Harry Schultz International Letter, Full Market Update

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Dow Industrial vs. Dow Transportation Index

Divergence intensifying via sideways/negative drift in industrials vs. symmetrical triangle breakout & rise to new highs in transports. In accordance with the Dow theory no valid signal of a trend change can be produced by the action of one average alone. Thus both indexes must rise to new highs, or break below Mar-May support to confirm a major sentiment shift. Key levels to monitor: industrials bullish above 10,738; bearish below 9862. Transports bullish above 3080; bearish below 2753.

S&P500 Index

S&P500 Sept futures closed Friday July 9 at 1112.80 ie, down 13.00 pts on the week.

The Commitment of Traders report shows S&P500 commercial hedgers reduced 2,321 longs, bringing total longs to 402,952, whilst shorts added 3,175 contracts, bringing total shorts to 416,526. Large speculators are holding 44,402 longs against 72,503 shorts. And, small traders are holding 132,423 longs against 90,748 shorts.

S&P 500 (continuation Cx) weekly chart - line on close:

Poss inverted head & shoulder base. Negative bearing in key momentum indicators warns additional/deeper consolidation probable before any attempt to breach 1150 neckline/pivotal resistance. Major support zone: 935-975. Chart neutral to shorterm bearish.

S&P 500 Sept futures daily chart - line on close:

Working lower & under pressure. Choppy trading reduces odds for consistent profits. Reduce exposure until new trend develops via rise above 1156, or break below 1082. Spinner in negative cross, but red timing line nearing recent oversold extremes (ie, shorterm bounce poss). Chart negative to shorterm neutral.

FMU Traders Guidelines:

Per HSL641, traders sold short at 1130 &/or 1115 (or better); stops no higher than 1150 S/C/O.

If U R out, sell short mini size at mkt (if down on day) & or sell a rally failure at/below 1140; stop: 1150 S/C/O. If sell at higher level, take ½ profits at 1105, ½ at 1085. Re-sell 1-dc below 1075 (intraday if sharp rally develops) for 1028 profit target.

Buy 2-dc over 1150 (intraday if sharp rally develops); stop: 1-dc below 1125, for run towards 1195 profit/sell target. Use TPS to lock in shorterm gains.

Traders are advised to use mini S&P's to enter/exit trades incrementally. 1 mini Cx = $50/point, compared with $250 for full size Cx (5 minis = 1 full size).

Nasdaq

Nasdaq (mini) Sept futures closed Friday July 9 at 1442.00 ie, down 46.00 pts on the week.

Nasdaq Composite weekly breadth figures show new lows nearly doubled new highs (209-106), declines crushed advances (2486-863) & declining volume outpaced advancing volume by the ratio of 1.94 to 1.

Nasdaq Composite (continuation Cx) weekly chart - line on close:

Break below Oct 2002 uptrend & sideways/negative drift below 1500 neckline/resistance of 3-year inverted H&S base doesn't bode well for shorterm strength. Must hold 1400 to keep higher hopes alive. Spinner neutral with growing bearish bias (blue confirming line in first dip below zero since Dec 2002). Negative hook in Stochastics. Chart neutral to shorterm bearish.

HSLP-Nasdaq chart (HSLP = our in-house mkt predictor) line on close:

An unusual degree of divergence apparent in HSLP-Nasdaq via 3 higher highs compared to 3 lower highs in its benchmark index, the Nasdaq Comp. Explosive rally leg poss IF Nasdaq Comp rises above 2075 resistance to confirm HSLP-Nasdaq's bullish posture. Spinner & MACD in negative crosses, but slight easing of downside momentum apparent. Major support band: 2310-2335. Chart neutral/bullish.

Nasdaq (mini) Sept futures daily chart - line on close:

Messy action & set for more of same. Poss symmetrical triangle. Next indication of medium term direction will come on rise above 1520, or break below 1375. Momentum indicators hint shorterm bounce poss on 1435 intermediate support. Chart negative/neutral.

FMU Traders Guidelines:

Per HSL641, traders who shorted bit at mkt exited via stoploss L.

Sell short small size at mkt (if down on day) &/or sell a rally failure at/below 1500; stop: 1525 S/C/O. If sell at higher level, take ½ profits at 1435, ½ at 1388. Re-sell 1-dc below 1360 (intraday if sharp rally develops) for dip towards 1235 profit target.

Buy bit on 2-dc over 1525 (intraday if sharp rally develops); stop: 1-dc below 1475. Buy again on rise above 1565 for run towards 1595 profit/sell target. Use TPS to lock in shorterm gains.

Market Sentiment

Bullish Consensus shows S&P 500 at 63%. Says: "S&P 500 futures are moving sideways/lower to test short-term support. Short Term Momentum Oscillators hover well above the oversold area. Signals are neutral short-term. The intermediate trend is cautiously bearish/neutral.

Market Vane Bullish Consensus at 66%, stable from 65% of the prior week.

UBS Index of Investor Optimism (overall index) shows sharp rise to 95 in June vs. 71 in May.

American association of Individual Investors show bulls at 57% almost unchanged from 56.4% one week before. Bears at 15.7%; neutral at 27.3%.

Sentiment indicators have been less effective during the surge from March lows, but excessive bullishness offers a cautionary tone.

Best & Worst Dow Jones US industries over 3-months:

10 Best Performing Industries

Internet Services Index +29.41
Oil Companies, Secondary Index +15.26%
Coal Index +14.51%
Trucking Index +11.25%
Technology Services Index +11.08%
Tires Index +10.43%
Cosmetics Index +9.91%
Lodging Index +8.69%
Energy Index +8.35%
Oil Companies, Major Index +7.12%

10 Worst Performing Industries

Mining Index -17.16%
Semiconductors Index -14.67%
Precious Metals Index -13.78%
Securities Brokers Index -10.87%
Electric Components & Equipment -10.70%
Advertising Index -10.59%
Nonferrous Metals Index -10.23%
Casinos Index -9.71%
Home Construction Index -9.20%
Tobacco Index -8.95%

10-Year T-Note

10-Year T-Note Sept futures closed Friday July 9 at 110^19, ie up 0^03 on the week.

The Commitment of Traders Report shows T-Bond commercial hedgers reduced 22,981 longs, bringing total longs to 339,140, whilst shorts added 27,560 contracts, bringing total shorts to 307,331. Large speculators are holding 60,119 longs against 100,133 shorts. Small traders are holding 98,105 longs against 89,900 shorts.

10-Year T-Note Sept futures daily chart - line on close:

Mini double bottom confirmed via rise above May 27 peak, but price now confronting 110^00-111^30 resistance/overhead supply. Negative hook in Spinners (red) timing line hints pullback towards 6/14 uptrend & 108^30 support poss. Chart bullish/neutral.

FMU Traders Guidelines:

Per HSL641, traders took partial profits at 110^21. Exit remainder at mkt, or use tight TPS to lock in gains.

If U R out, buy mini size if dips to 109^06; stops no lower than 108^16 S/C/O. Take ½ profits at 111^29 & use TPS on rest. Re-buy 2-dc over 111^29 for 114^00 upside profit/sell target. (Note: PPI & CPI reports due out on Thurs. Surprised inflations numbers may rock boat. Keep it tight).

Sell short 1-dc below 108^00; stop: 109^06 S/C/O. Sell again below 106^21 for dip towards 104^05 profit target.

CRB Futures Index

CRB futures price index closed May 272.69, ie up 4.46 pts on the week.

CRB futures price index weekly chart - line on close:

Consolidation digest within Feb 2002 uptrend channel. Tentative base action in Spinner & Stochastics hints 261-268 support band may hold corrective action/provide footing for next rally-leg. Chart neural to shorterm bullish.

DJ World Index

DJ World Index closed Friday July 9 at 190.28, ie down 1.53 on the week.

DJ World Index weekly chart - basis line on close:

Conflicting head & shoulders top vs. poss reverse H&S base. Explosive move possible on rise above pivotal 196 neckline/resistance, with 216 initial upside objective. Otherwise, lower drift targets 178 support with 165 & 152 extended support targets. Momentum indicators neutral to bearish with plenty of downside scope before reaching recent oversold extremes. Chart neutral/negative.

Gold

Gold Oct futures closed Friday July 9 at 409.20 ie, up 9.30 on the week.

***COMEX gold, silver surge, funds pile in on dollar woes
www.reuters.com
Thursday July 8, 2:52 pm ET

"NEW YORK, July 8 (Reuters) - Gold surged to a three-month high in New York futures trade Thursday, catapulting silver into an even bigger rally, as investors and speculators swapped the dollar for harder assets amid indications that U.S. economic growth is coming off the boil.

"Dollar disinvestments pushed the euro to a three-month high and buttressed gold as a safe haven. A U.S. warning about a major terrorist attack was another bullish factor in the days trade, along with a rise in oil prices.

"At the COMEX division of the New York Mercantile Exchange, August gold reached $409.60 an ounce in late trade to mark its highest price since April 13. It settled up $5.50, nearly 1.4 percent, at $408.20, extending Wednesdays $9.70 rally.

"David Rinehimer, head of commodities research at Citigroup Global Markets, cited relief that gold was able to hold above $400 after Wednesdays technical breakout. "The funds are becoming a little more confident as far as the upside potential in the gold," he said. "There is not too much gyration on the dollar side, though I think sentiment toward the dollar turned a little bit more negative."

"Gold has been choppy this week, trading down to $389 on Tuesday after skidding from its June 28 high at $405.60, which was only exceeded Thursday. Gold posted a 15-year high at $433 in April."
End quote.

Gold (continuation Cx) weekly chart - line on close:

Poss reverse head & shoulder base development below 420-428 resistance. Positive crosses in MACD & Spinner bolster stability of May rally-leg, but signals need more time to confirm. Nov 2001 uptrend holds key to medium term direction. Chart bullish.

Gold Oct futures daily chart - line on close:

Poss 6-mos reverse head & shoulder neckline warns 430 resistance may cap shorterm strength. Momentum indicators in firm bull mode above zero. Any corrective action likely to hold on/above 394-400 support if higher highs to follow shorterm. Chart bullish.

FMU Trader's gold Guidelines:

Per HSL641, traders bot Aug Cx at 392.00 &/or 401.75. Take partial profits at mkt & use TPS on rest.

Oct Cx: if U R out, buy small size at mkt (if up on day) &/or buy if dips to 402 & 398; stop: 392. Take partial profits at 415; again at 428. Use TPS to lock in shorterm gains.

*** To increase profits in gold shares, bullion & gold, we recommend trading them, not just holding. Our weekly 'Gold Charts R Us' service (GCRU) is available via Net, fax or mail. Via Internet at rate of: 3-mos $300, 6-mos $585, 9-mos $855 & 12-mos $1,110. By fax add $120 per 3-months. By mail only $250 per 3-mos. GCRU offers many gold mine charts with specific buy&sell & stops levels for each pick. U can sign up online at: www.hsletter.com (click on 'Gold Charts R Us').

Note: Special GCRU '2-Week Taster' offer available at $45 via:
http://www.hsletter.com/GCRUpromo_Special.html
oNew Subscribers only.

Euro vs. US$

Euro Sept futures closed Friday July 9 at 1.2390 ie, up 0.0080 on the week.

Euro futures (continuation Cx) weekly chart - line on close:

Series of higher lows & rise above 1/9 downtrend. Tentative base action/positive crosses in Spinner & MACD reinforce stability of April rally-leg. 1.2850 initial upside target (ie, re-test of Jan peak). Chart bullish.

Euro Sept futures daily chart - basis line on close:

Beware poss 6-mos reverse head & shoulder base development. 4-month H&S base validated via rise above 1.2270 neckline; theoretical 1.2770 upside target. Spinner in full bull mode, but (red) timing line easing at recent overbought extremes (ie, corrective dip towards 1.2770 breakout level poss). Chart bullish.

FMU Trader's Guidelines:

Per HSL641, traders bot at 1.2120 &/or 1.2350; stops no lower than 1.2130 S/C/O.

If U R out, buy small size at mkt (if up on day) &/or buy if dips to 1.2300; stop: 1.2130 S/C/O. Take ½ profits at 1.2560, ½ at 1.2720.

Next major bear cue: 1-dc below 1.1940.

US dollar index

Dollar Index Sept futures closed Friday July 9 at 87.67 ie, down 0.51 pts on the week.

Dollar Index futures (continuation Cx) weekly chart - basis line on close:

Waterfall breakdown continues after rejection below 2003 resistance band. Negative bearing in momentum indicators raises odds for re-test of Jan 2004 low. Needs rise above 93.00 (basis weekly chart) to give any upside credibility. Chart bearish.

Dollar Index Sept futures daily chart - basis line on close:

4-mos head & shoulder top validated via break below 89.00 neckline; 82.76 theoretical downside target. MACD negative, but Spinner hints shorterm pullback towards 89.00 neckline poss (may offer higher entry point for shorts). Chart bearish.

FMU Trader's Guidelines:

Per HSL641, traders sold short at 89.33. If U R out, sell short mini size at mkt (if down on day) &/or sell a rally failure at/below 89.10; stop: exit or sell ½ at 89.90 S/C/O, ½ at 90.50 S/C/O. Take ½ profits at 86.00 & use TPS on rest.

Next buy cue: 1-dc over 90.50; stop: 89.00 S/C/O, for run towards 94.50 upside profit/sell target.

Note: do NOT trade dollar index & euro simultaneously.

Yen vs. US$

Yen Sept futures closed Friday July 9 at .9261 ie, up .0005 on the week.

Yen futures (continuation Cx) weekly chart - line on close:

2½-year inverted head & shoulders base offers 99.50 theoretical measured target. Volatile double dip to 0.8757 breakout level. Momentum indicators warming to bullish, but tentative base action/positive crosses need more time to confirm. Chart neutral/bullish.

Yen Sept futures daily chart - line on close:

Pullback to neckline of Apr-Jun reverse head & shoulder base; 0.9636 measured target. Repeated setbacks likely as price tackles Feb-Apr overhead supply/resistance. Momentum indicators in crosscurrent bull mode, but waning downside pressure hints corrective action likely to be short-lived. Chart bullish.

FMU Trader's Guidelines:

Per HSL641, traders went long at 0.9250; stop: 0.9100 S/C/O.

If U R out, buy bit at mkt (if up on day); stop: 0.9100 S/C/O. Take ½ profits at 0.9525 & use TPS on rest.

Sell short mini size on 1-dc below 0.9000; stop: 0.9140 S/C/O. Take ½ profits at 0.8770, ½ at 0.8605 (or use TPS to follow downside).

New Stock Recommendations

Ati Technologies (Nasdaq: ATYT) buy at 17.50; stop: 15.75. Gamblers buy foothold longs at mkt.

Enpro Inds Inc (NYSE: NPO) buy at 20.82; stop: 18.75. Gamblers buy bit at mkt.

Flamel Technologies (Nasdaq: FLML) sell short a rally failure at/below 23.30; stop: 25.76 S/C/O.

Spx Crop (NYSE: SPW) sell short at 43.55; stop: 48.40 S/C/O. Gamblers sell mini size at mkt.

Notes:

1)Traders are strongly advised to limit total equity exposure in their portfolios to percentages outlined in the HSL Investment Box (see HSL641).

2)Traders must adapt recommendations to shorterm mkt direction. If strength/weakness kicks in before pullbacks to buy/sell levels are reached, enter small foothold positions at mkt. Likewise if general mkt direction moves against open positions, exit at mkt rather than waiting for stoploss levels to be hit. Your interpretation & modification based on conditions of our recommendations often makes the difference betwn profits or losses.

Stop & Sell Recommendations

Take partial profits on:
Ascom Holding.
Canico Resources & raise stop to 12.15.
Delta Petroleum & raise stop to 11.10.
Imperial Oil & raise stop to 58.95.
Schoeller & Bleckman & raise stop to 12.75.
Silver Standard Resources & raise stop to 9.75 S/C/O.
Western Gas & raise stop to 26.95.

Raise stop on:
Armor Hldgs to 32.30.
Amedisys to 24.70.
Cadbury Schweppes to 445.
Celesio Ag to 46.95.
Concophillips to 89.95.
Cott Corp to 31.10.
Dragon Oil to 37.80.
Drew Inds to 36.70.
Engineered Support to 50.55.
Exxon Mobile to 41.60.
Flughafen Zuerich to 98.50.
Generale de Sante to 11.10.
Groupe Bourbon to 82.00.
Helen of Troy to 32.80.
Hudsons Bay to 12.85.
Ispat to 10.50.
Lincoln Elec to 31.60.
Reckitt & Benkiser to 21.65.
Twentsche Kabel to 21.95.

Sell at mkt:
Ballast & Nedam.
Great Canadian Gaming.
Urban Outfitters.

*** Mapping the Real Deal:
WHERE WOULD JESUS BANK?

Extracts from a MUST read article by Catherine Austin Fitts, July 4th, 2004. The time to act is NOW.

Full story: http://www.scoop.co.nz/mason/stories/HL0407/S00040.htm

"………..Meanwhile, there is over $3.8 trillion missing from US government accounts. This translates to approximately $14,000 per American resident. To date, under four Treasury Secretaries - Rubin, Summers, O'Neill and Snow - the federal government has failed to comply with the laws requiring audited financial statements, and failed to make any significant effort to find or get back the missing money. Where is all this money going, and who/what is being hurt in the process? What does this mean to the environment, current citizens and future generations who are footing the bill?

"The answer is that innocent people around the world are assuming those liabilities. And the leadership within the banking system is in charge day-to-day of implementing the majority of these transfers."

"The US currency is managed by the Board of Governors of the Federal Reserve System, itself comprised of twelve privately owned Federal Reserve Banks, including the Federal Reserve Bank of New York, which in turn serves as depository for the US government bank accounts. The member banks that own and control the individual Federal Reserve Banks have received extraordinary credit and information subsidies through the governmental apparatus.

"If you review a list of the leading banks in the Federal Reserve System that are involved as depositories, trustees, servicers or securities dealers in the US agencies missing more than $3.8 trillion:

It's the same banks whose names appear in allegations of gold market manipulations.

It's the same banks whose engineered Enron offshore deals.

It's the same banks implicated in 9/11 profiteering.

It's the same banks implicated by the big narcotics and arms trafficking and money laundering allegations.

It's the same banks implicated directly or indirectly in the "pump and dump" and naked short selling stock market schemes.

It's the same banks implicated in black budget government contracting and collateral schemes and the fraudulent asset stripping of our great manufacturing enterprises.

It's the same banks that are managing the huge derivative positions that are increasingly used to manipulate markets and drive monetary and fiscal policy.

It's the same banks whose senior management, attorneys and accountants cycle in and out of the top government jobs at the agencies missing $3.8 trillion.

It's the same banks that tell you that small business loans are not good business."

"……To add insult to injury, government leaders such as Bob Rubin (former Treasury Secretary now co-head of CitiGroup) and Franklin Raines (former Director of the Office of Management and Budget and now Chairman of Fannie Mae) have explained that the government could not afford to finance parks, roads and schools because, instead we needed to pay the interest on the growing national debt. In fact, the "national debt" argument was a ruse. The actual intended use for American taxpayers' hard earned money dedicated, nominally, to "reducing the national debt" was the financing of billions dollars of back-door, rigged subsidies to banks and mortgage market players who have made Rubin and Raines so rich.

"And why should your children have to sign up for military service just so they can pay off their student loans, while at the same time $3.8 trillion is missing from the US government? Why can't your children's educations be financed by our tax dollars? Investing in education is the best thing we can do for our economy. Indeed, Peter Drucker notes that the GI Bill was perhaps the most profitable taxpayer investment of the 20th century. Why should you lose your home or small farm to foreclosure by the banks that are complicit in $3.8 trillion missing from the federal government? Are you earning 2% on your bank certificate of deposit while your neighbors are paying interest at 18% to Citibank or the IRS?"

"…….Someday someone will calculate the true cost to our families, our communities, our collective spirit and our environment worldwide, inflicted by this negative ROI economy. In the meantime, we can assume that the cost is somewhere between significant and staggering. In other words, the cost to you personally, to me personally, to each of our families, is significant.

"This first hit me several years ago when I was working in an official capacity for HUD (the US Department of Housing and Urban Development) and had experienced first hand the affects of fraud and corruption. A Congressional staff member told me, "HUD is being run as a criminal enterprise." Indeed, in fiscal 1998 and 1999, $17 billion and $59 billion respectively were officially reported as missing from HUD.

"I realized then that I was banking at the same banks I believed to be intimately involved in running HUD's extra curricular activities. I realized that my own banks and others that I had done business with were directly or indirectly costing me and my family a small fortune when I took into account my relationship with them as a citizen and taxpayer and their role as depositories and servicers for my government's financial dealings.

"It seemed to me that the least I could do was to try to clean up my own money. I decided I would learn how to "vote" with my money in the marketplace with all my transactions, including purchases, investments and banking relationships. I would start by withdrawing my money from the banks that were running my government's bank account and securities operations in a corrupt manner at great expense to my family and me. I would shift my deposits to banks and companies that were trying to do something beneficial on Main Street. "I closed my accounts at Citibank and JP Morgan Chase and moved my bank deposits to a community bank in Tennessee."

"On July 4th, 2004, my colleagues and I are launching the Solari Circles Campaign. Initially, we are calling for 600,000 people worldwide to join us in closing our checking accounts, certificates of deposit, credit cards and other business out of the banks complicit in dirty money scandals and moving them to local, well-managed, community-friendly banks, savings and loans and credit unions.

"Why 600,000? We estimate that 600,000 is 1% of 1% of our worldwide population. Since our financial system is highly leveraged, a relatively small shift (on the order of 1% of 1%) in customers from big banks to local financial institutions can cause a dramatic decentralization in political and economic power.

"I also know that we can actually make money by "pushing the red button." In financial terms, if we finance communities with equity while we bring transparency to government investment by place, and reengineer that investment to ensure optimal human and financial performance both by place and by function, we have the potential to bring the US economy back to a significantly more productive level. In layman's terms, if we shift our purchases, banking and investing to the local level, change how small businesses and farms get financed, and at the same time transform how government money is invested at the local level, we can transform from a negative to a positive return on investment economy.

"That means we can pay off, convert to equity and eliminate or forgive significant amounts of debt and cleanse our system of governance of the dirty money that is pushing us towards warfare, environmental damage and a significant reduction in our Constitutional freedoms.

"Let's Start Now".
End quote.

***Many thanks to RM for this snippet from www.economy.com (a provider of economic, financial, and industry research).

"Data collected by the Investment Company Institute show that the current economic environment is not just testing investors' mettle when it comes to those riskiest of assets; new cash is also being diverted away from a wide array of investments.

"The emergence of net outflows in those riskiest of bond classes earlier in
the year has manifested into a more widespread distaste for bonds. Major
bond classes - corporate, world, government, strategic income and municipal - all saw net outflows in May; all five classes registered net inflows as late as March. In contrast, high-yield corporate bonds recorded their fourth consecutive and largest net outflow in over a decade in May.

"The $16.2 billion net outflow in bond funds in May - the largest in nearly a decade - pushed the 12-month moving sum firmly into negative territory; the measure is now at its lowest level since December 2000.

"Stocks funds are also seeing less new money across a wider array of asset classes. Major equity classes - capital appreciation, world equity and total return - all saw weak positive or slightly negative net inflows during May.

"Capital appreciation funds, which include growth and aggressive growth
categories, saw their first net outflow since March 2003 in the latest
period. World funds, which include emerging market and global, international and regional equity categories, saw their smallest net inflow since June 2003, while total return funds, which include growth and income and income equity categories, registered their smallest net inflow since February of last year.

"The $564 billion net inflow into stock funds in May - the smallest since
March 2003 - was enough to push the 12-month moving sum lower for the first time in over a year. At $244 billion, this measure is some 25% below its September 2000 all-time high of $331 billion. That said, stock prices and investor confidence rebounded in June, making another month of weak net inflows and second straight decline in the 12-month moving sum unlikely.

"The early stages of the tightening cycle are largely to blame for such
widespread weakness in bond inflows. Rising interest rates - which push bond prices lower - are sending investors fleeing from all bond classes. The retrenchment in equity funds is harder to explain: stocks have historically been the best performing asset class during the early stages of a tightening cycle. In addition, the six-month lull in share prices had yet to make a sizable dent in net inflows until May. Some reduced risk appetite is surely at play here."
End quote.

***Fed hikes: Winners and losers.

Wall Street firm says certain sectors succeed; others suffer during phases of rate-hike campaigns. By Mark Gongloff, CNN/Money senior writer. May 5, 2004

Full article at:
http://money.cnn.com/2004/05/05/markets/rates_sectors

"NEW YORK (CNN/Money) - Despite investor moans and groans that come when the Fed raises interest rates ... as it's probably about to do ... there are stocks that manage to do well. In recent research note Merrill Lynch took a stab at doing just that.

"Merrill's economists studied sector performance during the past four Fed rate-hiking cycles, going back to the mid-1980s, and found that some sectors consistently succeeded during Fed party-pooping campaigns, while others consistently disappointed.

"In the past four rate-hiking campaigns, the winning sectors, Merrill said, have been metals, energy, computers and software, tech hardware, electrical equipment, pharmaceuticals, gas utilities, tobacco and food processing.

"The consistent losers, according to this research, have been banks, investment firms, real estate, telecom services, construction and building materials, food and drug retailers, beverages, media, leisure and hospitality, and general retailers.

"But the Merrill analysts pointed out that Fed rate-hike campaigns also seem to come in three distinct phases, affecting various sectors in different ways. The first phase is the six-month run-up to tightening, a period of growing market anxiety about the apocalypse to come.

"Then there's the early phase of tightening, in which things suddenly don't seem so bad -- some might call this denial. Finally, there's the later phase, after the Fed has made four or more hikes, sort of a nuclear winter in which only the most defensive stocks thrive.

"The prelude (6 months before the first hike). This is the everybody-panic-about-a-rate-hike phase. According to Merrill's research, the higher commodity prices giving the bond market the willies about inflation have also boosted materials sectors such as metals, oil and gas, chemicals and forest products.

"Meanwhile, stocks in interest-rate-sensitive sectors such as finance and real estate have suffered from the fear of rising rates.

"But the economy was also hot or overheating in this phase, meaning typical defensive sectors pharmaceuticals, beverages and food and drug retailers have also underperformed.

"Keep in mind that the lead-up to the Fed tightening is not generally a very good time to be fully invested in the market," the note said. "On average, the equity market is down 1.5 percent in the six-month run-up to the first rate hike."

"Still, there are several sectors that have outperformed the market during this time in recent decades, including aerospace and defense, autos and parts, health care and transport.

"The early stage (1 to 3 rate hikes into the campaign). Somewhat surprisingly, things often start to look better for the economy and markets during the first phase of a tightening campaign. In the early stages of the past four rate-hike cycles, the S&P 500 actually gained an average of 2.4 percent, according to Merrill's research.

"Meanwhile, inflation has translated into better pricing power -- and profits -- for some consumer discretionary sectors, including retail and hotels.

"Though real estate has typically continued to be a market laggard during this phase, it's possible that the end of low rates could send a flood of last-minute home-buyers and refinancers into the market for one last bite at the low-rate apple this time around. Auto sales could enjoy a similar boost, as they have in the past.

"Nevertheless, several sectors have underperformed in this phase, according to Merrill's research, including banks, beverages, construction, insurance, real estate and even tobacco.

"The late stage (4 to 6 rate hikes into the campaign). The stock gains from the early stage have begun deteriorate. Perversely, real estate stocks have outperformed the broader market during this phase, possibly because they'd previously fallen so far.

"Some business equipment has also done well during this phase, including tech hardware and electrical equipment, though computer software underperforms.

"For the most part, though, investors hunker down, rotating into the most defensive stocks.

"Bottom line -- no sense monkeying around after the Fed moves on from the fourth to the sixth rate hike," Merrill's note said. "Tobacco, pharma, insurance, food processors, food and drug retailing, beverage producers are all good places to be, from a relative and absolute return standpoint."
End quote.

***DEBT LOAD
THE REAL ECONOMY
www.uncle-scam.com

Many thanks to T.U.F.F (Taxpayers Union for Financial Freedom) for some eye-opening analysis on the debt bubble.

"With three months to go in fiscal 2004, and four months until national elections, the Bush administration is only $110 billion short of reaching their self imposed and ridiculous statutory public debt limit. It will mean that they've borrowed $984 billion (call it a cool trillion) since May 23rd of last year. Isn't that nice? Do you think it will effect the elections?

"One billion is a thousand million. And one trillion is a thousand billion. Most humans can't even count that far without a calculator or computer. If you could go back in time a billion minutes, you could talk to Jesus Christ. And if you set aside seven million dollars a day from Christ's birthday until today, you still would not have enough to pay off our national debt.

"While the spinmeisters tell us the economy is improving, ask yourself how much business or how many jobs do you suppose anyone in their right mind could create with a trillion dollar infusion of capital? And that's on top of the roughly $1.8 trillion the government collects and has budgeted from this year's annual taxes.

"In fiscal 2003, between October 1, 2002 and September 30, 2003, the borrowholics ran up the national debt $555 billion. A nice round number and the prefix Hollywood uses in most of its movie phone numbers.

"At the rate we've been going, and if he has a demonic sense of humor, John Snow the Secretary of the Treasury could end the present fiscal year September 30th with a debt increase of $666 billion, the mark of the beast. Besides setting a new record for the borrowholics, that ought to give the Stephen King fans, the end-of-the-world hawkers, and the skull and bones society something to talk about. Nobody else seems to care.

"Last year, the federal government went from February 20th, when they hit the debt ceiling, until May 23rd, a period of 92 days without borrowing an additional cent. The Treasury can do this again. At some point, they can simply stop adding new debt until after the elections and then sock it to you like there's no tomorrow.

"……...During the month of May, 2004, the national debt went up $78 billion ($77.9 billion). Only $12 billion ($11.8 billion) was borrowed from investors. Almost all of the rest, $66.1 billion, was part of the annual interest paid to Social Security against its $1.5 trillion ($1.484 trillion) and 22 percent of the national debt held at the close of fiscal 2003.

"This interest is due twice a year, once in December and again in June. It's the only reason the debt ceiling was finally increased last year.

"Worst of all, this interest is paid without any real cash involved - no money is turned over to the Social Security Trust Funds (Federal Old Age & Survivors Insurance and the Federal Disability Insurance trust funds that we normally speak of as one trust).

"Instead, what the trust gets are more bogus nonmarketable bonds simply handed out, but increasing the public's indebtedness and setting up you or your children for double taxation. It's all part of the biggest economic scam any government has ever pulled on its own citizens. And it has been going on for a long, long time.

"The Beltway Bandits try to disguise this scam in many ways. One way is to simply name part of the debt "Public Debt" in order to make people believe that's the only portion they are responsible for paying back - while the other portion is called "Intragovernmental Holdings" to imply that the government owes itself or one department owes another (where no transfer records are kept) and by some miraculous method can be redeemed without taxpayer money.

"The interest payment is part of the pretense that the government merely "borrowed" surplus entitlement money when they are actually stealing it from the supplemental retirement system, health care payments, gas taxes that are supposed to go to highways, airport taxes and twenty-five entitlements in total. Social Security just happens to be the largest with the greatest continuing surpluses from excessive payroll taxes.

"Neither the media, the press, nor the so-called watchdog groups bother to ask politicians exactly why the Social Security trust funds are more than twenty percent of the national debt."
End quote.

***2004 Looks a Lot Like 2000
Some interesting observations in Comstock Partners weekly mkt comment. Go see: www.comstockfunds.com
Tuesday, June 29, 2004

"The current condition of the stock market bears many similarities to that of the last presidential election year in 2000. The S&P 500 trading pattern in both years followed bubble-type environments including overvaluation, record consumer debt, large trade deficits and massive equity mutual fund purchases. To that list we can now add a serious housing bubble. The S&P 500 peaked early in the year 2000 and then fluctuated sharply until finally breaking down in September. So far we have been witnessing a similar pattern as the S&P 500 peaked in March at 1163 and has been fluctuating ever since. If the S&P 500 continues to follow the year 2000 pattern, a major breakdown of that index could be close at hand. The outrageous economic and financial bubble of the late 1990s will probably not be repeated for many years to come as the S&P 500's PE multiple exceeded prior market peaks by over 50% and the PE of the NASDAQ Composite was off the charts at 245 times earnings. However, with that said, the year-long 50% rally that peaked in March appears to be a mini-version of the surge in the late 1990s as the lowest priced and lowest quality stocks were by far the best performers. In fact, the highest PE stocks did exceptionally well while the stocks that had no earnings did even better. We believe that 2003-2004 rally was a counter-trend move in a secular bear market similar to the big rallies of the Japanese Nikkei Average while it was headed down about 80 percent in a 13-year period. Although the excessive overvaluation experienced after the financial mania of the late 1990s may not be exceeded for a long time, as we stated above, the overvaluation was far from fully corrected in the bear market of 2000-2002. And with the rally of 2003, the market valuation parameters have just returned to the valuation levels reached at historical market peaks prior to 2000.

"The excess consumer debt has been discussed so much on our web site we don't have to go into further detail, but suffice it to say that the debt build-up in the financial mania of the 1990s only got worse during the latest recession and bear market. In fact, it was the only recession on record where consumer debt did not decline. Since the public always buys "what they just missed", equity mutual fund inflows of $309 billion in 2000 exceeded the 1997 record by $87 billion. This year we were on track to exceed the $309 billion record in mid-March when the S&P 500 peaked at 1163. In fact, inflows were $43 billion in January and $26 billion in February. Estimated inflows were heavy in the first half of March and looked as if it would exceed the January number, but abruptly changed to outflows when the market began to pull back. After the huge downturn in the 2000-2002 bear market the public apparently learned to play the market as long as it was rising, but to get out quickly if stocks started to decline. In the end, March ended up with net equity fund inflows of $16 billion. With April inflows coming in at $23 billion and May being flat, one can see the rate of gain for the first 3 and 4 months of this year were on track to exceed the 2000 record. All in all, current comparisons to the year 2000 are eerily similar on a number of key parameters and if this continues, it doesn't bode well for the rest of this year or 2005."
End quote.

*** Freddie Mac's Impending Fiasco Could Cause A Systemwide Financial Panic. 7/06/2004

Thanks to Richard Lehmann, for this update on the Freddie Mac debacle.
https://www.newsletters.forbes.com/rli/subscribe.php4?10

"The long-awaited financial update for Freddie Mac was held June 30 and proved to be less than expected. As you may recall, Freddie stopped financial reporting in the second half of last year and fired its top management, supposedly because of earnings manipulation. This explanation was suspect from the outset, given that no one has ever lost his job because he understated earnings. Nevertheless, financial markets accepted this and waited for the earnings restatement. We were then advised in late 2003 that the accounting was so screwed up that no financial reporting would be made for 2003 until June 2004. Now, after spending more than $150 million dollars on an army of accountants, lawyers and consultants, what does management have to say about Freddie's financial performance?

"The revised numbers show that Freddie broke even for the second half of 2003, after a profitable first half. Losses from its derivatives trading--the source of the accounting problems and of some $4.3 billion in losses in the second half of 2003--were the cause of the poor second-half showing. To refresh your memory, interest rates fell in the first half of 2003, and they rose in the second half. Perhaps you need not be reminded where they've gone since April of this year.

"What's especially disturbing is that little guidance was given for any quarter of 2004 and, despite promises of greater transparency, management stated there would be no reporting of 2004 results until March 2005! The reason given is that the accounting is still not up to snuff. In fact, detailed financials for 2003 won't be published until September, so analysts will have to wait another three months to find out what wasn't said on June 30. Given the declining results in the second half of 2003, it was not inappropriate for one analyst to quiz Freddie's chief financial officer on the company's conference call what the effect of rising interest rates would have on its trillion-dollar-plus portfolio of derivatives. His astounding reply: "I don't know." So much for transparency. Reporting bad news still does not come easily at Freddie, so we need to look to other sources of information. First, we hear that banks are reporting they expect to benefit from interest rate rises, contrary to past experience in rising rate environments. Since they are big in the derivatives markets, where Freddie is one of the biggest players, it may well be that their optimism is because they are the counterparties to Freddie's derivatives contracts. Also, look to Fannie Mae's reporting for the first quarter of 2004. It reported losses of $1 billion on derivates, and this was before rates started rising in April. Since both companies have about $1.3 trillion in such contracts, Fannie's loss may be a fair estimate of Freddie's loss, if only it were as smart. As I have said in previous columns, the concern has always been that rising rates could cause Freddie to implode, much like the Long Term Capital Management hedge fund or the Orange County investment fund. Only, this time, the fallout could cause a system wide financial panic. In any case, it's fair to say that Freddie's stockholders are in for some sleepless nights, and Alan Greenspan and the U.S. Congress might be, too. Freddie could be just one car in the slow-motion train wreck that may be coming due to the artificially low interest rates engineered by the Federal Reserve in 2001."
End quote.

***New Hampshire launches a Gold/Silver money bill
Go see: www.goldmoneybill.org

A group of State Representatives in New Hampshire, state motto: "Live Free Or Die," have introduced a voluntary, parallel Gold/Silver money bill for the Granite State. Lead by Rep. Henry McElroy and co-sponsored by David Buhlman and Dan Itse, this Sound Money Bill would allow the state of New Hampshire to include the use of Gold/Silver U.S. minted coins (or their digital equivalent) to be used in daily transactions for payables/receivables between it (the state) and the inhabitants and businesses in New Hampshire. It would be totally voluntary. Federal Reserve Notes could still be used or a combination of Gold/Silver U.S. minted coins or a total transaction in Gold/Silver U.S. minted coins (or their digital equivalent)!

"There are NO restrictions or laws by the Federal Government that prevent ANY state from using Gold/Silver U.S. minted coins ! This bill is NOT radical...it simply shows that the state of New Hampshire conforms to the U.S. Constitution and wants to set an example of Constitutional conformity as well as offering a "Sound Money" alternative to its inhabitants and businesses !

"SOME COMMON QUESTIONS / OBJECTIONS ANSWERED
1. Americans have been using Federal Reserve Notes for some ninety plus years -so why stop now ?

"a. The Federal Reserve Notes Americans use today are not the same, economically or legally, as the Federal Reserve Notes used in previous decades.

"Federal Reserve Notes have gone through a process of deterioration. From 1913 to 1933, they were directly redeemable in United States gold coin; and the banks were required to maintain a reserve of gold equal to forty percent of their outstanding notes. Redeemability of Federal Reserve Notes in gold for American citizens was terminated in 1933; but the notes remained indirectly redeemable in silver from 1933 until 1968. Redeemability of Federal Reserve Notes for foreigners was terminated in 1971. So, today, Federal Reserve Notes are irredeemable in gold or silver. See Title 31, United States Code, Section 5118(b, c). Thus, the present situation is radically different from what it was prior to 1968 or 1971.

"Furthermore, the supply of Federal Reserve Notes (and of bank deposits payable in those notes) has greatly expanded since the 1950s, seriously eroding the purchasing power of all United States paper currency and base-metallic ("clad") coinage. Indeed, from 1985 to 2000, while the production of material goods in the United States increased by 50%, the money supply increased by 300%.

"In sum, today the purchasing power of Federal Reserve Notes has no anchor in a valuable monetary commodity (silver or gold); and the policy of the Federal Reserve System is to increase the supply of those notes (and related bank deposits), thereby further sinking the notes' real value.

"b. The proposed legislation does not stop-or in any way inhibit-the use of Federal Reserve Notes or base-metallic coin. It simply enables citizens of New Hampshire to use United States silver and gold coin in preference to other media of exchange in their monetary transactions with the State, if they choose to do so.

"Both before and after the Federal Reserve System was created in 1913, the United States minted silver and gold coins. Entirely base-metallic "clad" coinage began to be minted only in 1970. So, today, Congress has authorized a multiform monetary system, consisting of Federal Reserve Notes irredeemable in silver or gold [see 12 U.S.C. § 411 and 31 U.S.C. § 5118(b)], base-metallic coin [see 31 U.S.C. § 5112(a)(1-6)], silver coins [see 31 U.S.C. 5112(e)], and gold coins [31 U.S.C. § 5112(a)(7-10)], all of which are equally "legal tender" [see 31 U.S.C. §§ 5103 and 5112(h)], and any of which any individual may use to the exclusion of the others [see 31 U.S.C. § 5118(d)(2)].

"Under the proposed legislation, those citizens of New Hampshire who prefer to use irredeemable Federal Reserve Notes and base-metallic coinage may continue to do so. But they will make this choice intelligently, knowing of their option to use silver and gold coin instead.

2. Why should New Hampshire question what the national government is doing with regard to monetary policy ?

"New Hampshire is not questioning, but is actually implementing, Congressional monetary policy. As explained in No. 1, above, Congress has authorized several types of money as official media of exchange, but has not given a special position or preference to any. Through the proposed legislation, New Hampshire will enable its citizens to choose among these various media of exchange, and will facilitate their choices.

"To fulfill its duty to protect its citizens' economic welfare, New Hampshire needs to concern itself with the instability of the present monetary and banking regimes. See No. 4, below. Obviously, Congress, too, is concerned with this problem-or it would not have authorized the present multiform monetary system. See No. 1, above. The preceding is from "SOME COMMON QUESTIONS / OBJECTIONS ANSWERED" and referred to as "20 Questions About The Sound Money Bill." To read the whole article just go to the "Articles" section of www.goldmoneybill.org. The questions were posed by inhabitants upon hearing that the Sound Money Bill was being considered in New Hampshire. They were answered by Dr. Edwin Vieira, the author and crafter of the revised bill (HB 1342). We thank him for his hard work and his expertise in this important arena. Dr. Vieira is still involved and will be further revising the bill as it evolves and is, again, introduced in the 2004/2005 legislative session in New Hampshire.

"We encourage you to learn about "Sound Money" and to persuade your state Representative and Senator to pass this much needed bill in the next session ! We also encourage those inhabitants in the other 49 states to make their state Representatives and Senators aware of New Hampshire's intentions and to also consider passage of a similar bill in their states!"
End quote.

***Disequilibrium Economics
More top class analysis from Stephen Roach.
www.morganstanley.com

"Equilibrium is the anchor of macro analysis. It is tantamount to a condition of balance, or stability, that helps foster sustained economic growth. Yet equilibrium is largely a theoretical construct - very different from the disequilibria that depict actual conditions in the real world. The transition from disequilibrium to equilibrium has long been central to the policy and financial market debates. Ever-present shocks can be far more destabilizing for economies in disequilibrium than for those in equilibrium. Therein lies the key risk in today's world.

"For some time, I have maintained that the global economy is now in a fundamental state of disequilibrium. My argument rests largely on the extraordinary disparities between the world's current account deficits (mainly in America) and surpluses (mainly in Asia). By our reckoning, the gap between these external imbalances - the difference between surpluses and deficits - now amounts to approximately 3% of GDP. By way of comparison, that's about three times the size of the gap that prevailed as recently as 1991. To a large extent, these imbalances reflect the lopsided character of the US-centric global growth dynamic that has prevailed since 1995. Our estimates suggest that the United States accounted for fully 98% of the cumulative increase in dollar-based world GDP over the 1995 to 2002 period (at market exchange rates). External imbalances and lopsided global growth are the footprints of disequilibrium. And now such an unbalanced world must come to grips with two disruptions - a China slowdown and a normalization of Fed policy.

"The Fed's policy shift is the more immediate risk to contemplate - largely because the first step on the long road to normalization is now at hand. There are several aspects of the "Fed factor" to contemplate: For starters, the unusual stimulus of the US central bank has been the high-octane fuel that has fed the "carry trade" in a multitude of asset classes - from mortgage markets and credit derivatives to emerging market and high-yield debt. As the Fed acts to normalize its policy rate, the yield curve will eventually flatten and those trades will need to be unwound - an outcome which could prove quite destabilizing for fixed income markets, as well as the interest-rate-sensitive sectors of the economy they influence. The same is likely for the overly-indebted American consumer - arguably the greatest beneficiary of the carry trade (see my 4 June dispatch, "The Mother of All Carry Trades"). In an income-short climate, US households have benefited handsomely by extracting purchasing power from their largest asset holding - the home. And such equity withdrawal - which amounted to more than 5% of disposable personal income in 2003 - was facilitated by the sharp appreciation in property values that, itself, was very much a by-product of low interest rates. The coming normalization of Fed policy changes all that for an increasingly asset-dependent US economy.

"Nor should the impacts of the China slowdown be minimized. The Chinese economy could be vulnerable on two counts - the first being a downshift arising from the tightening measures that have already been implemented. Recent data on fixed investment, bank credit growth, and industrial output suggest the long awaited slowdown is now unfolding. Secondly, China could also be vulnerable to a slowing of the American consumer - long the principal driver of its external demand. The potential interplay between China's domestic tightening campaign and an American-led weakening of its external demand only underscores the wildcard nature of the "China factor" insofar as the global economy and world financial markets are concerned. As I have stressed repeatedly, the global repercussions of the China slowdown cannot be minimized. China's import explosion - a 40% increase in 2003, alone - has turned its economy into an engine of growth for Japan, Korea, Taiwan, and Germany. As China slows, these economies will also come under pressure.

"For a world in disequilibrium, that has drawn disproportionate support from the Chinese producer and the American consumer, the potential interplay between these two disruptions cannot be taken lightly. Recent history offers some hints as to what to expect. The 1994-95 period is especially relevant in that regard. During that period, the world also had to come to grips simultaneously with both a China slowdown and a normalization of Fed policy. On the surface, the global economy barely flinched. World GDP growth held at its longer-term trend of 3.6% over those two years, an outright acceleration from the recession-like gains of 2.2% that prevailed over the two preceding years, 1992-93.

"But the global growth aggregate masks some critical differences between these two periods insofar as the texture of the world economy is concerned. Most importantly, the world was in a more balanced state back then. Europe was on the rebound - rising at a 2.6% average annual rate in 1994-95 following anemic gains of 0.4% over the two prior years. Notwithstanding the earlier Fed normalization campaign of a decade ago, the US economy expanded at a 3.4% average annual rate over the 1994-95 period. While Japan was settling in to its 1% growth slump that was to become the norm for the next decade, the rest of the industrial world was surging ahead at a 5.4% clip in 1994-95. Moreover, growth in the developing world held at a 6.4% average annual rate over that same two-year interval, largely because Asia barely flinched in response to the Chinese soft landing of a decade ago. Latin America was the outlier, as Mexico's peso crisis - arguably a direct outgrowth of the unwinding of an earlier Fed-inspired carry trade - pushed most of the region into recession in 1995.

"In short, the mix of global growth was much more balanced a decade ago than is the case today. Over the 1990-95 period, the US accounted for only about 25% of the cumulative increase in dollar-based world GDP (at market exchange rates) - a growth contribution that was essentially equal to America's share in the global economy. This, of course, stands in sharp contrast to the unprecedented burst of US-centric global growth that, as noted above, was to unfold in the seven years to follow, from 1995 to 2002. At the same time, the gap between the world's current account deficits and surpluses amounted to only a little more than 1% of world GDP in 1994-95 - far short of the 3% gap prevailing at present. All this speaks of a world in 1994-95 that was much closer to equilibrium than is the case today. It, therefore, also speaks of a world that was in much better shape to withstand the twin jolts of a Chinese landing and a Fed policy normalization than is the case today.

"Ultimately, the endgame probably boils down to the rebalancing of the US economy. That's not to say the China slowdown isn't important, especially insofar as its potential impacts elsewhere in Asia are concerned. But given the central role that the United States has played both in driving global growth and in shaping world financial markets in recent years, America's challenge takes on even greater global importance. In that regard, the escape act looks far more treacherous today than it did a decade ago. In large part, that's because of the likely ramifications of America's looming current account adjustment. As a share of GDP, the US current account deficit hit 5.1% in the first quarter of 2004 - piercing the 5% threshold that normally triggers a reversal. Moreover, in an unbalanced world, there is good reason to look for a further widening of America's external shortfall to at least 6% (see Dick Berner's 25 June dispatch, "When Will the Current Account Peak?"). By way of comparison, the US current account deficit was only 1.5% to 2% of GDP in the 1994-95 period - providing America with a much greater cushion to cope with either internal or external shocks than is the case today.

"As I see it, America's looming current account adjustment sets the stage for the transition from disequilibrium to equilibrium that must now occur. It delineates the broad parameters of the big adjustments that are likely to impact world financial markets over the next several years - namely, a further weakening in the dollar, higher real interest rates in America, and a slowing of US domestic demand growth. Given sharply elevated government budget deficits, only under those conditions can the US rebuild domestic saving and thereby reduce its claim on global saving - thereby tempering the essence of the current-account conundrum.

"There are no assurances that this transition will be smooth or trouble-free. At the same time, there are no guarantees that such rebalancing will end in crisis either. But on a risk-reward basis, the odds appear to be skewed more toward a hard- than a soft-landing, in my view. That follows from a basic premise of disequilibrium economics - the more unstable the starting point, the greater the risk of a destabilizing response to a shock. Today's unbalanced world lacks the cushions that might otherwise insulate it from such shocks. Fed policy normalization and the China slowdown are now at hand - events that strike right at the heart of the current global growth dynamic. A decade ago, the same forces did little to disrupt the world. As history now repeats itself with a striking replay of the China and Fed factors, the case for a benign outcome seems like much more of a stretch. The pitfalls of disequilibrium economics should not be taken lightly."
End quote.

***Why Can't Congress Stop Spending?

More from friend & Congressman Ron Paul
June 30, 2004.

http://www.house.gov/paul/tst/tst2004/tst062804.htm

"Congress spent one evening last week debating a token measure to reduce government spending by implementing very slight caps on some future entitlements. Not surprisingly, even this exceedingly modest bill failed overwhelmingly. The process behind the vote, however, reveals just how deeply ingrained the spending problem really is.

"House leaders knew the spending control bill had little chance of passing. In fact, that's why they allowed the vote to happen. The real goal was to appease fiscal conservatives in Congress, some of whom have become increasingly uncomfortable with the unrestrained spending contained in the proposed 2004 budget. Some of these conservatives supported an alternative budget that merely spent about 1% less than the proposed budget, and even that nominal act of rebellion earned them the ire of House leadership. The spending control measure considered last week was merely a symbolic gesture designed to quash their complaints and ensure cooperation when the final budget vote is cast later this year. After all, those members now can tell their constituents they voted to keep a lid on spending, even as they please their party bosses later.

"The pressure to go along with the herd in Congress is intense, regardless of which party is in control. Every member knows that thwarting his party's leadership, particularly on budget matters, is risky. Any opposition to spending bills can result in veiled or even outright threats to cut funding for the member's district, to limit the member's committee assignments, and to bury the member's legislation. Some members who buck the system find themselves facing primary opponents in the next election as a result. The desire to win reelection is paramount, and those who go along get plenty of help from their party's fundraising machines.

"Predictably, almost all members of the House Appropriations committee- the committee initially responsible for every nickel of federal spending- voted against the bill. This simply highlights the institutional problem that plagues Congress and government in general: no politician ever voluntarily relinquishes power. In Congress, control of the nation's purse strings represents the ultimate power. Appropriators can reward some lawmakers and punish others with the stroke of a pen, by adding or eliminating federal projects in any congressional district. No amount of talk about spending can change the reality that government power naturally grows.

"Everybody complains about pork, but members of Congress keep spending because voters do not throw them out of office for doing so. The rotten system in Congress will change only when the American people change their beliefs about the proper role of government in our society. Too many members of Congress believe they can solve all economic problems, cure all social ills, and bring about worldwide peace and prosperity simply by creating new federal programs. We must reject unlimited government and reassert the constitutional rule of law if we hope to halt the spending orgy.

"The words of H.R. Gross, the great libertarian-conservative congressman from Iowa, ring as true today as they did during a budget debate in 1974:

"No amount of legislation will instill in a majority of the members of the House the ingredient, the element that has been missing. That is fiscal responsibility. Every Member knows that he or she cannot for long spend $75,000 a year on a salary of $42,000 and remain solvent. Every member knows this government cannot forever spend billions beyond tax revenue and endure. Congress already has the tools to halt the headlong flight into bankruptcy. It holds the purse strings. No President can impound funds or spend unwisely unless an improvident, reckless Congress makes available the money. I repeat, neither this nor any other legislation will provide morality and responsibility on the part of members of Congress."
End quote.

***Four guys were out on the golf course. As one of them was teeing off at the 10th hole, which was next to the highway, they saw a funeral precession go by.
Instead of teeing off, the guy removed his cap and placed it on his chest until the funeral had passed.
At this point, one of the other three said, "You know, that was the most touching thing I've ever seen."
And the guy answers, "Well, I was married to her for 15 years. It was the least I could do!"

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