What's the problem with the stockmarket? The stockmarket is an anticipatory animal. It does a remarkable job of predicting what it thinks the economy will be like in 6-9 months. Right now it's worried. And with justifiable reason. Everything that buoyed the recovery from the recession of 2000-2002 is going away -- the tax cuts, the low interest rates, the huge military spending.

And today, The Wall Street Journal argues that, as Kerry's chances of being elected have risen, the market "is worried about Kerry's tax policy, which, according to his policy advisers, calls for undoing the recent cuts in capital-gains and dividend taxes for investors with incomes greater than $200,000. Some analysts think worries about a possible higher dividend tax were part of the reason Microsoft announced its multibillion-dollar special dividend this year, although the company denies that.

" Below the surface," says the Journal, "there is a broader problem, a whiff of what during President Carter's era was called a malaise. People worry not only about what Mr. Kerry might do, but also about how Mr. Bush is managing the economy and whether he will be able to maintain an international coalition to fight terrorism. Part of the problem, Mr. Wallace says, is that some investors fear a rocky road no matter who wins."

On Friday, I watched the regional Bell Operating companies -- BellSouth (BLS), SBC Communications (SBC) and Verizon VZ) -- rise strongly after UBS upgraded them because of AT&T's departure from selling to residences. The moment the UBS-inspired boost was over, I jumped in and sold each of three stocks short. By the afternoon, I was up nearly $1,000. I believe these three and my favorite short, AT&T (T), will fall even further in coming weeks. This market is perfect for shorting -- but, ideally, you need three things:
+ A story as to why things are doing terribly for the stocks.
+ Some stupid analyst to upgrade them, giving them a temporary boost.
+ Genuine angst in the market. Wrote one broker friend this morning, "On Friday, the Dow's 50-day moving average crossed over and is now lower than its 200-day moving average. Big deal, right? I think it is."

It's time too look for more shorts.

The housing bust that is coming: Interest rates are rising, making it expensive to raise money on your home. And in June, the nation's housing starts dropped by a big 8.5%. On Sunday The New York Times' Gretchen Morgenson, an excellent financial journalist, wrote the following story. I reproduce all of it because it's very good. I also bolded the most interesting parts:

"Housing Bust: It Won't Be Pretty.

LET the stock market slide. Let the bond market sink. As long as home prices keep rocking, it's easy for Americans to feel fat and happy. But what happens when the run-up in housing prices loses steam, or worse? The implications are sobering, not only for homeowners but also for the economy as a whole.

With the growth rate for home prices starting to slow, now may be the time to ponder what a bear market in real estate may bring. A recent study by two economists at Goldman Sachs provides some answers. For now, prices are still climbing over all. The average home price in the nation rose 7.71 percent in the 12 months ended in March.

But the first three months of this year showed far slower growth than previous periods. Prices rose only 0.96 percent, according to the Office of Federal Housing Enterprise Oversight, which keeps an eye on Fannie Mae and Freddie Mac. The last time housing prices grew by less than 1 percent in a quarter was in the spring of 1998.

More ominous, six states showed declines in housing prices in the first quarter: Vermont, Alaska, North Dakota, South Dakota, Iowa and Nebraska. No state had price declines in the previous quarter. To be sure, home values are still hot in many spots. In the most recent 12 months, prices have jumped by more than 15 percent in Hawaii and Nevada, by 14 percent in California, 11 percent in New Jersey and 10 percent in New York.

In nominal terms, United States home prices are up 60 percent since 1995; in real terms, adjusted for inflation, they are up 37 percent. Viewed historically, home prices are up twice as much now as they were in the bullish real estate markets of both the mid-1970's and the 1980's.

As a percentage of disposable income, home prices are more than 18 percent above the long-term average. Prices exceeded that average by only 4 percent in the 1970's and 8.5 percent in the 1980's boom.

Michael Buchanan, a senior global economist at Goldman Sachs, and Themistoklis Fiotakis, a research assistant there, reckon that at current interest rates, home prices are now overvalued by 10 percent, on average. Because this figure spans the entire nation, the hottest markets - California and New York - are obviously more overpriced.

The economists compute fair value in home prices by using a variety of measures, including interest rates, population and demographic data, and the overall health of the economy. If interest rates increased by one percentage point, the economists said, home prices in the United States would be overvalued by 15 percent.

None of this would be worrisome if homeowners had not turned the paper profits in their properties into cold, spendable cash. But withdrawals from home equities have recently totaled 6.3 percent of household disposable income, according to the Goldman study. In the late 1980's, equity withdrawals reached only 2.5 percent of disposable income.

Federal Reserve studies indicate that as much as half of the equity withdrawals went into personal consumption and home improvements. As a result, the Goldman economists estimate that equity cash-outs added 1.75 percent to the growth in the gross domestic product in 2003. That is a significant increase from the 1.25 percent kick that equity withdrawals added in 2002.

Consumption would slip 1 percent, Goldman estimated, if housing prices fell by 10 percent, to the fair value level. But if prices decline to well below that, as often happens when overheated markets go cold, consumption may fall by 2.4 percent, Goldman reckoned. Such a housing crash took place in Britain in the early 1990's. At the market's low, home prices had fallen by 27 percent, 5 percent below Goldman's estimate of fair value at the time.

Such a decline is not expected here, said Dominic Wilson, a senior global economist at Goldman. That's because home prices in Britain had escalated much more than they have in this country, even now. And interest rates had soared into the high teens, which is unlikely here. But even small declines in home prices could hurt the economy. "The precise degree of the vulnerability isn't going to be clear until we see house prices slow," Mr. Wilson said. "You've never seen consumers this stretched, operating at levels of leverage we've never experienced before. House prices are starting at a level that is pretty high relative to what we think fair value is going to be, and the economy as a whole has gotten a lot more sensitive" to housing-related spending.

Indeed, Goldman estimates that home equity lines of credit and the like have magnified the effect of housing wealth on consumption over the past decade, taking it to 10 percent from 4 percent. Although rising home prices have been stopped dead in the past by sharply higher interest rates, the Goldman economists note that bear markets don't necessarily need major triggers to get started. Small events can change the market's psychology, and asset bubbles sometimes just cave in on themselves.

One risk that looms large, however, is that United States policy makers would have few tools to cushion the fall if a housing decline gained real momentum. Interest rates are already so low and fiscal policy so loose that little could be done to ease the pain. "This is one of a series of risks and imbalances that suggest there has been a price to the low-interest-rate policy that led the recession to be much shallower than it might otherwise have been," Mr. Wilson said. "Fiscal and monetary policy are both already fully utilized. If things go wrong from here, the U.S. finds itself in a more fragile position."

In short, if you're thinking of selling your house, do it quickly. If you're thinking of buying or building a new house, wait a little.

Useful ideas and gadgets:
+ Keep your old PC for testing new software on, or new upgrades of software on. Sometimes, the software sounds good but it ain't. It's easier not to install it on your PC than to install it and to remove it.
+ My iPod's best feature is "Shuffle." It randomly plays one song and then another another. I thought shuffling was done through the iPod's "playlist," which I've never figured out. It's not. It's done on the iPod itself. Here's my son's simple instructions (for dumb Daddies):
1. Go to iPod's main menu
2. Click settings
3. Click shuffle until it says "songs" or "Albums. (You can shuffle songs or albums, but you can't shuffle both.)
3. Back to main menu
4. Pick a song to play. The iPod will pick all future ones randomly.

My iPod second best feature is its headphone jack. You can listen to the iPod with its distinctive white earpieces. You can plug the iPod into your home stereo system. You can plug the iPod into an FM radio transmitter and hear it on your car radio.

Apple has announced a new generation of iPods. This means you now can pick up the older iPod cheaply. Amazon.com is selling the 15 gigabyte iPOD for $250 new.

+ This is a picture of my desk.

My favorite gadget is the VillageTronic PC display card which you can see sticking out the left side of the center laptop. This wonderful gadget lets me run a third screen from my laptop -- the laptop's internal screen and two external 19" LCDs. One screen for emails, one for this column, one for exploring the Internet, one for stock prices... you get the idea. The VillageTronic is the absolute best video gadget for a laptop because it lets you drive screens of multiple shapes and multiple sizes, as you can see from this graphic I picked up on their site. Click here.






My new friend's new art exhibition: You're all invited to the opening of a group show including Kinga Czerska on Thursday, August 5 from 5-8 PM. It's at the Friesen gallery, 1210 Second Ave. between (University and Seneca), Seattle WA 98101. Samples of her wonderful work:

   

  

 

Lance, I'm proud of you. You just won your sixth 2,200 miles Tour de France. No one else has ever done that. This makes you, in my mind, the world's great living athlete.



The Ingenious Work Crew
A fellow stopped at a rural gas station, and, after filling his tank, he paid the bill and bought a soft drink. He stood by his car to drink his cola and he watched while a man would dig a hole two or three feet deep and then move on. Then another man came along behind and filled in the hole. While one was digging a new hole, the other was about 25 feet behind filling in the old.

The men worked right past the fellow with the soft drink and went on down the road. "I can't stand this," said the man tossing the can in a trash container and heading down the road toward the men.

"Hold it, hold it," he said to the men. "Can you tell me what's going on here with this digging?"

"Well, we work for the county," one of the men said.

"But one of you is digging a hole and the other fills it up. You're not accomplishing anything. Aren't you wasting the county's money?"

"You don't understand, mister," one of the men said. "Normally there's three of us: me, Rodney and Mike. I dig the hole, Rodney sticks in the tree and Mike here puts the dirt back."

"Now just because Rodney's sick, that don't mean that Mike and me can't work and get paid."

Harry Newton

I make my daily column -- In Search of the Perfect Investment -- (Monday through Friday) freely available for three reasons:
First, writing is good for sorting things out in my brain.
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