I learned (again) the value of diversification. While my main trade has been short the US equity indices, it has gone nowhere. In the meantime, energy, gold, currency positions have made out like bandits. Thank goodness. Just wish those trades had been bigger. (Don’t you always wish that about the winners?)

Energy stocks got whacked this week after US crude inventories showed a modest increase. Is this the pullback that we have been expecting? Far from clear that this is anything significant from looking at the chart (ino.com - fair use).

The chart does look parabolic and those parabolics do typically experience nasty reversals.

Wait and see at this point. Our energy trusts are making excellent money at these prices. A few dollars either way makes little difference. If we get a good pullback, I will be looking to add to positions. Energy stocks are still undervalued at these prices IMO and so there is no percentage in trying to get too smart about trading in and out of them.

The GDP and associated data for the third quarter were released on Friday. GDP was reported to have increased at a 3.7% annual rate. Consumer spending continued strong, expanding at a 4.6% annual rate, but personal income was up only slightly so the spending came at the cost of driving the personal savings rate down to 0.4%, a low since the 1930s Great Depression.

Most money supply measures (except M2, which made a marginal new high) are still flat to lower since May of this year. The dollar is hovering around its lows for the year, about 0.85 basis the US Dollar Index.

The ECRI index of leading economic indicators fell modestly, showing a weekly MA of -1.4%. The official index of leading indicators has now fallen for four months in a row. Michigan consumer confidence shows a slight up-tick from the mid-month reading, but still lower than last month. ABC/Money consumer confidence remains at -11, and has been flat for weeks now. I suspect the election will move these numbers lower in the event of a Kerry victory (simply because the Repubs polled can’t get any more positive).

The big anomaly was the Chicago PMI, which showed a huge uptick. Just an anomaly until we see some confirming data, it is at odds with practically everything else that we see.

In general, nothing has changed. Foreign central banks continue to buy US Treasuries, financing US consumption. Last datum that I saw was that the US was consuming 80% of the rest of world’s savings. This doesn’t seem like a sustainable situation to me, but it has been going on for some time now. Foreign private investors have stopped putting money into the US, it is just the CBs now. Not Today Thank You Steve Roach has pointed out that, historically, the exit of private investors has marked the beginning of instability. So I think it has to be all eyes on the dollar. If the dollar breaks below the .85 area, then it could be Katy bar the door. Many folks seem to think that the next stop could be in the .70 area. There is a pretty depressing article in this week’s Economist on the subject. The Wolf At The Door China raised interest rates recently for the first time in nine years in order to curb overheating investment in their economy (China’s savings rate is about 40%, BTW. That is not a typo.) . This could be the first crack in the pseudo-stability that we have been seeing. I’m concerned that I am insufficiently hedged and so I will be looking to fix this.

Obviously, the key will be how markets react to the outcome of the US presidential election. Vote early and vote often. Libertarian if in doubt.

42 Supercontainer ships awaiting unloading off Huntington Beach as of yesterday.

The last couple of days have seen substantial rallies. While yesterday was, at least in part, due to index funds that needed to reinvest the proceeds of Cingular’s cash acquisition of AT&T Wireless, today was a pure jam job. The financial year end for most mutual funds is October 31, and of course annual bonuses for the managers are figured on performance to that date. As you might expect, the fund managers use all the tricks at their disposal to make their performance look as good as possible. This is often called “window dressing”. They do this pretty much every year, as the following table shows:

This is, of course, completely illegal; however, the fund managers don’t care and nobody seems to do anything to stop them, so the practice continues.