Market WrapUp (08-21-03)

Financial Sense Online ^ | 8/21/03 | Scott Middleton

[arete]

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Today's WrapUp by Scott Middleton 08.21.2003  Mon   Tue   Wed   Thu   Fri   Archive

Bulls vs. Bears

This debate goes on these days, just as a few months ago the constant debate was about inflation and deflation. While it seems with the latter, that in the end it was a little bit of the both, the bull vs. bear debate should be answered with some authority, real soon.

  

Today, it was the Bulls tooting their horn as economic data indicated economic growth in key areas. The short-end of the Treasury yield curve gave the bulls more reason to be excited as the yields increased significantly throughout the trading session. Jobless claims fell 17,000 in the latest week to reach 386,000 -- below the pivotal 400,000 level that economists believe to be the mark between an improving and deteriorating labor market. It was also the lowest level for claims since early February. The Philadelphia Fed’s business index rose to 22.1 in August from 8.3 in July. It's the highest reading in more than five years. Readings above zero indicate that most firms say business is getting better or no worse. About three times as many firms said activity was better in August than said it was worse. Economists expected the index to fall to about 7.8 in August.

The Bears however continue their chant of the same old story, as CNBC puts it. Even if the economic numbers are improving, valuations have gotten too far ahead of themselves and the consumer has buried themselves in debt, as such bankruptcies are on the rise. According to the Consumer Credit Counseling Service, the average amount of credit card debt per consumer is about $17,000 to $20,000. It wasn’t that long ago that the average was around $6,000 to $8,000 per consumer. Bears also point at the record budget gap in the U.S. as ammo for their argument. Just this week the Treasury Department indicated that the deficit grew to $323 billion dollars and will most likely finish above $400 billion before the end of this fiscal year. It is the Bears’ contention that with the market banging its head against the resistance levels of the Primary Bear Trend, there is no new Bull market.

In corporate news, yesterday afternoon, one day after HP announced that its personal computing business lost money, Dell cut prices on its computers, printers and other products by up to 22 percent, essentially telling the competition, “When we see an opportunity to lower prices, we do it.” Timing couldn’t be better for Dell as they enter the back to school buying season. In the Food sector, Hormel issued their latest earnings, reporting a 9 percent drop in 3^rd quarter earnings. They cited lower sales of “Spam” as the key reason for the disappointment. Since “Spam” has always been a favorite when times are tough, I guess we should glean from this report that the consumer is thriving.

Financial Markets

The Dow Jones Industrial Average added 26.17 points, or 0.3 percent, to 9,423.68. The Nasdaq Composite closed higher by 17.01 points, or 1 percent, to 1,777.55 and the Nasdaq 100 Index rallied 14.92 points, or 1.1 percent, to 1,314.65. The Standard & Poor's 500 Index headed 0.3 percent higher adding 2.97 points to 1,003.27. Volume came in at 1.38 billion on the NYSE and at 1.72 billion on the Nasdaq Stock Market. Advancers sprinted past decliners by 20 to 12 on the NYSE and by 21 to 11 on the Nasdaq.

In the currency market, the U.S. dollar was mixed against its major trading partners, losing 0.2 percent to 117.80 yen, a low not seen since mid-July. But the euro extended its losing streak to six straight sessions, falling a hefty 1.7 percent to reach a fresh four-month low of $1.0925. Gold fell to a low at $359.50 an ounce before closing at $361.80 an ounce, down $5.20.

Treasury Markets

The short-end of the bond market was a primer for expectations of a tighter monetary in the near future. The yield curve flattened on the short-end of the scale and the rates on the long end remained unchanged on the day. The 10-year Treasury note slid 10/32 to yield 4.475 percent while the 30-year government bond dropped 1/32 to yield 5.285 percent.

Overseas Markets

European stocks advanced as the dollar rose to a four-month high against the euro, boosting optimism exporters including Royal Philips Electronics NV and L'Oreal SA will benefit from rising sales in Europe's largest export market. The Dow Jones Stoxx 600 Index advanced for the 11th session in 12, adding 0.9 percent to 217.23, its highest in eight months, as of 4:50 p.m. in London. The Stoxx 50 climbed 0.7 percent to 2523.31, its highest since January. Benchmark indexes rose in all 17 Western European markets, except Denmark and Italy.

Asian stocks gained, led by exporters such as Toyota Motor Corp. and Samsung Electronics Co., as some investors anticipate U.S. jobs and manufacturing reports today will show growth in the world's largest economy is accelerating. Japan's Nikkei 225 Stock Average gained 0.7 percent to 10,362.69 at the 3 p.m. close in Tokyo. South Korea's Kospi index surged 2.3 percent, the biggest advance in two months. In Hong Kong, the Hang Seng Index added 1.6 percent to a 13-month high, while Taiwan's TWSE Index climbed to its highest in 15 months.

© 2003 Scott Middleton
August 21, 2003

chart courtesy ~ Bloomberg

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[arete]

In the Food sector, Hormel issued their latest earnings, reporting a 9 percent drop in 3rd quarter earnings. They cited lower sales of “Spam” as the key reason for the disappointment. Since “Spam” has always been a favorite when times are tough, I guess we should glean from this report that the consumer is thriving.

Just wait until I get around to restocking the bunker.

Richard W.

[arete]

Market WrapUp is Delivered!

Today's Roger Arnold Show

Richard W.

[lelio]

I have enough spam in my inbox already.

Went to the local Asian supermarket and they were selling spam sushi. Apparently its a hit in Hawaii, just never saw it here.

[Fzob]

Thanks and a bump

[coloradan]

Does one have to have a special spam sushi license to be allowed to prepare it for sale, as is necessary for fugu?

[sarcasm]

America fears revival may be short-lived

[Soren]

From Jim Sinclair's jsmineset.com (sans charts):

You will note that we now have established Up-Trends in all the primary aggregates after a nine month hiatus [Note: He is talking about up-trends in the growth rates]. The Federal Reserve has undertaken to provide the system with liquidity in order to offset the forces of deflation. Let's see if the Fed remains firm now or vacillates!

A major establishment international investment banking firm in its private communication with preferred clients, published today a chart of the velocity of money. I have not seen this chart published before in this publication.

It is clear to me that others are now focusing on velocity which we know is the means of transmitting the increase in aggregates into business activity when velocity is positive.

As you can see, this is simply not so at this moment. In order to turn velocity, the most practical means would be for the Fed to advertise a target for inflation. The longer the Fed fails to clearly indicate and communicate firmly what it wishes to do, the lower the velocity of money will go.

For those that adhere to Professor Ludwig von Mises, don't write me any nasty letters. That folder in my mailbox is full. The conditions deflation can deliver to the world are more horrid than you can imagine - no matter how benign it's being portrayed by various economists and on financial TV.

What is being portrayed today as a magnificent economic recovery is nothing of the sort. The U.S. economic drivers have been the refinancing of mortgages for consumer purchases and the extension of credit.

As far as the extension of consumer credit is concerned, it simply does not exist in the important "percentage terms." With interest rates rising, the credit quality and liquidity measure for borrowers will have higher goal posts and therefore lower successful mortgage and refinancing applications.

With the lower amount of successful mortgaging and refinancing, there will be less of a driver for consumerism. This is a game where two strikes and the consumer is out. Yet the world of stock salesman, media writers and spin doctors are already breaking out the fine wine to celebrate the return to boom times based on the breakout in the Dow a few days ago.

What contrived madness lives in these markets?

[arete]

What is being portrayed today as a magnificent economic recovery is nothing of the sort. The U.S. economic drivers have been the refinancing of mortgages for consumer purchases and the extension of credit.

There is little choice for the monetary authorities and central planners. They must keep the debt bubble expanding or we'll be going head first into a deflationary depression the likes of which will make the Great Depression seem like a walk in the park. Inflate or die.

Richard W.

[Beck_isright]

And from the "Safe Money Report" today...I found this interesting...

"This morning, comments by Intel's Chief Executive Craig Barrett's comments sent semiconductor stocks shooting higher. Barrett said Intel is "in the middle of upgrading and buying a substantial number of PCs and we see some other examples around the world that that is happening."

We don't know about you, but we've just got to ask: "What the heck are stock buyers thinking?" Every little comment about the sale of an extra computer or chip or cell phone seems to spark furious rallies. But nobody's stopping to think about the fact that sales are still way down from bubble heights -- or that the supposed "rebound" is likely just a temporary blip. Indeed, investors are reacting to every nugget of tepid news as if it's proof that profit nirvana is just around the corner.

Take Broadcom for example. This week, the chip company said revenue in the current quarter will likely come in at about $416 million. That was above its prior sales forecast of up to $410 million. Just in case you don't have a calculator handy, that means revenue might exceed expectations by a whopping 1.5%. And yet, investors latched on to the announcement like it was the best news they ever heard, bidding the stock up 11%. Since October, Broadcom's share price has more than doubled to around $25 -- giving it a price to earnings ratio of 225!

Frankly, investors are acting like its 1999 again. You know what happened then, and we wouldn't be surprised to see a similar meltdown this time around."

[Beck_isright]

And one more article, just for the heck of it...

Fund Spy
A bond manager sees more pain ahead for bonds

The 10-year bond is now yielding about 4.6%. Is it headed for a 6% yield?

By Russel Kinnel

Last week, I wrote that most bond fund managers believe the worst is over. But, of course, not everyone thinks that's the case. In June, FPA New Income (FPNIX) manager Bob Rodriguez shifted from cautious to downright bearish.

He declared a buyers' strike against Treasurys because their yields had dropped to record lows despite the fact that tremendous liquidity had just been injected into the economy via tax cuts and Fed rate cuts.

At the time, Rodriguez noted that the stock market's rally signaled a healthy growth spurt in the economy while the bond market was signaling sluggish growth or a recession coupled with deflation. He said the stock market was more likely to be right in this case. “Low interest rates and easy money are combining to set the stage for rapid economic growth. Over the next twelve months, it would not surprise us to see real GDP grow faster than 4%,” he said.

Actually made money
His bearish stance soon paid off as the bond market was pummeled in July, and his fund was one of a handful to actually make money for shareholders.

Despite the spike in rates, Rodriguez isn't tempted to go back in. Although the 10-year Treasury currently yields 4.6% (as of Thursday), he won't begin buying until it hits 5% -- and even then, he'll only gradually ease in. (To find today’s 10-year note yield, check Leading Indexes on MSN Money.)

"This is only the start of a longer period of difficult bond market returns," he told me. "The base level of U.S. inflation is still in the 2% to 2.5% range," he said. "Given a minimum real return of 3% (that is, at least a 3% return above the rate of inflation), this would place fair value on the 10-year T-bond in the 5%-5.5% range.... It would not surprise us to see the 10-year T-bond yield rise into the 5.25%-to-5.5% range within the next 12-18 months."

A three-year quagmire?
As if that wasn't depressing enough, Rodriguez says there's a decent chance that bonds will be a quagmire for three more years.

"Assuming President Bush is re-elected, we expect that the odds of a difficult bond market in 2005 and 2006 are also rising. The combination of growing government entitlement debates along with a likely weaker dollar makes for a difficult bond market environment. Longer term, it would not surprise us to see the bond with a 6% handle (i.e., a yield between 6% and 7%). . . . The important thing to remember is that the bond bull market of the last 20 years is over. It will be more difficult managing bonds from the long-only side going forward."

Mind you, most bond managers are a little more optimistic than that. Rodriguez really hates to lose money, so he'll gladly err on the side of caution when it comes to protecting principal.

A bond manager sees more pain ahead for bonds

[Orangedog]

We don't know about you, but we've just got to ask: "What the heck are stock buyers thinking?" Every little comment about the sale of an extra computer or chip or cell phone seems to spark furious rallies. But nobody's stopping to think about the fact that sales are still way down from bubble heights -- or that the supposed "rebound" is likely just a temporary blip. Indeed, investors are reacting to every nugget of tepid news as if it's proof that profit nirvana is just around the corner.

They want...no, they NEED to believe. They have to keep believing that the elusive "2nd half recovery" is always around the corner. The have to keep up the act, because they know that they are in to deep to get out and the reality of what is to come is to unsettling to think about. But denial is not a river in Egypt.

[Beck_isright]

"Denial" is what they should rename the Potomac....

[Starwind]

Barrett said Intel is "in the middle of upgrading and buying a substantial number of PCs and we see some other examples around the world that that is happening."

Barrett should check with his CFO. From Intel's Q2 Conf Call 7/15/03:

Chief Financial Officer Andy Bryant said Tuesday that the company isn't seeing any evidence that a corporate replacement cycle for computers is occurring.

Bryant noted that Intel has restarted a program to provide Intel employees with one home PC each. He said the program should be completed by the end of the year, with most of the costs coming in the third quarter. Intel had put that program on hold in 2001 as the company cut nonessential spending to address the downturn.

[Beck_isright]

It's amazing the bovine scattalogy these guys are spreading. And terrifying if they dupe more retirees into re-investing what's left of their money into the market now.

[Sam Cree]

How do you mean, Shenandoah and Blue Ridge?

[arete]

It's amazing the bovine scattalogy these guys are spreading

Not amazing at all. There is a full court press on right now and all the stops have been pulled out. If the public stops borrowing and spending or even reduces the borrowing, the flim flam scam game is over for the inflationists and central planners. They must keep the illusion alive at all costs and truth and honesty sure isn't going to stand in the way.

Richard W.

[Orangedog]

"Denial" is what they should rename the Potomac....

LOL! Now there is a good tag line!

[Beck_isright]

A crash course in Galbraith

[Sam Cree]

Thanks. That's a depressing article.

I take it you are not too optomistic about the stock market. However, where would you suggest one put his cash?

[Beck_isright]

I really don't like to make suggestions only because each individual has their own needs, etc. I would suggest studying the past 100 years of market history and finding those pockets which held up through the storms and invest in them. I do not reccomend US Treasuries at all however.