Market Watch 7/29/02 (Dow +447.49, NASDAQ +73.10, SPC +46.12)

Yahoo ^ | 7/29/02 | me

[Xenalyte]

Wanna place a friendly bet? I think the Dow will hit 7,000 before election day, but that it'll be back up to just under 9,000 by year-end.

Xena's Market Watch: you read it here first, FReepers!

[follow your bliss]

You may find this read interesting...

King Report

The Fed says, as of 3/31/02, total US indebtedness is 287% of GDP!!! The 50-year mean is 180.8%!!! It’s the debt, stupid! Debt, not accounting standards or Wall St. mores, is the principal drag on the economy and stocks. Increasing debt service by businesses will reduce future earnings. PS- Total debt is now >$30 trillion, and will rise sharply this year in both the public and private sectors.

Debt is almost 3X GDP. GDP growth must equal 3X (interest rates + debt growth) to just service the debt. The ratio of debt to GDP keeps increasing because GDP growth pales compared to debt formation. This totally and irrefutably debunks Easy Al’s productivity miracle hokum. The bubble was, and always will be, build on debt. That debt is now the yoke on corporations and consumers’ necks.

The FT: “US and Euro banks and bondholders lent an estimated $500B to the crippled US gas and power sector, new research commissioned by the Financial Times reveals. The figure raises fears that a further string of corporate failures in the wake of the Enron scandal would expose lenders to heavy losses.”

A hallmark of perceived or real intervention in the markets is the 1-day super rally followed by a couple of days of ennui and drifting. Operators are fearful of being caught short but are reluctant to get exuberant due to the artificial stimulus. That’s what occurred on Thursday and Friday.

Barron’s Alan Abelson says talk last week had US Treasury Sec O’Neill asking Wall St. bigwigs to do some ‘strategic buying’ in return for W’s silence on the markets…Merrill’s recent poll of 279 global managers shows 84% say stocks will be higher 1 year from now. Is that capitulation and pessimism?

The predictive power of the stock market for the short to intermediate term continues to diminish. After July 4th, there was a 40-80% rally in tech stocks. Inexplicably, this occurred just prior to earnings releases. One would infer, like we did with LU, that someone knew earnings or guidance would be good. That was not so. It was only wise guys’ over-anxiousness for a buy opportunity. The increasingly faster and violent pace of trading impels wise guys to exacerbate the problem by seeking to implement action sooner and sooner. Now, wise guys are anticipating the anticipation. It’s that ridiculous, and it will continue until stocks fall to fundamental buying levels, or a requisite number of wise guys implode…The best bet for a significant tech bottom could be Q4 on portfolio purging, bankruptcies, etc.

Incredibly, Goldman’s semiconductor equipment analyst put out a buy recommendation the day after Taiwan Semiconductor announced a reduction in capex and issued a pessimistic view of the industry. When quizzed on CNBC about the buy, the analyst admitted that the fundamentals for the group look awful for the next 6 months, but the stocks have fallen so much they’re a buy. Pisanti then interjected that sources told him that some people heard the call Thursday. When pressed by Maria, the analyst denied leaking his call early. What did they expect – the poor guy to say ‘yeah, I called the hedge funds that pay us the most commissions and told them tomorrow blah blah blah’?

For the past 24 years, there’ve been regular banking crises: 1/80 the Hunts; 7/82 Mexico; ’84 Contilly, Maryland and Ohio S&L crisis, Penn Square; ’86 Texas ban collapse; ’87 crash; ’89 S&L crisis; ’90-’91 money center banks at the abyss; ’94 Mexico again; ’97 Asian Contagion; ’98 Russia and LTCM; November ’00 – after Thanksgiving, dollar tanks, Fed starts juicing the money supply, JPM rumors commence. The Fed has papered over each crisis, save the money center crisis. Al used the carry trade to reliquidify the banks, but created Frankenstein-like hedge funds. Volcker prudently removed the punch bowl after each crisis was mollified. Al just kept on pumping. Now, pumping has lost its effectiveness. What can Al do now, if and when the system is threatened?

Few want to admit it, or even address it, but the odds are higher now than at any time in over 70 years that the US could have a DEPRESSION… Rubin, Gore, other Dems are advocating a tax hike. This is a replay of 1930. The political conventional wisdom was the US budget deficit caused the stock market collapse and receding economy so Hoover raised taxes and later FDR raised them again.

AP reports, “Shortfalls in private companies' pension plans soared to $111 billion last year, the highest level ever reported by the Pension Benefit Guaranty Corp.”

Hershey has put itself up for sale. According to Bloomberg, HSY is 8.33 times book value; 27X earnings; and 19X cash flow. The only available financing is equally [or more] overvalued stock.

House Republicans, trying to inoculate themselves from charges of business coziness for November, said they would introduce legislation that will allow the seizure of mansions, yachts, and other personal property from corrupt corporate executives. This can’t be good for stocks or reported earnings.

The SF Chronicle notes state budges are plunging in part because they became overly depended on capital gains taxes. California had $17B in capital gains taxes in ’00, but only $6B in ’01. Any guess for ’02?

Paul Sperry (Worldnetdaily.com) notes exec stock options proliferated after Slick and Congressional Dems removed the corporate deduction for executive pay over $1m (’94).

We’ve been waiting for the inevitable shakeout in gold that normally occurs in nascent bull markets after the first initial strong rally. This occurred in 1984 for stocks. Gold and gold shares peaked in June, about a month after cyclical stocks. In June, copper and industrial commodities started a collapse that continues to this day. Gold fell in concert. When JPM and Citigroup concern threatened to go nuclear, gold was hammered, giving JPM relief from its purported onerous gold derivative book. Of course that coincided with the dollar rally. Contributing to gold’s decline last week is forced hedge fund selling. Hedge funds that are hemorrhaging from picking too many stock bottoms the past few months are now selling winning positions such as gold, euros, etc. This is very common during unexpected moves, and is a cardinal mistake – selling winners to support losers. Gold should fall to, and probably below, $300 in the near future. But as we opined weeks ago, after whatever summer rally occurs, autumn will bring renewed and intensified concerns about the economy and the rumored Iraq excursion. Enjoy the summer respite; unfortunately it will be brief.

Today – Operators will try the upside. Figure rally attempt today, Turnaround Tuesday tomorrow.

[wardaddy]

Funny....where are all the doom and gloom crowd today?

Hell...I know where they are. They are waiting for this buy back in frenzy to cool so they can come tell all of us how wrong we are. FR is a pretty good case study on market psychology although a bit tilted to the downside. Conservatives being realists and all I suppose.

I took a lot of friendly fire along with Dales last week. If this rally (?) falters, I'm sure we'll be in for more...LOL

[wardaddy]

NASD up/down volume ratio almost 10 to 1. That is simply incredible.

I'm sure the writers on the finance page and Yahoo and Reuters are crying in their morning coffee. No indicators to spin negative thus far today for their cover page.

Are Daschle and Gephardt in upper floor offices with windows? Somebody better lock those windows. G-D, how I do love it...even knowing it's going to get tempered at some point...it's a pretty thing to watch.

Have we gotten off the bicep and onto the shoulder yet?

[wardaddy]

A case can be made that US stock markets appeared to behave more rationally when a smaller percentage of the population owned stocks

That is quite true. Individual investors and daytraders have a much much larger impact today then in the past. A friend of mine is a NASD market maker and he has told me he suspects daytraders and direct ECN individual buyers are often in the majority...trade-wise if not volume.

[SauronOfMordor]

I have never been a conspiracy theorist when it comes to manipulation of financial markets. But after what happened to gold and JPM and CITI last week, I'm not so sure. There is still a LOT of fundamental weakness and it does not explain the 15% run-up since Wednesday.

Financial markets are manipulated all the time. For example, the SEC has this warning about "pump and dump" schemes:

Pump and Dump Schemes

"Pump and dump" schemes, also known as "hype and dump manipulation," involve the touting of a company's stock (typically microcap companies) through false and misleading statements to the marketplace. After pumping the stock, fraudsters make huge profits by selling their cheap stock into the market.

Pump and dump schemes often occur on the Internet where it is common to see messages posted that urge readers to buy a stock quickly or to sell before the price goes down, or a telemarketer will call using the same sort of pitch. Often the promoters will claim to have "inside" information about an impending development or to use an "infallible" combination of economic and stock market data to pick stocks. In reality, they may be company insiders or paid promoters who stand to gain by selling their shares after the stock price is "pumped" up by the buying frenzy they create. Once these fraudsters "dump" their shares and stop hyping the stock, the price typically falls, and investors lose their money.

Is the rally a very-large-scale "pump and dump" by the Fed & institutionals?

[GraniteStateConservative]

Amen.

[Wyatt's Torch]

Funny....where are all the doom and gloom crowd today?

I'm still here...preaching my apocolyptic deflationary gospel to...ummmm...nobody...;-)

[Dukie]

At least some pension funds have established percentages of assets allocated to stock, bonds, short term instruments, etc. The recent swift decline in stocks pushed down the equity fraction necessitating the "re-balancing" to restore those percentages. If bonds didn't drop, then cash or short term debt would have been the source of the funds, I suppose.

[Wyatt's Torch]

Is the rally a very-large-scale "pump and dump" by the Fed & institutionals?

I believe it is. But to what end? Save JPM?

[ken5050]

We shall see....I suspect the bear has a few surprises left....you could also have a lot of shorts covering,and a little monthly window dressing...wouldn't surpirse me to se the market give back most of it in the last hour.....that's when all the real action happens...

[Dukie]

In his last two posts, wardaddy has used the word "incredible" ..... seeming too extraordinary to be possible ...... lacking believability.

There are movements in the markets which seem too much like the orchestrations depicted in Jim Carey's film "The Truman Show"

[wardaddy]

Well....I admire your honesty and willingness to weather it.

[wardaddy]

Yes I have used the word incredible excessively this morning. Even given my bullish disposition, I did not expect this today. I expected profit taking and at best a little waffling trying to establish footing. I'm suprised. It's still to early to tell if this is a recovery but it's certainly a respite from the freefall we were in.

If this is a bear trap, it's a really big one....an incredible one...lol

I do not think this is short BTC...it's too broad based. I think the perception is that 8-14 is going to be managable and folks are buying in. The highly touted Bear trap will close if something happens to shift the mass psychology down again. We will correct this surge at some point but how much is the key. No doubt the momentum which has been up overall since Wednesday has gotten a massive shot in the arm this morning.

[Wyatt's Torch]

Believe me. I hope I'm dead wrong. I'm just far more fearful if I'm right. Deflation is an ugly, ugly phenomenon and very difficult to escape. See Japan.

[LS]

Wyatt, you ask "what has changed since last week?" Are you kidding? The world.

1) Merely the THREAT of new government "crackdowns" has caused Coke, the Wash Post, and others to change their future accounting practices.

2) That same threat has caused numerous companies, including Qwest, today, to announce that it was re-stating its "earnings reports" to include the kinds of options that should have been on there before. But clearly these companies think that, for whatever reason, getting it out in the open is better business than concealing it further.

3) The market overcorrected (as you know, IMHO, badly).

4) The economy. Productivity---remember that one? It is real, it is up, and the market knows it.

5) The scandals only ever had a limited news shelf life. This is not the Great Depression, and the kidnappings and trapped miners were, well, much better stories.

6) Robert Rubin, Robert Rubin, Robert Rubin. He was so tied to ENRON that the media has had to back off; and as it did, the markets come back due to better percpetions.

I think there are also other reasons, but this will do.

[LS]

I disagree that stock buy backs are not the basis of an "extended economy." They certainly are IF (here we go again) productivity is up and the companies are UNDERVALUED, in which case they are acting quite rationally.

[hchutch]

I'd say it was seeing the Adelphia execs indicted and arrested. That was a biggie in terms of restoring confidence. People seem to feel more confident because they know the crooks will pay the price.

[Dukie]

Budget Group ( Budget / Ryder / etc. ) seeks Chapter 11 protection

http://www.upi.com/view.cfm?StoryID=20020729-101744-1339r

[Wyatt's Torch]

1) Merely the THREAT of new government "crackdowns" has caused Coke, the Wash Post, and others to change their future accounting practices.

The spectre of government cracking down was in place over the last few months. Especially over the last few weeks. Why did the markets decline then? Only when they stopped by reaching a deal did they rebound.

2) Why was Q a non-event?

3) My fear is that it has overreacted positively. Other than the weak, thank goodness, Sarbanes bill has changed the landscape. The numbers are still what they were before.

Which brings me to #4 but we've already beaten that horse to a bloody pulp. It will be interesting to see the productivity numbers when the GDP growth is reduced by 60% as expected later this week.

I don't really care about the scandals but they do, as you mention, contribute to short-term sentiment. The real answer is in the numbers and the underlying details of those, in my opinion, is still not very good. We have a very long way to go.

Regards