its index of leading economic indicators dropped by 0.3% in January.... the index, currently at 115.6, is lower today than it was six months ago. That is clearly showing a stagnant (if not worse) economy. The LEI has been a fairly reliable indicator of the economy in the past, so this is one data point that you should pay careful attention to and realize that the economy isn't expanding at the gangbuster pace the bulls want you to think. - Tony Sagami

I think, over time, unless we have a major change in trade policies, I don't see how the dollar avoids going down. I don't know when it happens. I don't have any idea whether it will be this month or this year or next year, but we are force-feeding dollars on to the rest of the world at the rate of close to a couple billion dollars a day, and that's going to weigh on the dollar. - Warren Buffett

I'm short the dollar. - Bill Gates

Central bankers in the U.S. and central planners in China are attempting to slow down their respective economies. Both economies are awash with money and credit‹the financial atmospherics that produce storms. In the U.S., credit is being used to finance consumption and asset bubbles. In China, credit is being used to finance an industrial boom. The U.S. is in the process of hollowing out its manufacturing base, while China is in the process of transforming itself into a manufacturing powerhouse. One country is in denial, while the other is in ascendancy. We are witnessing the greatest wealth transfer in history‹one that may eventually lead to war as an inflationary hurricane in the U.S. confronts a deflationary typhoon out of China. - Jim Puplava

The "invisible hand" is fine for lumber and poultry prices. But at the short end of the market in debt, Alan Greenspan's paw presses down, like a butcher's thumb on the meat scale. The Fed quickly cut rates to head off the recession. Indeed, never before had rates been cut so much, so fast. George W. Bush, meanwhile, boosted spending. The resultant shock of renewed, ersatz demand not only postponed the recession; it misled consumers, investors and businessmen to make even more egregious errors. Investors bought stock with low earnings yields. Consumers went further into debt. Government liabilities rose. The trade deficit grew larger. Even on the other side of the globe, foreign businessmen geared up to meet the phony new demand; China enjoyed a capital spending boom as excessive as any the world has ever seen. What the Greenspan Fed had accomplished was to put off a natural, cyclical correction and transmogrify an entire economy into a monstrous ECONOMIC bubble.... Where does it lead? The force of a correction is equal to the deception that preceded it. - Bill Bonner

In actual fact, in the past few years, the Greenspan Fed has systematically and deliberately fostered parabolic credit and financial excess with the explicit purpose of inflating asset prices. What manifestly is duping most people is the fact that the bulk of the credit excess poured into asset prices and the soaring trade deficit, rather than into the CPI, as had been usual.... Principally, credit excess may find three different outlets: first, rising prices of goods and services; second, rising prices of financial and tangible assets; and third, a rising trade deficit. The conventional focus is exclusively on the first outlet: that is, on the movement of consumer prices, popularly called CPI in America. Amazingly, even most experts flatly deny a causal connection between a rampant credit expansion, rising asset prices and a rising trade deficit. The rampant inflation in U.S. stock and house prices is actually hailed as "wealth creation." - Kurt Richebächer

If I have one regret about life this time around, it is that the Big Lie about the economy was so well-shielded from me when I was young. Life in America is no longer about hard work. It's about owning paper that indentures and manipulating people for economic gain. Getting ahead is not about building houses, factories, and taking time to smell the roses. It's about paper. So when the head of the Banker's Reserve [Sir Alan Greenspan] gives a speech about the economy, ask yourself "Is he being straight with us about the role of interest and the whole fractional reserve pyramid scheme?" I think you know the answer to that one already. Interest is a banker's meal. And what of hard work? That's for the folks who make minimum wages and the illegals we bring into the country to do the real dirty work while we hold the paper - interest bearing instruments - as a better whip than slavers ever had. - George Ure

Look at the psychology out there, folks. The typical American homeowner truly believes that when his home his appraised at a higher value and he's able to borrow against it, that he is somehow wealthier! The fact that he has to start paying back those borrowings beginning ONE MONTH LATER, and that he will continue paying them back for 15-30 years, escapes him. It escapes him that by the time he's paid back his borrowings, he will have spent 2-1/2 to 3 times as much as he borrowed initially. This is wealth? I don't think so. If it's YOUR wealth, how come you're PAYING interest on it? Duuuuuuuh. - Mark M. Rostenko

STOCK MARKET OUTLOOK

You've been saying for a long time the stock market would go way down, she said, but it hasn't happened.

Well, I said, it did happen in the over-the-counter stocks, which are only about one-fourth the value they reached at the bubble peak. But on the New York Stock Exchange stocks dropped only by about a third, and have since recovered a lot of that loss, partly because the economy isn't really all that bad (yet), and partly because the government pushed interest rates way down and printed a lot of money, so this reflated the stock bubble to some extent, along with giving us this ridiculous housing bubble.

There's also some evidence that the government manipulates the stock market to keep prices up. Whenever it looks like prices might jump off a cliff, a mysterious "990N" drives them back up by buying stock futures. You can't prove the government is manipulating the stock market, but it certainly has the knowledge and the money to do it, and also the incentive. A lot of people have socked away their savings into 401(k)s and similar retirement plans, so if stocks should suddenly decline to "normal" levels (which is about half of today's prices) and stay there for any length of time, there would be a great deal of unhappiness and the politicians would have a big problem on their hands.

At any rate, I don't want to put my money somewhere that politics has distorted, then have it suddenly disappear because the politicians screw up and make a big mistake. So I'll just wait. Real value will return to stocks someday, I just don't know quite how or when.

In the meantime (leaving the conversation with my wife).... it does appear that the stock markets are now making another important top. I still expect the peak in the March to May period, and it looks like it might be at higher, rather than lower, levels than last December's. After that, I expect stock prices will have a gentle downward bias until something in the economy gives way. My candidates for this "something" are:

1. The housing bubble pops.
2. The housing bubble pops.
3. The housing bubble pops.
4. The foreign-exchange value of the dollar drops precipitously.

At any rate, history shows (a) when stocks are grossly overvalued, they usually don't make much more headway in an environment of rising interest rates, and (b) when the economy appears to be chugging along well (I say "appearing", because the books are pretty well cooked), stocks have already made the bulk of their gains. So, don't expect any fireworks to the upside. And, don't be surprised if we get fireworks to the downside.

PORTFOLIO REVIEW

A. "Professors' Investment Group (PIG)" - investment club portfolio.

SUMMARY - "PIG":
Original cost: $10,224.00
Present value: $17,707.41
Increase: $ 7,483.41 [+73.19%]
COMMENT on "PIG": Because I was unable to buy Evergreen Solar at or near the price the PIGs originally specified, we discussed ESLR again at the January meeting, and the PIGs decided to buy fewer shares for about the same money. We bought 300 shares just as the secondary offering was being priced, at $5 per share. Because our purchase was in the open market, we paid a slight premium to the $5 price. Since then, the stock has continued to take off.

TIAA/CREF 403(b) retirement plan; I switch between indexed stock/bond/money funds:
(No transactions since June 30, 2004 due to my retired status. Update soon, I hope!)

Values, 28Feb2005: stock, 192.22; equity-index, 77.72; MM, 22.09; bond, 74.75; inflation-indexed bond, 45.11; real estate, 212.12; TIAA current yield in SRA, about 5.2%. Current money-market yield is 2.01%.
Gain, 1988: 18.91%; 1989: 14.48%; 1990: 8.28%; 1991: 27.93%; 1992: 10.20%; 1993: 3.08%; 1994: 4.07%; 1995: 4.80%; 1996: 5.28%; 1997: 5.38%; 1998: 5.72%; 1999: 5.12%; 2000: 9.99%; 2001: 1.11%
Gain, January 1 through March 31, 2002: 0.97% (3.86% annual rate of return)
Total gain since January 1, 1988 (14.25 years): 223.43%
Compound annual rate of return: 8.59%
Gain shown excludes the impact of additional monthly cash contributions.

(Please note that I have not had the time to calculate my rate of return beyond March 2002, and may not get the time until 2005)

Buying CREF stock on January 1, 1988 and holding it gained 422.38%, for a compound annual rate of return of 11.46%.

COMMENT on NYSE "Timer's Trend": We are currently still on a BUY signal of August 16, 2004.

COMMENT on NASDAQ "Timer's Trend": We're currently on a SELL signal given February 17, 2005.

NEXT ISSUE - will appear near the end of March.