Finance Digest for Week of January 5, 2004

ANALYST ASSESSES TECHNOLOGY STOCKS OUTLOOK FOR 2004

Tech valuations are high, although it has not seemed to matter in the latter part of 2003. But I think it will matter in 2004. I am not convinced there will be so many opportunities to hold long and get out in time, although there will be some of these opportunities. Looking longer-term, some technology drivers for the next three years include RFID (radio frequency identification), Voice-over-IP, Wi-Max, and other related communications technologies, Linux, and the move of the Internet from TCP/IP-4 to TCP/IP-6.

Silicon Valley’s lead in technological innovation slipping away.

Generally considered the hub of innovation and entrepreneurial activity in the world, Silicon Valley is seeing its once insurmountable lead in technological innovation slipping away to competitors such as India and China. Most distressingly, world-class technology companies like Oracle, Microsoft and Motorola are now tripping over themselves in their rush to ship thousands of high-end R&D jobs to India and China. What is most disconcerting is that these companies are not shipping jobs overseas purely for cost-cutting reasons (although, no doubt, that plays a key part) -- they continually cite the inability to find the type of scientific and engineering talent needed to fuel world-class R&D facilities within the USA.

As more companies transfer R&D jobs overseas, America’s dominance in next-generation intellectual property will come under increasing pressure. The rate of innovation in India now rivals that of Silicon Valley -- and rivals in every corner of the world are no longer wowed by the myth of Silicon Valley. It is not a stretch of the imagination to believe that Indian R&D workers will go on to found the next generation of innovative start-ups -- in India. Over the past 30 years, Silicon Valley has continually reinvented itself to respond to external competitive threats. It is quite clear that Silicon Valley once again faces a staggering threat to its dominance in innovation.

IRS ISSUES REGULATIONS DEFINING INCOME IN CODE SECTIONS CONCERNING TRUSTS, ESTATES

In a statement released last week, the US Treasury Department and the Internal Revenue Service issued final regulations amending the definition of income under section 643 of the Internal Revenue Code. The new regulations are also designed to clarify the circumstances under which capital gains are included in the distributable net income of an estate or trust. Section 643(b) of the Code defines income for purposes of numerous federal tax provisions, including determining qualification for the estate and gift tax marital deduction, and computing required distributions from pooled income funds and certain charitable remainder trusts.

BAHRAIN CONSIDERING INCENTIVES TO ATTRACT FOREIGN INVESTMENT

According to new legislation being considered by the Bahranian government, foreign investors will be entitled to significant tax and ownership incentives in a bid to boost international investment in the Middle Eastern state. The bill will give foreigners access to most sectors of the nation’s economy, and will allow 100% ownership by foreigners in some instances.

Saudi government set to slash tax for foreign investors.

Saudi Arabia’s Shura Council voted to approve a proposal cutting tax for foreign investors to 25% from the currently imposed 45%. While the Council’s decisions are not legally binding, they are usually rubber stamped by the government.

SOCIAL SECURITY NUMBER THE KEY TO IDENTITY THEFT

These days getting your hands on someone else’s social security number is pretty easy -- and part of that is because people ask for it all the time, and most people comply. Many people either do not realize how important the number is or just do not want to complain about it being asked for -- even if, in many cases, these firms have no right to know. Of course, that is never going to change. Instead, what we should be working towards is a system that does not require a permanent and easily copied number like a social security number to prove you are who you say you are. It is like having a not very secret password that is impossible to change. Not very secure. Until a more secure system is standard, the problem is not likely to go away.

SORROWS OF EMPIRE: MILITARISM, SECRECY, AND THE END OF THE REPUBLIC

In the years after the Soviet Union imploded, the United States was described first as the globe’s “lone superpower”, then as a “reluctant sheriff”, next as the“indispensable nation”, and now, in the wake of 9/11, as a “New Rome”. Here, Chalmers Johnson thoroughly explores the new militarism that is transforming America and compelling its people to pick up the burden of empire. Among Johnson’s provocative conclusions is that American militarism is putting an end to the age of globalization and bankrupting the United States, even as it creates the conditions for a new century of virulent blowback. Sorrows of Empire suggests that the former American republic has already crossed its Rubicon -- with the Pentagon leading the way.

GOLD WARS

Gold Wars deals with gold’s history, the gold rushes and the abandonment of gold-as-money under the modern welfare/warfare state. It shows how governments, fearing the affinity of free people for gold, fight it, thereby helping to destroy whole countries along with the gold mining industry. The book highlights the betrayal of gold-rich Switzerland. The author condemns gold “hedging,” gold market manipulation by governments and bullion banks, fiat money and debt. He concludes that only a gold standard can return an ailing world economy to its full potential, reduce unemployment, help restore law and order, and help to secure peace and freedom for mankind.

UK VALUED AT $8.8 TRILLION

The United Kingdom -- that is, England, Wales, Scotland and Northern Ireland -- is officially valued at $8.8 trillion, a sum that includes all of its property and buildings, machinery, roads, bridges, planes, trains and automobiles. It also includes all the money deposited in its banks and other financial institutions. Plus everything on the shelves at Harrods. The $8.8 trillion price tag does not include data from 2003, which, with the departure of the soccer superstar David Beckham and his wife, Victoria, to Madrid -- along with their vast net worth -- could be expected to alter considerably any future calculations.

More than half of the $8.8 trillion figure comes from the value of people’s homes, a total that has more than doubled in the last 10 years. Commercial and public property accounted for about $1 trillion, and the country’s roads, bridges, pipelines and other infrastructure were valued at $961 billion.

GUERNSEY A SQUEAKY CLEAN FINANCE CENTER ACCORDING TO A NEW BOOK

The island’s finance regulatory system has been given a clean bill of health in The Sink, a new book by Jeffrey Robinson. The American, said by the British Banker’s Association to be “the world’s leading financial crime journalist”, was critical about the island’s probity as an offshore finance center in a previous book, The Laundrymen, 10 years ago, but now said that regulation has made the difference.

He reckons that money laundering is the world’s third biggest business, after the oil industry and foreign exchange, with about $600 billion circling the globe through jurisdictions where oversight is strictly forbidden by local law. The Sink is a fast-paced factudrama spicing up familiar tales with very interesting snippets. Quite how and when the Channel Islands became major players in the finance game in the 1970s is succinctly told.

AUSTRALIA -- LOVE IT BUT LEAVE IT

Almost one million Austalians, or about 20th of the population, are living overseas. Many of the expatriates are professionals earning more than $100,000 a year. The trend has been steadily growing in the past decade with the number of Australian expatriates rising 146%. The Government has ordered the first full-scale inquiry into the reasons why Australians choose to live overseas, with submissions due by February 27.

The Senate Legal and Constitutional References Committee inquiry is not only investigating why Australians choose to live overseas but how to use expatriates to promote Australia. The far-reaching study also will look at the costs, benefits and opportunities presented by the phenomenon and how to deal with the needs and concerns of expatriates.

PUTIN VS. THE JAILED TYCOON: DEFINING RUSSIA’S NEW RULES

The collision between Russia’s most powerful politician, President Vladimir Putin, and its richest businessman, Mikhail Khodorkovsky, had been brewing for months when Mr. Khodorkovsky took the step that more than any other landed him in prison -- trying to sell a major stake in his oil company, Yukos, to ExxonMobil. Mr. Khodorkovsky failed to consult the Kremlin adequately about a deal that would cede substantial control over a strategic Russian resource to a foreign company, and an American one at that.

The tycoon’s trial, which the government is no hurry to begin, is likely to open a Pandora’s box of issues from the 1990's, when the Kremlin, businessmen, organized crime and huge sums of money intersected in the race to privatize Russia’s economy. In February, Mr. Putin had summoned Mr. Khodorkovsky and other tycoons who made financial killings in the early post-Soviet years to a meeting, telling them he wanted to eliminate “the very foundation of corruption,” by establishing “a civilized partnership between business and state.”

His message was clear: businessmen had to follow new rules, rules that included economic order and a respect for government power. Mr. Khodorkovsky failed to heed that message and his arrest in October on murky fraud charges has set off an international debate about Russia’s economic and political course. The case also has renewed questions about civil rights in a country led by a former K.G.B. official intent on redefining the government’s relations with an elite class of business owners who are known as oligarchs.

MUTUAL FUND SCANDAL PUSHES HEDGE FUNDS OUT OF THE SHADOWS

Hedge funds are for rich people only ... or the old story went. But investors who have far less than the $1 million or so in assets required to invest are learning just how much impact these funds can have on the stock market and ordinary mutual funds. As New York state Attorney General Eliot Spitzer revealed in September, mutual fund managers have been cutting secret deals that allow hedge funds to make short-term predatory trades and profit at the expense of other mutual fund investors. One hedge fund has paid $40 million in penalties and the manager of another has pleaded guilty to fraud. Alliance Capital Management LP agreed to pay $250 million in restitution.

The pools initially gained popularity when wealthy people and companies wanted to find a way to “hedge”, or protect themselves, when the stock market went down by selling securities “short” -- a practice that mutual funds are sharply limited in their ability to do. As more hedge funds were created, they also began to employ strategies that had nothing to do with selling short, but they continued to limit their investor pools to relatively small numbers of wealthy people to avoid SEC oversight. The SEC, with limited resources, has generally exempted small investment companies that serve rich customers from regulation, because those clients are considered more sophisticated and less in need of government protection. [Thank you SEC. Our gratitude is boundless!]

The SEC estimates that there are currently 6,000 to 7,000 hedge funds, managing between $600 billion and $700 billion in assets -- one-tenth the size of the mutual fund industry but a notable increase from 1990, when fewer than 2,000 funds managed less than $100 billion. Hedge funds are popular because the good ones produce high returns: the Van Global Hedge Fund index has averaged 15.8% a year since 1988, compared with 11.9% for the Standard & Poor’s 500 stock index. Providers like hedge funds because they can charge higher fees for managing them -- they generally get to keep a percentage of profits, on top of standard fees -- and the reduced regulatory oversight.

Hedge funds cost more, says report.

London-based fund monitoring company Fitzrovia International has released a study of hedge fund investor pricing which shows that hedge funds can charge, on average, 80% higher annual fees than actively managed offshore equity funds. Fitzrovia has produced the first analysis of the annual charges for hedge funds -- including management fees, Total Expense Ratios (TERs) and performance fees.

TERs of 2.00% (excluding performance fees) rank in the second lowest fee quartile for hedge funds, while management fees of 2.00% rank in the highest quartile. For hedge funds in particular, says Fitzrovia, it is also crucial to examine performance fees, which can range from 5% to 30% of net gains. When all annual fees are taken into account, investors selecting a random hedge fund in this report could have paid 3.94% a year in all annual fees (over the latest accounting period). When this average is weighted by fund assets the figure is reduced to 3.23%, compared to an equivalent figure for equity funds of 1.79%.

EUROPEANS PROBING FUND MANAGERS FOR DODGY OPERATORS

European regulators and investors have opened a second front in the fight against mutual fund trading abuses. Government agencies that oversee the activities of portfolio managers in some of the largest European fund markets have begun investigations into whether funds in their jurisdictions have allowed preferred investors to engage in frequent trading and late trading to the detriment of other shareholders. Such problems are at the heart of the American controversy.

Many companies under investigation in the US have big operations internationally. Companies that are found to have broken trading rules, either in funds sold in the US or abroad, were bound to lose business from large foreign investors, such as pension funds, and from financial advisers who steered small investors into funds, European advisers and consultants said. That would compound the difficulties that these companies face in the US, consultants warned.

INDUSTRIAL COMMODITIES, GOLD HAVE MADE STRONG BULL MARKET MOVES

Industrial commodity prices, which rose 22.1% last year, are within striking distance of their post-World War II high reached in 1995. Gold, up 19.5%, to $416.10 an ounce, went over $400 in December for the first time in more than seven and a half years. Industrial commodities -- which are as varied as copper, tin, steel, crude oil, rubber and plywood -- had their fifth-biggest annual gain as measured by the Journal of Commerce-Economic Cycle Research Institute index, which began in 1949. This index, which includes 18 industrial commodities, began its current rally with a 15.9% increase in 2002, after falling in 15 of the previous 21 years.

Gold had its third consecutive annual gain in 2003, the first such broad rally since the late 1980’s. Since the end of 2000, the price of an ounce of gold has climbed 52.1%. Global economic growth is forecast to pick up this year and the dollar to head even lower; consequently, industrial prices are expected to hit a new peak, while $400 could become a floor for gold rather than a tough-to-maintain high.

Analysts say that China was the biggest customer for industrial commodities as its economy grew at an expected annual rate of 7 percent to 8 percent last year. The key to demand is whether that pace continues. The gold price could move higher if China decides to loosen its currency peg to the dollar, because that could allow the value of the dollar to fall still lower. In addition, China appears to be moving toward allowing individuals to own and trade gold, a change that could easily increase demand and lift the price.

HIGHER GOLD PRICES COULD SIGNAL NORTHERN RUSH

High-flying gold prices are causing a flurry of activity in Canada's north as companies look for new deposits and blow the dust off old ones. “We’re holding our breath that [the gold price] stays high,” said Mike Vaydik, general manager of the Northwest Territories-Nunavut Chamber of Mines. “Anything north of $400 is a big source of inspiration for exploration. A lot of projects have got a shot in the arm.”

Unlike diamonds, where economics mean exploration is a big-company business, high gold prices bring in everyone from large companies to individual prospectors, Vaydik said. And with analysts predicting gold will remain relatively high into 2004, financing is much easier to come by, he said. “You only have to look at how much some of these companies have raised in the last few months to realize how much activity is going on.”

U.S. INVESTORS MULL OVER PROSPECTS FOR CONTINUED GAINS IN FOREIGN STOCK MARKETS

When translated into dollars for American investors, stocks in some emerging markets more than doubled in 2003, among them Thailand, up 134.3%; Turkey, 122.4%; and Brazil, up 102.9%. Some developed markets also posted dollar gains that exceeded the American markets’ 26.8% gain, as measured by Morgan Stanley’s country stock indexes. Germany was up 60.1%; Canada, 52.1%; and Japan, 34.6%. Over all, the Morgan Stanley Capital International index of world stock markets, excluding the United States, rose 37.5% last year.

Many large institutional investors, however, are treating the extraordinary returns as, well, extraordinary. Instead of piling more money into global markets in search of once-in-a-decade gains, they are taking a more restrained approach as they brace for more modest, single-digit increases that are expected this year. [Note: Some market analysts would take this as a reason to be optimistic about further strong gains to come in the sector.] While companies in Asia, in particular, will continue to benefit from strong growth in the United States and China, investors are becoming more selective about picking winners and losers, rather than simply betting that broader economic rebounds will lift all boats.

U.S. CREDIT CARD DELINQUENCIES HIT RECORD HIGH

The weak U.S. job market helped nudge credit card delinquencies to a record high in the third quarter of 2003, a banking trade association said in a report. Credit card delinquencies rose to a seasonally adjusted 4.09% of all accounts in the period from 4.04% in the second quarter, the American Bankers Association said. “The job market has been flying against strong headwinds, lengthening the time between jobs and intensifying financial stress,” ABA Chief Economist James Chessen said.

THE SILENCE OF THE CEOS: STICK UP FOR MARTHA, FOR YOUR OWN SAKES

If only Attorney General John Ashcroft could cow Al Qaeda as successfully as he has CEOs of publicly-traded companies, the U.S. might be making more progress in the war against terror. How else to explain the silence with which corporate chiefs -- woman CEOs included -- around the country greeted the chilling criminal indictment of Martha Stewart on the charge of professing her innocence of insider trading allegations leaked to the media by anonymous government sources?

The silence is ominous because the government’s criminal case is transparently thin. Yet the implications for officers of public companies are enormous. The SEC’s civil insider trading charges against Stewart are flimsy, and the Justice Department has decided against pursuing criminal charges of insider trading. Yet Stewart could now go to prison for making a public statement during the investigation of those charges. The perversity of this situation does not faze U.S. Attorney General John Ashcroft, who personally selected Stewart’s prosecutor to be his new number two man at the Justice Department.

Ms. Stewart has been charged with criminal securities fraud because she and her lawyers publicly declared her innocence in connection with her sale of a small amount of stock in another company. This exercise of pure free speech, Ashcroft’s Justice Department contends, was a “material false statement” made to influence the stock price of her company, Martha Stewart Living Omnimedia, in violation of SEC Rule 10b-5; for that, Ashcroft believes, she should go to prison. What Ashcroft has done by approving the indictment is to threaten prison terms for officers of companies who dare to exercise their First Amendment rights. This is bad for publicly-held companies and worse for their officers.

To paraphrase Bob Dole in another context: Where is the outrage? Make no mistake. This is the most blatant attack by government on pure free speech in recent memory, made more chilling by the prominence -- and wealth -- of the target. If they can do it to Martha, they sure as hell can and will do it to the average American.

POLL REVEALS AMERICA DEEPLY DIVIDED BY PARTY, IDEOLOGY, GEORGE BUSH, AND VALUES

The poll reveals that as we enter what promises to be a very contentious 2004 presidential contest, George W. Bush and his Democratic challenger will be campaigning in two different, yet parallel universes. When respondents were asked whether Bush was legitimately elected president, or whether the 2000 election was stolen, 62% of Red State (those that voted for Bush in 2000) voters said that Bush is the legitimate president, while 32% said the election was stolen away from the popular vote winner, Al Gore. In the Blue States (those that supported Gore), half (50%) of the respondents said that the election was legitimate while 44% think it was stolen.

Respondents were sharply divided on President Bush’s job performance. 60% of voters in the Red States gave Bush positive marks, while only 46% of voters in the Blue States agreed. A solid 56% majority of Red State voters reject former president Bill and current senator Hillary Clintons’ values while 34% do not. Blue State voters are split with 45% responding favorable to the Clinton’s values and 47% disagreeing.

Ideologically, the two Americas are quite distinct. Ideological differences are buttressed by considerable discrepancies in party identification. A majority (51%) of those living in the Red States say they own a gun, while 64% in the Blues States do not.

THE WRIGHT STUFF

Wilbur and Orville, the inseparable Wright brothers, the bicycle mechanics from Dayton, Ohio: We have seen and will be seeing the old photos of them quite a lot as we come to the culmination of this one-hundredth-anniversary year of powered flight. Just about everything that could be learned and said about them and their achievement has been documented and written. Still, somehow, none of it can do justice to the genius of these two men, whose feet were so thoroughly planted on the ground and yet whose sublime combination of the practical and inspirational opened the heavens and changed the world forever.

It has taken a hundred years, and it is still sinking into the minds of scientists and aeronautical engineers and craftsmen just how deep, how original, how prescient was the genius of the Wright brothers. They had an unshakeable and, yes, good-humored determination to fly. But they had the wit and the sense and, as it turned out, the necessarily dogged resolution to move their invention beyond novelty to practicality.

SLOVAKIA’S TAX REFORMS NOW BEING PUT TO THE TEST

With Slovakia’s new across-the-board 19% flat rate of income tax now in effect, the government is hoping to see a surge of interest from foreign investors and manufacturers, potentially earning the country a reputation as Eastern Europe’s “tax haven”. Not only does the flat tax apply to personal income tax, it also applies to corporate tax and VAT, both of which will also be levied at 19%. In the latter case, however, this entailed a tax increase.

Although the Slovak President, Rudolf Schuster initially vetoed the legislation late last year, fearing that the tax would create greater social inequality, parliament overruled him, preferring to take Finance Minster Ivan Miklos’ view that the changes will create a “fair, simple, and investment-oriented tax environment.”

Some observers have suggested that the Slovak government may have gone out on a limb somewhat with the flat tax, although it could be argued that the move is already starting to pay dividends, with many global firms (most notably in the automotive sector) showing a keen interest in establishing operations in the country.

THE PARMALAT INVESTIGATIONS: PLENTY OF CRYING OVER SPILT MILK

It has been dubbed “Europe’s Enron” thanks to the swiftness of its fall from grace and its use of dubious offshore vehicles, but as investigators delve deeper into Parmalat, it appears that the similarities between the mess at the bankrupt Italian dairy group and the implosion of the Texas energy trader may be fewer than first thought. The financial gymnastics at Enron were truly sophisticated, with an army of legal and financial advisers employed to build clever but devious structures that kept the company just inside the law. In Parmalat’s case, prosecutors appear to have found that the longstanding fraud was breathtakingly crude, which raises a whole new set of unpleasant questions about the firm’s accountants, bankers and regulators, not to mention the people running it.

Hindsight is a wonderful thing, of course, but it does appear that many Parmalat-watchers had suspicions about the company for years. Why, for example, should a company with a substantial cash balance also be issuing lots of debt? These concerns gathered steam in the investment community during 2003, with Italian fund managers complaining as long ago as last March about a lack of transparency in the company’s accounts.

There are differences emerging in the accounts of the main protagonists, but so far there appear to be two main allegations being laid at Parmalat’s door. The first is that the company falsified its accounts for years, perhaps from the mid-1990s on, in an effort to conceal losses, especially in international operations such as Brazil. Investigators now estimate that at least €8 billion of assets listed on the balance sheet are fictitious. The second allegation is that up to €800 million was embezzled, chiefly by Calisto Tanzi, the group’s chairman, founder and main shareholder.

Scandal prompts EU call for audit reforms.

Rules for auditors across the EU are set to be changed in the wake of the Parmalat scandal, following moves by the EC to ensure that group auditors take responsibility for all aspects of companies’ accounts. The Commission is also considering requiring each EU member state to set up US-style accounting oversight boards.

In the Parmalat affair, the auditing was divided between Grant Thornton, which audited accounts at 19 Parmalat subsidiaries and Deloitte, Parmalat’s chief auditor. EC officials say new proposals would mean that the group auditor for a company would be fully responsible for the consolidated accounts.

DOW 12,000? HMMM

A self-confessed recovering bear, your columnist does not now treat every upward move with a snort of derision, and the market certainly seems to have the wind in its sails. But he cannot help feeling that headwinds aplenty loom on the horizon. This is not a view held by most strategists at investment banks. Abby Joseph Cohen, Goldman Sachs’s stockmarket guru -- dubbed “permabull” by those who treat her prognostications with a pinch of salt -- thinks shares will rise again this year, although not, to be fair, as much as they did last year.

It seems a stretch to describe America’s stockmarket as “cheap”. The S&P has a price-to-earnings (p/e) ratio of 29 or thereabouts, depending on how you calculate it. That is some way above its multi-year average of about 15. Ms. Cohen and her like tend to decry high p/e ratios as misleading because the “e” is depressed, as it is in any recovery. In any case, she says, p/e ratios should be higher when inflation is low, as it is now, because profits are of better quality and the Federal Reserve is likely to be friendlier for longer. Which seems reasonable, except that such views are “rubbish”, says Andrew Smithers, a stockmarket consultant of independent mien. There is, he points out, no evidence that profits are of better quality now. Quite the opposite, indeed, thanks partly to the distortions produced by stock options. Mr. Smithers thinks that the market is overvalued by at least 60%.

Bond yields could rise sharply, especially if inflation started to climb, the dollar tanked or Asian central banks stopped buying American assets. Merrill Lynch, for one, thinks that ten-year Treasury yields will go up to 6%, from around 4.3% now. That would not be good for equities. Equally, bond yields could fall. Disinflationary pressures are still strong, mostly due to excess capacity. Inflation could go lower still were American consumers finally to realize that they need to start saving for their retirement. Falling bond yields, falling consumption, strong disinflationary pressures. None of that would do much for equities either.

ECONOMY GOOD, BUT WILTING DOLLAR RAISES RED FLAGS

GDP, consumer spending and retail sales have all increased. The stock market is up, interest rates are down and unemployment is falling. The news has given the Bush administration something to crow about. Over the past two months, however, the U.S. dollar has fallen 10% against the Euro to about 80% of the Euro’s value. It is worth about half the value of a British pound. Most analysts expect it to plummet further in the days ahead, remaining weak for the rest of this year.

Experts say the weakened dollar is the fault of increased U.S. deficit spending, financed largely through foreign loans. “The magnitude of the current ... deficit is very large and the ... liabilities of the United States are rising quite rapidly,” reads an IMF report. “This is a problem which, if not addressed, could create ... disorderly conditions in exchange markets.” The IMF is, in effect, nagging the Bush administration about its spending.

The Bush administration blames deficit spending on a confluence of events, including a cyclical downturn in the economy, the war on terrorism and corporate malfeasance. Democrats blame the deficit on tax cuts pushed by Bush.

SUCCESS WITHOUT MISERY

If someone asked you this question, what would your immediate mental response be? “What is it like, being a success?” Would your first thought be this? “Why are you asking me?” Would you actually say this? You have what most of the world today wants, and 98% of the world in 1900 did not have: leisure (TV, movies), hot and cold running water, power tools, wonder drugs, cheap reading material, 50,000 items for sale at Wal-Mart, air conditioning in summer, heat without having to chop wood in winter, a bank account, and anesthetics if you ever need an operation.

If your attitude is, “I’m not a success,” then you owe it to yourself to spend some time thinking about these things: 1.) What constitutes success?; 2.) What would constitute success in my life?; 3.) What do I have to do to get it?; 4.) How long will it take?; and 5.) What is my exit strategy after I do get it? I honestly believe that #5 is more important than #1-#4. No matter how you define success, you must have a plan to get off the treadmill in a graceful manner. A plan for success must recognize and deal with your own mortality.

BEARS DESTINED TO BE HUMILIATED

How long should this bull market last? Until the last bear cries uncle. I am waiting for most of the big-name investors who were pound-the-table bearish as 2003 began to either capitulate or be publicly ridiculed. That has not happened yet. The market is the Great Humiliator. It wants to humiliate everyone but has a strong preference for the biggest and most famous.

That is how the 1990s boom played out. It did not -- could not -- end until the seers who were bearish in the mid-1990s became bullish or were derided as quacks. Longtime bear Charles Clough, Merrill Lynch’s chief strategist, was openly fired and replaced by longtime bull Christine Callies in June 2000. Almost perfect timing -- backwards! That was when the two-and-a-half-year bear market was just getting underway. Over those two and a half years every important bull either caved in and turned bearish or was painted as powerless by the press. Christine Callies took her turn on the execution block. Unbendingly bullish, she was booted for value-based permabear Richard Bernstein in January 2002. Poor Merrill! Self-lynched again.

To kill the bull market that started a year ago, the same eternal invisible hand must unseat most of the current bears. They must either do an about-face, turning bullish, or else be cast out as kooks. Which bear will be undone first? Merrill’s Richard Bernstein is an obvious candidate. Another likely victim is Robert Shiller, the widely revered Yale academic whose book Irrational Exuberance, appearing on the eve of the 2000-03 crash, was brilliantly timed. Professor Shiller’s admirers forget, though, that he was bearish throughout the 1990s. Another famous bear is Jeremy Grantham of money management firm Grantham, Mayo, Van Otterloo. Others: newsletter writers Robert Prechter, Richard Russell and Martin Weiss; and fellow Forbes columnists James Grant and Gary Shilling.

Some bears maintain their pessimistic proclivities by claiming 2003 as a counterrally in a longer bear market. But my reading of history says the move to date is already too big for the Great Humiliator not to have his way. So buy and hold until you hear that beautiful hum -- of bears either turning tail or being humiliated. None of them has gotten really ridiculed, yet. Until the public turns against them, this most enjoyable bull market has legs. A great way to participate is by buying money-management stocks.