For many years, Halloween mostly meant the day before (All Hallows Eve) a religious holiday (All Saints Day). Kids dressed up as religious figures — saints, bishops, monks, etc. — not chainsaw murderers. These days the focus is more on candy and mischief rather than on religion.

We stopped the dress-up thing when we left ‘kid-dom’ many years ago. We naturally relished all that candy our own kids picked up as a result of their walking about the neighborhood in some neat costume Mom made for them (kids still went around knocking on doors where we lived). But now even that’s over.

Since we never got the point of adults dressing up, these days we’re reduced to carving up a pumpkin, lighting a candle inside it and eating some store-bought candy. It’s not the same.

But rather than brood about Halloweens gone by, let’s have sometrick or treat fun with this month’s letter. Let’s start with…

At least it is for the top guys. Goldman Sachs earned profits of $3.19 billion for the quarter and plans to hand out $16.7 billion in annual bonuses — an average of $700,000 per employee! While not as spectacular as Goldman’s payouts, other banks like JP Morgan are doling out the dough too.

Sounds like a treat for the execs.

Strange though, since banking has to do with money lending. You remember the old formula: they take in deposits, pay you interest, then lend it out for a higher rate of interest. They keep the difference. But as far as lending goes, not much is happening. Try getting a small business loan — or even a mortgage.

So where do all the profits come from? Seems that banks like Goldman Sachs and JP Morgan have been aggressively trading in the markets. And why not? The government (= us) basically guarantees that they can’t fail if they screw up. It’s called “too big to fail.”

Bank execs love it. Their pay is tied to various “performance” formulas. The more they roll the dice, the more they make. And so what if they roll “snake eyes” here and there. Their losses are backed up by the government, which means — that’s right — us. We take the risk and they get the money.

Sounds like a trick for us.

But wait, what about the government crack down on executive pay? Hmm…I guess Goldman didn’t get the memo.

Let’s move on to that famous American business daily…

Example: The October 28th front page featured a “surprise” report stating that home sales were down in September after going up four straight months. Surprise? Home sales are seasonal and they typically go up from May through August. In a down market, you could pretty reasonably have anticipated a down September, as seasonal buying patterns dry up. Where’s the surprise? Oh, that’s right, the Journal’s been pumping the housing market for the last few months. Things have “turned around.”

Not so fast. Banks are holding off on foreclosures — and even with that, foreclosures have been spiking up. Mortgage resets in the ‘Alt-A’ and ‘Prime’ mortgage categories (a step up from those sub-prime bad boys that upset the markets last year) are expected to result in lots more foreclosures. Unemployment keeps grinding up — meaning more folks are having trouble paying the mortgage.

And the housing market’s turning around? Hmm…sounds like atrick to us.

They say the stock market can predict business conditions 6 – 18 months out. If that’s so, it’s obviously seeing good time ahead. But what’s the market seeing that we don’t? Unemployment high and going higher, consumer spending falling, home foreclosures rising, consumer confidence sinking — it just doesn’t seem like things are turning up. But what do we know?

Now this late breaking news: GDP was up 3.5% in the third quarter — the first positive reading in over a year. Okay, let’s be fair. It could be either a trick or a treat.

What? You expected a trick again? Wait. Could it be our healthy skepticism has failed us? Not really. After all, you can find economists who’ll push you one way or the other.

Plus, we’re trying our best to see even the faintest silver linings on all those clouds rolling by. It keeps us sane in the face of all the pessimists out there who almost sound like they can’t wait to seal up their emergency shelters and start eating all that canned and dried food they’ve been saving up.

So what do we do then in the face of this battle of the optimists and pessimists? We turn to our trusty friend, the Dow Theory. It’s been a good partner since 2000 when the market pulled the rug out from under Alan Greenspan’s “new productivity” that was going to keep stocks flying up forever. So what’s good old DT telling us now?

It’s signaling caution. And it’s giving us a road map to follow in the coming weeks and months. If you’re interested, here’s how it goes:

If this is a true primary bull market, we need to monitor its secondary reaction, which we’ve yet to see (although we may be seeing one pick up steam now. In any case, there’s always a secondary reaction.) When the reaction comes in earnest, we’ll watch as the market goes down.

At some point, when it starts up again, it can do one of two things: either the Dow Industrials and the Dow Transportation averages both reach new highs; or the Dow Industrials and the Dow Transportation averages (both, not one or the other) will not reach new highs. The market will then come back down again (markets never go straight up or down; they always go up and down), and if both averages hit new lows, that will confirm that we continue in a primary bear market.

Why does this matter? It matters because committing large amounts of money to stocks in a primary bear market leads anywhere from great disappointment to outright disaster — an outcome we’d prefer to avoid.

(Yes, we realize this is a bit involved and it takes a fair amount of careful monitoring of the markets, but if you don’t do what we just described, we hope you’ve got some other discipline you follow besides guesswork.)

Anyway, watch yourself here. As for us, if it turns out to be atreat, we’ll sound the “all clear.” If it’s a trick, batten down the hatches.

So what about a clear treat? There must be something out there that looks, feels and tastes good in the world of markets and money. What could it be?

Oh no! It can’t be…

What? You’re saying this is a real treat? But isn’t gold exhausted and ready to correct? Haven’t hedge funds and other speculators simply bid up the yellow metal — you know, the way oil shot up last year before it collapsed under the weight of all those speculative traders? After all, isn’t gold just a barbaric relic? All right, we’ll stop being wise guys. Show us what you’ve got. Hmm…guess we should share this with our readers. But we’re going to trim it down to something we can put in the candy bag for Halloween, okay? Good. Now, here’s the treat.

Gold started going up against the dollar — depending on how you measure these things — right around the turn of the 21st century. By 2001, it was pretty much tracing the pattern of — there’s no way around it — a bull market. Yep. There’s been a real, bona fide bull market in gold for almost nine years now.

But it hasn’t just gone up against the dollar. Within the last year or so, it pretty much established that it’s going up against all the other nations’ currencies just about as steadily as it has against the dollar. That’s pretty good action, we’d say.

Then there’s the whole point of having some gold. You do it because money today is just paper issued by governments. It’s not like what paper money used to be: something that represented something real (and most of the time that “something real” was — take a guess — gold).

So now that the U.S, the Europeans and — well, just about every other government — are printing up more and more of the paper stuff, lo and behold the value of gold’s been going up and up and up.

Well, this isn’t a treatise on gold. But you’ve got to admit it’s tough to call it a trick when it’s been treating us for almost a decade now. In any case, we’re voting treat on this one.

Let’s face it. That entrepreneurial spirit is what’s got India and China — and much of Asia — stirring now. It’s not like they just came on the scene. They’ve been around for more than a few centuries and they’ve had lots of people living there that whole time. What else do you think has got their economies humming like never before? It’s not just that they’ve got lots of cheap labor.

The Chinese, Indians, et al — smart as they are — have learned a thing or two from us. What could make them great is what already made us great. They’ve discovered some of our secrets. And — in spite of their governments for the most part — they’re letting fly with the same creative entrepreneurial spirit we once called our own.

Of course, they’ve got a ways to go. Incentives that encourage entrepreneurs to create products and services that make material life better is just a first step. They’ll need to keep increasing rule of law, property rights, personal liberty, government in the service of the people, and let’s not forget the freedom of conscience that helps the spirit grow along with the body and the bank account.

So where’s the treat for us? Listen. If what made us great is now making them great, why can’t we continue doing what we’ve done so well all these years?

Sure, times are tough. And sure, things aren’t going to be easy for us the way they were when we were just about the last one standing after those two world wars in the 20th century. But that doesn’t mean we’re done for.

For example, we still lead the world in technology. If you want to get a real sense of where retaining leadership in technology could take us, look up nanotechnology. It’ll make your head spin. We’re talking about creating molecular sized machines that can — for one thing — literally get into your body and repair, even reverse, the physically and mentally debilitating effects of aging and disease. It’s not here yet, but it’s also not mere science fiction.

And guess who’s at the cutting edge of nanotechnology research?

Well, just as we don’t have room for a treatise on gold, we also have to cut off our brief discussion on what made the American spirit great. But one last thought: while we can’t glorify the past at the expense of the future, we can’t just throw it away either. Just ask the Asians who’ve been studying our history, including our form of government, our industrial revolution, and, yes, our capital markets — in spite of the economic blow-ups we’re living through now and all the talk about how “capitalism doesn’t work.”

It’s one thing for us to suffer economic hardship, face our faults, argue and debate the best policies for the future. It’s quite another to neglect our past success, the people and institutions that helped America become the envy of the modern world.

So here’s why we think “us” is a treat:

The ‘shop-’till-you-drop-consumerist-McMansions-money-mad world we’ve lived in for the last few decades may have been just a distraction, a brief indulgent detour during our long history of self-reliance and accomplishment. Let’s not only hope so. Let’s make it so.

As a matter of choice and intention, there’s absolutely no reason we can’t be both tough enough to deal with our current challenges and smart enough to call on the great reservoir of virtue and knowledge that brought us this far.

There’s no trick in that. So let’s just do it, OK?

A Happy Halloween to all!

P.S. — For more specifics on what’s really going on in the world of money, check out our blog. Our latest themes: What the Chinese Have Learned From Ben Franklin (not Bernanke)…How To Know Whether You’re In a Recovery or a Depression (“GDP” won’t tell you)…How Big-Shot Bankers Got Us To Pay For All Their Bonuses…and more.

Richard S. Esposito, ChFC
Lighthouse Wealth Management LLC
405 Lexington Avenue, 26th Floor
New York, NY 10174
Tel: 212-907-6583/Fax: 866-924-1952

Email: resposito@lighthousewm.com