Weekday Commentary from Jim Puplava
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Markets Have a Down Day Across The Board
Ned W. Schmidt |
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1.38
109.13%|
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Market WrapUp for the Week
Monday l Tuesday l Wednesday l Thursday l Friday
Tuesday's Stock Market WrapUp
Upbeat Market Fizzles with CCI Report
The market started out the day in positive territory as Wall Street and the financial media tried to put their best spin on what were dismal economic numbers. The spin was that the numbers beat estimates, which is the standard response to lousy numbers. The Conference Board Consumer Confidence Index suffered its biggest decline in June. The consumer confidence numbers closely track the stock market. The fact that the stock market has declined in 12 out of the last 14 weeks and has fallen five consecutive weeks in a row are taking their toll on the consumer. Besides seeing their net worth decrease, consumers reported jobs were getting harder to find. It is the toughest it has been in six years as more companies restructure, meaning more layoffs. When your neighbors are losing their jobs, it is hard to remain confident about your own job, much less think about going into debt and spending money. The major drop in confidence is expected to impact spending plans by consumers in the months ahead. This could lead to another dip into a recession by this fall. (Note the chart above which dramatically illustrates investor response to the CCI news.)
Housing Bubble Still Alive and Kicking
The combination of a falling stock market and declining job market does not bode well for the second half recovery scenario that everyone envisions. The only strong components within the economy are government spending and housing. Despite the drop in existing home sales last month, housing is still expected to remain strong as long as mortgage rates remain at or are below 7%. The rate on a 30-year fixed rate mortgage was 6.63% last month. Many marginal homebuyers are using adjustable rate mortgages, which are around 4%, to qualify for purchasing a home. This is keeping the lower end of the housing market strong. The average median home price rose 0.1% last month to a record $154,600 from $154,500 the previous month. Rising housing prices are helping to mitigate some of the fear in falling stock prices.
It may be a sign of the times, but here in San Diego, the real estate bubble has produced a return of the real estate guru. Many local talk radio stations now include real estate investment shows. The cable channels are starting to run more get-rich-in-real-estate programs. Buy real estate with no money down, cash flow riches and other enticements of buying and investing in real estate are making a comeback. You know it has become a bubble when the stock market people are becoming experts on real estate. On the way home yesterday, I listened to a program that disparaged stocks while extolling real estate as the road to new riches. The program sounded just like most stock investing programs during the mania days of the 90’s. The only difference was the words ‘real estate’ were used instead of stocks. How much further can this bubble go? That depends on interest rates. If fixed rates go up, buyers and mortgage lenders switch to adjustable rate loans. What is of greater concern is the rate of growth in mortgage lending to riskier borrowers. If the economy gets softer or the job market goes tougher, what happens to these marginal buyers when one spouse loses their job? That risk hasn’t been reflected yet in the housing market while it has impacted the stock of many financial intermediaries.
Missed Earnings Targets Merry-go-Round Continues
Today we had the daily dose of confidence shakers. More companies reported they would miss earnings targets. Today it was Federal Express. This is raising questions over the earnings recovery predicted to start this quarter. According to First Call, the five-quarter slide in profits was supposed to end this week. The best that can happen this quarter is the earnings on a pro forma basis remain flat. Notice I said ‘pro forma’ earnings -- actual earnings will still be negative. But that is another story in the today's world of make believe. Companies report numbers that beat estimates, analysts upgrade their recommendations; while anchors, totally oblivious to it all, will report pretend profits to the public. Day traders will react in Pavlovian fashion and bid up shares, if only for a short while, until something else distracts them.
That has been the standard prescription for each quarter. We rally, and then fade into the abyss as markets sink to lower levels. This could be the sixth straight quarter of earnings declines, and it will end up being the third year of negative returns for the stock market. However, despite ample injections of liquidity into the financial system, Greenspan & Co. have failed to resurrect the bubble in stocks much to the disappointment of penitent investors. All that has happened is the Fed has managed to create another bubble in housing to replace the stock market bubble that is now deflating. The question of "what next?" arises. The Fed is running out of bullets. In many ways, what happens is out of the Fed’s control and now rests in the hands of foreigners. What to do about the dollar and America’s growing trade deficits may be the predominant topic at this week’s meeting of the G-8 countries in Canada. There is no easy way out for the Fed or the U.S. financial markets. They are hemmed in by the dollar. If rates rise to protect the dollar, then the stock market and housing bubble deflates. If the Fed lowers rates and if the economy weakens, then the dollar tanks and interest rates rise on long-term-bonds. Neither alternative looks appealing for the economy, nor investors.
Geopolitical Positioning
There are other matters much more serious than those listed above, which are the geopolitical events that remain in the background. The present path taken by the Palestinians shows the possibility for a Palestinian State is unlikely. As long as the suicide bombings continue, Israel will never negotiate. This is something the Palestinians already know. The path taken by the more hardened groups within the Palestinian leadership indicates a much broader plan may be in the making, which would involve creating a united front against Israel in an effort to destroy and eventually occupy the country, creating a larger Palestinian State. The new Bush proposal may be designed to flush out the Palestinian leadership’s real intentions.
Below the radar screen is a "Great Game" still being played in the Middle East. At stake are not only land, but also oil. At the lowest level, we have the terrorist. Above them we have their immediate sponsors such as Iran, Iraq, Syria, North Korea and Libya. Above them we have Russia and China. The major powers are all jockeying for position in the Middle East. Each side, both West and East, are arming their foot soldiers. The East arms are Hizbullah, Hamas, al Qaeda and other terrorist groups. The U.S. is moving more troops into the region, and so are the Russians who hope to dominate the Caspian and gain a foothold in the Persian Gulf by supplying arms to Iran, Iraq, and Syria. China is there too. In fact, much of the new radar installations in Iraq come from China. In addition to the Middle East, China is supplying Pakistan with a variant of the M-11 missile, a missile with a range of 300km and capable of carrying a nuclear warhead. Last week Pakistan flight-tested three of its ballistic missiles as a warning to India of its capabilities.
Each side is making its moves to get into position. Turkey is expanding into Central Asia with U.S. encouragement as a means of countering Iran. Iran’s missile development program aided by Russia threatens not only Israel but also Turkey. Azerbaijan is also moving closer to Turkey, Israel, and Georgia as a means of countering an alliance between Russia, Armenia and Iran. There are growing skirmishes between Azerbaijan and Iran. At stake in the region are not only the rich oil resources, but also a new pipeline from the Baku through Georgia to Turkey’s Mediterranean terminal at Ceyhan. Iran and Russia oppose the new pipeline because it threatens their own. They want the Caspian oil to run through their own territories, which will mean more revenues for the state.
Reading Between The Lines
The time for diplomacy is coming to an end. The time for battle is at hand. When words don’t bring peace, armies do. There has been more than a decade of negotiations since the last war, and the region is no more peaceful today than it was a decade ago. Osama bin Laden now threatens to kill 4,000,000 Americans, and the President vows to strike before we are struck. Between the lines there seems to be something more serious at stake than the headlines reveal. Al Qaeda is hoping to create events that unite the Arab world against the West, in particular the U.S. and Israel. Bin Laden is hoping to do just that by provoking the U.S. into action from another heinous act of terrorism. Something is afoot and something big is in the making. The sound of war is in the air even as the words of peace are spoken.
That may be what the markets sense. Today’s news was no different than any other day. The disappointments in earnings and the daily scandals were still present. They are now part of the daily landscape. But the markets are in the mood to sell and fear is in the air. A recent Bloomberg poll showed that the number one fear in the country, at least among the rich, is terrorism. Turn on the news and what do you see? If it isn’t the Middle East, it’s Pakistan and India, which is the only news shown to you. Below the surface is much more that is never shown. There are just too many conflicts besides the headliners, Israel-Palestinians and India-Pakistan. We still have Afghanistan and emerging dangers in the Philippines. There is no getting away from the bear market. Just as in a bull market, the markets react and focus on different stories that would drive stock prices higher. In a bear market, the markets react to different stories, but in reverse. That is what we saw today whereby an attempted rally was thwarted. FedEx countered the good news from DuPont and the markets reacted more to FedEx. The Dow took investors on a 286-point swing ending down for the day by 155 points.
We have all kinds of market internals that are coming into play right now. You have the end of the quarter window dressing, so there is a lot of churning going on in mutual funds that are having another dismal quarter. There was red just about everywhere today with the exception of energy. Volume was moderate at 1.48 billion on the NYSE and 1.87 billion on the Nasdaq. Market breadth was negative by 18 to 14 on the New York Stock Exchange and by 21 to 13 on the Nasdaq.
Overseas Markets
European stocks rose, led by Vivendi Universal and Credit Suisse Group, after the Dow Jones Stoxx 50 Index fell to its lowest in 3 1/2 years yesterday. The Stoxx 50 posted its first gain in six sessions, adding 2.8% to 2970.83. All eight major European markets were up during today’s trading.
Japan's Topix stock index rose, led by Honda Motor Co. and other carmakers, on optimism the government will try to keep the yen from strengthening further after it sold the currency for a fifth time in a month yesterday. The Nikkei 225 stock average gained 0.2% to 10,496.67.
Bonds Today
Government bonds eked out a gain by day's end as stocks succumbed to heavy selling in the final hour of trading. The 10-year Treasury note added 2/32 to yield 4.82% while the 30-year government bond lost 1/32 to yield 5.46%.
© Copyright Jim Puplava, June 25, 2002