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Tuesday, 7/30 Market Wrapup (Dow 30's Wild Ride, Fasten your seatbelts... more to come)
FinancialSense.com ^ | 07/30/2002 | by Jim Puplava

Posted on 07/30/2002 5:20:41 PM PDT by Lazamataz

 
Weekday Commentary from Jim Puplava
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Dow 30's Wild Ride
Fasten your seatbeltshttp://www.financialsense.com. more to come.


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for 7/26/2002

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July 30 Column

 Tuesday Market Scoreboard
 July 30, 2002

 Dow Industrials 31.85 8680.03
 Dow Utilities 15.61 235.58
 Dow Transports 8.56 2389.51
 S & P 500 3.82 902.78
 Nasdaq 8.94 1344.19
 US Dollar to Yen   120.2
 US Dollar to Euro  

0.9837

 Gold 1.5 306
 Silver 0.02 4.658
 Oil 0.81 27.36
 CRB Index 2.57 209.85
 Natural Gas

0.01 2.891

 

  07/30 07/29

Change

  HUI (Amex Gold Bugs Index)

Close
YTD
109.24 102.38 6.86
68.01%
52week High 147.82

06/03/02

52week Low 59.86

11/26/01

  XAU (Philadelphia Gold & Silver)

Close
YTD
61.71

59.54

2.17
12.61%
52week High 88.65

05/28/02

52week Low 49.23

11/19/01

     
     
     

 Market WrapUp for the Week 
Monday  l  Tuesday  l  Wednesday  l  Thursday  l  Friday


Tuesday's Stock Market WrapUp

Spin Cycle
They are all turning out to be one-day wonders. The markets explode on the upside with no follow through. One day up and the next day down. The financial markets have recovered from one of the worst months for the stock market in decades. However, the recovery has been in one-day explosive spurts rather than an orderly advance. They are becoming known on the Street as intervention rallies. They are sparked by big movements in the futures markets followed by heavy buying in key selective stocks that drive up the indexes. Yesterday it was the financials and the semis that rose explosively to the upside. The move in semiconductor stocks was prompted by an upgrade of the sector by Goldman Sachs following the firm’s purchase of 10,000 calls on the SOX the night before the upgrade.

As the graph above shows, the recovery hasn’t been orderly, but in large explosive spurts that seem to have no staying power. As stocks rise, investors seem to be viewing the rise as an opportunity to sell rather than buy. The momentum players are trading the market, but very few believe this is the bottom, or in fact, that the stock market is now cheap. The problem as discussed in previous WrapUps is valuation. Despite the media and Wall Street spin, stocks are still extremely expensive if you look at the broader indexes, such as the Dow or the S&P 500. There are two ways stocks can become cheaper: earnings or price adjustments. In order for the S&P 500 to become a bargain, earnings would have to double each year for the next two years -- something I don’t expect to happen given the pressure for companies to come clean on their books. You also have to remember when we talk about earnings for the S&P 500, we are talking about pro forma earnings and not the real bottom line. Even here, Bloomberg lists trailing earnings for the S&P 500 at $28.23. This places the pro forma P/E on the S&P 500 at 32. That equates to an earnings yield of 3.13%, hardly a bargain.

The Dow is much cheaper, selling at 24 times earnings or an equivalent earnings yield of 4.16%. This is better than the S&P 500, but once again, hardly a bargain by historical standards. The historical average for the markets has been between 12-14. We haven’t even come close to historical averages much less bargain levels. Forget the Nasdaq as it has no earnings.

Wall Street is hoping that the public stays in the market and comes off the sidelines with their cash. The big boys are trading or shorting this market; while the small investor is just hanging on.

The Ostrich Effect
Following last Friday’s story in the Wall Street Journal on investors not panicking by not opening up their monthly account statements, a similar story appeared on CNNfn last night. The vignette featured an street interview of Manhattan investors who refuse to look at their monthly statements. One woman said her husband got mad if she opened their monthly investment statements. Instead, the statements got thrown in a desk drawer where they have been piling up since the beginning of the year. Another husband leaves the room if his wife puts on the financial channel. I call this the ostrich effect. After seeing markets go down 2 1/2 years, investors put away their statements rather than face the grim reality of 50-60% losses in their portfolios. The financial industry has done their job well. The new trend in investing is to put your head in the sand. One of the street pedestrians interviewed last night in the CNNfn piece said he was too busy working and making money to watch the markets. He then said, "I go to work to make money, then I invest it and lose money." We had the new paradigm economy and bull markets in the 90’s. This kind of thinking must be part of the new paradigm recession.

In the same piece last night, the well-respected anchor, Lou Dobbs, said it amazed him that gold had been going up in this kind of low inflationary environment. He was flabbergasted by the fact that investors were buying gold. Dobbs doesn’t understand that gold does well in either an inflationary or deflationary environment. The financial community has failed to take into recognition that gold is rising in all markets across the globe. Gold is rising against the yen, the euro, the Swiss frank and the dollar. For the first time since the 70’s, investors are fleeing paper assets and heading into things, especially gold and silver. There has been a synchronized rise in gold prices against major currencies around the globe. This movement reflects an inflection point in the markets that runs counter to prevailing investment attitudes towards the markets. The rise in gold is signaling that major trouble lies ahead for the financial markets and the banking system.

Since this bear market began, fund managers have been fleeing the markets and going into bonds. This has helped the Treasury market rally. It has also replaced the drop in foreign investor demand for Treasuries. The next shock to the financial markets is going to come from the bond market. When investors wake up to the fact that treasuries are offering very little in return, especially against dollar depreciation, the final prop in the financial markets will have fallen.

Talk about the bull market in gold being over will be proven just as shallow as the repeated calls for a second half recovery over the last few years. Anyone with a bit of knowledge in reading charts can see this reflected in the price of bullion and the price of gold and silver equities. The summer rally will be with us only for a short period of time and then the primary trend in this bull market will continue -- this time in full force. As mentioned so many times, not until the excesses of the 90’s credit boom have been cleansed from the financial system and values are restored to the markets will we begin a new bull market in stocks. When you see your neighbor forswearing to ever invest in the markets again, we will be close to reaching a bottom.

Bank Balance Sheets Troubling
There are too many problems at the moment to be reconciled that pose even larger threats to the financial system. Like a brushfire, they keep popping up all around the globe simultaneously. Bank balance sheets are full of non-performing assets. For the fourth quarter of 2001, the top three banks, Citigroup, J.P. Morgan Chase, and Bank of America, had non-performing assets respectively of 12.33%, 9.54%, and 10.12% of equity. According to the latest FDIC report for 2002 Q1, non-performing assets continue their long-term rise, but at a decreasing rate. Non-performing loan growth has slowed down to 5% from 9% during the fourth quarter. However, the second quarter this year has been another bad quarter, so non-performing assets could be in an uptrend. The FDIC report shows that loan growth remains stagnant. See 4Q 2001 and 1Q 2002.  We still don’t have a clue on what is happening to the derivative book of the big three banks listed above. We won’t know that until the fourth quarter when the OCC reports the derivative position of the big banks as of the third quarter of this year. At the moment all we hear are the rumors circulating around that the big three are in trouble. The Financial Times recently did a story on the banking system entitled, "
Where’s the risk?" The editorial states that there is growing concern in the derivative markets of another LTCM-like crash in the banking system.

Most banks derivative books are made up of OTC-type derivatives that are high risk and illiquid. According to the FT, "… there are dangers that institutions take bets on particular risk models that turn out to be wrong." It could be that a few of these trades lie at the tail end of the curve. They are the ten-sigma events that regulators can’t foresee, but their probability of becoming a reality are becoming even greater because of the degree of leverage now in the financial system. Everyone from banks and insurance companies to hedge funds have had to use leverage to increase their returns in what has become one of the lowest interest rate environments in half a century.

The Financial Times goes on to point out that with corporate default rates up at record levels, the chances for coping with mounting losses may be too much of a strain for the financial system. At the moment, financial institutions have been spreading the risk by transferring it to other players. This is lot like a hot potato that may be tossed back to banks if the other counter-party to the derivative contract goes under. The rise in gold is now reflecting the risks in the financial system, such as derivatives, and the chances for a systemic breakdown that is ignored by the financial markets. It is like a sailor heading out to sea and ignoring what the barometer is saying. It is these kinds of risks that have become so pervasive in the financial system that are now being ignored by investors.

The Dominoes Are Falling
Today Providian Financial reported its profits fell 34% on loan defaults. Vanguard Airlines filed for bankruptcy. Brazil’s currency fell to a new record low, and the nation’s bonds slipped to lower levels as concern mounts that the IMF loan package won’t keep the country from defaulting on its sovereign debt. Meanwhile, Uruguay closed all of its banks today as the country faces the worst economic crisis in decades. Uruguay’s central bank announced it has suspended all banking operations in the country. Experts say there is an eerie similarity to what happened in Argentina. Money has been fleeing the banking system, the currency has gone into a nosedive, and the financial markets are plunging in the country. Now the question is which banks are on the hook for the country’s external debt? Latin America is going down in domino fashion as one country after another follows each other into a financial crisis. Analysts fear that the domino effect may be heading north to Mexico and then the US. This is just one more example of the kinds of systemic risks that lie at the tail end of the curve, which is not factored in most models. So far there have been six-sigma events. The question is where will the ten-sigma event come from?

Today's Market
It was another mixed day in the markets today following yesterday’s one-day wonder. That has been the pattern for month of July. The markets finished mixed after spending most of the day in negative territory. The tech sector was riddled with losses that miraculously transformed into gains by today’s close. Investors were in no mood to take risks. They were buying defensively. Today’s winners were concentrated mainly in the utility, gold, and the natural gas sector. Volume came in at 1.81 billion shares on the NYSE and 1.73 on the Nasdaq. Market breadth closed on a narrow positive by 17 to 15 on the NYSE and 18 to 16 on the Nasdaq.

Overseas Market
European stocks fell as lower confidence among manufacturers and consumers sparked concern about economic growth. The Dow Jones Stoxx 50 Index fell 1.0% to close at 2720.82. Three of the eight major European markets were up during today’s trading.

Asian stocks rallied on optimism a surge in U.S. equities will lift consumer confidence and spending in the biggest overseas market for exporters such as Sony Corp. and Samsung Electronics Co. Japan's Nikkei 225 stock average had its biggest one-day gain in a month, while South Korea's Kospi index advanced 3.4%.

Treasury Market
Treasuries closed mixed, forfeiting most of their earlier upside following a recovery in the equity market late in the day. The 10-year Treasury note shed 6/32 to yield 4.59% while the 30-year government bond gained 9/32 to yield 5.405%.

© Copyright Jim Puplava, July 30, 2002



TOPICS: Business/Economy; Editorial
KEYWORDS:
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To: Lazamataz
His-and-hers Armalites; that's good for a few brownie points ;-)
21 posted on 07/30/2002 5:58:41 PM PDT by steveegg
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To: meyer
and here I was thinking it was "shoot, shovel, and shut up". j/k, of course...

BS, "just kidding".

Your cashiers check in the amount of $20,000 is on the way. The Family thanks you.

22 posted on 07/30/2002 5:59:01 PM PDT by Lazamataz
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To: steveegg
His-and-hers Armalites; that's good for a few brownie points ;-)

How do you think I get gun purchases approved???

"But honey, THIS one is YOURS..."

;^)

23 posted on 07/30/2002 6:00:14 PM PDT by Lazamataz
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To: Lazamataz
Your cashiers check in the amount of $20,000 is on the way. The Family thanks you.

And the passports? Don't forget the passports...

24 posted on 07/30/2002 6:03:59 PM PDT by meyer
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To: meyer
And the passports? Don't forget the passports...

Is there ever a time when we have let you down? I mean someday -- and that day may never come -- I may ask a favor of you. And if that favor were to be granted, I would be in your debt. And then, we would call each other friends.

(Godfather theme music)

25 posted on 07/30/2002 6:08:57 PM PDT by Lazamataz
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To: meyer

26 posted on 07/30/2002 6:10:27 PM PDT by Lazamataz
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To: Lazamataz
They are sparked by big movements in the futures markets followed by heavy buying in key selective stocks that drive up the indexes.
This struck me as an odd thing for the writer to assert. Yesterday's huge rally in particular was really, really broad. It wasn't just the indexes.

And pretty much everyone in the world expected a pullback today, and we only got it in the DOW.

Methinks this guy is writing what Daschle hopes is reality, instead of what is happening.

27 posted on 07/30/2002 6:16:57 PM PDT by Dales
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To: Dales
No, he's just bearish. You can be bearish without being a Democrat, you know. We did just go through an 8-year cycle of deceit and lies and market mania.
28 posted on 07/30/2002 6:19:26 PM PDT by Lazamataz
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To: Lazamataz
I didn't say he was a Democrat. I said he writes like Daschle wishes.

One can be bearish without misstating things too. Yesterday's rally was simply not just in the indexes. And to imply that it would be unexpected or a sign of weakness for there to be a slight pullback after a four day 16% index gain strikes me as bizarre.

Your mileage may vary though.

29 posted on 07/30/2002 6:23:08 PM PDT by Dales
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To: Lazamataz
Is there ever a time when we have let you down? I mean someday -- and that day may never come -- I may ask a favor of you. And if that favor were to be granted, I would be in your debt. And then, we would call each other friends.

"I know Jim Traficant. I used to live in the district next to Jim Traficant. And you, sir, are no Jim Traficant."

More godfather music

30 posted on 07/30/2002 6:26:21 PM PDT by meyer
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To: Lazamataz
Good find.
31 posted on 07/30/2002 6:28:34 PM PDT by steveegg
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To: Wyatt's Torch; arete; rohry; LS; meyer; DarkWaters; STONEWALLS; TigerLikesRooster; junta; ...

ChevronTexaco Corp. reported an 81% decline in second-quarter earnings, reflecting flagging profit margins in its refining business and $631 million in write-downs related to its investment in cash-strapped energy marketer Dynegy Inc.

But San Francisco-based ChevronTexaco, the second-largest U.S. oil company, postponed more bad news by keeping its Dynegy write-downs to a minimum. ChevronTexaco warned that it could be forced to write off its remaining $2 billion investment in Dynegy in the third quarter. Dynegy's stock price has been pummeled by liquidity concerns after it disclosed that this year's cash flow will be lower than expected.

BP PLC signaled a brighter future despite reporting a 44% drop in second-quarter profit on lower oil prices and weaker refining margins.

Reflecting its improving outlook, BP raised its dividend by 4.3% and reduced its net debt during the quarter. The company also said its crude-oil and natural-gas output is accelerating.

32 posted on 07/30/2002 6:31:14 PM PDT by razorback-bert
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To: Dales
One can be bearish without misstating things too. Yesterday's rally was simply not just in the indexes. And to imply that it would be unexpected or a sign of weakness for there to be a slight pullback after a four day 16% index gain strikes me as bizarre.

One must balance the bulls with the bears. Weigh the opinions carefully. Find the logic in each arguement. Pick apart the discrepancies that exist.

...then, throw darts.

OK, seriously, you are speaking a temperate opinion here. And a drastically needed one. The market report is bearish. I'm neutral. I enjoy a lively discussion on the events of the market.

If you want my honest opinion, I was expecting a 100-150 DOW pullback with similar drops in NAS and S&P. I wasn't disappointed in being wrong. It appears to me that things are becoming slightly less emotional and people are again resorting to studying the fundamentals and placing thier money accordingly.

Have we hit bottom? How the heck should I know. I just know that there are enough low priced stocks out there to entice some investors to put a little of that sideline cash back into it. I think there are also enough bargains out there to cause many short-buyers to have taken their profits over the last few days and placed them on the bull side of things or at least took the sidelines. Maybe not a majority, but many.

All I know for certain is that people will be a bit more prudent over the next decade or two. Decadence will rear its ugly head again around 2020 when I sell all my securities, buy CD's, and retire. :)

33 posted on 07/30/2002 6:37:04 PM PDT by meyer
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To: meyer
All I know for certain is that people will be a bit more prudent over the next decade or two. Decadence will rear its ugly head again around 2020 when I sell all my securities, buy CD's, and retire. :)

That's about my plan for early retirement <VBG>. FWIW, I was expecting closer to a 200-point profit-taking pullback (with corresponding profit-taking in the other indexes). If that would have happened, followed by a return to the current levels, I'd be much, much more confident that the emotion's been drained from the market.

34 posted on 07/30/2002 6:42:57 PM PDT by steveegg
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To: meyer
buy CD's
I recommend The Who's box set (in memory of John Entwistle).
35 posted on 07/30/2002 6:44:08 PM PDT by Dales
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To: steveegg
I'll be very happy with a day tomorrow where none of the major indexes have any substantial change in any direction. I would be thrilled if we are unchanged from now by Friday.

But I am still bullish through the end of the year.

36 posted on 07/30/2002 6:45:54 PM PDT by Dales
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To: Dales
I recommend The Who's box set (in memory of John Entwistle).

LOL! Good choice! Hey, at least they sing about My Generation. Of course, in 20 years, I'll not be able to hear, see, walk, or anything else that I took for granted 20 years ago. But I'll have my Who CD's.

37 posted on 07/30/2002 6:56:27 PM PDT by meyer
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To: Lazamataz
Instead, the statements got thrown in a desk drawer where they have been piling up since the beginning of the year.

Believe it or not, I know a couple of people doing this. They figure as long as they don't acknowledge it, it didn't happen. Severe denial going on.

Anyway, tomorrow makes one week of the "happy days" rally. Let's keep it going for another day or two.

Richard W.

38 posted on 07/30/2002 7:29:05 PM PDT by arete
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To: meyer
Humor break:

Tragedy or Farce?: It may not produce anything like Trollope's "The Way We Live Now," but an investor-relations agency in Philadelphia is sponsoring a scandal-inspired writing contest. Gregory FCA, as the agency is called, asks contestants to mark the WorldCom collapse, or that of any other "infamous company," by writing a before-collapse annual report in the style of a famous writer. It offers, as an example, this "Faulkner" excerpt, which refers to WorldCom's fallen CEO: "Ebbers, like all the grizzled male Ebbers before him, had in him that certainness and had added a richness to that certainness, and then added a faith to that richness that a dime earned and then spent was still there. . . ."

39 posted on 07/30/2002 7:29:53 PM PDT by razorback-bert
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To: Lazamataz
I put all my dough into WorldCom, AOL and Enron

 

40 posted on 07/30/2002 8:30:51 PM PDT by dennisw
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