Idle Thoughts

Our minds are wandering. Call it the initial stirrings of spring fever up here in the glorious mountains of Northern California, call it attention deficit disorder, call it what you will. As we sifted through the world's news and market action today, there was too much going on in our brains to focus. So, how about a potpourri of smaller items worth noting?

1. There really hasn't been much meaningful news lately. Most headlines are dominated by the Libby verdict and a fair amount of jawboning about currencies and the market correction. Not much in the way of real developments. That's a great sign this is a correction and not a bear market—nothing fundamental has changed, just a lot of psychology and worry.

2. ECB raises rates from 3.5% to 3.75%, as expected. The statement was fairly hawkish overall, but not overly so in our view. Right now, the market is pricing in one more rate hike this year. Trichet (the ECB's head banker) says rates are still accommodative of economic growth. Most interesting, however, was the ECB's revised GDP forecast for 2007 from between 1.7% to 2.7%, to a higher range of 2.1% to 2.9%. We believe even this could be too conservative, but the overwhelmingly positive economic fundamentals out there are forcing officials to (begrudgingly) ratchet up their outlooks. That's bullish.

3. Obi-Wan's Pricey Duds. Here's a sign of the times: the original brown cloak worn by Sir Alec Guinness playing the role of Obi-Wan Kenobi in (what I'm sure we can all agree is the greatest film of all time) Star Wars was sold for a cool $104 grand. Some subscribe to the theory that when art, or in this case kitsch, hits new highs it's a sign of a mania and speculation. We don't. Most likely, this is just a sign consumers in the developed world are doing very well and continue to do even better. People just aren't buying ratty, 30 year old $104,000 cloaks in times of economic bust.

Obi-Wan's Brown Cloak Sells for $104,000
By Raphael G. Satter of the Associated Press Writer via Wired News
https://news.wired.com/dynamic/stories/F/FILM_COSTUME_AUCTION_GMOV-?SITE=WIRE&SECTION=HOME&TEMPLATE=DEFAULT

4. The Yen Carry Trade "Implosion" is a fallacy and bank lending looks good. Here are two stories that illustrate why concern over the yen carry trade is overblown:

Yen's Rebound Defies Carry Trade Fears
By David Pilling, Peter Garnham, and Gillian Tett, The Financial Times

Grey Power is Playing Long Game with Yen
By David Pilling and David Turner, The Financial Times

Even better for Japan, we note lending by Japanese banks rose 1.4% on year in February to 388.5 trillion yen. This is something probably not on most American investors' radars. We've long said the Japanese economic expansion is for real this time, and this is key evidence of such. This news is particularly bullish because not many are paying attention to it. This was the 13th straight month of lending increases. Japanese corporations would be well served to take advantage of very low interest rates in Japan to repurchase shares and make acquisitions—and we see that happening eventually. We remain bullish on Japan for 2007.

5. Regret Shunning's not dead yet, but the Cap is. It takes euphoria to destroy a bull market, and these days we see acute caution out there.

Daily Bugle: Captain America shot and killed: Living legend assassinated on steps of Federal Courthouse
By The Daily Bugle Staff
https://www.marvel.com/news/comicstories.392

Now, you might be asking yourself how the Death of Captain America relates to stock markets. Well, the ascent or plight of comic book heroes is actually a pretty good anecdotal indicator of sentiment. The last time major comic characters died? Superman was slain by the harrowing menace Doomsday, and the Batman's back was broken by the nefarious Bane in the early 90s…a time of dour sentiment coming out of a recent recession, war, and stock market woes. When people aren't feeling well, our heroes become our martyrs. That's the point of communal societal heroes: to wear our psychological burdens. So it was with the Cap—one of the ultimate adolescent symbols of American values. We hope he rests easy after more than 50 years of adventures.

The Biography of Captain America (A.K.A. Steve Rogers)
Marvel Comics
https://www.marvel.com/universe/Captain_America_%28Steve_Rogers%29?utm_campaign=front+page+tracking&utm_source=character+unit&utm_medium=character+name&utm_content=Captain%20America

To wit, we note the lack of pervasive bullishness by analysts today: The Lex editorial staff at the Financial Times reports "…the average recommendation, with a "buy" scoring one, and a "sell" five, is at 2.5 in the US and Europe. This is less bullish than the peak US score of 1.9 in 2000 and the average since 1994 of about 2.2."

Moreover, we could be headed for yet another regret shunning episode. This time, insider trading is the target. We've been touting the M&A boom for some time. If big merger activity begins to be associated with "crooked" capitalists, skepticism and anger will be born anew. This is a very tiny story in the US, but worth keeping an eye on. Coverage in the UK has been pretty heavy so far.

Insider Trading Still Widespread in London
By Barney Jopson and Robert Orr and Brooke Masters, The Financial Times

6. Economies almost always grow. This is such a basic thing, we often forget about it when miring ourselves in the daily news and data. With few exceptions, the global economy is just about always growing. One of the only ways economies don't grow is if we figure out a way to screw them up—with government intervention or other harmful protectionism and free trade restrictions. But, just like stocks, up is the natural direction. That we're seeing a prolonged expansion, and that we should expect it to continue is not a worrisome or strange thing. It's a normal thing. And it's a good thing.