The world, one had to remember, was analog, not digital, in the way it operated. And ‘analog’ actually meant ‘sloppy.’” The Teeth of the Tiger, by Tom Clancy.

Stocks rose in the second quarter after a dismal 2007 first quarter. The debate now concerns the degree to which they have been “overbought” and/or will these levels serve as a new launching pad.

Richard Russell’s July 6th comments are relevant: “…we are now entering the third speculative phase of this bull market, and selling pressure remains low. So yes, the Dow could be part of an international bull market third phase – and stocks around the world could run wild. We could be entering an ‘anything goes’ phase of this bull market.

Almost every central bank on the planet is now boosting its money supply – nobody wants an ‘expensive’ currency. Commodity prices in general are booming. Oil prices are surging. Populations that never owned cars before are buying cars hand-over-fist. Airline orders are in backlog. Defense orders are surging. The luxury business is running wild. Housing prices the world over are heading north.

In addition, the world is awash with money – often with very highly leveraged (borrowed) money – and cheap credit that enables worldwide Global Hedge Fund and individual stock, bond and derivative speculation as well as weekly Private Equity buy-outs amounting to billions upon billions of dollars. And, as mentioned above, at the moment the urge to sell is low.

On the other hand:

– Interest rates here and around the world have been rising. The Fed cannot raise rates further, however, because of the reality that the US housing situation is still worsening,

– Subprime mortgages are still a threat to their holders, many of whom have already suffered massive losses. Portfolios holding these mortgages are almost impossible to price in market terms as are mundane stocks and bonds. The holders do not know their value, nor do the ratings agencies Standard & Poor’s and Moody’s. The July 13th issue of GRANT’S indicates the size of this market to be “$3.6 Trillion, equivalent to 84% of the marketable U.S. public debt.”

– The dollar is weakening, and

– Foreigners are diversifying out of the dollar.

– US deficits are not going away.

– Oil has been climbing to $77 a barrel.

– While the US economy has generally been doing well, certain large areas continue to be weak, i. e. American automobile sales.

– The parabolic rise of the Chinese (Shanghai) and other stock markets will pose a substantial problem when the bubble bursts.

We focus on the good news; we focus on the bad news. That’s what the symbol of the Bull and the Bear perpetually struggling with each other is all about. It has been that way for more years than we can count, and we don’t expect it to change.


From the Financial Times on May 3, 2007 an article titled “NY Fed warns on hedge fund risk.” The first sentence began: “The risk hedge funds pose to the global financial system has reached levels by some measures comparable to those just before the Long Term Capital Management fund imploded in 1998, the Federal Reserve Bank of New York said yesterday.” “The bank’s study is the latest contribution to a debate that has seen regulators and analysts express concern over the risks and leverage taken on by hedge funds, the private investment vehicles that are increasingly influential in financial markets. The hedge fund industry has mushroomed in recent years and now accounts for an estimated $1,500bn ($1.5 trillion to us Americans) of investments.”

We will be the first to admit that we are unable to call market highs or bottoms. Imagine the markets to be like a pendulum that when at rest its “real” or “true” fixed point (or value in this case) is at 6 o’clock. Bull markets always overshoot to the upside, for example to 9 or 10 o’clock and bear markets to the downside, for example to 3 or 2 o’clock.

We continue to be both optimistic and cautious. We are not in the “gloom and doom” business — just the opposite. Nevertheless, the above articles and comments are from eminently respectable sources that we take very seriously in view of our experiences having spent our careers in the investment business in excess of 110 years. The challenge is to Preserve Capital as well as to Create Capital, and we have learned over those years that one of the best ways to “make money” is to keep from loosing it.

Yes, the financial markets as well as the world itself are “analog.” And Dow 14000 is just a step along the way.

John W. Hamilton
July 19th, 2007