The Contrarian's View

Vol. XXII, #1 July 27, 2007

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: Free on the Internet. Using your favorite Web-browsing program, open URL http://onashi.org. Former paid subscribers to the printed version are now receiving LIFETIME subscriptions, and subscriptions to the printed version are no longer being accepted. 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 "PALMPHONE" ARRIVES (ALMOST)

In five to eight years, what I see is: You pull out your Palmphone with its glorious full-color screen and press a button to connect to the web (your cellular provider is also your ISP). A quick check, no new e mail messages. You call up your portfolios to see how they're doing for the day, and look at the graphs of the indexes. In your reminders, you see that you should call to schedule the dog's rabies shot; a single button-press fetches the vet's number from the phone book and places the call.

At work, you put the Palmphone into its cradle to connect it to a keyboard, mouse and large flat-panel display. While you're there, you're wirelessly connected to the organizational network, at no cost to you, of course. (No need to 'connect to the computer'.... your Palmphone is the computer.) When you're not at work, you can call or connect to the Internet anywhere, all for a flat monthly fee....

I see fierce competition ahead, rapidly declining cost to the consumer and slim profit margins in the business of providing high-speed data access. I think the hefty profits will be made by the people who create the Palmphones - or maybe the software for the Palmphones - just as previously, obscene profits were garnished by the makers of computer equipment and software. There will be a built-in one- to three-year cycle of technological obsolescence for these gadgets, particularly when it's something you have with you all the time, it's become very personal. With so many new features constantly being added, people are going to want to keep upgrading their Palmphones to the latest thing.

In the March 2005 issue I revisited the "Palmphone" with a progress report which was prompted by my buying a new cellphone which today I call my "not quite" phone. It has "not quite" a Web browser - a primitive beast which fails to render most Web pages, showing instead a cryptic "unspecified error" message. It has "not quite" e-mail - a plain-text messager, but only with your cellphone carrier's e-mail server, which nobody ever uses. It has "not quite" an address book/contacts list, all of which must be entered on the phone's primitive keyboard or transferred from another cellphone. It also comes with "not quite" a real calculator, some primitive games, and "not quite" TV (jerky audio with slides is the best description for it) for a stiff extra monthly fee. I did make use of the "not quite" a camera - which took pictures as if they'd been shot through a pinhole, slightly fuzzy all over, with very blurred edges, and greenish - and I uploaded them from the camera to the carrier's pictures website, then moved them from the website to my computer.

In my progress report I noted, With decent storage, the cell"phone" will become a computer, and it will solve one of the more vexing problems of modern computer usage.... synchronizing calendars, contacts, e-mail and databases between work, home and the road. You won't need to synchronize because you'll always have your computer with you.... So what do I see in 2009? The "Palmphone" in your pocket will be able to make calls almost anywhere for a flat fee (most of them over the Internet). It will take pictures and video, and show TV. It will be your primary computer, always connected to the Internet one way or another, and you can plug it into (or Bluetooth it to) adapters for desktop use at home and at work.

In 2005 I saw this breakthrough arriving with tiny hard disks being installed in the phones. Instead, it's been done with flash memory.... but the "Palmphone" has indeed arrived with the end-of-end-of June introduction of Apple's iPhone.

Now, as a retired systems manager and long-time computer programmer, I know never to buy the first version of anything. Wait until it's been revised one or two times and they get the major bugs out.

But for the iPhone, I made an exception. I've been waiting for years to get an Internet-connected computer into my pocket, so I was really chomping at the bit as introduction date (June 29th) approached.

My wife asked If I wanted to postpone the play we were scheduled to see Friday night, so I could visit the nearest Apple store at 6PM when they re-opened in iPhone mode. No, I said, I can wait. (After all, how would it look for the Crafty Contrarian to be mingling with the overanxious herd?)

On Saturday morning (June 30th), my wife suggested I visit the local AT&T store to get my iPhone, rather than driving to the Apple Store in the Burlington (Mass.) mall. She had read an article in the morning so-called newspaper about people standing in line at the local AT&T store on Friday to buy their iPhones.

I figured this was a waste of time, but to humor her I went. We've never seen one, the rep behind the counter said. The best we can do is order one for you. It should be here in a couple of days. (Obviously, the people in the newspaper story waiting for iPhones never walked away with one, a fact the newspaper failed to report.)

I asked him what kind of training he'd received on the new phone. He said most of it was about what he could and could not say. Questions about the AT&T phone contracts, he could answer; any questions about the iPhone itself, ask Apple.

A similar experience awaited me at the Apple store. I expected long lines; there were none. Lots of iPhones sprinkled about, tethered to security cords. Lots of teenagers trying them out. Not many people my age.... but I got lots of offers for help from the staff, probably because they figured I actually had the money to buy one. I asked the staff about their training. Anything about the iPhone, we will (try to) answer, they said If you want to know about the phone service, you need to talk to AT&T.

It was then that I realized that the Apple CEO genius Steve Jobs has successfully divorced the phone from the phone service. Henceforth, you will be able to buy them independently (although at the moment, your choices are limited to one kind of each).

I had told my wife I was going to the Apple store just to look.... I expected they would be sold out for the day by the time I got there. You're going to buy one, she said. No, really, for now I just want to look, I said.

She was right. I bought one. (They had plenty in stock.)

On Saturday night my wife and I went into Boston for a performance of step dancers clogging on the stage for two hours; so I didn't get to actually sit down and work with the phone until well after midnight.

Unlike all other cellphones, which are activated at the store, the iPhone is activated by connecting it to your computer's USB port via a cradle. That is, the iPhone is designed to talk with your computer. (But until you activate it with an AT&T account, it's just a dead piece of hardware.) During the activation process one comes to a critical question: Keep your old phone number, or get a new one?

Now, I have no particular love for my Sprint cellphone number. It was assigned to me, and is hard to remember. Besides.... to let you in on a little not so-secret secret.... I hate the telephone. Not as much as I hate fluorescent lighting, but it's close. The only reason I carry a cellphone (as a phone) is for emergencies and so I can answer calls from my wife, which are frequent. Anyway, virtually nobody else has my (old) cellphone number, so changing it would not inconvenience a great number of people.

Also, as a retired systems manager I was very suspicious of two different phone companies' computers talking together to get my cellphone number smoothly transferred. As a check I decided to log into my Sprint account via the Sprint website. Surprise, surprise, it failed to recognize either my username/password or my Sprint cellphone number. Well, I decided, I'll try to access my Sprint account info with my (old) cellphone. Nope, couldn't get at it that way, either.

I knew that if I could not access my Sprint account, no way on God's green earth would AT&T's computers be able to. So I elected to get a new phone number. Good choice.... the rest of the activation went smoothly and I got to use my new iPhone right away. I have since heard and read stories of people who have waited days for their phone numbers to be transferred, a process that by law is supposed to be completed within three hours. I can see why people who have dumped their landlines and transferred the landline phone number to the cellphone would have an investment in that phone number and want to keep it; for them, there is no choice but to be patient.

The synchronization of address book entries,photos, web browser bookmarks, e-mail accounts and music went smoothly, and the iPhone worked flawlessly with our wireless router which I'd turned on for that purpose. (For security reasons the wireless in our house is normally off; I installed it primarily for the convenience of guests who show up with laptop computers.) It was a joy to be able to surf any internet site at laptop-computer speeds, and to read e mail with imbedded pictures and graphics. At last, a computer in my pocket.... by 3 AM I was able to do everything mentioned in the first italicized paragraph.... except for the dog's rabies shot; she got hers a month before the iPhone was introduced. So that is why I say the "Palmphone" has finally arrived.

The only glitches I had were.... as you might expect.... not with Apple, but with the phone company AT&T (until Tuesday; more on that in a minute). On Sunday morning my wife discovered that the new phone number AT&T had assigned me was not a local (Worcester-area) phone number. This meant a second visit to the local AT&T store.... where they were delighted to actually see and touch an iPhone. As a reward I was able to select a new, rememberable local number from about a dozen showing on the service rep's screen.

The second glitch, for which there is currently no fix, is that there is no way to send (or reply to) e-mail messages in a standard (POP3 or IMAP) e-mail account unless you are physically connected (via wireless router) to your internet service provider. Apple suggests accessing your ISP's outgoing (SMTP) mail server via alternate "ports" when you are connected through the AT&T EDGE service, or you're on a "foreign" wireless connection (such as Starbucks). This does not work. I checked with both our high-speed ISP for Worcester, the financial backwater of America, and our dial-up ISP for our Florida condo. Indeed, they are not going to allow off-network access to their servers because, as one rep put it, "we have no way of verifying who you are".

This will likely persist until someday a high-level pointy-haired manager in one of the big ISPs discovers he can't send iPhone e-mail when he's off-network and he says to his underlings, "make it work". In the meantime, the workaround is: Log into your ISP's webmail, and answer e-mails through the Safari browser interface on your iPhone. I do fault AT&T for not providing an outgoing mail server for its data-plan customers; this is a glaring oversight on its part.

I have heard several people say that the iPhone is way overpriced; indeed it is, for those people (and there are many) who are only interested in making and receiving phone calls on a pocket device. But I think the proper way to view the iPhone is: It's a pocket computer which also happens to make phone calls. If you think of it as the world's first truly portable Internet-connected computer, then you will see that it quite reasonably priced for such a technological marvel (even if Apple's profit margins on it are 55%!). I might add that the iPhone's human engineering is superb. It not only is extremely powerful, it's also a really cool gizmo.

Although the initial introduction of the iPhone is as a consumer device (for example, it has a YouTube function as a sop to teenagers), in my opinion its real future lies in "opening up" its pocket-computer side, so people can seamlessly move it between work and home computers. In the title you will observe I added the qualifier "(almost)". The reason is that in its initial release the iPhone transfers only "accepted" forms of data, viz. photos (JPEGs or TIFFs), music, calendar items and email account and address info - and only via iTunes or iPhoto software on your home or work PC/Mac. There is no "desktop" onto which to place files of your choice, nor can you see and manipulate the iPhone's storage memory as if it were a hard disk. Also, there is currently no way to recognize or print to a network printer. I would expect these limitations to disappear rather quickly as Apple updates and adds to its software. And if Apple doesn't do it, some third party will.

Oh yes, about Tuesday.... on Saturday (Sunday early AM) and Sunday nights I left the iPhone charging in the kitchen, where it is just out of range of the wireless network. On Monday my wife said, the iPhone is much too valuable to leave in the kitchen where a burglar might break in and steal it. I really should keep it upstairs at night, so we can fight off the burglar before he snatches the iPhone. Yeah, sure. So Monday night, after my radio shift, I left the fully charged iPhone sleeping (not off.... but sleeping....) in my upstairs workroom, about five feet from the wireless router. When I turned it on Tuesday morning, I found the poor thing had suffered a heart attack. The battery was depleted.... showing red.... and the iPhone said, feed me. Feed me! FEED ME! OK, not really, it said it needed to be charged. That was the last peep out of it. When I picked it up to plug in the charging cable, the backside was very warm, almost hot. I have been in the computer business long enough to know when a piece of electronic gear has been fried. Some chip or component in there had clearly spontaneously overheated.

This meant another trip to the Apple store in Burlington, where I demonstrated and explained my predicament to the genius at the Genius Bar. His theory, which confirmed my suspicions, is that for some unknown reason my sleeping iPhone "woke up" and tried to communicate with the wireless router, in some sort of tightly-programmed loop (that is, a software bug) which overheated the CPU chip. (I also suspect this is a known to Apple, but not advertised, bug.) I walked out of the store with a replacement within a half hour. Needless to say, I have been very careful with the replacement unit to not leave it sleeping within range of the wireless network. And at night I make certain both the iPhone and the wireless router are off.

OK, this is supposed to be a stock market letter, not a publication which reviews electronics and computers. You probably want to know what the investment implications of the iPhone are. So let me give you my best guesses.

The most important new strategy, in my opinion, is that Apple got the provider of cellphone service to get out of the way.... AT&T's only real usefulness is to be the carrier of data (and the occasional phone call). This business model differs from the current carriers' strategy of tying the phone (usually free or at a discount) to the service and making money with expensive add-ons such as pictures, videos and primitive TV, and data services (news, sports, movie reviews, stocks, etc). So I would expect the carriers' income and profits to suffer as people come to expect what is currently on the Internet for free, to become available on their cellphones (iPhones or in-the-future look-alikes) for free.

The second most important is that the iPhone's data functions work on both wireless networks and AT&T's (somewhat pokey) data network. Phone calls with the iPhone currently cannot be made on wireless networks; but I would expect that barrier to disappear in a few months (through a third-party add on, if not with Apple), so that cellphone-bandwith usage may actually decline in urban areas as the use of wireless spreads. (Good for makers of wireless hardware, bad for sellers of cellphone minutes.)

Thirdly, Apple has "opened up" the iPhone to add on applications from other companies as long as they are "Web 2.0-compliant" (tech gobbledygook, but the companies making the add-on software know what this means). Just try that with your typical cellphone company.... heck, I never could get my Sprint-based cellphone to ever talk to my computer, and I sure tried. This means we'll see an explosion in future useful add-ons to the iPhone which will make it even more like a pocket computer.

I can think of one current example, and a possible future one. The current iPhone comes with a "Maps" software button, which brings up Google maps. Now if you've ever used this feature on your home computer, you know how helpful it can be to check out your cousin's aunt's scrambled directions on how to get to her niece's graduation party before you even step into your car. But this is nothing compared to having it with you on the road.

The second weekend in July (13th and 15th) I was visiting daylily open gardens which were part of the AHS Region IV convention hosted this year by the Connecticut Daylily Society. On Friday, I needed to get from the second to the third garden before the third one closed to visitors for the day. Most of Connecticut is suburban something-or-other, so I had a good cell signal most everywhere, and I was able to call up Maps to show me a back route which saved me about 15 minutes' travel time. On Sunday, between two gardens, Maps showed me a time-saving 20-mile back-roads route through farmland and charming little villages. The feeling of freedom I had was wonderful. I felt I could drive most anywhere and not get lost, and I was completely free to explore roads I'd never traveled before, because I could see where they would lead. With this, who needs GPS?

The future application I would love to see is streaming audio on the iPhone. The iPhone comes with (the equivalent of) an iPod nano built in, and I've never thought of myself as an iPod person because I don't want to walk around wearing earbud headphones. Sometimes I had thought of getting an iPod for the car, tied to an FM radio transmitter so I could hear music of my choice on the car radio.... but this wasn't something I wanted badly enough to actually go out and buy an iPod and add-on transmitter. But.... if I could actually listen to any radio station of my choice (which streams its audio over the Internet) on my car radio, now that would be worthwhile. Apple probably won't provide this because the AT&T data contract prohibits streaming; but no doubt a third-party add-on (or a competing phone product) lies in the near future. When it arrives, you can kiss satellite broadcasters XM and Sirius, with their limited canned choices, goodbye.

Fourthly, in my opinion the iPhone will generate enormous pressures for managers of corporate data networks to accommodate them, because they are so adept at synchronizing data between work and the road (also home, if needed). The pressure to get corporate mail servers to work with the iPhone will be especially intense. Once the iPhone becomes corporate-savvy, who will want to screw around with a Blackberry and its proprietary e-mail system?

In short, the iPhone has demonstrated that, with a pocket computer now available, the future lies with Internet-compatible data transmission. Providers of alternate, specialized or proprietary information systems will have to adapt to this new paradigm, or they will suffer.

QUOTES FOR THE MONTH

We are now at the onset of a major bear market in bonds worldwide that should bring interest rates above the level in 1981 when US Treasuries were yielding over 15 per cent. But this process will take at least 10 years. In this environment stocks will not do well in real terms but will rise in nominal terms. How high will depend on Bernanke's money printing presses. - Marc Faber

In current theory, the excess cash piling up around the world is like manna from heaven. Don't believe the hype. Liquidity is merely a euphemism for inflation. Asset prices, including stocks, are simply rising to reflect the diminished value of the currencies in which they are traded. Wealth is not being created, merely re-priced. - Peter Schiff

Foreign dollar recipients are NO LONGER going to prop up the US fixed income markets by buying them endlessly.... They understand where the game is headed as the United States economy is faced with dealing with 70 trillion dollars worth of future obligations and must pay for it with an economy that is 13 trillion dollars in size but makes barely 3 percent growth if you believe the phony inflation numbers, and no growth if you believe the headline CPI (Consumer price index) and PPI (producer price index). Anyone who invests based on the core numbers is insane, so you can call most of Wall Street insane, as this week's TERRIBLE CPI and PPI reports were heralded as demonstrating receding inflation based on the core numbers. Take a look at the latest CPI report:

Notice the increase in prices of everyday items? The decreases are in seldom-purchased categories. I know I don't regularly buy a computer, a new or used car, information technologies; hardware and services while used are used and purchased once, then set up and used for years. This is how they paint the numbers to FOOL YOU! I am definitely in the dark blue regular purchase categories. How about you? Analyst after analyst from the money center banks and big brokerages stepped forward on the financial news networks and pointed to the core numbers as evidence of receding inflation.... inflation is tame so paper can go up. Keep the "PAPER GAME" going for their benefit at any price. It couldn't be further from the truth. - Ty Andros

When it comes to paying bills these days, America just doesn't feel like the land of the free any longer. To be truly free you must be debt-free; if you're not, your creditors own you. Americans now owe a staggering $16 trillion dollars ($2.4 Trillion in personal loans, and $13.6 trillion borrowed from their houses). Yet, as a society, we just can't seem to get away from accumulating debt, and have become nothing short of debt slaves.... Consumers are still not saving enough and continue using credit to offset any shortfall in income just to keep up with normal expenses like a mortgage, groceries, and gas because they have chosen to live extravagantly. One major cause of our country's need to import massive amounts of foreign capital to keep our economy afloat stems from a weary American consumer struggling to live and pay the rent, but behaving like they're rich. The United States might be the only superpower but we still owe Japan and China each about a trillion dollars. (We owe even more to the Gulf Arabs.) ....We are effectively giving America away to our creditors and if we continue to give more and more away, we will lose the ability and the will to take back control and ownership of our own economy. - Richard Benson

Currently 7% of subprime loans are in default. The percentage will grow and grow like a weed in your backyard tomato patch. Now I, the curmudgeon of credit, am as sure of this as I am that the sun will set in the west. The uncertain part is by how much. But look at it this way: Using the current default rate of 7% (3-4% total losses), the holders of some BBB investment grade subprime-based CDOs will lose all of their moolah because of the significant leverage. No need to worry about fictitious 100 cents on the dollar marks here. One hundred percent of nothing equals nothing. If subprime total losses hit 10% then even some single-A tranches face the grim reaper. AAA's? Folks, the point is that there are hundreds of billions of dollars of this toxic waste and whether or not they're in CDOs or Bear Stearns hedge funds matters only to the extent of the timing of the unwind. To death and taxes you can add this to your list of inevitabilities: The subprime crisis is not an isolated event and it won't be contained by a few days of headlines in The New York Times. And it will not remain confined to a neat little Petri dish in some mad financial derivative scientist's laboratory. - Bill Gross

The risk to the financial system was not merely that some large brokerage firms may have been forced to write down a couple of hundred million dollars - they may still have to do that. But had the fire sale gone through, market values would have been available to the securities sold. This in turn would have forced other lenders to revalue the collateral they hold; and as the collateral is worth less, the brokers will lend less money. That would have triggered further margin calls, further forced liquidations. When hedge funds implode, they tend to sell off more liquid assets first; at the end of the sale, the prices of the liquid assets are depressed, yet the fund may still be left holding illiquid securities.... In our assessment, the well-intended attempts to unwind the Bear Stearns fund in an orderly fashion are highly problematic. The fund's problems have clearly shown that the credit extended to the industry is too large. The bankers involved commit similar mistakes as bankers in Japan in the 1980s and 1990s, where clearly bad loans were kept afloat with artificial means; those involved had the best intentions, but caused over a decade of pain to Japanese banks, corporations and consumers. - Axel Merk

Bear Stearns' reluctance to mark down the value of their overpriced CDOs is mirrored by an equal desire among homeowners to hold tight to their fantasies of real estate riches. Despite the obvious weakness in the current market, deluded sellers continue to behave as if the boom of 1998-2005 never ended. A recent survey by Boston Consulting Group showed that 55% of home owners believe they could sell their house for more now than a year ago, and nearly three-quarters think they could sell their homes within the next six months at a price they set. Is it any wonder that there is a record 8.9 months supply of new homes on the market? Just as CDOs are not worth the "marked to market" value conveniently assigned by Wall Street, homes throughout the country are not worth anything near the asking prices listed on "For Sale" signs. Wall Street may be able to buy some time by bailing out troubled hedge funds to keep their worthless subprime mortgage investments off the market, but no such safety nets exist for strapped consumers looking down the barrel of resetting adjustable-rate mortgages. Inventories will continue to balloon until reluctant home owners come to their senses and slash prices.... Imagine the effect on the economy when America consumer's biggest assets turn into their greatest liabilities! - Peter Schiff

These highly-illiquid securities [CDOs] have been priced so far on unrealistic and distorted credit ratings as the ratings industry has been complicit. They have not been rerated in a way that is consistent with rising subprime default rates. That is why Wall Street is in a panic. Losses will be massive once these assets are correctly priced to market. - Nouriel Roubini

God knows what the true values of CDOs really are since banks have shut down the marts where they trade. - Charles Dumas [Lombard Street Research]

This is the big one: All investment portfolios will be shredded to ribbons. - Albert Edwards [Dresdner Kleinwort]

I continue to believe that we haven't seen the bottom in the subprime market. There will be more pain felt by people as that works through the system. - David Viniar [CFO, Goldman Sachs]

From their peaks in 2005, existing home sales are down 16.9%; new home sales, down 29.4%. For the first time since data was collected in 1968, home prices have declined nationally for nearly a year. Worst of all, American homeowners are falling behind on their mortgage payments in record numbers: The delinquency rate on low-quality mortgages has surged to 13.8%. On medium-quality mortgages, it has more than doubled. And on all mortgages, it has now surpassed the worst level of the last recession. This mortgage meltdown has struck down the stocks of home builders, low-quality lenders, and.... also the widely-owned Real Estate Investment Trusts (REITs). The mortgage meltdown has mortally wounded or killed 82 higher risk lenders, delivering huge loan losses, early payment defaults and funding cutoffs. Some have severely curtailed lending operations. Others have filed for bankruptcy. And last week came the clincher: The mortgage meltdown has just precipitated one of the largest hedge fund collapses of all time. The fund's manager, Bear Stearns, promptly come to its rescue with an astounding sum of $3.2 billion.... The main reason Bear Stearns is bailing out its failed fund is to COVER UP the sinking value of these esoteric securities [CDOs]. If major Wall Street firms go ahead and sell these in the open market, everyone will find out how little they're really worth. And if everyone knows that they're really worth only a fraction of their stated value, the game is up. - Martin Weiss

The Chinese are wild-men, building roads, bridges, factories and real estate projects at a frenzied pace. The government struggles to manage China's economic rocket while onlookers yell, "Slow it down!" But nobody seems to know how... and maybe they don't really want to. After all, who wants to bum out a perfectly good economic-growth-buzz? ....Investors caught up in the mania ignore a long list of hazards right now, but they will see the problems clearly when it's over. China has punitive restrictions on individual freedom, severe pollution, a cultural penchant for gambling, and shoddy accounting practices that keep investors ignorant of what they are buying. None of that matters during the exciting performance, but eventually this gong show too will end. - Alan Hall

Everyone thinks that Greenspan gave up a lucrative consulting business to work in the public sector. In actuality, his business had been losing clients steadily to the point where he hardly had any left by the middle of the 1980s. - Pierre Rinfret

There continues, however, to only be one party in America: The banker/corporate party, masquerading as a two-party system. Both are addicted to the free-flowing money that corporations put into pockets, both publicly and privately, to get their wishes legislated. Still, at some point, a collapse seems likely, if not inevitable. - George Ure

STOCK MARKET OUTLOOK

The second is of a now-shuttered mortgage finance company's office in Worcester's Tatnuck Square, not too far from our house. If I remember correctly, this outfit opened in mid-2006 and didn't last six months. You know you are at or near the peak of a boom when the stringers jump in.

The housing bust is now showing up as subprime-mortgage rot, evidenced by the near-total collapse of two Bear Stearns hedge funds. ("Oops, so sorry you lost all your money. But we made and kept our exorbitant fees.") It even is now showing up in softening demand for consumer goods (such as autos) as the economy slides deeper into recession. Only this week has it begun to show up in the popular averages of the "no fear" stock market.

The "no fear" syndrome is about to change in a big way. June and July have now seen eight "Hindenburg omens" in the NYSE market, and statistically, this indicates the odds that stocks will decline by 10% or more within six months are greater than 3 in 4, with about 1-in-4 odds that stocks will crash in that same timeframe. As with all technical indicators, you should ask, What is this measuring? And is the measurement valid?

The "Hindenburg omen" apparently measures major shifts in stock-buying sentiment.... specifically, distribution (selling) by "smart money", while "dumb money" (the public) continues to buy. It is not a very well-known indicator.... being publicized only by a handful of permabears. Statistically, its record is as I just stated, so I think you should pay attention to it as long as it is hardly known. (Should it ever become a popular, widely-watched indicator it will, of course, stop working.)

Allowing for seasonal factors.... namely, if in the autumn the market has a good reason to be bearish (such as after a long, uncorrected rise), it will be.... the picture for stocks over the next few months is coming into focus. The market is putting in a major long-term top now. I thought it would be done in May; but in July, it's still topping out. It may not be done topping out until late August (like 1987!....), but I expect a serious decline in September and especially October. Along the way we'll continue to see more mini-systemic failures like the Bear Stearns hedge-fund vaporization.

And I'll go with the Hindenburg omen's 1-in-4 odds of a market crash, most likely in September or October. I should say, I'm not sure just what that crash would look like.... certainly not like 1987.... because the Plunge Protection Team would most certainly be working overtime to avert it. Circuit breakers would keep the markets closed instead of stocks plunging, while the PPT would be voraciously buying index futures to reverse the downtrend. Stocks could yo-yo several thousand Dow points over the space of a few weeks, with the eventual outcome dependent on which wins, the PPT's (and Fed's) aggressive money-printing, or investors' fears.

The Hindenburg omens have increased the risk of systemic failure slightly, to about 75% odds for the remainder of the summer. I expect these odds will rise higher in the fall.

PORTFOLIO REVIEW

A. "Inheritance" - real (normalized) "dividend and interest distribution" portfolio:

SUMMARY - "Inheritance":
Original cost: $100,000.00 (normalized)
Present value: $115,161.52 (see below)
Increase: $15,161.52 [+15.16%]

COMMENT on "Inheritance": The big change from the last issue is the addition of a large position in QQQ ultrashort (QID), in an effort to stabilize the portfolio during the downdraft I expected and which now appears to be underway.... with my being willing to forego any portfolio appreciation in exchange for this stability. Normally, I am way too early in my purchases and you have plenty of time to duplicate what I've done at more favorable prices. I'm not sure that will be the case this time.... my last QID purchase of 110 shares was just as the Dow was poking above 14000. So far, the strategy appears to be working reasonably well. Even though my energy shares purchases were reasonable buys, the liquidity glut has added fluff to all asset prices, and energy shares are no exception, thus the "protection". At its recent bottom QID was yielding about 4.1%, so I look at this position as being similar to a money-market fund with portfolio insurance as a bonus. Should there be a total derivatives collapse, QID could blow up (like a Bear Stearns hedge fund), so the strategy is not without risk; short of that, I should be OK.

The portfolio cost (normalized) is $109,610.56 with $25,591.90 currently in cash or near-cash.

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

SUMMARY - "PIG":
Original cost: $10,699.00
Present value: $21,733.11
Increase: $11,034.11 [+103.13%]

COMMENT on "PIG": I continue to "roll over" 3-monthT-bills, one per month (except when I forget).

C. Roth IRAs - real portfolio:

SUMMARY - Roth IRAs:
Original cost: $30,046.19
Present value: $37,027.10
Increase: $ 6,980.91 [+23.23%]

COMMENT on Roth IRAs: As T-bills mature I have added 85 more shares of PSEC and bought 125 shares of Canetic Resources. I have updated the dividend rates shown on the Canadian royalty trusts for the higher Canadian/US dollar exchange rate, and the 15% Canadian withholding tax.

D. TIAA/CREF 403(b) and (non-Roth) IRA retirement plans: My TIAA-CREF and Fidelity non-individual-stocks retirement investments, both the part from which I am making monthly withdrawals and the parts that are "resting", are invested as follows: TIAA traditional, 75.74%; T-bills and money-markets, 2.44%; TIAA-CREF inflation-indexed bonds (retirement), 15.10%; TIAA real estate, 3.22%; MLPs, 3.46%; TIAA CREF High-Yield II, 0.04%. A new MLP for the traditional IRA is Linn Energy LLC.

TIAA-CREF values, 27Jul2007: stock, 254.77; equity-index, 98.45; MM, 24.40; bond, 80.68; inflation-indexed bond, 47.97; real estate, 296.64; TIAA current yield in SRA, about 4.82%.

COMMENT on NYSE "Timer's Trend": We are currently on a SELL signal of July 20, 2007.

____________________________ NYSE TIMER'S TREND  _______________________________
Mon  2 Apr 07        .  |  . #     |12382.30  | .+                *
Tue  3 Apr 07        .  |  .    #  |12510.30  | . +                  *
Wed  4 Apr 07        .  |  . #     |12530.05  | .  +                  *
Thu  5 Apr 07        .  |  .  #    |12560.20  | .  +                   *
Mon  9 Apr 07        .  |  . #     |12569.14  | .  +                   *
Tue 10 Apr 07        .  |  .  #    |12573.85 @| .   +                  *
Wed 11 Apr 07        .  | #.       |12484.62  | . +                  *
Thu 12 Apr 07        .  |  .  #    |12552.96  | .  +                   *
Fri 13 Apr 07        .  |  .  #    |12612.13  | .  +                    *
Mon 16 Apr 07        .  |  .    #  |12720.46  | .  +                       *
Tue 17 Apr 07        .  |  . #     |12773.04  | .  +                         *
Wed 18 Apr 07        .  |  . #     |12803.84 @|~.~~~+~~~~~~~~~~~~~~~~~~~~~~~~~*
Thu 19 Apr 07        .  |  #       |12808.63  | .  +           *
Fri 20 Apr 07        .  |  .    #  |12961.98  | .  +               *
Mon 23 Apr 07        .  |  .#      |12919.40  | .  +              *
Tue 24 Apr 07        .  |  .#      |12953.94  | . +                *
Wed 25 Apr 07        .  |  .    #  |13089.89  | .  +                   *
Thu 26 Apr 07        .  |  .#      |13105.50  | .  +                    *
Fri 27 Apr 07        .  |  #       |13120.94  | . +                     *
Mon 30 Apr 07        .  |# .       |13062.91  | . +                   *
Tue  1 May 07        .  |  #       |13136.14  | .+                      *
Wed  2 May 07        .  |  .    #  |13211.88  | .+                         *
Thu  3 May 07        .  |  .  #    |13241.38  | . +                        *
Fri  4 May 07        .  |  .  #    |13264.62  | . +                         *
Mon  7 May 07        .  |  .  #    |13312.97  |~.~~+~~~~~~~~~~~~~~~~~~~~~~~~~~*
Tue  8 May 07        .  |  #       |13309.07  | .  +           *
Wed  9 May 07        .  |  .   #   |13362.87  | .  +            *
Thu 10 May 07        . #|  .       |13215.13  | . +         *
Fri 11 May 07        .  |  .   #   |13326.22  | . +            *
Mon 14 May 07        .  |  #       |13346.78  | .+              *
Tue 15 May 07        .  |  #       |13383.84  | .+               *
Wed 16 May 07        .  |  .  #    |13487.53  | .+                  *
Thu 17 May 07        .  |  #       |13476.72  | . +                 *
Fri 18 May 07        .  |  .   #   |13556.53  | . +                   *
Mon 21 May 07        .  |  .  #    |13542.88  | .  +                  *
Tue 22 May 07        .  |  . #     |13539.95  | .  +                 *
Wed 23 May 07        .  |  .#      |13525.65  | .  +                 *
Thu 24 May 07        . #I  .       |13441.13  | . +                *
Fri 25 May 07        .  |  . #     |13507.28  | .+                  *
Tue 29 May 07        .  |  . #     |13521.34  | .+                   *
Wed 30 May 07        .  |  .   #   |13633.08  | . +                     *
Thu 31 May 07        .  |  . #     |13627.64  | . +                     *
Fri  1 Jun 07        .  |  .   #   |13668.11  | .  +                     *
Mon  4 Jun 07        .  |  . #     |13676.32  | .  +                     *
Tue  5 Jun 07        .  |# .       |13595.46  | .  +                   *
Wed  6 Jun 07        #  I  .       |13465.67  | .+                 *
Thu  7 Jun 07   #    .  I  .      {|13266.73  + .             *
Fri  8 Jun 07        .  I# .      ]|13424.39  |-.                 *
Mon 11 Jun 07        .  &  .       |13424.96  | -                 *
Tue 12 Jun 07    #   .  I  .      [|13295.01  | . -           *
Wed 13 Jun 07        .  I  .#     ]|13482.35  | -                   *
Thu 14 Jun 07        .  I  . #     |13553.72  + .                     *
Fri 15 Jun 07        .  |  .   #  }|13639.48  |+.                       *
Mon 18 Jun 07        .  |  .#      |13612.98  | +                       *
Tue 19 Jun 07        .  |  .#      |13635.42  | . +                     *
Wed 20 Jun 07        .  I# .       |13489.42  | . +                 *
Thu 21 Jun 07        .  |  #       |13545.84  | .+                    *
Fri 22 Jun 07        .# I  .       |13360.26  | +               *
Mon 25 Jun 07        #  I  .      {|13352.05  + .               *
Tue 26 Jun 07       #.  I  .       |13337.66  |-.               *
Wed 27 Jun 07        .  I# .       |13427.73  |-.                 *
Thu 28 Jun 07        .  I  #      ]|13422.28  |-.                 *
Fri 29 Jun 07        .  I #.       |13408.62  |-.                 *
Mon  2 Jul 07        .  |  .   #  }|13535.43  |+.                    *
Tue  3 Jul 07        .  |  . #     |13577.30  | .+                    *
Thu  5 Jul 07        .  |  .#      |13565.84  | . +                   *
Fri  6 Jul 07        .  |  .  #    |13611.68  | . +                    *
Mon  9 Jul 07        .  |  .#      |13649.97  | .  +                     *
Tue 10 Jul 07        .# |  .       |13501.70  | .+                  *
Wed 11 Jul 07        .  | #.       |13577.87  | +                      *
Thu 12 Jul 07        .  |  .   #   |13861.73  |~.+~~~~~~~~~~~~~~~~~~~~~~~~~~~~~*
Fri 13 Jul 07        .  |  . #     |13907.25  | .+              *
Mon 16 Jul 07        .  |# .       |13950.98  | +                *
Tue 17 Jul 07        .  |# .       |13971.55  | .+                *
Wed 18 Jul 07        .# I  .       |13918.22  | +                *
Thu 19 Jul 07        .  |  .#      |14000.41  |+.                  *
Fri 20 Jul 07       #.  I  .      {|13851.08  + .              *
Mon 23 Jul 07        .  I# .       |13943.42  + .                *
Tue 24 Jul 07   #    .  I  .       |13716.95  | -          *
Wed 25 Jul 07      # .  I  .       |13785.07  | .-           *
Thu 26 Jul 07  #     .  I  .       |13473.57  | .  -*
Fri 27 Jul 07   #    .  I  .       |13265.47 @|*-~~~~~~~~~~~~~~~~~~~~~~~~~~
--------------------------------------------------------------------------------

COMMENT on NASDAQ "Timer's Trend": We're on a SELL signal of July 16, 2007.

____________________________ NASDAQ TIMER'S TREND  _____________________________
Mon 19 Mar 07        .  I #.       | 2394.41  | -           *
Tue 20 Mar 07        .  |  #       | 2408.21  + .           *
Wed 21 Mar 07        .  |  .  #   }| 2455.92  |+.             *
Thu 22 Mar 07        .  |  #       | 2451.74  | +            *
Fri 23 Mar 07        .  |  .#      | 2448.93  | .+           *
Mon 26 Mar 07        .  |  .#      | 2455.63  | . +           *
Tue 27 Mar 07        . #|  .       | 2437.43  | .+           *
Wed 28 Mar 07        .# I  .      {| 2417.10  |+.           *
Thu 29 Mar 07        . #I  .       | 2417.88  + .            *
Fri 30 Mar 07        .  I #.       | 2421.64  + .            *
Mon  2 Apr 07        .  I# .       | 2422.26  |-.            *
Tue  3 Apr 07        .  |  . #    }| 2450.33  |+.            *
Wed  4 Apr 07        .  |  . #     | 2458.69  | +             *
Thu  5 Apr 07        .  |  . #     | 2471.34  | .+            *
Mon  9 Apr 07        .  |  #       | 2469.18  | .+            *
Tue 10 Apr 07        .  |  #       | 2477.61  | . +           *
Wed 11 Apr 07        .# I  .      {| 2459.31  | +             *
Thu 12 Apr 07        .  |  .#     }| 2480.32  | +             *
Fri 13 Apr 07        .  |  . #     | 2491.94  | +              *
Mon 16 Apr 07        .  |  .  #    | 2518.33  | .+             *
Tue 17 Apr 07        .  |  #       | 2516.95  | .+             *
Wed 18 Apr 07        .  |  #       | 2510.50  | . +            *
Thu 19 Apr 07        .  |# .       | 2505.35  | .+             *
Fri 20 Apr 07        .  |  . #     | 2526.39  | .+              *
Mon 23 Apr 07        .  | #.       | 2523.67  | +               *
Tue 24 Apr 07        .  | #.       | 2524.54  | +               *
Wed 25 Apr 07        .  |  .#      | 2547.89  | +               *
Thu 26 Apr 07        .  |  #       | 2554.46  | .+              *
Fri 27 Apr 07        .  I #.       | 2557.21  | +               *
Mon 30 Apr 07        #  I  .      {| 2525.09  |+.               *
Tue  1 May 07        . #I  .       | 2531.53  |+.               *
Wed  2 May 07        .  |  .  #   }| 2557.84  |+.                *
Thu  3 May 07        .  |  . #     | 2565.46  |+.                *
Fri  4 May 07        .  |  . #     | 2572.15  | +                *
Mon  7 May 07        .  |  #       | 2570.95  | .+               *
Tue  8 May 07        .  I  #       | 2571.75  | . +              *
Wed  9 May 07        .  |  #       | 2576.34  | .+               *
Thu 10 May 07        #  I  .      {| 2533.74  | +               *
Fri 11 May 07        .  I  .#      | 2562.22  | +                *
Mon 14 May 07        .  &  .       | 2546.44  |+.               *
Tue 15 May 07        #  I  .       | 2525.29  + .               *
Wed 16 May 07        .  I #.       | 2547.42  + .               *
Thu 17 May 07        .  &  .       | 2539.38  + .               *
Fri 18 May 07        .  I  #       | 2558.45  + .                *
Mon 21 May 07        .  I  .  #    | 2578.79  |+.                *
Tue 22 May 07        .  |  . #    }| 2588.02  | .+               *
Wed 23 May 07        .  | #.      [| 2577.05  | .+               *
Thu 24 May 07        #  I  .      {| 2537.92  | +               *
Fri 25 May 07        .  I  #       | 2557.19  | +               *
Tue 29 May 07        .  |  . #    }| 2572.06  | +                *
Wed 30 May 07        .  |  .#      | 2592.59  | +                 *
Thu 31 May 07        .  |  .  #    | 2604.52  | .+                *
Fri  1 Jun 07        .  |  . #     | 2613.92  | . +               *
Mon  4 Jun 07        .  |  .#      | 2618.29  | . +               *
Tue  5 Jun 07        .  |# .       | 2611.23  | . +               *
Wed  6 Jun 07        .# I  .      {| 2587.18  | +                *
Thu  7 Jun 07       #.  I  .       | 2541.38  + .               *
Fri  8 Jun 07        .  I  .#      | 2573.54  + .                *
Mon 11 Jun 07        .  I# .       | 2572.15  + .                *
Tue 12 Jun 07       #.  I  .       | 2549.77  |-.               *
Wed 13 Jun 07        .  I  .#      | 2582.31  + .                *
Thu 14 Jun 07        .  I  . #     | 2599.41  | +                 *
Fri 15 Jun 07        .  |  .  #   }| 2626.71  | +                 *
Mon 18 Jun 07        .  |  #       | 2626.60  | +                 *
Tue 19 Jun 07        .  | #.       | 2626.76  | . +               *
Wed 20 Jun 07        . #I  .      {| 2599.96  | .+                *
Thu 21 Jun 07        .  I #.       | 2616.96  | +                 *
Fri 22 Jun 07        .# I  .       | 2588.96  + .                *
Mon 25 Jun 07        .# I  .       | 2577.08  |-.                *
Tue 26 Jun 07        .# I  .       | 2574.16  |-.                *
Wed 27 Jun 07        .  I  #       | 2605.35  |-.                 *
Thu 28 Jun 07        .  I  #       | 2608.37  + .                 *
Fri 29 Jun 07        .  I# .       | 2603.23  + .                 *
Mon  2 Jul 07        .  |  . #     | 2632.30  | +                  *
Tue  3 Jul 07        .  |  . #     | 2644.95  | .+                 *
Thu  5 Jul 07        .  |  .#      | 2656.65  | .+                 *
Fri  6 Jul 07        .  |  .#     }| 2666.51  | .+                  *
Mon  9 Jul 07        .  |  #       | 2670.02  | . +                 *
Tue 10 Jul 07        .# I  .      {| 2639.16  | +                  *
Wed 11 Jul 07        .  I# .       | 2651.79  | +                  *
Thu 12 Jul 07        .  |  .  #   }| 2701.73  | +                    *
Fri 13 Jul 07        .  |  #       | 2707.00  | +                    *
Mon 16 Jul 07        .  I# .      {| 2697.33  |+.                   *
Tue 17 Jul 07        .  I  #       | 2712.29  | +                    *
Wed 18 Jul 07       #.  I  .       | 2699.49  |+.                    *
Thu 19 Jul 07        .  I  .#      | 2720.04  |+.                    *
Fri 20 Jul 07      # .  I  .       | 2687.60  |-.                   *
Mon 23 Jul 07        .  &  .       | 2690.58  |-.                   *
Tue 24 Jul 07    #   .  I  .       | 2639.86  | .-                 *
Wed 25 Jul 07        #  I  .       | 2648.17  | .-                 *
Thu 26 Jul 07   #    .  I  .       | 2599.34  | .  -              *
Fri 27 Jul 07    #   .  I  .       | 2562.24  | .  -             *
--------------------------------------------------------------------------------

NEXT ISSUE - may appear in August 2007. (Might do August, might not.... jury duty near end of month.)