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Still Waiting for the End of the World


Ross M. Miller
Miller Risk Advisors
September 27, 2004

It is amazing how the mainstream media appear to have forgotten about the 1970s. First, there was Dan Rather and his colleagues at CBS News who forgot how typewriters worked back before there were word processors and personal computers. Now, the doomsayers in the news appear to have forgotten about Jeanne Dixon, the psychic who made tabloid headlines on a weekly basis.

Ms. Dixon was notorious for making predictions and then extending them out in time when they did not pan out. For months, the mainstream media claims that "something big" on the terrorism front would happen on American soil before the November election. The two main targets were the Democratic and Republican conventions. Now that nothing has (knock on wood) happened, the doomsdate has been pushed back to the January presidential inauguration.

When I last wrote about the fearmongers in my May 17th (isn't it neat how my IBM Executive typewriter not only does superscripts, it also does hyperlinks) prequel to this commentary, the Volatility Index (VIX), a measure of nervousness in the financial markets, was bouncing off 20. In recent days, it has flirted with 13 and seems destined to continue on its inexorable path down to 10 or below. Unless…

With nature's help, oil has stubbornly stayed high and has unquestionably left its dent in the economy. Gasoline, however, which in retrospect was, as I had claimed, being hoarded, actually dropped in price during the peak summer driving season while oil prices were headed higher. Now, gasoline at the pump is turning the corner.

I would be happy to tell you where oil is going, but I haven't a clue. By the end of the year, I would not be surprised to see it at $75 a barrel. Nor would I be surprised to see it at $25 a barrel. Who knows? At some point, sustained higher oil prices will do more than dent the economy, but we are not there yet. With any luck, we will never be.

Not to worry, though. My old friend Alan Greenspan discovered inflation some months after I did and he and his merry band of Fed governors see a future so rosy that it is a good bet that several more quarter-point interest rate hikes are in the works. I figure I'll turn bearish about three months before Greenie given that he perceives things with a lag.

In my financial management class, I'm having my students track fifteen securitiesthree ETFs and twelve stocks. Seven of the stocksGE, C, DIS, JNJ, XOM, WMT, and MSFTwere chosen because they are representative of the market in a way that makes them attractive to traders who employ factor models. Though XOM and WMT can have minds of their own, on a typical trading day these stocks move in factor-model-based lockstep. Some days, it seems like you can see the Barra model trading with the Northfield model while everyone is out to a long lunch. Can the "no-trade equilibrium" posited by Bill Sharpe and his nifty capital-asset pricing model be that far off? Maybe the New York Stock Exchange can dispense with the bell and gavel stuff at play Elvis Costello's "No Action" at the start of every session.

And then there's the election. I remember that when we had class elections in high school that the principal would say, "Remember, this is not a popularity contest." If you have not figured it out already, the U.S. presidential election is a popularity contest. Here's why. Once you elect someone, you have to see him on television for the next four years. Most people, even if it they are not consciously aware of it, are voting for a television program. And not a very popular one at that.

I think Dubya recognizes this and lays low, making sure not to pre-empt Survivor or CSI? with one of his speeches. John Kerry, however, is oblivious to this and I think the viewership can sense this. (The media should stop referring to them as the electorate, they are the viewership.) John Kerry's election will guarantee four years of very bad television programming. Worse than Jimmy Carter. Worse than Mike Dukakis was as governor. Worse than Ross Perot once we figured out he was nuts. And Teresa is worse still. Perhaps John Kerry could pull off JFK, he's almost got the hair thing worked out, but I remember Jackie Kennedy and you, Ms. Kerry, are no Jackie Kennedy. Our educated viewership may not be all that swift, but they know a clunker of a drama series when they see it.

Amidst all this gloom and profound boredom there is a growing glimmer of hope for gut-wrenching and profit-margin enhancing volatility in the markets. Somewhere, deep in the electronic books of Fannie Mae there are tens, maybe hundreds, of billions of dollars are unaccounted for. The very same billions that have been fueling the real-estate boom that has in turn been fueling the U.S. economy. I just know it. Stayed tuned next week for my commentary entitled "Fannie Mae Death Watch: Part I."

Copyright 2004 by Miller Risk Advisors. Permission granted to forward by electronic means and to excerpt or broadcast 250 words or less provided a citation is made to