Market Wrap-Up 2.11.03

FinancialSemseOnline ^ | 2.11.03 | Jim Puplava

[dtel]

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Today's Market WrapUp by Scott Middleton 02.11.2003 Back to Market Monitor Commentary Mon  Tue  Wed  Thu  Fri

Is it War or is it Profits?

Everything we watch or read today has something to do with the current tensions with Iraq and North Korea and one can’t help but think about the effects that war with Iraq may have in the equity markets. In fact, many of us seem to think that war has already been priced into the markets today. Is that really the case?

As the market tacks on to its 3-year decline the only reasonable explanation, so says the mainstream media, is the war with Iraq, which leaves too much to question. Even today in Greenspan’s testimony in front of the Senate, he stated that he believes the U.S. economy will work its way through the current trough as long as the war or threat of war doesn’t get in its way. War, in his viewpoint, is what is keeping our economy from getting its legs back underneath itself.

His testimony failed to address a battle on another front: earnings growth. There has been no sign that earnings growth has taken solid footing; in fact, just the opposite is true. Earnings growth projections have been constantly revised downward. With or without war with Iraq, corporations are painting a picture of slower days ahead. We have already seen the cuts in capex from companies like Intel and SunMicrosystems, and that was just the beginning as the inventory channels start to back up again. During the last six successive months the forecasts for S&P 500 earnings growth has been reduced. In August, analysts thought earnings for companies in the S&P 500 index would grow at a rate of more than 20% in both the first and second quarters of this year. They thought that kind of growth could continue for a full year. Since then, they have steadfastly cut their expectations, and now are calling for less than 8% growth in the first half of the year and 12% for the full year, according to Thomson First Call data.

 

War seems to be the excuse for the markets’ weaknesses lately, and in some cases it may fit that billing, but if your were to strip the war out of the equation I think you would still find the economy in a very precarious situation. The equity markets in the U.S. have yet to find their footing and any expectations of this to occur before corporate profits find their footing is misleading.

Financial Markets
The Standard & Poor's 500 Index fell 6.77, or 0.8 percent, to 829.20. The Dow Jones Industrial Average lost 77.00, or 1 percent, to 7843.11. The Nasdaq Composite Index dropped 1.22, or 0.1 percent, to 1295.46. All three benchmarks closed at their lowest since Oct. 10. Almost three stocks fell for every two that rose on the New York Stock Exchange while 10 declined for every nine that advanced on the Nasdaq Stock Market. Some 1.30 billion shares traded on the Big Board, 3 percent below the three-month daily average. Almost 1.32 billion shares changed hands on the Nasdaq by 5:15 p.m. in New York.

April gold futures rose $1 to $364.00, bouncing off its intraday low of $361 following bin Laden's statement. Also, March crude futures shot up $1.02 to fresh contract highs of $35.50. The U.S. dollar's action was similar. It initially rallied to three-week highs versus the euro and two-month highs versus the yen on U.S. economic optimism, but was recently trading down 0.1 percent versus the euro at $1.0744 and down 0.2 percent versus the Japanese yen at 121.01.

Overseas Markets
European stocks rose, lifting the Dow Jones Stoxx 50 Index for the first day in four, after BP Plc posted higher fourth-quarter earnings than analysts expected and companies including Tele2 AB and Valeo SA returned to profit. The Stoxx 50 added 2.2 percent to 2209.17 as of 3:15 p.m. in London. The Stoxx 600 Index rose 2 percent, with banks and insurers accounting for a third of the gain. The Stoxx 50 has shed 7.9 percent this year, and the Stoxx 600 is 7.5 percent lower, amid concern a war with Iraq would stall economic growth.

South Korea's Kospi index fell to a 15-month low, led by Korea Electric Power Corp. and KT Corp., after Moody's Investors Service cut the nation's rating outlook, citing the threat of North Korea's nuclear weapons program. The Kospi dropped for a fifth day, losing 0.2 percent to 575.98, its lowest since Nov. 8, 2001, at the 3 p.m. close in Seoul.

Treasuries
The bond market initially declined following Greenspan's testimony, but bin Laden's new comments triggered a rebound in assets considered to be safe in times of uncertainty. The yield on the 2-year Treasury bond was unchanged at 1.15 percent and the yield on the benchmark 10-year bond was dipped 0.02 percentage points to 3.96 percent.

Copyright © 2003 Scott Middleton
February 11, 2003

Dow chart courtesy of stockcharts.com

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[dtel]

Market Wrap-Up is delivered.

Up, down, in, out, light, dark, does it ever change?

Does it ever matter?

[AdamSelene235]

Thanks, dtel.

From the GSE front:

Greenspan: Strong GSE Oversight Wouldn't Hurt Borrowers Tuesday February 11, 2:40 pm ET

WASHINGTON -(Dow Jones)- Federal Reserve Chairman Alan Greenspan told lawmakers Tuesday that proposals in Washington to beef up the oversight of Fannie Mae and Freddie Mac wouldn't significantly effect mortgage rates.

Greenspan, who was testifying before the Senate Banking Committee, was responding to a question from Sen. John Sununu, R-N.H., asking whether the Fed chairman supported Securities and Exchange Commission oversight of or involvement in Fannie and Freddie. The companies were created by congress decades ago and given special perks as government-sponsored enterprises, or GSEs.

Lawmakers in the House have advocated for legislation that would completely repeal the companies' many exemptions from federal securities laws.

Greenspan said, "these are legally private corporations and should be handled the way private corporations are handled."

Although Greenspan wouldn't comment on specific legislative or regulatory proposals, critics took his comments as an endorsement of the House bill, which is sponsored by Reps. Christopher Shays, R-Conn., and Edward Markey, D-Mass.

"To us (Greenspan's testimony) calls for the basic question as to why they are treated differently to begin with," said Mike House, executive director of FM Watch, a coalition of competing mortgage finance companies.

Fannie and Freddie agreed in July to give up some of their federal perks and begin registering their common stock and filing financial disclosures with the SEC early this year. They additionally agreed this month to enhance their mortgage-backed securities disclosures as recommended in a report released last week by the SEC, Treasury Department and Office of Federal Housing Enterprise Oversight.

However, Greenspan said that the companies' effect on mortgage rates is negligible enough that any change or increase in their oversight wouldn't significantly impact mortgage rates or the secondary markets. The companies had vehemently fought increased SEC oversight on the grounds that it was a "tax on home ownership."

Greenspan reiterated his stance that Wall Street's presumption that the federal government would bail out either company in a crisis "effectively enables them to sell mortgages at a number of basis points below what the market would otherwise be."

However, Greenspan said, "as best we can judge, it is a very small number. So I'm not at all convinced that many of the proposals really make all that much difference to the secondary mortgage market or to the level of mortgage interest rates to the American public."

Fannie Mae and Freddie Mac officials didn't immediately return calls for comment. (Probably too busy swearing)

So, if they don't significantly affect the price of mortgages, why are they given exemptions from SEC regulations. Why do they have a credit line to the Treasury. Why have they been allowed to accumulate more debt that the publicly held Treasury debt...Huh, smart guy??

[steveegg]

Up, down, in, out, light, dark, does it ever change?

Does it ever matter?

No and not unless you're exposed in the market.

[Steven W.]

Frankly, I'm surprised they're publishing today. I figured they'd be among the first to run down to Home Depot to pick up their plastic + duct tape (the sky is falling!)

[AdamSelene235]

Is it just me or are the telcoms starting too look attractive? Any thoughts on Corning (GLW) and JDSU ?

Thoughts on Applied Materials (AMAT) ?

Thoughts on Pfizer (PFE)?

When "it" hits the fan, the aforementioned might plunge to decent prices.

Also bullish (gasp) on Entergy (ETR) but I've always loved nuclear energy. ETR has divs, trades at book, runs a number of solid reactors and is actually interested in doing serious R&D in the reactor/hydrogen field.

What to do with oil trusts like BPT. Bail in the middle of the war? Hold long term? Any opinions on propane. SPH? No my account has not been hacked, I also am accumulating physical silver.

[dtel]

If duct tape and plastic wrap are what it takes to survive,
The Rednecks shall rule the Earth.

[Cicero]

I think the bear market has another couple of years to run. But what do I know?

[top of the world ma]

Thanks for the pings. Always appreciated!

[AdamSelene235]

I think the bear market has another couple of years to run. But what do I know?

I agree...but it won't be monolithic.

[dtel]

The telecoms will start to look attractive when highly-motivated, over-qualified people like myself, start msking the big bucks again.
It is picking up, but we are not even close ywt.
IMHO

[AdamSelene235]

JDSU has 1.3 billion in cash, no debt , 840 million in sales with increasing profitability vs a 4 billion dollar market cap. Insiders are buying.

GLW is not in as good of shape, but insiders are buying like mad.

PFE has 50% ROE !!

I still expect a dollar crisis, terrorism, etc, but just because you keep gold bars stashed away in a remote mountain cabin doesn't mean you can't go equities shopping now and then.

[steveegg]

JDSU has 1.3 billion in cash, no debt , 840 million in sales with increasing profitability vs a 4 billion dollar market cap. Insiders are buying.

Sounds like something to take a flyer on.

[Marianne]

Still no "joy in Mudville".

[arete]

Good read whenever you have a minute. Pretty much sums up our current situation.

Message Board

Richard W.

[B4Ranch]

http://stockcharts.com/gallery?JDSU

I don't see any movement in JDSU, except to follow the market down.

[Free Vulcan]

Despite a down day, volume was much heavier on the upswings. Nonetheless, the day high completed what looks like a consolidation pattern that from the break out looks like about a 800 target area on the S&P.

If we end there then we would be in what looks like an inverse head-n-shoulders type situation, if it holds. Volume is lower than the last two bottoms making it seem a likely bottom. If it does break thru, look out below.

[Prolifeconservative]

If enough people panic and buy plastic and duct tape, by golly, we can get this economy moving afterall.

[razorback-bert]

All of you people that don't read Doug need to do so. He so nicely explains the oncoming freight train and what occurred to create this bubble in the first place. A guy named Bentson also wrote a pretty simple article about what we should see going forward.

I have been looking at charts and things like Japan and it occurs to me we likely see a low of 2300 or lower on the Dow before we are done. Japan went to 20% on their bubble and we all know they might not be finished going down yet and I believe ours was at least as inflated as theirs was on the top. Plus they had the rest of the world in a stock boom during the 1990's, easy Fed money and other components to ease their fall. Prechter has said Elliott Wave Principal states we fall into the 1000 and under area before we are done, possibly below the bottom made in the 1970's. We have already penetrated the low made in 1998 and for that matter October 1997 in the S&P and are below the October 97 low presently. I believe that means we fall to the next level down as a requirement, which is around 600. With all the potential for economic disaster in the debt market and what is happening to the savings of Americans, I believe corporate America has a rough road ahead of it and I can see the potential of there not being 500 companies to warrant having an S&P 500.

What Noland wrote last week was stunning. In this article he prints quotes from a report released from a Federal institution that goes into detail what might happen if FNMA or FHLMC(I think if one falls both fall) runs into crisis. The report was given to Congress on February 4th and the director of the institution was immediately replaced by the Bush Administration. Today is Feb. 11th so you can see the kneejerk that followed this disturbing news coming out of DC. The report is linked on Nolands site and it is over 100 pages long and contains some interesting links and references. It is probably a weekends of reading if you look at the links, which access central banking organizations around the world.

Does anyone here believe that in the 1990's government economists didn't think we were going to have trouble once this mania ran its course? I believe that anyone that has a strong economic history background would have to know we were headed for trouble. CSCO sold for over $600 billion as did INTC, MSFT and GE. These 4 companies approached in value the entire market cap of the market when we had the 1987 crash. Clearly INTC and CSCO were $500 billion (half trillion dollar) errors in value. MSFT was likely close to $400 billion or more in error and heaven knows what GE was, due to the massive gains they were making doing business in the mania. Throw in probably a dozen worthless telecom and broadband related outfits that sold for over $100 billion that had no long term worth and you start getting around $4 trillion for a few companies that quite clearly now are worth on the south side of $1 trillion. But, the call from Wall Street was buy more before it goes up.

So, the Bush administration shoots the messenger that brings potential bad news for the 2 institutions that have kept this economy from falling into a depression. This isn't a reflection on the Bush administration, but a reflection on government itself. Robert Rubin came out of Goldman Sachs just in time to bail out Mexico where his operation not only had massive investments, but I suspect created the crisis in the first place, taking the funds out of the country. This man clearly knew economic history and one would think he and Greenspan would have gotten together in stopped the bubble. But, all things came together where the private sector financed government spending and removed the deficit for a couple of years under the delusion that it had gone away. Government could pat itself on the back, but the deficit was a convergence of a lot of issues that began long before Clinton or the Congress at that time, the main one being the government finally slowed spending enough that an artificial boost in revenues was sufficient to catch up with spending temporarily. One who knows how credit works didn't swallow that news, as the debt has no mathematical solution. A long running surplus in a country with the structure of the US economy would collapse the private lending of the country and of course result to a return of even larger deficits or national bankruptcy. All the players knew this, but the American people bought the news and paid half trillion dollar premiums, if not higher for some of the high flyers. With money like this floating around, of course it was in the best interest of corporate insiders to play the game and inflate their profits by any means possible.

If one looks at the private sector deficit for the years the government ran a surplus, they can understand how the surplus came about. Artificially high, leveraged financed expansion of what we are going to see looking back was nonproductive assets. You can easily recreate the assets of GM, if you don't have to create the associated names with them, for under $100 billion. We sunk trillions into the internet and cellphones, which I admit serve to make the fringe more productive if used correctly. But, we didn't build any productive capacity to use these products to make more productive. So, are we stuck with products that can only make the industries that make them more productive and the associated paper companies like insurance, finance and accounting, which do nothing but count the beans associated with these products?

Bentson wrote an article, I believe was titled Long Winter. It is a simple read and he covers a lot of bases that relate to this debt bubble. In it, he mentions the war and how the government could stimulate production, but he also states it will not be enough to replace what is lacking. Of course it will, as we are going to take what we produce out of the war and blow it up, a total loss. He also mentions falling tax revenue, which I feel isn't totally linked to falling incomes, but in some ways a tax cut enacted last year. This is the best method of keeping money in the system, as the government never gets it.

What I believe the government knows and is reluctant to let us know (see above replacement of the messenger about FNMA/FHLMC)is the debt in this country is in danger of flying into a million if not a billion pieces. I propose that if Bush hadn't cut taxes yet or should I say failed to get a tax cut when he came into office, we would already be in a full depression. The government is financing the bubble with their paper instead of ours, hoping to buy time to let the air out of it. The reverse, of course is happening as people are now borrowing to hold on. My contention for deflation is the forces that are gobbling up these revenues are greater than the ability of the government to prop it up and the credit system will soon fail to produce new credit. The entire system is credit, including the money we pass around, which unfortunately is secured by credit, the entire money supply being owed to the Federal Reserve (for people that don't understand where we are as a republic, one only has to look at what Roosevelt and the Fed pulled off in 1933, whereas we went from the Fed owing us gold for the currency to us owing the Fed the currency for the US debt on deposit there). The mathematical solution to such a problem is bankruptcy. It was in the 1930's and will be today. The government has already pulled the switch in the 1930's and again in 1964 and 1971 or 1972 when Nixon closed the gold window. I don't know what they do other than attempt to wipe out the debt totally, lest we all go bankrupt, but it looks like the solution for the present is more of the same. Interest on the over $30 trillion in debt we have has to be running at around 30% or more of GNP and once it ceases to expand, we are going to develop an animal that consumes all. I doubt the Federal Government can run deficits greater than its current spending to keep this system from collapsing and can only hope to manage liquidation down to a reasonable figure, through gradual default.

What was missed by many in the 1990's was bankruptcies never really declined and delinquencies on mortgages were around historic highs. The credit structure has been in trouble for some time and it became big business to lend marginal debtors more money. With big fees and the ability to liquidate high yield paper at low yield prices on the other end, why not? But the time to pay the fiddler is coming.

For you that don't read Noland, I would start if I were you. He is somewhat complex, but if you keep reading what he puts out, stuff will start to sink in. I am educated in Finance, but I was totally unaware what had transpired in the credit markets for the most part over the past 15 years or so, except to say I kept getting dozens of credit card apps in the mail and most of them were loaded or should I say unilateral contracts, where the terms almost entirely favored the credit creator. Low payments and high fees to keep the borrower trapped and needing more and more credit. Doug states how the fact we are needing credit at an accellerating pace at low economic growth is fueling a collapse. Maybe we get up and walk one more mile up the hill, but Greenspan and the Bush tax cuts and the war will at best postpone the inevitable.

For those of you that are trying to figure out where to buy this market, except for a rebound trade, there isn't a place to buy the market. Americans are hopelessly trapped by their dreams of early retirement. Many are going to be deluded by the seemingly low prices available in comparison to the highs we saw in 2000, but those numbers were all a dream. The debt pyramid is too large for us to escape for long and any recovery will be short lived. Those that are buying gold have a good idea, regardless of what the price of gold does between now and collapse, as long as they don't need to prematurely liquidate it. I am not sure we are in a long bull market in gold at this time, as I think the credit generated to buy gold at these prices is likely to disappear. Without credit, there is likely to be selling or liquidation to follow this run up, so if you are heavily invested in the yellow metal, be sure you also have plenty of cash reserves. I don't know if you can put a price on gold once they have to blow up the credit based money, but what happens in the meantime could be anything. I would without a doubt, if I had the money own enough current price gold to live for a year, meaning I would own a years living expenses in gold at current prices if I could. We might find credit so hard to get you will have to have something to spend to live. Survival is more important than getting rich in these time.

[razorback-bert]

I brought it over to read in larger font.