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Today's Market WrapUp |
Unemployment Report Overshadowed by New Economic Team
Today’s big news came as a surprise with the resignations of Treasury Secretary Paul O’Neill and White House economic adviser Lawrence Lindsey. According to a Bloomberg article, an administration official said that President Bush asked for both of the men to resign. It appears that Mr. Bush is determined to get his way as he realigns his economic team to provide a stimulus package to get the US economy rolling again. For now, it looks like the short-term focus will be some kind of stimulus package that includes tax cuts and increased government spending. I would sure like to hear the candid comments from both Mr. Lindsey and Mr. O’Neill.
Also in the news today was a weak employment report that showed the jobless rate increasing more than expected from 5.7% in October to 6% for November. This is the highest rate of unemployed workers since 1994. The unemployment report has further weakened confidence for a US turnaround and has put additional pressure on the dollar. This morning the dollar weakened to $1.0076 per euro and 123.82 yen per dollar. I will be watching to see what kind of impact the new stimulus package will have on the strength of the US currency. With Mr. Lindsey and Mr. O’Neill out of the way, it will be interesting to watch the developments. Let’s see if President Bush will push through a tax cut to relieve the double taxation of dividends. If he is successful, tax-free dividends could really boost stock prices. For now, the stock market is responding well to the news of the changing of the guard on Capitol Hill.
I’m not going to take the time to go through the rest of the news for the week as it would be redundant. If you would like to get a good overview for the week, just go to the Market WrapUp that Jim Puplava wrote on Wednesday. He extracted thirty-six headlines and bullet-pointed them under the four categories of Earnings Warnings/Economy, Scandals, Investment Market Analysts, and Geopolitical Risks. If you have the time, print out the news headlines and read them in the context of the ten graphs below. See for yourself if the headlines match the trends in the graphs.
Patience, Patience, Patience ... ... ...
The Stock Market has been going sideways for over a month now, Treasury Bonds have been in consolidation since the sharp break in early October, the US Dollar has gone sideways since July, gold has been consolidating since the high reached in June, and the CRB Index has been catching its breath for the last three months after marching higher all year long. The graphs below offer a pictorial of the “sideways-grind” that the markets have endured for the last few months. How will these consolidations resolve themselves? Are we looking at reversal patterns or are we looking at consolidations that are destined to continue the primary trend? Again, please read the headlines and study the graphs side by side to make your own conclusions.
Up With Things, Down With Paper
Since the markets have not provided any real direction recently, I decided to take some extra time to see how the different asset groups have been acting relative to each other. In many of the past market commentaries Jim and I have taken the basic stance that “THINGS” are going UP in price and “PAPER” is going DOWN, especially “PAPER” that is tied to excessive debt. As a proxy for “things” I have chosen to use the CRB Index, gold and oil, and for “paper” I have chosen to use stock prices, the long bond and the US dollar. When I started this project I had one primary goal in mind. I wanted to see if the numbers would confirm our belief that commodities are headed up relative to paper. The answer should also give us a good indication of what to expect when the market consolidations have run their course. Will gold break to the upside? Will the dollar continue its decline? Have we seen the top of the bond market? Will the stock market head down again? Let’s take a closer look.
If you are like me, you can take many hours to play the “what if” game. You can read lots of things into the data contained in these “relative” charts. You can see where most of these relationships made their initial shift at some point in 2001. To make a turn in these relationships is no small matter. These are huge forces at work. To turn these graphs is like trying to make a u-turn in an aircraft carrier doing forty knots. It is a process, not an event—and it takes time! We have now made the initial shift, had a few months of “balancing” with the consolidations, and shortly should begin the next leg in the continuation of the new trends.
You can dissect these graphs in many different ways, but no matter how you slice it or dice it, they are all painting the same picture. All of the graphs show a major trend change that favors tangible assets over paper assets. The sharpest contrast can be seen in the comparison of the CRB Index to the S&P 500 Index. On that chart I intentionally only drew the midline of the trend to highlight the charting principle that once resistance is broken, it typically becomes support. I also look at this graph as being “non-political” relative to the others. The CRB and SP500 are less “political” than gold, the US dollar, Treasury Bonds, etc. In my mind, that relationship has not been “restricted” or “held in check” like the US dollar, gold and bonds.
A Few More Observations
Take a look at the CRB relative to the thirty-year bond ($CRB:$USB). You can see the last consolidation that ended in early October when the ratio broke out above the red resistance line. After it broke out, it came back to re-test support and has since continued its upward path. I expect that relationship to continue along the same direction.
Here’s another thought. Look at the CRB in the first set of graphs and compare it to the CRB relative to the US dollar. The CRB alone looks rather flat for the last three months, but relative to a declining dollar it’s screaming a signal of future inflation.
The chart that fascinates me the most is gold relative to thirty-year Treasury Bonds ($GOLD:$USB). I’m captivated with the support on the graph at the low end of the trend channel. Next year when gold goes to $400 per ounce and bonds fall with rising interest rates, I see this chart going absolutely vertical!! Inter-market relationships tell a big story. Play with the relationships on a “What if” basis to see where these charts will be heading. By summertime next year, I expect we will look at these same charts to see the completion of phase two in the transition of market leadership. If you don’t have any portfolio insurance in the form of exposure to precious metals, it might be a good idea. Got Gold? Even better, got Silver? In my mind we are about one-third of the way through the correction process brought about by the excesses that were created during the expansion of the last two decades.
Stocks for the Week Overseas Markets Japanese stocks fell, dragging the benchmarks to their first weekly drop in three. Ito-Yokado Co. and other retailers that depend on domestic sales slid after a government report pointed to a shrinking economy in six months. The Nikkei 225 Stock Average fell 0.6% to 8863. The Topix index slid 0.7% to 860.65, with retail, telecommunications and bank shares accounting for a fifth of its drop. For the week, the Nikkei lost 0.6%, its biggest weekly drop since the five days ended Oct. 25.
The Dow Industrials dropped 250 points to close the week at 8646 for a loss of 2.8%, the NASDAQ lost 57 points or 3.9% to 1422, and the S&P 500 declined 24 points to 912, a loss of 2.6%.
European stocks fell, sending benchmark indexes to their biggest weekly losses since September, as reports indicated economic growth is slowing. Aegon NV and Barclays Plc, among the week's worst performers, dropped. The Dow Jones Stoxx 50 Index declined 0.4% to 2542.00, having earlier lost as much as 2.5%. Both the Stoxx 50 and Stoxx 600 indexes have shed more than 4 percent this week.