Barron's Bear Tracks Jude Wanniski April 16, 2001

Our Mike Churchill found this week's Barron's bearish from cover to cover. Here's the memo he sent to our staff this morning, which I thought worth sharing with you. I hope to have some news later in the day on where Washington policymakers stand on the monetary deflation issue, which I continue to stoke. I'm hoping for a positive follow-up from Senate Majority Leader Trent Lott, who understands the issue and who interjected comments about the deflation during a floor statement before the Easter recess.

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Barron's had a variety of convincing pieces with very bearish implications.

1) Alan Abelson's column quotes the Boston research firm of Fechtor Detwiler demolishing the arguments for a tech rally. FD's points: * Big firms like Cisco, Nortel, Lucent are demanding 40% price cuts from their suppliers. * There is talk of DRAM dumping by major tech firms who have excess inventory. * There is no demand anywhere in the channel. * Historically, severe pricing pressure follows periods whereinventories go to excess. We are likely to be entering that phase now. * Many of the companies that have been gobbling up chips are stagnant or going bankrupt. * The overall market for tech products has shrunk, and most tech companies still are priced for strong growth.

2) General Motors is starting to have earnings trouble due to its defined-benefit pension plan. The plan's investments have fallen and the company must take cash from operations to make up the shortfall. This problem comes on top of a softening auto market.

3) There are starting to be rumors that China will begin to consider devaluation if the yen hits 130. This is plausible. Within China, pro-devaluationists will be bolstered by Argentine Economy Minister Domingo Cavallo's move to change Argentina's system to a dollar/euro basket.

4) Cotton prices have plunged, but apparel retailers are not seeing any margin improvements because they are being forced to cut prices aggressively.

5) Good interview with Richard Russell, editor of the Dow Theory Letter. His arguments have a number of flaws, but he also makes some interesting insights. He expects Dow 5,500, with a possibility that we see an overshoot taking the Dow as low as 2,500. On top of his Dow theory arguments, he bases his view on his analysis of historical average valuations (we're still very high), combined with weakening fundamentals. I think the 2,500 case is not completely insane. It would be the same dynamic as occurred in the Nasdaq: If you have a 10% decline in gross margin (moving from 5% positive margin to 5% negative margin) your stock does not fall 10%, it falls 70%.

6) Gene Epstein's column is interesting. He is wrong three times out of four, but makes a fairly cogent explanation of why Fed rate cuts are not "easing." Once again, here is another guy who is normally bad sniffing in the right direction.

7) In yesterday's NYT business section, there is a good article examining the investment banks that brought all the busted dot-coms to market. Bear Stearns, in particular, looks very bad. This crash must have some kind of negative repercussions on investment banking. In sum, quite a collection of compelling bearish pieces. While Barron's always tends to be bearish, the marginal factor in the market remains dollar deflation, which is an extremely bearish dynamic. For the past year or so, Barron's bearish pieces have had quite a good track record.