Dr Faber's views on 2004 (page 4 of 4)

I am not sure exactly how the present imbalances will play themselves out, but I am certain that Peter Bernstein will be proved right when he writes (see above) that the breeze that will accompany the restoration of balance won't be "gentle" but will likely take the form of a financial and economic hurricane.

In fact, trouble may have already started. All measures of money supply have turned negative, and MZM has declined at an annual rate of 7% in the 13 weeks ended November 10 while M3 is growing at its slowest pace since 1993.

The bulls will, of course, point out that there is nothing to worry about in regards to the decline in money supply, which, they argue, has to do with an increased preference for equities over cash by investors. But the steep deceleration in money supply growth is more likely to be due to the collapse in home refinancing activity and was, incidentally, accompanied by first a deceleration in the growth rate and more recently by a decline in total bank credit.

The recent decline in money supply and bank credit doesn't bode well for either the economy or the stock market. In fact, if we look at the recent performance of consumer-sensitive shares such as airlines and retailers, one has to wonder about the wildly optimistic economic forecasts.

Sears and Best Buy have broken their up-trend; Home Depot and Lowe's look like they have topped out; Southwest Airlines and Jetblue have collapsed, and Delta Airlines is no higher than it was at the beginning of the year.

The price of Wal-Mart is weakening despite all the brouhaha about the strength of the economy and is now barely higher than a year ago. Even the recently super-strong Philadelphia Semiconductor Index (SOX), whose components are very economic-sensitive, is no longer leading the market and is breaking down. In addition, most recently, housing stocks also took a beating, possibly confirming the weakness in the Merrill Lynch Housing Index.

In sum, the stock market seems either to have had second thoughts about the sustainability of the present economic recovery, or it may already have fully discounted the recovery. In fact, in the past a high level of ISM orders, such as we had recently, has always been a reliable sell stock indicator! In short, US equities offer limited up-side potential but entail, in my opinion, high risk and should best be avoided.