Thoughts from the Frontline

My annual predictions letters for the last two years have been easy to write, and with one glaring exception, have been generally on target. I start with a basic premise - one key economic factor -- and work out from there. I look for the one thing I believe is going to affect the economy more than anything else in the coming year. If I am wrong on my basic premise, then everything else is likely to be wrong.

A lot of data has come out this week. I slice and dice it for you to help us figure out whether the economy is truly turning up, or is this just a head fake from the markets? Plus, we look at what some are calling a slam dunk investment. I agree it is as close as it comes to being a lock.

Wow! What a data downpour the last few days! We are going to cover Warren Buffett, junk bonds, Enron, deflation, corporate accounting hank-panky, and the wildest markets I can remember. Let's jump in and see where we end up.

Time to put on our thinking caps. This is an important and seminal e-letter, as it will help form the basis and rationale for future investment suggestions. Rather than focus on where the market is going in the next two weeks, today we are going to try to get an idea over where the market is headed in the next ten years. Armed with that information, we can more logically structure our portfolios to take advantage of the prevailing winds.

"Leningrad gets DAMNED cold in the winter, so bring it on, lay the price siege, and lets see who can outlast whom." For details see more below. Lot's of news this week, especially in the oil patch. Kuwait tells us there is "no floor for oil prices." I smell a rat. Let's jump right in.

Let's look at the huge amount of data that we had this week. (Thanks to Wayne Anderson in my office who gathered a few hundred pages of articles for me to read while I was out.) I had dinner with fellow analyst Greg Weldon this last Sunday in New Jersey. Watching the scores of wild swans and Canadian geese on a tranquil ocean side pond, we reflected about what Greg calls the "deflation tsunami" that is sweeping the world, which is anything BUT tranquil. Deflation has been a long time theme of this letter. It is why I have been so bullish on bonds for years. I first wrote in the fall of 1998 that we are "approaching a period of deflation", as a summary of an article. We are now there. Let's look at the evidence, which is mounting each month.

What a week! There is so much to talk about, and the good news is that it is not all bad! The theme of today's e-letter is going to be : "The Games People Play". My less than sainted Dad was a games player. I have a letter on the wall over my desk from John Wayne to my Dad referring to some legendary WW II poker games. (The Duke was gloating. He won. Dad lost. But Dad made it up from Wayne's scotch horde.) Dad's dictum: "Tell me the rules and deal the cards. Just don't change the rules in the middle of the game." Are the rules changing? Maybe. Today we look at rate cuts, bond offerings, GDP, employment, stimulus packages and a private, you will read it only here update from 10 miles from the Afghan front where the B-52s are carpet bombing. Let's jump right in.

This week we will start with a letter from a reader who asks an important question that is on your mind (not to mention mine). From there we will piece together some odd bits of data, some of which I picked up from the hedge fund conference I attended in Bermuda and see what type of forest we are wandering around in.

One of the constant complaints of Yankees who come to Texas is that those of us who are natives do not know how to drive on ice. This is true. But that is because we only get to practice about once a year. We don't seem to remember what to do from year to year. Is it steer into the slide or away from it? What do we do when we start sliding back down the hill? It can cause huge traffic tie-ups.

Last week we began a series on developing a philosophy of investing. This week we will continue with part 2 as we focus on what types of investments should do well after the economy turns around. Then we look at specific funds you can go into now.

Today begins a two part series on a framework for investing when the economy starts to recover. It is my belief that investors need to have a consistent philosophy of investing when choosing investments, otherwise your portfolio looks like the local dog pound: a few lonely purebreds mixed in with a lot of mutts. Some of the mutts end up becoming your best friend, but mostly they just mess up the place.

From ghoulies and ghosties And long-leggedy beasties And things that go bump in the night, Good Lord, deliver us! --Old Scottish Prayer The cheerleaders are proclaiming we have visited The Bottom. Dark as a Texas canyon at midnight, it was scary; full of bears and ferocious short-selling beasts. They are glad we have finally left it behind to enter the green pastures where bulls placidly graze. Now, after the shock of the last few weeks which triggered the sell-off they have been waiting for, we can resume the Bull Market, although they admit there might be a few bumps on the way. As evidence, they point to today's NAPM Index for September, which is up, although still in negative territory.