Weekday Commentary from Jim Puplava
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Still Looks Like a Bear Market for the S&P
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Storm Watch Update 3/22
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Jim Puplava's NEW Perspectives Series Market WrapUp for the Week
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Tues day's Stock Market WrapUp
Lessons From the World's Greatest Stock Trader
The great stock market speculator, Jesse Livermore, once observed, "Nothing ever changes in the market. The only things that change are the players, the pockets, and the memories. The new players have no memory of the previous cycles, because they have not experienced them." 1 Livermore was astute enough to discover there were two demons that controlled the market--greed and fear. You either controlled them or they controlled you. In looking back at recent events since September 11th, it isn t hard to observe that greed is once more in control of the market. The weekly Commitment of Traders report (COT) indicated the small investor was long 102,196 contracts, which is close to a record high. This absolute bullishness corresponds with today s jump in consumer confidence. At the other end of the spectrum, the pros and commercial hedgers are bearish in shorting the stock market.
Bulls vs. the Bears
The investment public s bullishness is backed by actions of investors going back into the stock market. Money is starting to flow into equity funds again, so fund managers have new cash with which to buy stocks. The smart money commercials, on the other hand, are using this opportunity to sell stocks or go short the market. It looks like the pros may end up wining the battle. Chart patterns of both the Nasdaq and the S&P 500 show nothing more than a bear market rally that has been marked by short buying climaxes in select big cap stocks, causing the major indexes to rally. This is confirmed by overall sentiment that is also running high with advisers who are also on the bullish side of things. The public is buying the recovery scenario, believing that now is a good time to buy stocks, ignoring the fact that market valuations are at extremes and that earnings keep deteriorating. Unfortunately for individual investors, it is going to be a painful experience that will have to be relearned. As Livermore once said, "Nothing ever changes in the market."
Livermore made and lost a fortune playing against the market. The only time he ever lost money was when he violated his own rules. He observed, "It was never what the brokers, or the customers, or the newspapers said--the only thing that was important was what the tape said." He also noticed that the tape pronouncements very rarely matched up with what brokers or customers were predicting. The tape, or the market, had a life of its own which rendered the final verdict on the market.
Investors must now choose between the two. Wall Street is telling investors there is a recovery coming in the economy, followed by corporate earnings. The market may signal a different conclusion contrary to Wall Street and Washington s best wishes. In viewing the charts above it is clear the markets are still in the clutch of the bear. It is also clear that Wall Street and Washington are willing to use every means at their disposal to keep that bear trend from accelerating by lowering interest rates, injecting liquidity into the financial system, spending money and running budget deficits, to propping up the markets by going into the futures markets and buying stock indexes. So far the battle may have come to a draw. Stock prices seem to be locked into a narrow trading range, or channels, as they are called.
But officials in Washington and on Wall Street have a problem. How can they maintain confidence amidst a war, mounting layoffs, falling corporate profits, accounting scandals, and record debt? The answer everyone believes is the stock market. It has become the key leading indicator of economic health. As long as the Dow holds, everything will be all right. In their position paper # 641 (thank Claus for this one), Fed analysts stated, " if short-term Treasury rates are at zero and the economy is floundering, credit risk premiums could be quite high (this has already happened). If these risk premiums are holding back an economic recovery, the central bank could potentially unlock credit flows and jump start the economy by taking this credit risk onto its balance sheet, for example, through purchases of private sector securities." This seems to be foremost on the minds of Fed officials as stated in the minutes of their January meeting. In that meeting, as I covered yesterday, the Fed contemplated monetizing the entire financial system, either through the purchase of stocks and bonds, or real assets such as mines and real estate. This is a rather frightening thought if one ponders the implications of such an act.
The stock has become the key economic barometer to follow. You can line up the consumer confidence graph along side a graph of the stock market and they run parallel. The key going forward, therefore, is to understand what might happen next and to follow the Dow. If the Dow is up, consumer confidence and the economy are up. If the Dow goes down, consumer confidence and the economy go down. The Fed has been able to stabilize the markets and arrest a decline in the economy. But now the Fed has a problem with commodity prices, which are starting to rise, especially in gold and silver. Even more spectacular has been the rise in gold and silver stocks. The major gold indexes are up close to 90% over the last 52 weeks. If the Fed is going to maintain confidence it must suppress the price of gold and silver. It has been able to keep a lid on prices by select moves into the market, orchestrated by bullion banks. But someone big is quietly accumulating. Someone has been willing to accumulate and go against the commercials that are net short. At the moment that someone isn t yet known. It reminds me once again of Jesse Livermore, whose biography I just read last night. When Livermore made his famous moves they were done without broadcasting them. He moved silently and accumulated quietly until his positions had been fully accumulated. Then he waited patiently for his assumptions to be proven correct. His three famous rules on trading are visible now in the precious metals markets: First, decide on the overall direction of the market. Second, develop a buying strategy. Test and probe the markets. Third, be patient and wait for all the facts.
It is obvious to me after looking at the movement in metals stocks and the rise in the price of metals that someone is testing the markets. A decision has already been made, a strategy has already been employed, and patience is being tested. One more Livermorism, Jesse realized when it came to the market, it is what people actually did in the stock market that counted---not what they said they were going to do. This truism may also be applied to the field of economics. Consumer confidence may be up which tells you what people are feeling at the moment or what they might do. On the other hand, the drop in durable good orders fell in February if government defense spending and transportation is excluded from the reports. Excluding government and transportation spending durable goods actually fell 1.3%. The sale of resale homes also fell by 2.8% last month. It could be that just as Livermore observed nearly 70 years ago, what people say and what they do can be two entirely different things.
Consumer and Government Debt
The one problem consumers have is the same problem corporations and government have, which is debt. Indebtedness by consumers and businesses is the nation s number one problem, and could present a problem for the Fed later on this year if it needs to raise interest rates to keep foreign money flowing into the country. That may be why in today s speech Fed Governor McTeer says that the Fed is no hurry to raise interest rates. The assumptions used for economic recovery are all based on the willingness of consumers and corporations to take on more debt. We know the government is willing to take on this task, but the government has an unlimited budget. What it can t raise in taxes can be raised by printing money, which it is now doing. It remains a question if this task of borrow and spend can be kept up indefinitely by business and consumers.
The earnings game has been dealt another setback in confidence. Today the SEC accused five former executives in Waste Management of fraud by inflating the company s profits by $1.7 billion. The SEC lawsuit was filed in a federal court today in Chicago. Waste Management was an Arthur Andersen client during those years. The suit claims executives at the company manipulated earnings results from 1992-1997. The SEC is also expanding its probe into Network Associates by looking into whether the company improperly booked revenue in 2000. The profit miracle was so widely hailed during the 90 s but turned into a mirage, a product of fraudulent accounting practices.
Today's Markets
Markets got a boost for the first time in a week as a result in today s jump in the consumer confidence numbers. The Conference Board said its gauge of consumer sentiment rose to 110.2 this month from 95 last month. Comments coming from Fed Governor McTeer were the Fed wasn t in a hurry to raise interest rates. Investors ignored earnings warnings coming from companies and analysts, and bid up shares of chip and Internet stocks. Investors sold off shares in gold, utility, natural gas and biotech firms. Energy shares have been rising as of late with the price of natural gas and oil back above $3 and $25 respectively. The price of oil rose $0.39 to close at $25.75. Outside the rise in natural resources since the beginning of the year, the market has just meandered. Volatility is near record lows and volume has been drying up. These are important indicators showing events may soon change.
Volume was light again with only 1.19 billion shares traded on the NYSE and only 1.66 billion on the Nasdaq. Market breadth was positive by 20 to 12 on the New York Stock Exchange and by 20 to 16 on the Nasdaq.
Treasury Market
Government bonds climbed after several days of selling pressure. The 10-year Treasury note rose 14/32 to yield 5.345% and the 30-year government bond climbed 19/32 to yield 5.755%.
Overseas Market
European stocks advanced after U.S. consumer confidence climbed to its highest in seven months. The Dow Jones Stoxx 50 Index rose 6.74 points, or 0.2% to 3633.78 for a 1.9% decline this year. Benchmark indexes gained in five of Europe's eight biggest share markets.
Japanese stocks fell for a fourth day led by exporters such as Toyota Motor Corp., after a U.S. homes report raised concern signs of an economic recovery will push the Federal Reserve to raise interest rates, curbing demand for their goods. The Nikkei 225 stock average fell 0.5% to 11,207.92.
© Copyright, Jim Puplava, March 26, 2002
1 Smitten, Richard Jesse Livermeore: World's Greatest Stock Trader, John Wiley & Sons, 2001
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