Market Wrap-Up (02-04-2004)

Financial Sense Online ^ | 2/4/2004 | Mike Hartman

[Orangedog]

"Double-Minded Markets"

The U.S. dollar strengthened and government bond prices moved lower today, pushing interest rates a notch higher due to further signs of economic improvement. Simultaneously, stock prices moved lower due mainly to lower guidance of near term sales and earnings for technology companies. Late yesterday, Cisco softened their overly optimistic expectations by saying some business leaders remained 'surprisingly cautious' toward capital spending and hiring. Cisco stock fell $2.33 or nearly 9% to $24.08. Also note Cisco sold off on very heavy volume over 190 million shares, which is about four times their normal volume in a day. Ciena also warned late Tuesday that first-quarter revenue would fall short of expectations. Since the market punishes those who don't perform, Ciena shares were pounded for a one-day loss of almost 18% to close at $5.99.

The news from Cisco and Ciena was enough to gap the NASDAQ down at the open and hold it down for the day. At the closing bell the NASDAQ Composite fell a very large 52 points or 2.5% to close at 2,014, the Dow Industrial Index declined the least in percentage terms by falling only 34 points or 0.3% to close at 10,470, and the S&P 500 split the difference with a loss of 9 points or 0.8% to close at 1,126. With continuing signs of economic improvement one would expect stock prices to move higher, but not today except for some of the blue-chips. The talking heads at CNBC described the decline in technology and the move to large-cap blue-chip stocks as a 'sector rotation' out of technology with a flight to quality. Among the gainers in the Dow were companies in the oil services sector, drug makers and retailers. To translate the CNBC jargon, a 'sector rotation' means that the declining stocks are well into the 'distribution phase,' (the big money hands-off to the retail investor in technology) when they have already 'based' or accumulated their shares in the companies that are going to be pushed higher. Once the drug makers, oil services companies and retailers move higher, they too will go into 'distribution' as new sectors will be milked for profits by the market makers.

As the stock market grinds lower this year I believe we can expect more movement to the large-cap multi-national companies. The Dow Jones Industrial Average is the 'World's Barometer' for stock markets around the globe. If the Dow crumbles, you can bet that stock indices around the world will be lower. If the governments and central banks around the globe are working to intervene in the financial markets, and assuming they are bent on re-inflation, the Dow components will be supported long before the insignificant tech stocks.

Economy and Bonds

The Commerce Department reported factory orders rising by 1.1% in December while economists were anticipating a gain of 0.7%. In similar fashion, the Institute for Supply Management's Service Industry Index rose to 65.7, the highest reading EVER since the index was created in July 1997. Economists expected the Service Industry Index to rise to 60, from 58.6 in December. According to Bloomberg News, economists' estimates ranged from 56.5 to 64.5, but the number (65.7) wasn't even within their range! How can all of the economists be so wrong? I would suggest there has been some tinkering with the numbers, and none of our officials have given the economists a heads-up the rules of the game are being changed behind the scenes.

It's really no problem if we get a bad number, because it can always be revised later. My case in point comes from this CBS MarketWatch quote, 'A troubling slump in capital spending in December that was reported last week was revised away by more complete data from the Commerce Department on Wednesday. Rather than falling 0.4% as previously estimated, core capital goods orders increased 0.8% in December, the government agency said.' Not bad'a few adjustments and magically the orders go from negative to positive. According to the article, 'The soft capital goods data last week had raised major questions about the durability of the U.S. expansion. Please folks, look back at what Cisco had to say yesterday regarding their expectations for REDUCED CAPITAL SPENDING. Their statement was based on current input from their customers. Cisco's statements support the reduction of capital spending as originally stated by the government statistics rather than the numbers that were adjusted higher.

The last bit of positive economic news came on the employment front. CBS MarketWatch, 'Announcements of job reductions by U.S. corporations surged 26% in January to 117,556, the highest since October, according to a monthly tally by outplacement firm Challenger, Gray & Christmas.' Challenger says they typically see higher job cuts in January as companies set into motion business plans and employment needs for the New Year. Here's the good news. Even though announcements of layoffs increased by 26% over December, it is still 11% lower than January last year, so the trend is in the right direction even though there aren't enough jobs to go around.

Call it what you will, but the good economic news supposedly caused bond prices to move lower as higher interest rates are priced into an improving economy. I have a hunch there is more to the decline in Treasury prices than simply an improving economy. The most basic law of supply and demand says if the supply increases relative to demand prices will decline. I believe the following quote from Bloomberg News is the real reason for the decline in bond prices: 'U.S. Treasuries fell in New York after the government announced plans to sell $56 billion of notes next week to help pay for a record federal budget deficit. The Treasury Department said it will sell $24 billion of three-year notes, $16 billion of five-year notes and $16 billion of ten-year notes. The total amount is close to the record $57 billion sold last quarter. President George W. Bush is facing an estimated $521 billion budget gap for the fiscal year ending September 30.' The primary bond dealers are probably still choking on inventory from last week's sales, but they have mountains more on the way! According to Andrew Lombara, head of Treasury trading at HSBC Securities USA in New York, 'It's unprecedented this much supply is coming to market ' obviously that's got to get placed somewhere.' According to Lombara, the heavy supply is not a problem unless the Bank of Japan and other central banks decide to stop buying our Treasuries.

The quarterly re-funding of Treasury debt must continue indefinitely because we are not able to pay our debts as a country. We are currently adding to our record debt levels, so how could we possibly pay down our old debts? The answer is simple ' we can't. The best we can do is re-finance the old debts each quarter as they come due and add our current needs on top of the old debt. President Bush has said he hopes to cut the federal deficit in half within five years. That means we continue adding to our debt that will never be paid back. How long do you suppose this can continue? It will continue as long as foreigners are willing to loan us money. The success of the Treasury re-funding next week will be contingent on the participation by foreign central banks. Domestic demand for Treasuries is declining as investors anticipate higher interest rates. In December foreigners bought 30% of our debt and last week they bought 44% of the $26 billion of two-year notes auctioned on Thursday. As the trend continues, we are becoming more and more dependent on foreign capital to keep our country running.

G-7 and The Dollar

The dollar resumed its recent downtrend in recent trading sessions as investors are beginning to doubt the likelihood of G-7 cooperation to support our declining currency. The Group of Seven countries is made up of Canada, France, Germany, Italy, Japan, United Kingdom and the United States. When looking at the roster of countries, it is not difficult to believe they will have difficulty coming to an agreement on how to handle the recent volatility in currency exchange rates and the rapid fall of the dollar. Most analysts close to the situation don't see any major changes coming from this meeting since it is being portrayed as political window-dressing.

Prior to the meeting investors have been cautious about purchasing euros on the outside chance the ECB will cut interest rates tomorrow. I doubt it will happen tomorrow, since the ECB officials will hold their stance on interest rates going into the G-7 meeting. While investors are concerned about the possibility of the ECB cutting interest rates to weaken the euro, the U.K. central bank is widely expected to raise the country's base rate by a quarter to 4%, its second rate hike in four months. The U.K. stands at 3.75% and is ready to raise while the U.S. overtly stands pat at 1%. The dollar must and will continue lower. It must be devalued or our system will collapse under the weight of unprecedented debt at all levels of government, corporate America, and within most American households.

If the employment picture doesn't improve significantly in the next few months we could have some big problems. It is estimated that two million more Americans will exhaust their unemployment benefits by June with no more available extensions from the States or the Federal Government. Most people that become unemployed have on average about two month's worth of living expenses in their savings account. Many eyes will be focused on the employment data tomorrow and Friday to see if the economic recovery is for real, or just a lot of hype and artificially inflated statistics. It will be interesting to see how the Treasury auctions go next week in the wake of the G-7 meeting. I also have to think the stock market will be under additional pressure next week as the authorities will need to 'talk' more money into the bond market in order to absorb the huge supply of government debt. I tend to believe the dilution of the U.S. dollar will continue to push commodity and precious metals prices higher. The quarterly refunding next week will bring the debts and deficits into full view of the investment community, which should put pressure on the dollar and could provide the fuel for the next leg in the precious metals bull market.

I'll be taking the next couple weeks off writing the Wednesday Market Wrap since we sold our home in San Diego and will be moving the family to Colorado next week. It's time to bail out of California! I'm a native Californian, but this place has become a zoo! For me it's time to get out of the rat race and slow down to a better quality of life.

Back at ya' in a few weeks!

Mike Hartman

Source: StockCharts.com

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[Orangedog]

President George W. Bush is facing an estimated $521 billion budget gap for the fiscal year ending September 30.” The primary bond dealers are probably still choking on inventory from last week’s sales, but they have mountains more on the way! According to Andrew Lombara, head of Treasury trading at HSBC Securities USA in New York, “It’s unprecedented this much supply is coming to market – obviously that’s got to get placed somewhere.” According to Lombara, the heavy supply is not a problem unless the Bank of Japan and other central banks decide to stop buying our Treasuries.

What was all that talk about not needing to worry about the national debt because "we only owe it to ourselves"?

[Orangedog]

Doomers and Malcontents unite!

Archive of Today's Roger Arnold Show

Roger had a pretty good show today...worth a listen.

[groanup]

Dealers will mark down that inventory and move it. Why? Because there are so many investors that HAVE to buy bonds, especially US Treasuries.

[Orangedog]

A thank you goes out to lelio and everyone else who has helped me out this week. We all may be just a bunch of "gloom and doomers" but by my count of the ping list, there's well over 120 of us (I lost count at 120).
I won't go as far as to say "stay out of the casino" but if you go there, just go for the free drinks.

[Orangedog]

I'm not worried about how the bond dealers will eat next week. They certainly are going to have their hands full, though.

[superloser]

I'll be taking the next couple weeks off writing the Wednesday Market Wrap since we sold our home in San Diego and will be moving the family to Colorado next week. It's time to bail out of California! I'm a native Californian, but this place has become a zoo! For me it's time to get out of the rat race and slow down to a better quality of life.

To me, this was the most telling part of the entire article.

[imawit]

Looks like everyone is waiting for the G7 mtg. Got some charts I wanted to throw up but I'm at work. The DOW, NASDAQ, HUI have all been bouncing off of their support levels.

The USD and Treasuries have more or less been flat lining also. Don't want to give the G6 guys something to jump all over at the G7 mtg.

Stay tuned I'll have charts up later. It's pretty much text book example the way everything has been going.

[mac_truck]

Here's another look at the Cisco move. Both the recent high and todays intraday low fall outside of their corresponding Bollinger.

[Orangedog]

I've wondered when the people involved with the website would start to get the Hell out of Dodge. I have more respect for this guy already.

[Orangedog]

I'll take your chart-fest any day over Ike's.

[imawit]

oooooops. Look at the volume and the MacD is widening. Good sell/get outa dodge is right.

[Axenolith]

We're considering it for the mid term future. We've always planned to get a farm back east but the NV side of the NV\CA border is looking compelling. Cheap land, no state income tax, a lot of mines on either side set to benefit in a prolonged uptrend in gold\silver and a lot of COOL GEOLOGY!

[Free Vulcan]

I think we are going to have a classic bull market correction. The market has risen at a steep angle of descent since Thankgiving. The second top was on much lower volume, and the down move was on higher volume, with a weak correction Monday on lower volume.

The jobs report could disappoint Friday and knock the market down good, ending in a selling climax and a bounce.

[Orangedog]

Sounds like something I considered a few years ago. Make sure you have a plan and stick to it. As corny as is sounds, those who fail to plan, plan to fail.

[Orangedog]

The second top was on much lower volume, and the down move was on higher volume, with a weak correction Monday on lower volume.

As I've heard many a market timer say, volume tells you what is real and what is not.

The jobs report could disappoint Friday and knock the market down good, ending in a selling climax and a bounce.

If we get another 1000 jobs number, things could get ugly for equities.

[imawit]

beginning to doubt the likelihood of G-7 cooperation

What cooperation ?????

Does Mike mean they don't do anything and just let it drop/devalue. After all it's the US that's responsible for the devaluation. More credit and more printing runs. A whopper coming up next week in Treasuries.

Do you think they might cooperate by printing their own currencies but using it to buy gold rather than the USD ?

Or, does he mean they buy gold with their USD reserves to really drop the dollar ? Now that's what I would call cooperation to the max.

Of course if they print their currency and buy dollars, that's proping up the USD and that sure ain't cooperation. After all we're trying to rid of our debt with cheaper dollars, RIGHT !

Like I said before (now the experts are beginning to see what I'm sayin, he he he he) the G7 mtg is going to come up with nothing. Especially the closer you examine the possiblities. The only excitement maybe 911 calls during the discussions.

[sourcery]

My CSCO forecast:

Expect the current downmove to complete in the price range of 21.5 to 23.45, but more probably between 22.5 and 23.4. This down swing could complete anytime between now and 13-Feb-2004, but is most likely to complete sometime between 05-Feb-2004 and 10-Feb-2004.

[mac_truck]

I'm guessing CSCO will bounce off its 50 day EMA and trend sideways for a while. Its had a big run in the last 10 months and needs to form a new base before its next move. (thats my way of saying I think the glass is half full). Cheers.

[sangoo]

I got out of California last year. What a relief. Should have done it years ago. Really a breath of fresh air.

[Orangedog]

What cooperation ?????

Guess we'll all see soon enough if G-7 can play well with others now that the fight over the toys is getting more heated. It would be nice if we could give them a time-out and sit them in the corner for a while.