Thoughts from the Frontline

In the 17 years from the end of 1964 to the end of 1981, the Dow gained exactly one-tenth of one percent. In the bull market which followed from 1982 to the peak in March of 2000, the Dow rose from 875 to 11,723, a spectacular rise of 1,239% or over 13 times from the starting point. We all remember what a difficult time that first period was. You had three recessions, oil shocks, Viet Nam, stagflation, the collapse of the Nifty Fifty, Watergate, short term interest rates rising to 18%, gold at $800 and very high inflation.

The news all seems so bleak sometimes. But is it? If my view that we are in a Muddle Through Economy is to prevail, then we surely must be seeing some good news somewhere. In this issue, I find some good news, some bad news and highlight a recent study which shows that the run in small cap stocks may be coming to an end. And much more, of course. Let's jump right in.

Every week, as I sit down to write, I think about the scores of research reports and articles I have read in the past few weeks. Is there a new theme? What trend is developing? What is the picture coming into view from the pieces of the puzzle at which I get to look? What have I seen that I should bring to your attention? Usually one or two things jump out, and this week is no exception. A number of articles, all about the dollar, and when taken in concert, are beginning to concern me. The developments in the dollar are the most serious threat to my view of a Muddle Through Economy and Market. This is important for you to understand, as it could have a profound affect upon your investments. We will look at these in depth.

I get a lot of reader questions and comments along the following lines: "John, how can you believe we are in a Muddle Through Economy when (pick a statistic) is so strong? Look at this indicator. Don't you think we are finally in a strong recovery and a new bull market?" Then, I get even more like this: "John, how can you believe we are in a Muddle Through Market when (pick a statistic) is so disastrous? Look at this number. Don't you think we are headed for a stock market crash?"

As I predicted several months ago, the dollar is beginning to show signs of real weakness against the euro and a host of other currencies. It has the potential to happen even faster than the gradual process I originally thought it would. But what does it mean for you and your investments? Today, we are going to look at some of the implications of a weaker dollar, whether or not it means inflation or, even worse, stagflation is in our future and what the implications of a weaker dollar will mean for the Muddle Through Economy. As promised last week, we will take a pass at what all this means for interest rates, as well, so we have lots to think about.

I must confess I like to work jigsaw puzzles. If you have ever worked on one, you know there are times when the pieces come together, and you can begin to see a major part of the puzzle. There is a certain sense of satisfaction when that happens.

Over the past few months, I have commented about how large corporations are using their company pension funds to bolster their corporate earnings. Under accounting rules, if a pension fund has "excess" funding, the excess can go to the bottom line of the corporation. Nothing particularly wrong with that, except the meaning of the word "excess" is as loose as Bill Clinton's definition of "is." Today we will visit an amazing statistic that clearly shows just how deceitful, large and widespread this practice is.

What a week. A whirlwind tour through Southern California visiting clients has left me quite tired, but driving through ridiculous freeway traffic has given me a lot of thinking time. I needed it, as I have been meditating in the implications of a very important new article in the AIMR Financial Analysts Journal. It is a lengthy and devastating analysis of what investors should expect by way of returns in the stock market over the next decade or so. I will do my best to give you the highlights.

As I leave the country today, headed for Mexico's beaches, I can't help but notice the stock market seems to be stuck in neutral, where it has been since the first of the year. So far, at least, my Muddle Through Market prediction at the beginning of the year seems to be the right one.

Today, we will look at a company that will pay you 8.7% a year because you are getting older. Yes, my Maine Source for value investing has come up with a gem for this month's value stock.

Life in the Muddle Through Economy goes on. With all of the sturm and drang going on in the markets, most stock indexes are not too far from where they were at the beginning of the year, except for the NASDAQ, which has been far from reality for a long time.

Two summers ago, I went on an Alaskan Cruise with #2 daughter. One of the highlights was flying by helicopter to several glaciers. Seeing the huge valleys these glaciers had dug into the bare rock of massive mountains was impressive.