Weekday Commentary
from Jim Puplava
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Market WrapUp for the Week
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Tuesday, November 12, 2002
Troubles For The Bubbles
Stock prices bounced back today in what is becoming an increasingly volatile market. Today’s rally was started by positive comments from Fed officials and by various companies in the telecom and tech area saying they are seeing some improvement in sales. Fed Vice Chairman Roger Ferguson said that business spending on equipment and software “appears to have bottomed and may be increasing,” which helped to boost stock prices. The Fed governor’s comments, when added to tiny forecasted sales increases coming from the likes of Motorola, Vodafone, and Oracle, added excitement to the market’s rally. Fund managers rushed in to buy, which helped the NASDAQ finish out the day with a 2.3% gain. We now have Fed governors calling business bottoms. I’m not sure I would put much confidence in the Fed calling a market or a business bottom. It would be a lot like the captain of the Titanic telling passengers not to worry about icebergs.
The problem these market averages are having is holding on to a long-lasting rally. Most rallies last no longer than a few weeks with most of the gains accruing to a few large gapping upside days. Outside these few one-day wonders, the markets then go sideways before resuming their downtrend pattern. The volume, the advance/decline line, the number of new highs versus lows haven’t been there to support a sustained rally. For a rally to become enduring you want to see explosive volume and breadth. This tells you there is power and momentum behind the move. It has been absent in all of the rallies this year. The one problem markets are having, and a major problem at that, is bringing back the little guy into the market. Only as recent as last week were there any signs that the little guy was putting money back into stocks, and only tepidly. The general public for the most part is sitting on the fence, paralyzed like a deer in the headlights, afraid to do anything. Most Americans are still sitting on a losing portfolio hoping for a reprieve, but too scared to do anything.
Without the public’s participation, it will be hard to make any rally sustainable. Money has been flowing out of stock funds for the last five consecutive months. This month is looking no different. Without fresh money coming into the market these rallies end up as flops with fund managers simply shuffling from one sector to the next. I believe this is why there are so few new highs. With no new fuel of new money coming into the markets fund managers lack new supply lines to feed into the markets. The only money that seems to be coming in is through pension plans and 401(k) contributions. Despite these new inflows from pension contributions money is still flowing out the door. One of the more subtle events going on is the slow death of the equity cult. CNBC viewership is down during the first half of this year by 23%. It is down by almost 45% from its peak during March of 2000. Investment clubs are folding, financial magazines and many newsletters are struggling to hold on to readers. The same thing is happening to the number of mutual funds, which are being consolidated or are shut down.
There has been no great capitulation in this ongoing bear market. Thanks to the relative strength in the big blue chips, which have not faired as badly, a lot of investors are just sitting on the fence waiting for a cue as to what to do next. Most investors aren’t sure whom to trust. CNBC’s creditability has been tarnished. As the main cheerleaders of the boom, they failed to warn investors of the bear market. Although they ask tougher questions of their guests and probe as to possible conflicts of interest, the guests tend to come from the same barn. They are all bulls with basically the same message: buy and keep buying stocks. The only other pervasive message is the attempt by anchors and guests to keep calling a market bottom. Occasionally, the networks branch out and feature a bear fund manager. It is rare that they talk about gold, and when they do, it is with derision.
One of my pet peeves is the reporting of CRAP earnings instead of GAAP earnings. The pro forma business has gotten way out of hand. The economic numbers and the policy issues tend to get confused. This author was aghast to hear one anchor go along with a liberal that tax cuts don’t benefit the economy and that they only benefit the rich. The reason given was that rich people would save and invest the tax cuts versus lower tax cuts for the bottom bracket, which would spur consumption. A greater understanding of economic issues would be more helpful. One anchor never ceases to call for the Fed to print more money without acknowledging that the Fed created the bubble in the first place. You seldom hear on the financial shows coverage of where the big boys are really putting their money. For example, since the end of last year the S&P 500 is down 23%, and the NASDAQ is down 31%. The dollar has lost over 10% of its value; gold prices are up close to 20%, unhedged gold stocks are up over 86%, and the CRB Index is up over 19%. Instead of this, you hear the daily drivel like today that some tech stock or another may see a glimpse of light at the end of the tunnel, which leads fund managers to go ga ga and drive up shares of select NASDAQ stocks. Is this what John Q really wants done with his money? I don’t think so. This is why John Q is either sitting on the fence or slowly exiting the markets.
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Watch the Dollar. Watch the Indexes of "Things" The real problem these markets have right now, and a real threat to the multiple bubbles created by the Fed, are shown in these charts. A falling dollar, rising gold prices, and rising commodity prices pose a threat to the bond market which hasn’t been acting well lately. The 10-year note and the 30-year bond fell during the October-November rally. Only after the Fed surprised the markets last week with a half point cut did rates fall back down again. Today rates rose on the 10-year and the 30-year bond. If the dollar continues to fall, if gold prices rise, and the CRB continues its upward climb, the bond market is headed for trouble. If the bond market gets in trouble, stocks will shortly follow. |
The CRB Futures Index is widely viewed as a broad measure of overall commodity price trends because of the diverse nature of the 17 commodities of which it is comprised. As a broad measure of commodity price trends it serves as an excellent price measure for macro-economic analysis. This reflects the fact that a more diverse price index contains more information and, thus, can be used to better analyze economy-wide market forces. Learn More Also visit our Raw Materials Resource Page.
The fact that the US is running a trade and current account deficit of half a trillion dollars a year speaks of nothing but trouble ahead for the dollar. Rising gold and commodity prices, which are directly linked, should be on everyone’s radar screen, but unfortunately it is ignored by the mainstream. It reminds me of the market crash in 1987 when the dollar and bond prices tumbled, while gold and commodity prices broke out. The stock market ignored all three events until that fateful day in October when, without warning, the unexpected occurred. Very few anticipated it or saw it coming. That is how most ten-sigma events happen. They have a habit of showing up when no one expects them.
I would like to direct viewers’ attention to the dollar, gold, the CRB Index, and the yields on 10-year notes and 30-year bonds. If the bond market begins to falter, the stock market is headed for big trouble along with the economy. The currency markets and the bond markets are much bugger than the stock market and more important to global finance. The government must finance its huge trade and current account deficits along with a growing budget deficit. What happens to the bond market is more important than what happens to stocks. Interest rates in the US are close to rock bottom, making the US less attractive to foreign investors. If the dollar begins to weaken again, look for interest rates to start rising. The falling dollar, rising gold and commodity prices are signaling that trouble lies ahead for the financial markets. These rising graphs may be one reason why rallies have been so short and shallow this year. After all, the major indexes are down between 16-31% this year. In sharp contrast gold equities are up between 24-86%, junior golds are up between 200-400% and commodity prices are up double digits. That is a story you won’t hear talked about on cable channels. You are more likely to hear why this or that tech stock beat pro forma estimates.
Today's Market
Philip Morris brought the market down from its intraday peak after reporting that it can’t confirm next year’s profit forecast. States and cities have been hiking taxes on cigarettes to the point that they have become as expensive as drugs. The government is the largest beneficiary of tobacco sales. They make far more money than the tobacco companies. The problem for many states, like New York or California that have issued bonds, based on the tobacco settlement the tobacco companies can reduce payments if sales drop. Somebody needs to explain to politicians how economics work. Higher prices reduce demand. That is what Philip Morris is trying to gauge since many states and cities such as New York have raised taxes to the point that cigarettes in New York City now cost over $7 a pack.
As mentioned earlier, comments coming from various Fed governors that the business spending had bottomed helped to rally the averages. The markets fell in the final 90 minutes of trading after the Middle East satellite station Al Jazeera played a new tape of Osama bin Laden praising the recent terrorist attacks in Yemen, Bali, and in Moscow. The new tape of the terrorist leader puts terrorism back on the front pages again. The latest tape of bin Laden comes at a time the US is preparing for a possible attack on Iraq. Iraq’s parliament rejected the UN’s resolution. War and renewed terrorist attacks could damage a fragile and debt laden US consumer and terrorism could disrupt oil supplies.
Helping to smooth out the markets worries were soothing words coming from the Fed and Wall Street officials. The Fed reassured the markets that the economy was on the mend, while Wall Street strategists Barton Biggs and Byron Wein told investors they expect higher stock prices. Wall Street economists are also raising their economic forecasts for next year.
The pep talk worked at least with fund managers who were buying again. The markets ended the day with gains. Volume came in at 1.34 billion on the NYSE and 1.55 billion on the NASDAQ. Breadth was positive by 20 to 12 on the big board and by 21 to 12 on the Nasdaq. The VIX fell .72 to 35.39 and the VXN dropped .45 to 55.25.
Overseas Markets
European stocks rose, led by telecommunications shares, after Vodafone Group reported a narrower first-half loss and predicted higher sales. The Dow Jones Stoxx 50 Index climbed for the first day in five, adding 1.5% to 2534.32. Vodafone, which makes up more than 5% of the index and is Europe's third-largest company by market value, accounted for almost half of the climb. All eight major European markets were up during today's trading.
Japan's stock benchmarks rose after Finance Minister Masajuro Shiokawa said the government may act to stop the yen's three-week rally against the dollar, which threatens to squeeze the earnings of Toyota Motor Co. and other exporters. The Nikkei 225 Stock Average rose 0.1% to 8464.77.
Treasury Markets
Long-dated Treasuries lost their early luster as stock gains accelerated. Fixed-income markets were closed on Monday in observance of Veterans Day. The 10-year Treasury note shed 3/32 to 3.855% while the 30-year government bond shaved 7/32 to yield 4.805%.
Copyright © Jim Puplava
November 12, 2002