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Tuesday, 7/23, Market WrapUp (Things vs. Paper)
FinancialSense.com ^
| 07/23/2002
| by Jim Puplava
Posted on 07/23/2002 4:27:32 PM PDT by Lazamataz
|
Weekday Commentary from Jim Puplava
 Home
|
Things vs. Paper
| Index |
High |
Low |
% Change |
Dow Jones
Industrials |
03/19/02
10635.2 |
07/23/02
7702.34 |
 27.60%
from high |
Nasdaq
Composite |
08/02/01
2087.38 |
07/23/02
1282.65 |
38.55%
from high |
HUI
Amex Gold Bugs |
06/03/02
147.82 |
11/26/01
59.86 |
 76.60%
from low |
|
|
Market WrapUp for the Week
Monday l Tuesday l Wednesday l Thursday l Friday
Monday's Stock Market WrapUp Volatile Markets Move on News and Emotion
There are three investments in the financial markets, maybe four, that are considered to be the most volatile sectors of the market. They are gold and silver, defense stocks, environmental stocks, and biotech stocks. All of these sectors move on news and emotion. The preparation for war, the break out of hostilities, or a sudden terrorist attack can send defense stocks through the roof. The eruption of Mt. St. Helens or an oil spill can send environmental stocks skyward. A major financial fiasco such as we had in Asia, the bankruptcy of a hedge fund, or a major bank failure can cause investor panic, which sends the prices of bullion and precious metals shares soaring. An announcement of a new miracle drug discovery will send the shares of a biotech stock up like a NASA space launch rising 40-50 percent in a single trading session. These specific sectors over the long run will move on fundamentals but over the short-run they move on emotion. I would like to suggest that to you that we no longer have fundamentally-driven markets. Markets are driven by emotion whether it is greed or fear. It has been that way since the mid-90’s. It was greed that drove the markets in the 90’s. Instead of fundamentals, investors were encouraged to trade. Gone were the days when investors bought stocks based on value and held on to those stocks until the financial markets recognized that value. When I got in this business in the late 70’s I was influenced by the investment philosophy of John Templeton, Ben Graham, and Warren Buffett. They taught me that you buy a stock based on fundamental values and then wait patiently for the markets to realize that value. The average holding period for stocks bought by John Templeton when he was managing portfolios was 3-5 years. That philosophy held true up until the late 80’s. After the 1987 market crash, things began to change under the stewardship of Alan Greenspan. When financial crises presented themselves, the Fed’s response was to pour money into the markets and reliquify the markets. The standard prescription to any financial crisis was money -- lots of it. Money was added to the system until the financial fires were put out. The consequence of such action was that the markets became more volatile as the new swarm of money danced around the markets looking for a place to land. Wherever that money landed, a bubble was created -- whether it was healthcare stocks, technology, or the Internet. Trading became more prominent. Instead of "buy and hold," we now had "buy and sold." This culture still permeates much of our financial culture to this very day. In the 90’s it became so prominent that professionals were encouraged to quit work and trade for a living. It became so easy to make money in the financial markets that you didn’t need a professional. All that was needed was a computer; a trading software program with a data provider and the rest was easy. That was the past. Now we have the present. The reason I bring this up is that what we have today is a technical trading and emotion driven market. There are very few convictions that are held today by either bulls or bears. Very few people know where this market is heading. Those that do are in the bear camp. How else can you explain the economic and financial forecasts that have been completely wrong for three consecutive years? Today there are no convictions that are held long-term. When you find them in an individual, they are rare. Most fund managers trade positions like lottery players. Most on Wall Street tell investors to do one thing; while they do the opposite. So we have the volatile markets that we have today because convictions and beliefs are nonexistent. These are shallow markets with investors looking for leadership when none is given. Today we have is a technically trade-driven market with no long-term beliefs. To this market, "long-term" can be defined as either an hour, a day, a week, a month, or maybe a quarter. Another aspect to this market that is not explained is that we are in transition from a bull market and a booming economy to a bear market and a depression. All the financial and governmental forces with all of their powers are at work to prevent its occurrence. Both Washington and Wall Street want to keep the sheep corralled in their pens. The problem is that the sheep are getting skittish. They know instinctively that something is wrong. They see the scandals. They see the fraud. They know that they have been lied to. They are looking for something to believe. Washington and Wall Street are losing their credibility with each new passing scandal and bankruptcy. The financial system is breaking down and the multiple bubbles created by the Fed are starting to deflate. The only bubble left is the housing market and even that is on a shaky foundation of debt. Four Words Sum It All Up
So how to you explain what is now happening in the markets? It is very easy. It can be explained in four words debt, deflation, transition, and things. The credit bubble can explain what you are now seeing in the financial markets along with the parade of bankruptcies that you see almost on a daily basis. Deflation is the consequence of that debt imploding. Transition explains where we are going. It explains the move in gold, oil, and commodity prices this year. Things best explain where that money is going once it exits the financial system. That is what has driven prices of raw materials and precious metal stocks this year. Please review the chart above of the HUI and the Dow and the Nasdaq over the last year. That is the story that the financial industry doesn’t not want you to see or understand. Despite its performance over the last two years, the standard advice given is to sell what is going up and buy what has been going down. This is why Wall Street is losing its credibility. They are scared stiff that investors will bail out of their mutual funds and cross over the road to the other side. So they encourage investors to sell and buy stocks like they always have done. There is only one problem -- that advice has proven deadly to your financial health. Study chart above and ask yourself what you see. Then make the decision as to which road you want to travel on. The second phase of the bear market in equities has begun; while the first phase in a new bull market in metals is in a corrective phase. This corrective phase has been helped along by the financial industry, which is selling off shares after taking profits, and scared investors who have seen their accounts pull back over the last few weeks. The financial industry is hoping that the sheep stay in their financial corral and don’t break lose for the other side. So they will do all that is possible to discredit this new bull market. Even after today, the HUI is up over 62% for the year in comparison to losses of 23% for the Dow, 31% for the S&P 500 and 37% for the Nasdaq. The HUI was up over 127% before pulling back. It is still up over 62%. As mentioned earlier, gold and silver are emotional investments they move on emotion, especially fear. There is no better barometer of fear in the financial markets than gold. This is why the financial industry doesn’t want to see its rise. But bare in mind, this is a thin market. There are 1500-ton annual deficits in gold and 100 million ounce annual deficits in silver. The above-ground stockpiles of silver are dwindling; while gold is kept low by a constant supply of gold being sold into the markets by central banks and gold leasing. This game cannot last forever unless central bankers are prepared to tell the citizens of their country that there is nothing to back their national currency. Eventually, like the London Gold Pool of the 60’s, this game will be abandoned as it is realized that it is hopeless to stop its transition from a commodity to its historical role as money. That is exactly what it is doing now. Look around and tell me what you see. The financial markets are imploding. Bankruptcies are becoming a weekly, if not daily occurrence, scandals and fraud are being exposed almost on a daily basis. What you are seeing is the evaporation of confidence in the financial system. What remaining confidence that is left will disappear when we get a string of bankruptcies in the financial system, especially in the banking sector. That is what is coming next. You can’t have all of these bad loans, leveraged derivative plays, and overextensions of credit, hidden loans, frauds and scandal without consequences. Look at the charts of all of the financial sector from the major banks, credit card companies, government sponsored entities, mortgage insurance companies, to regional banks. The financial system is headed for trouble. That is what the rise in gold is signaling. This is not the time to hesitate or the time to be without firm convictions or beliefs. If you don’t have them, get into cash and be content with what you have left. For those of you that believe what the rise in gold and fall in the financial markets are telling you, it is time to take advantage of those who are subsidizing the price of gold and silver. It is the time of mice and men. It is a time when those who have convictions must stand by their beliefs because those who have none will eventually follow. Overseas Markets
European stocks fell after insurers Skandia AB and Fortis said lower share prices are hurting results. The Stoxx 50 fell 50.40, or 2 percent, to 2449.99. It's shed 12 percent since Thursday's close. Asian stocks rose, led by Hyundai Motor Co., Honda Motor Co. and other automakers as a rebound in the U.S. dollar led to expectations that their sales in the world's biggest car market will increase. South Korea's Kospi index rose 3.1 percent, while Japan's Nikkei 225 stock average added 0.3 percent. Treasury Markets
Government bonds gained considerable ground for a second session as safe-haven seekers bid up the fixed-income sector. The 10-year Treasury note put on 20/32 to yield 4.53% while the 30-year government bond piled on 1 6/32 to yield 5.33%. © Copyright Jim Puplava, July 23, 2002
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TOPICS: Business/Economy; Editorial
KEYWORDS:
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To: arete
I have a bad feeling about tomorrow because of todays failed rally and the investigation of JPM and C. It could get ugly. . . but that's just my opinion.The Financial Times is running a story tonight which starts: " Citigroup and JP Morgan Chase shares went into free fall on Tuesday..." More at http://www.freerepublic.com/focus/news/721175/posts
To: arete
the investigation of JPM and C We haven't had much good news lately. Starting to wonder if this is just beginning the second round.
To: RightWhale
Does gold count as things? Gold took a little hit today; the gold index took a big hit. Gold is a "thing". It took a pretty solid hit today; something on the order of $10.75. My initial guess is that someone dumped a bunch of gold on the market, possibly taking profits on some metals they bought 2 years ago.
23
posted on
07/23/2002 5:23:55 PM PDT
by
meyer
To: dennisw
Freddie Mac, the government-sponsored mortgage financier, said net income rose 21% in the second quarter. But the company's retained portfolio of home loans contracted, and the company said future portfolio growth will be slower than expected.
Freddie Mac said net income was $1.11 billion, or $1.50 a share, compared with $914 million, or $1.24 a share, a year ago.
Those results included the effects of Financial Accounting Standard 133, or FAS 133, an accounting rule that took effect last year that requires companies to record changes in the market value of their derivatives each quarter. Freddie Mac uses derivatives to hedge some risks associated with owning home loans. Freddie Mac has argued that results including FAS 133 don't accurately portray its true financial position, in part because the rule doesn't require the company to record changes in the market value of some assets. Excluding FAS 133, Freddie Mac would have earned $968 million, or $1.30 a share, up 26% from $769 million, or $1.03 a share, a year earlier
To: RightWhale
Starting to wonder if this is just beginning the second round.We already have more scandals than we do people to investigate them. The investment portfolios of insurance companies are just yet another ticking bomb. Where are they going to get the cash needed for reserves and claims? It is a house of cards in a wind storm.
Richard W.
25
posted on
07/23/2002 5:30:11 PM PDT
by
arete
To: meyer
RE: gold
I posted on another thread that an Aussie banker told me today that a wave of new gold-mine financings may have resulted in a renewed onslaught of fresh hedges.(to ensure that the banks get paid)
To: StockAyatollah
Re the gold slump today: Sounds like a damned good buying opportunity to me.Today was an absolutely gut-wrenching day to be in gold equities. The only thing worse could be owning stocks of JP Morgan and Citicorp!
The difference is, tomorrow the miners will still be digging gold. JPM and C will be giving sweaty testimony and trying to stay out of jail and/or default.
IMHO, part of this precipitous drop in gold today was the machinations of the above two heavy hitters in gold derivatives who were running for their financial lives when their SHTF!
JPM alone is responsible for more gold on derivative paper than will be mined in the entire world in the next two years! They couldn't let themselves be more exposed to the tune of many more billions of dollars if the gold price got out of control on the upside. Therefore, they beat it down by hook or crook (not hard to do when you have billions of dollars in the bank).
Somehow, they have to hold the gold price down so they can unload that gold derivative monster without it taking them down with it! But, that will probably take years, as options go waaay out there. They don't have years. With the latest revelations, they may have only weeks before their jig is up?
On the bright side, gold stock volumes were up. A lot of it was being bought by institutional investors. They must know something we don't! They were selling most everything else. Of course, somebody else was also selling hard as prices were down 5-25% across the board, even for the strongest stocks!
We'll see what happens tomorrow.
27
posted on
07/23/2002 5:34:09 PM PDT
by
Gritty
To: arete
The investment portfolios of insurance companies The institutions. Retirement funds. 700 to 1 leverage. {expletive deleted}.
To: arete
"Gold took a little hit today" Somebody somewhere needed to raise cash.
You couldn't help buy take note of the overnight move to push the market up today. Futures were strong by 6:00 am ET and the market popped for 100 points on the DOW. PPT or foreign hedge fund? Who knows, but there are rumors -- lot'sa rumors floating around. Those who know, aren't talking.
Anyway, from 100 up to 80 down is a considerable drop again. The manipulation didn't work or the player didn't have enough support to keep it going. We might explain it as simply gold being sold to buy dollars, but I have a feeling that this is a move that didn't work out as planned and someone took a hard hit.
I have a bad feeling about tomorrow because of todays failed rally and the investigation of JPM and C. It could get ugly. . . but that's just my opinion.
Richard W.
Thanks, Richard. My first impression was that someone was profit taking from their gold, but why would they sell it down so much. There was certainly a considerable amount of metal (or paper metal) dumped on the market. Somebody that is in so deep that they have to tank the gold market to keep their margins is way overextended.
You stand a good chance of being correct, but I'll wait a day or two to see. I could predict a couple of other patterns developing here, though I don't think they are as likely. Remember that 8000 is a milestone. Could be the combination of someone taking gold profits to take a new position in the market along with some people shifting from short positions to neutral. Considering the amount of movement oin gold though, I suspect that you are closer to right on this one.
29
posted on
07/23/2002 5:37:32 PM PDT
by
meyer
To: DeaconBenjamin
Bourses end lower as rebound comes to a halt
By Philip Stafford, FT Investor
Published: July 23 2002 12:18 | Last Updated: July 23 2002 17:35
European markets headed for fresh five-year lows in late trade on
Tuesday as bad news from the financial sector spooked the markets
for the second day running.
The falls were largely triggered by Belgian-Dutch banking group
Fortis, which issued a profit warning, and Swedish finance house
Skandia, which said June sales fell to $930.6m, lower than analysts'
estimates.
Coming a day after a warning from Dutch insurer Aegon, the alerts
sent the rest of the banking and insurance sectors lower. Telecoms were also marked down in
the afternoon sell-off, which more than erased an earlier rebound.
The pan-European FTSE Eurotop 100 was trading 1.8 per cent lower at 1,921.1 at the London
close, heading for its lowest close since April 1997.
The Dow Jones Industrial Average bucked the trend to add 0.9 per cent, but the Nasdaq
Composite was 0.4 per cent higher.
London's FTSE 100 closed down 1 per cent at a fresh six-year low and Paris's Cac 40 fell 2.5
per cent. In Frankfurt, the Xetra Dax 30 shed 3.2 per cent.
On the new markets, the FTSE Techmark was 0.4 per cent weaker and the Nemax down 1.3 per
cent.
Investors on both sides of the Atlantic were unsettled by a number of weak earnings reports,
particularly from major Dow component Bristol Myers-Squibb, the pharmaceutical group. In
Europe, GlaxoSmithKline fell 1.4 per cent to pounds 10.56 and Sanofi-Synthelabo closed down 5 per
cent at euros 52.25.
Some commentators attributed the poorer performance of European markets compared with the
US over recent sessions partly to a repatriation of US money back to the States.
"US funds seem to be bringing money home and there's some talk of needing dollars for margin
calls," said Paul Bednarczyk, a strategist at 4Cast in London. "In the longer term, I'd still rather
have money in the US than in Europe but at the moment I'm not keen on either," added Mr
Bednarczyk.
The dollar strengthened against the euro which fell below the $0.99.
Financial stocks were in focus after Belgian-Dutch banking group Fortis warned that because of
the weak equity markets, the value of its portfolio had fallen below purchase value for the first
time in its history.
The company said its solvency position remained good but warned full-year results would be
affected if markets remained soft, and its shares fell 8.7 per cent in Amsterdam to euros 14.10. The
warning comes a day after a similar announcement from Dutch group Aegon., which lost a
further 11.7 per cent at euros 12.29.
Swedish group Skandia fell 12 per cent to SKr25.80 after it said June sales fell to $930.6m,
lower than analysts' estimates, owing to weakness in the equity markets.
Prudential, Axa and Royal & SunAlliance were among the top decliners as insurance stocks bore
the brunt of the sell-off. Prudential fell 8 per cent to 42p, Axa lost 7.5 per cent at euros 11.18 and RSA
shed 10.6 per cent to 170p. Munich Re fell 6.1 per cent to euros 174.
Swedish telecoms equipment maker Ericsson, the most actively traded stock by volume in Europe
on Tuesday, was down 7.5 per cent at SKr11.10 after Moody's cut its credit rating to BBB-, one
notch above junk status. US peer Lucent added to the gloom when it said it would take a $5.83bn
non-cash charge in its second-quarter results and said it saw no upturn in the market. Finland's
Nokia fell 7.1 per cent to euros 11.80.
Arm Holdings, the UK chip designer, was the top gainer in Europe, gaining 9.1 per cent at 144p
after it reported record licence revenues in its second quarter and said it was confident growth
could be maintained for the rest of the year.
Chip stocks were in focus ahead of second-quarter sales from French-Italian semiconductor
maker STMicroelectronics, due at 2200 GMT. STMicro reversed earlier gains to close 1 per cent
lower at euros 23.01 and rival Infineon Technologies was also down 1 per cent at euros 15.80. Sentiment
in the sector was unsettled after US chip equipment maker Novellus reported an 80 per cent drop
in second-quarter profits and said customers were becoming more cautious. Dutch chip
equipment maker ASML fell 4 per cent to euros 13.85.
Drug group AstraZeneca, fell 0.9 per cent to pounds 20.25 after it announced it had begun new clinical
trials on its cholesterol drug Crestor. Investors remain concerned that the new trials could delay
the launch date of Crestor on the market.
Swiss biotech group Serono reversed early gains to close 3.6 per cent lower at SwF846 after it
signed an exclusive agreement with AstraZeneca to develop a new female infertility treatment.
Global information provider Reuters rose 0.3 per cent to 300p after reporting its first ever
underlying loss as a listed company, of pounds 88m from a pounds 357m profit a year ago, mainly due to a 38
per cent drop in revenues at Instinet, its electronic broking platform.
French software group Dassault Systemes rose 3.4 per cent to euros 33.09 despite cutting its sales
growth target to around 8 per cent, mainly due to a weak dollar and weak growth in Europe. The
design software maker said net income for the first half fell 3 per cent, before acquisitions, to
euros 30m or euros 0.26 per share.
Vivendi Universal fell 2.4 per cent to euros 15.89 after the company's board on Monday met to
discuss an asset disposal strategy to secure rescue funding for the cash-strapped media group.
Proposals included selling the stake in Cegetel, its French phone network.
Electrical equipment company Schneider Electric jumped 5.2 per cent to euros 43.09 after it said its
exclusive talks with Wendell Investments for its euros 3.7bn sale of Legrand would be extended until
the end of the week. The company also said first-half sales fell 7.2 per cent to euros 4.6bn as
demand for its products remained weak and forecast no pick-up in the second half of the year.
To: AdamSelene235
Seems like fiat would be better than gold in a deflationary environment? You are right. However, the Fed has been attemping to reflate (my opinion) as you can see by this chart on the Adjusted Monetary Base.
The Fed numbers were the first place I looked when I saw gold falling but I couldn't find what I was looking for. That big a drop must have been something else besides the Fed draining liquidity.
To: RightWhale
Turmoil in the insurance industry is catching hardrock mining companies between a rock and a hard place.
For years, mining companies have depended on insurers for financial guarantees to government agencies assuring that lands affected by mining would be properly cleaned up. But following the massive hit to the insurance industry after Sept. 11, as well as the Kmart Corp. and Enron Corp. bankruptcy filings, numerous insurers are refusing to issue the so-called reclamation bonds, saying they are too risky.
|
At the same time, state and federal agencies have been sharply increasing mining companies' bonding requirements, forcing some companies to ante up more than 100 times as much money as before to ensure taxpayers won't have to bear the cost of reclaiming former mining lands. All this while prices for gold, copper and many of the other metals the companies extract remain well below historic highs, crimping corporate profits. |
To: meyer
33
posted on
07/23/2002 6:01:07 PM PDT
by
arete
To: Lazamataz
This is an excellent article, but I have one quibble.
The only bubble left is the housing market and even that is on a shaky foundation of debt.
A bursting housing bubble will not necessarily wipe you out like a bursting equity bubble can. When your Enron or WorldCom or Global Crossing stock is gone, it's gone. The nice thing about housing is that it has inherent value. You can still live in it even when the housing market craters. There's nothing to do with stock in a company that no longer exists. Your house will normally be worth at least SOMETHING when the dust settles, unlike stock in a dead company.
Of course, if you lose your ability to pay the mortgage (assuming you have one), you're sunk. This applies to real estate investors as well as to home owners. There's a down side to every investment.
I'd like to hear the "analysts" who helped pump up the equities bubble admit holding stocks can be ruinous in a bear market. But we are still hearing about nearing the bottom and holding on for the upturn. Did these people call the "top" in 2000? No. And they can't call the bottom.
To: arete
Thanks. Interesting...
35
posted on
07/23/2002 6:22:08 PM PDT
by
meyer
To: arete
I'm seeing this all over the place. Could be the big explanation for the gold decline today. The last ditch effort to save the "cartel". If even partially true, this is not good. Not good at all.
To: arete
The investment portfolios of insurance companies are just yet another ticking bomb. Where are they going to get the cash needed for reserves and claims? It is a house of cards in a wind storm.That's been a concern of mine for some time...those annuities. What's going to happen when people who have been paying for years into 403B's (annuities for teachers and someother non-profit organization employees) go to collect them? There's no FDIC insurance there, the insurance companies have set up their own agreements to cover each other.
Interesting that nobody in the media seems to bring this up. And, I still don't hear many financial advisors suggesting insured CD's for the disenchanted.
37
posted on
07/23/2002 6:24:24 PM PDT
by
grania
To: arete
Okay, since this rumor is now posted, here it is: To Big to Fail and Too Big to Bail
The same is true for Fannie Mae and Freddie Mac. One way or another she's coming down like a lead zepplin.
See post 9.
To: Semi Civil Servant
Of course, if you lose your ability to pay the mortgage (assuming you have one), you're sunk. This applies to real estate investors as well as to home owners. There's a down side to every investment. This is the part of the housing market that is at risk. There are a lot of loans out there that are less than 10% equity, including a rather large 2nd mortgage market. Now, most of us have at least 20% equity and can survive a bad market better than others can. But, if things get tight in the job market, the housing situation will quickly grow worse for many people.
The stock market isn't directly connected to the consumer market, but it isn't disconnected either. People have savings in the markets. If the value goes down enough, they will view it as threatening and will tighten up their spending. This will be the downward effect that could tank the economy.
39
posted on
07/23/2002 6:28:24 PM PDT
by
meyer
To: Semi Civil Servant
A bursting housing bubble will not necessarily wipe you out like a bursting equity bubble can. When your Enron or WorldCom or Global Crossing stock is gone, it's gone. The nice thing about housing is that it has inherent value. You can still live in it even when the housing market craters. There's nothing to do with stock in a company that no longer exists. Your house will normally be worth at least SOMETHING when the dust settles, unlike stock in a dead company. Eventually, the GSE money pumps will run out of suckers. A Fannie Mae implosion would simultaneously compromise the bond, stock and real estate markets.
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