Posted on 11/05/2002 4:36:11 PM PST by rohry
Market WrapUp for the Week Week in Graphs Storm Watch Geopolitical News Energy Precious Metals Raw Materials Tuesday, November 5, 2002 Easy Al's Market-Making Money Machine After the markets turned down in 2000, Wall Street thought it was merely a correction. When the markets didnt come back, Wall Street turned to the Fed. It was believed that Easy Al and his money machine would once again bring prosperity to the financial markets as he had done so many times in the past. Flooding the markets with easy money became the Greenspan signature. It worked. Throughout all of 2001 as the Fed cut interest rates aggressively, Wall Street dreamed of a rising stock market. But it never happened. Instead the US economy went into a recession and the stock market produced another year of double-digit losses for investors. The Fed cut interest rates 11 times, bringing interest rates down to the lowest level in half a century. Instead of inflating the stock market bubble, Easy Al created three new bubbles in the mortgage, consumption, and real estate market. The rate cuts failed to resurrect the bubble in stocks. This failure didnt stop so many on Wall Street for calling for lower interest rates. Despite the failure of 11 interest rates to resurrect the markets, Wall Street is still calling for more rate cuts. As todays EWI graph at the top illustrates, lower rates didnt stop the 89% plunge in the Dow between 1929-32 or prevent the Great Depression from occurring. Lowering interest rates have not helped Japan out of its quagmire. Today the Nikkei stands at 8,937 twelve years later after hitting 39,000 in January of 1990. Interest rates in Japan are close to zero and their stock market, real estate market, economy and banking system is still a mess. What I wonder is what they think a rate cut of 25-50 basis points will do for the economy besides giving the markets a momentary thrill? Sending The Wrong Message We now find the Fed intervening in the stock market, bond market, currency market, and allegedly in the gold markets. They really do believe they can prevent stock prices from falling when they are in fact setting the markets up for a greater fall. At the minimum, investors may go through a long and enduring agony of watching their equities decline year after year over a long period of time, perhaps longer than a decade. The Fed may continue to pump money into the economy, but this money pumping may lead to stagflation, hyperinflation, greater poverty and destruction. Before you get caught up in all of the hyperbole of another rate cut and its miracle effects on the economy and the stock market, please view todays graph. It shows supporting evidence of the inefficacy of monetary policy in resurrecting a bubble once it has deflated. Complacency in Oil Markets Traders have driven energy prices down in recent weeks on growing doubts over immediate military action against Iraq. At the same time, they ignore recent weather patterns and declining stocks of oil and natural gas. Energy stocks are declining globally. The complacency in the markets has been reflected in the price of shares within the energy sector. As the graphs below indicate of the OSX (Philadelphia Oil Service Index), the XOI (Amex Oil Index), XNG (Amex Natural Gas Index), and the UTY (Philadelphia Stock Exchange Utility Index), the energy sector has remained weak despite the run up in oil and natural gas prices this year.
The divergence between the price of crude and the oil and service stocks would seem to indicate much weaker prices lie ahead for commodities. Energy stock prices tend to lead the price of the commodity. One of the two is right. Either price will head sharply lower, which is what energy equities are saying, or the price will skyrocket on the first sign of a supply disruption or severe weather. This is what happened in 2000-2001 in the last energy crisis. Crude oil and natural gas stocks are running low and getting even lower so there is no room for error. The price of energy stocks, which remain weak despite their attractiveness in price, look far too complacent to me. This War Will Be Different The oil markets have also ignored the change in tactics by al Qaeda. The terrorist group is now targeting economic assets, especially oil assets. The groups new strategy is to target key nodes of the global economy, which runs on oil. They are now focusing their efforts on the oil infrastructure of the Middle East. They realize that stopping the flow of oil would bring the western economies to their knees. The plan now seems to be to attack the loading piers of oil in the Middle East. Recently they attacked the French oil tanker Limburg. On Sunday a US drone fired and killed an al Qaeda terrorist group in Yemen. Among those killed was Qaed Salim Sinan al-Harethi, believed responsible for the attack on the USS Cole last year. Stratfor reports there is now evidence that the terrorist group killed on Sunday were targeting the Hunt oil facilities in Yemen. Their car was loaded with explosives. Stratfor believes that al Qaeda affiliated groups in Yemen are now shifting their focus towards oil targets in Yemen. There is now a growing consensus within the intelligence community that al Qaeda is shifting its attention to economic assets. During the Afghan campaign last year, the US picked up plans and photographs of key energy installations in the US, which included refineries, nuclear power plants, pipelines and other energy assets. If you want to stop the economy, you need to stop the fuel, which runs the economy -- cheap and abundant energy. A severe oil shock similar to what happened during the 1970s would do irreparable harm to an already fragile economy. In fact, a disruption in the supply of energy would do more harm to Europe and Asia as they are more dependent on imported oil. Outside al Qaeda, there also remains the perilous state of the Saudi monarchy. The royals have alienated the merchant class in the country as well as the nations religious leaders. The relationship with Washington is deteriorating. There are many in the country that resent the stationing of US troops on Saudi soil. The US has been steadily pulling out military assets in the country and relocating them elsewhere. All of the above points indicate an energy market that is priced for perfection and has become far too complacent. The wall that separates the world economies from another energy crisis is razor thin. A severe winter storm or another terrorist attack against strategic energy assets could send the price of energy soaring again. Unlike the last war we dont have a margin of safety. Another terrorist attack, which seems to be occurring more frequently, would deliver a severe blow to a fragile world economy. The possibility of such an attack doesnt show up on any energy chart nor is it programmed into any derivative or option model. If it occurs, the markets will have to do some serious repricing. Today's Markets Stock prices recovered from earlier losses in the S&P 500 and the NASDAQ to post minor gains. The markets have now moved beyond rate cuts and are rallying on the possibility of a Republican victory in congressional races. The S&P 500 gained less than 1% driven mainly by oil and defense issues. Wall Street analysts cite the fact that the market has been able to ignore a slowing economy, rising unemployment, declining profits with no improvement for next year, deteriorating corporate and household balance sheets, new scandals, an approaching war, and the rising frequency of terrorist attacks as a sign that the market has bottomed. The Dow hit a 10-week high on hopes of rate cuts and a Republican victory in the Senate. In other markets, things arent going as well. The dollar continues to decline and the bond market continues to lose ground with long-term interest rates rising again. In this bubble economy we now live in, what happens to the bond market may be more important than what happens to stocks. The consumer consumption binge is totally dependent on the refi market. Housing is also dependent on long-term interest rates as are the incomes of senior citizens that depend on the investment returns on their portfolios. With markets declining and interest rates headed to zero, income for many seniors is putting them in a difficult situation as short-term rates fall. Many money market funds are going to have problems earning income as returns fall below the cost of operating the money fund. Besides a falling dollar and bond market, the price of commodities and gold are rising again as they have since the beginning of the year. A declining dollar, rising commodity prices, and rising interest rates place this stock market rally on very tenuous ground. A few observers see the parallels to fourth quarter of last year when the market rallied on false hopes of a strong economic recovery and profit rebound that never materialized. Others see the similarity to the markets of 1987 prior to the crash when the dollar fell, commodity prices rose, gold went up, and the bond market fell. Bear market rallies are built on hope more than reality. Sometimes they go up just because they have gone down for so long. It is as if when things are down someone says, lets have a party. Dont try to read too much as to why the markets rally. There are no sound fundamental economic or financial reasons for the markets to do so. The sentiment with investors is they are now worried they may miss out on the next big rally in stocks. There is still a hangover of bullish sentiment remaining from the bull market of the 90s. The markets may rally for a little longer as the investors and analysts look for something to hang their hat on. A Republican victory in the senate seems to be the next big hope. Winning the war may come after that. None of this will disturb the primary trend in the market, which is still a bear market in its infancy. The more the government intervenes to prevent it from achieving its logical conclusion, the more torture investors will face. It could become a long drawn out process of interest rates declining to zero and stocks losing ground until the prices of equities become a bargain. The markets will become a bargain when the Dow is between 1000-2,500, 250 for the S&P 500 and around 200 for the NASDAQ. Volume fell sharply during todays rally, a pattern on most days that the markets go up. Volume on the NYSE came in at 1.31 billion shares and was 1.71 billion on the Nasdaq. Market breadth was weak with advancers barely beating out losers by a 17 to 15 margin on the NYSE. On the Nasdaq the two sides were about even. The VIX continues to fall, declining 0.19 to 34.28. The VXN rose 1.98 to 51.20. Oil, natural gas and defense stocks were todays clear winners. Select gold and silver stocks also rose with the HUI and XAU both rising, the XAU just barely. Gold still remains the strongest performing sector this year with the HUI up over 83%. Overseas Markets Japanese stocks rose, with the Nikkei 225 Stock Average completing its biggest gain in three weeks. Exporters such as Fanuc Ltd. led the rally on optimism the U.S. Federal Reserve will cut interest rates tomorrow. The Nikkei added 2.9% to 8937.56. Bond Market Copyright © Jim Puplava |
I don't think so but of course I'm just a redneck who wants to know what is happening to the American peoples finances.
With France on board at the UN and the UN vote coming shortly, we'll soon see. Remember that Hitler's invasion of Russia was at first considered by many in Berlin a non-event. Try to be prudent in investments, as always.
Excuse me, but it looks like Greenspan is doing a fairly good job of creating another stock bubble right now. Next thing you know, the prices of Pokieman cards will revive and Global Crossing will come out of bankruptcy and immediately start laying more fiber optic cable to link Greenland with Australia. There is so much easy money out there that even junk bond prices are starting to go up again.
Richard W.
.....if 11 rate cuts didn't so the trick, why on earth would Wall Street think a 12th cut would be magicial....this looks like another shot of the hair of the dog to me.
As always thanks Rohry, and good luck to everybody!
Stonewalls
.....if 11 rate cuts didn't so the trick, why on earth would Wall Street think a 12th cut would be magicial....
It won't. There will be lots of arm waiving and shouting, but at the end of the day, the FED shot another bullet to keep a vapor rally on even more vapors, and reduced its options for a later crisis.
The Permabulls have a stale playbook. If the FED cuts, that's good for stocks (never mind 2001). The same playbook says buying the war rally will give big gains. They also run the "chase beta" play quite often.
When this rally fails, and fails hard, they will reset and hope for another gift from easy-Al.
Watch CNBS for a few hours. Count how many times valuations of fast moving companies are discussed. In fact, gouge out an eye every time it is discussed. You could watch for a week and still have stereoscopic vision. It's all about beta, hype, and spin.
What is "beta" ?
The markets will become a bargain when the Dow is between 1000-2,500, 250 for the S&P 500 and around 200 for the NASDAQ.WOW! (And thank you for continuing to post this nightly thread, despite the recent posting difficulties.)
Well, we can say that much of 90's market has been a hard-core beta-addiction. :)
FR is a great continuing education.
So it is relative to the market average. Thanks for your tip. My characterization of 90's as the beta-addiction is now moot, I guess.:)
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