Market WrapUp (01-28-04)

Financial Sense Online ^ | 1/28/04 | Mike Hartman

[arete]

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Today's WrapUp by Mike Hartman 01.28.2004  Mon   Tue   Wed   Thu   Fri   Archive

Mr. Greenspan Speaks

It is always fascinating for me to see all the players in the market jockey for position prior to announcements or speeches from the U.S. Treasury, the Labor Department, or any other entity that influences the financial markets. Today everything has been drifting sideways in anticipation of the remarks from Federal Reserve Chairman Alan Greenspan. Throughout the morning and early afternoon stocks, bonds, and the U.S. dollar have remained very slightly in positive territory, however the dollar has dipped the line a few times. With about a half-hour to go before Mr. Greenspan’s statement the Dow Industrial Index sits at 10,615 and the NASDAQ at 2,120. Treasury bonds are up about 0.5% and the 10-year note is up by 0.3%. Commodities were tame in the early morning hours, but have increased in volatility as the day progresses. Right now the markets seem to be pricing-in expectations of continued stimulus from the Fed due to weakness in employment and excess capacity in manufacturing, along with the notion that they see “no signs of inflation.” Now we wait to see if anything significant has changed in the Fed’s outlook, and how market prices will react to the statements.

The Federal Reserve announced they would leave interest rates unchanged, however some of the rhetoric regarding future interest rates was changed ever so slightly, and that minor change put all the traders into action. In prior statements the Federal Reserve has said they could leave rates unchanged for a “considerable period.” In today’s statement they rephrased it by saying they could be “patient with raising interest rates,” but removed the “considerable period” portion of the phrase. Market participants read this as a sign that perhaps the Fed is laying the groundwork for higher interest rates in the near future. The stock market did not like the prospects of higher rates. Within 15 minutes of Greenspan’s statement the Dow Industrials dropped 100 points and the NASDAQ shed 20. Treasury bonds sold-off in a big way reflecting expectations of the higher interest rates in the not so distant future. The dollar strengthened with implications of higher interest rates. It just doesn’t look right when I see stocks down, bonds way down, and the dollar way up. Who the heck is buying dollars when stocks and bonds in the U.S. are headed lower?

The way I see it, the bond market over-reacted with the strong sell-off, because I don’t believe the Feds will raise rates soon. Once the initial reaction has settled, I believe money will move back into bonds due to economic weakness and money will come out of the stock market seeking a safer haven. Since the Fed statement, nothing has really changed. We need inflation more than any other country because we have more debt than all the other countries. The Fed has always said they will err on the side of inflation, or worded differently, the Fed is determined to devalue the U.S. dollar. We simply have to pay our debts back with dollars that aren’t worth as much. The global problems that our foreign friends are having stem from the fact that the dollar has fallen too far, too fast. I suspect we could stay close to the current currency exchange rates for a few months to allow importers and exporters in all countries to absorb the dramatic changes in currency valuations. The rhetoric from the Federal Reserve today implying higher interest rates worked to slow the decline of the dollar without actually doing a thing. I suspect currency exchange rates will be less volatile over the next few months. The meeting of the G-7 nations next week will probably be centered on stabilizing the foreign exchange market to decrease volatility.

In the News

The economic news today wasn’t very good. Durable goods orders were expected to gain 2% in November, but the report shows orders to be flat versus the prior month. Weak durable orders imply that corporations do not need capital expenditures, therefore economic stimulus from corporate spending will be subdued moving forward. Another very negative economic development is starting to happen in housing. For the month of December new home sales were expected to increase by 1.7%, but the Commerce Department reported today that new home sales actually declined by 5.1% - a big surprise. Capital spending could slow even more from corporate America, and it will be difficult to keep consumers in the game with weakness in employment and without cash-out re-financing to buy the big ticket items. If the markets are correct today that interest rates will be going higher in the near term, it will put even more pressure on new home sales. In November new home sales declined 2.8%, then declined 5.1% in December. If this is the beginning of a trend, it’s headed in the wrong direction if we are looking for economic improvement.

Commodities and Precious Metals

As I mentioned earlier, most commodities were very quiet in the morning hours, but once the Federal Reserve implied higher rates, the dollar strengthened and commodities were slammed. The grains took the biggest hit by falling 1% to 4% followed by the “softs” with cocoa and cotton down 4%. Crude oil dropped below the $34 mark to close at $33.68 per barrel and the metals were firm throughout the trading session. Platinum and copper were strong all day as were gold and silver…until the Access Market opened. The gold and silver trading pits close early every day since they don’t want to see too much exposure for an alternative to the dollar.

In the past when a senior official was preparing to make a statement, the short interests in gold and silver would get heavy handed and drive the prices down just to make sure everyone understands who is in control. In the first hour of trading, the shorts tried to take gold and silver down, but could not overpower the buyers to force further liquidation in the metals. This is a significant difference from just a few months ago. The best the short interests were able to accomplish today was to keep a lid on a price explosion in the metals. They have NOT been able to manage the prices lower! I believe the mission for the commercial bullion banks has changed from “punishment” for the precious metals longs to “containment” of a price explosion. Do not lose heart if you are invested in gold and silver. The temporary price suppression in the metals is only acting as the proverbial “coiled spring” that continues to build pressure before the next upward thrust. The fundamentals in gold and silver should make any investor fearful to go short the metals. When the shorts try to cover they will drive the prices higher…they are boxed in a corner, especially with silver. Hey, Ted Butler, if you’re out there…this could very well be your “800 pound gorilla.” You will be vindicated! If you are not intimately aware of the silver happenings, there is a tremendous amount of speculation that the March silver contract is going to be “squeezed.” I sincerely hope the shorts get crushed! If not in March, I will be there when the explosion happens!

Spot gold closed strong at $414.60 with spot silver also powering out at $6.60. As soon as the Access Market opened, gold was taken down by almost $5, but held at $410. Simultaneously, silver went down ten cents in the after-market. Staying long in this market will clearly require some thicker skin. After today’s action I am expecting an attempted takedown tomorrow morning, but I will hold all long positions.

Fuel for the Fire

By the closing bell, the Dow Industrial Average fell by 141 points or 1.3% to close at 10,468 and the NASDAQ Composite dropped 38 points or 1.8% to close at 2,077. Every major sector and broad index is bleeding red ink today, except for the Dow Jones Utility Index which posted a gain of almost 1%. Treasury debt was lower across all maturities with the 10-year note falling 0.9% which moved the yield from 4.08% to 4.19%. I have my doubts that this trend of rising interest rates is going to last. If the cost of debt service goes up significantly, you can kiss an economic recovery goodbye. In the end I believe the powers that be would like to see a lower dollar, however in the near term stability is needed for the global system to absorb the dramatic changes in valuations. In the near term they will “talk the dollar stronger” rather than actually having to raise interest rates. I do not believe the Federal Reserve will raise interest rates by choice. The day will come when bond buyers begin dumping Treasuries because of a falling dollar (inflationary pressures). When that day comes, the bond market will force the Fed to raise rates. In the meantime, the powers that be will continue in their attempt to extinguish the fires by pouring more gasoline on our fiat paper dollars!

I hope you have a great evening!

Mike Hartman

Copyright © 2004 All rights reserved. Michael Hartman Technical Analyst & Market Commentator Bio Email Commentary Archive

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[arete]

The way I see it, the bond market over-reacted with the strong sell-off, because I don’t believe the Feds will raise rates soon. Once the initial reaction has settled, I believe money will move back into bonds due to economic weakness and money will come out of the stock market seeking a safer haven. Since the Fed statement, nothing has really changed. We need inflation more than any other country because we have more debt than all the other countries. The Fed has always said they will err on the side of inflation, or worded differently, the Fed is determined to devalue the U.S. dollar.

The economic news today wasn’t very good. Durable goods orders were expected to gain 2% in November, but the report shows orders to be flat versus the prior month. Weak durable orders imply that corporations do not need capital expenditures, therefore economic stimulus from corporate spending will be subdued moving forward. Another very negative economic development is starting to happen in housing. For the month of December new home sales were expected to increase by 1.7%, but the Commerce Department reported today that new home sales actually declined by 5.1% - a big surprise. Capital spending could slow even more from corporate America, and it will be difficult to keep consumers in the game with weakness in employment and without cash-out re-financing to buy the big ticket items.

In the past when a senior official was preparing to make a statement, the short interests in gold and silver would get heavy handed and drive the prices down just to make sure everyone understands who is in control. In the first hour of trading, the shorts tried to take gold and silver down, but could not overpower the buyers to force further liquidation in the metals. This is a significant difference from just a few months ago. The best the short interests were able to accomplish today was to keep a lid on a price explosion in the metals. They have NOT been able to manage the prices lower! I believe the mission for the commercial bullion banks has changed from “punishment” for the precious metals longs to “containment” of a price explosion. Do not lose heart if you are invested in gold and silver. The temporary price suppression in the metals is only acting as the proverbial “coiled spring” that continues to build pressure before the next upward thrust. The fundamentals in gold and silver should make any investor fearful to go short the metals. When the shorts try to cover they will drive the prices higher…they are boxed in a corner, especially with silver.

Nothing has really changed. Today, the FED threw the ECB/Germany a bone to keep them quiet and prevent them from resigning from the global central planning club.

Richard W.

[arete]

Market WrapUp is Delivered!

Other interesting articles and links --

US budget agency: Govt debt cap to be hit July-Sept

John Law

The Bear's Lair: Drowning in liquidity

Boomtown China: Opportunity and Crisis

Perpetual Debt: From the British Empire to the American Hegemon

Today, Roger Arnold discusses Japan's threat to turn their currency reserves into gold.

The Roger Arnold Show

Richard W.

[AdamSelene235]

Geez, 140 points, not for a mention of a rate hike but a failure to say there wouldn't be a hike.

Makes you wonder what a couple years of Volcker style policy would do to the markets, huh.

[Orangedog]

Sounds like the Germans may have buyer for all that gold they want to sell. Oh well. Fools and their gold were lucky to get together in the first place.

[Orangedog]

Makes you wonder what a couple years of Volcker style policy would do to the markets, huh.

Not to mention that we'd be paying somewhere in the neighborhood of $1 trillion a year just to service the national debt. Especially since the rocket scientists decided to finance the bulk of that debt in shorter term instruments.

[arete]

Geez, 140 points, not for a mention of a rate hike but a failure to say there wouldn't be a hike.

You know what? -- The whole Greenspan/rate hysteria is just an excuse. Today was overdue. The big traders teed up the sheepsters on Monday knowing that they would cut them off at the knees today.

Richard W.

[arete]

Sounds like the Germans may have buyer for all that gold they want to sell.

You must have listened to Arnold today. Japan is just making noise -- everyone is making noise. Can't keep the global centeral planners quiet as a matter of fact.

Richard W.

[ex-snook]

This guy must see something in his crystal ball.

Editorial 2/2/04
By Mortimer B. Zuckerman • Editor-in-Chief
Guns, butter, and hubris

How do you stop a runaway elephant? If words could do it, particularly words from the Republican camp, there might just be a sliver of hope of reining in what the Wall Street Journal describes as "the most profligate administration since the 1960s." Reaching back to his Navy days for a more colorful metaphor, Sen. John McCain says, "I've never known a sailor, drunk or sober, with the imagination this Congress has." The omnibus appropriations bill just approved, covering seven of the 13 spending bills Congress was supposed to complete months ago, is well and truly dubbed "a pork-laden monstrosity" (by Club for Growth, a political action committee). "Grotesquely stuffed with pork," echoes the Washington Post. The federal budget, declares the investment firm Goldman Sachs, is, quite simply, "out of control." And the beat goes on.

What we have here is nothing short of fiscal disaster. America has gone from a $280 billion surplus when George W. Bush was inaugurated to $500 billion annual deficits as far as the eye can see. And those deficits would be $100 billion higher if the government wasn't raiding the Social Security surpluses now treated not as a lockbox but a candy jar. These numbers understate the scale of the spending binge because historically lower interest rates have sharply cut interest costs on the $3.9 trillion federal debt.

Disarmament. Most critically, the $5.6 trillion surplus once estimated for the first decade of this century is now projected to be a $5 trillion deficit. So what? Vice President Cheney is reported (by former Treasury Secretary Paul O'Neill) as saying that President Reagan proved "deficits don't matter." They do. And they will do just what they did back then, which is to crowd out private investment, raise interest rates, and slow economic growth to the point where our legacy to our kids will be lower living standards.

President Bush, who has not vetoed a spending bill in three years, has fractured the fragile bipartisan consensus of the late 1990s to dedicate the surplus to reducing debt. Now there is no pretense of fiscal discipline. We do not choose between guns and butter; we have guns and butter and tax cuts. This is the first war where the president and Congress seem totally unwilling to sacrifice. It is the equivalent of fiscal disarmament, and it will compromise our ability to respond to problems at home and abroad.

The Bush team defends the excesses by pointing to higher productivity (hardly the result of the Bush years) and increased profitability, as well as the higher stock market, all of which will increase federal revenues. But their claim stands economics on its head. Why? Because larger long-term deficits can lead only to reduced private capital spending, higher interest rates, and increased indebtedness and interest costs to foreign creditors.

In happier times, the GOP was the party of hard money, balanced budgets, and a shrinking public debt. Back then, it was Democrats itching to prime the pump with deficits while blithely ignoring the size of the debt. Now the roles are reversed. And the public has noticed. In a Wall Street Journal/NBC News poll last year, 64 percent disapproved and only 29 percent approved of tax cuts as the best way to improve the economy. In a CNN/Gallup/USA Today poll last September, 74 percent said a candidate's position on the deficit would be taken into account this year. By a whopping 60 to 21 percent, Americans said they would reduce the deficit by canceling some tax cuts, rather than spending less on health and education. And now, in a Pew Research Center poll this month, 51 percent call the deficit a top priority for Bush and Congress. All of which would seem to give Democrats a major issue, especially as Bush proposes to make the tax cuts permanent, at a cost of $1.7 trillion added to the deficit over the next decade.

The public will be even more outraged to discover that in the next spending bill, total discretionary spending soars to more than $900 billion, compared with $649 billion in 2001, the last of the Clinton-era budgets. These increases cannot be blamed on the war in Iraq. The 18.6 percent increase in nondefense discretionary spending under the last Congress is the largest in decades. Dozens of special programs got more money. Agricultural support (for big agribusinesses mainly) is up approximately $50 billion over the decade, while projects earmarked for specific congressional districts (that is, political pork) have quintupled to almost 10,000, at a cost of $23 billion.

Our politicians are so focused on the next election they don't seem to care about the next generation. If the war cry back in 1992 was "It's the economy, stupid!" this year it seems to be "It's politics, stupid!" Only it should say, "It's stupid politics!"

 

[Soren]

I think this explains why the bond market is so sensitive to any indication short term rates may rise (from another article on FinancialSense):

What's happening here is that the "carry trade" is continuing to be exploited by "hedge funds," and other bond fund managers due to the "Fed's" promise to keep the short end of the yield curve down. The long end of the yield curve remains low because these fund managers are selling the short end of the yield curve and buying at a leveraged rate of about 3:1 of the mid-to-long end of the yield curve. Why? Because this practice of selling the short end (borrowing at 1%), and buying 3 times the amount of the 5-year notes has been yielding roughly 19%; this outperforms stocks!

The danger of this practice comes in the quick unwinding of these positions brought on by scare of a rise in interest rates, or a decline in rates overseas rates by the "ECB" as was whispered on Friday, and which contributed to the sell off in the bond market.

[Cicero]

Gold was pretty wild today. It went up big in the Comex, and has fallen off a cliff in Asian trading since then. But the HUI, which was up in the middle of the day, also went negative, and I think shares will now lead gold down intermediate term. This was probably the last chance to get out unless people want to hold on for the next leg up 3 to 6 months from now.

I rather foolishly made a short term trade, buying gold shares on Monday and selling them back today for a tiny profit. I was kicking myself for selling at 11:00 this morning instead of waiting an hour longer, but when I saw what happened later in the afternoon I was delighted to have escaped.

[arete]

Thanks for the article. Pretty scary stuff.

Richard W.

[Orangedog]

Roger was spot-on with his assessment on Japan buying gold. and everything else today. Especially the corner that Japan has painted itself into with the dollar. They must have borrowed the paint and brushes from the Fed. Kinda seems funny now, how they used to scold us for our national debt. Now they own a good chunk of it and spend an amount equal to our deficit just to keep the Yen down.

[montag813]

It just doesn’t look right when I see stocks down, bonds way down, and the dollar way up. Who the heck is buying dollars when stocks and bonds in the U.S. are headed lower?

Uh, has this guy ever heard the term "short-covering"?

[Starwind]

In today's statement they rephrased it by saying they could be "patient with raising interest rates," but removed the "considerable period" portion of the phrase. Market participants read this as a sign that perhaps the Fed is laying the groundwork for higher interest rates in the near future.

Note the subtle distinctions in the number of letters in considerable period versus patient - 18 letters versus 7 - nearly a 2/3 reduction!

Voila! the selloff in bonds and stocks due to the Fed adopting a 7-letter bias in it's language.

Watch now in future language how the Fed will maintain the new 7-letter bias but will replace "patient" with "prolong" to reassure the stock markets, but then "prolong" will be replaced with "persevere" to calm the bond markets (bond vigilantes require more letters to be calmed as they can generally read bigger words).

When they get around to "punt" - then worry.

[arete]

This was probably the last chance to get out unless people want to hold on for the next leg up 3 to 6 months from now.

Most of the correction in the miners is over, IMO. Maybe not much up prospects for now, but from March on they should be recovering. I'm not going to lose any sleep over it. Still buying physical silver. The government is on a spending and debt binge -- that's all I need to know.

Richard W.

[montag813]

If the jobless claims and GDP data are stong this week, we will see 4.5% yields on the ten year by Friday, perhaps 4.75 next week, and panic will ensue. Meanwhile people keep financing homes they could not normally afford with cheaper ARMs, as if rates will stay at 45-year lows forever.

[dalereed]

"In November new home sales declined 2.8%, then declined 5.1% in December."

As i've said before, developers are always at least 6 months behind the curve and the lucky survive and the unlucky go bankrupt with banks holding unsalable buildings.

[Orangedog]

Got out of the WHT that I bought at $2.76 for $2.81. It covered my round trip fees on the trade. Keeping my powder dry for the next shakeout.

[arete]

Meanwhile people keep financing homes they could not normally afford with cheaper ARMs, as if rates will stay at 45-year lows forever.

That would seem pretty risky right now. Greenspan's forever won't last much beyond the election, IMO.

Richard W.

[Soren]

The vertical spike in the dollar today looked like short covering to me too.