Monday, 8/5 Market Wrapup

FinancialSense.com ^ | 08/05/2002 | by Scott Middleton

[Lazamataz]

 
Weekday Commentary from Scott Middleton
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Don't Count on the Fed

Source:  CNN/Money

 

 

Storm Watch Update for 7/26/2002

Monday Market Scoreboard  August 5, 2002
Dow Industrials		269.5	8043.63
Dow Utilities		1.55	224.52
Dow Transports		69.76	2132.27
S & P 500		29.64	834.6
Nasdaq		41.91	1206.01
US Dollar to Yen			119.64
US Dollar to Euro			0.9812
Gold		0.6	309.6
Silver		0.04	4.63
Oil		0.26	26.58
CRB Index		1.79	208.6
Natural Gas		0.18	2.678
All market indexes The Week in Graphs Storm Watch Geopolitical News in Focus Energy Resource Page Precious Metals
	08/05	08/02	Change
HUI (Amex Gold Bugs Index)
Close YTD	109.04	113.08	4.04 67.70%
52week High	147.82	06/03/02
52week Low	59.86	11/26/01
XAU (Philadelphia Gold & Silver)
Close YTD	59.17	63.23	4.06 7.97%
52week High	88.65	05/28/02
52week Low	49.23	11/19/01

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

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^{Monday, August 5, 2002 Market WrapUp}

Double Dipping
The past few days of economic data is driving concerns of a double dip recession. So much to the tune that Goldman, Sachs & Co. economists are convinced that the Fed may consider another rate cut during their meeting next week in order to avoid recession. Remember, it was only five weeks ago the bank said growth was strong enough to warrant an increase, so to make a sudden 180-degree turnabout is probably unlikely. However, should consumer confidence and the economy continue to deteriorate in the coming weeks, the Fed will surely act swiftly.

Consider this--for some time now it has been the belief of many that when the Fed cuts rates the markets will rebound. Will that happen this time around? With rates currently at 1.75%, what effect is lowering it going to have? The markets could very well react positively to a rate cut. Surely the media is going to pump it up and convince everyone that what the Fed is doing is right for your portfolios. What they won’t tell you is that by cutting rates further, they are running the risk of further alienating foreign investors in the U.S. markets. Without foreign investment dollars the market is unable to support itself. Henceforth, the rally will, no doubt, be brief and many people will just use it as an opportunity to eliminate positions and the market will continue in the general trend downward.

The Economy
The ISM’s index of retail, financial services, construction and other non-manufacturing companies dropped to 53.1 during July from 57.2 in June. A number above 50 still means expansion, but this was the second straight month the pace of growth slowed.

Financial Markets
The Dow slid 269.50, or 3.2% to 8043.63. The Standard & Poor's 500 Index fell 29.64, or 3.4% to 834.60. All 10 of the benchmark's industry groups dropped. The Nasdaq slid 41.95, or 3.4% to 1205.97, led by shares of Cisco Systems Inc. Trading fell to 1.4 billion shares on the New York Stock Exchange, the slowest day in a month. More than three shares fell for every one that rose on the exchange.

Financials and pharmaceutical companies led today’s decline as Lehman analyst, Brock Vendervliet, lowered his rating on Citibank and JP Morgan Chase & Co. from strong buy to "equal weight."

Overseas Market
European stocks slumped as more evidence economic growth is stalling prompted investors to sell shares of companies such as BHP Billiton and Imperial Chemical Industries. The Dow Jones Stoxx 50 Index closed 3% lower at 2526.33 as 49 of its members declined. All eight major European markets were down during today’s trading.

Taiwan stocks tumbled and the TWSE Index had its biggest drop in 21 months after President Chen Shui-bian described the island as a separate nation and supported a referendum on independence. Japan's Nikkei 225 stock average lost 0.05%.

Treasury Market
Treasury bonds traded significantly higher in response to continued weakness in the equity realm. Yields on a benchmark 10-year remain at their lowest levels since early November. The 10-year Treasury note was up 22/32 to yield 4.205% while the 30-year government bond gained 30/32 to yield 5.16%.

© Copyright Scott Middleton, August 5, 2002

[steveegg]

Do you think that Dow 5000 is low enough for the DemonRATs? I was looking at Dow 3000 myself.

[truthkeeper]

Hey, what took you so long? (Thank you.)

[truthkeeper]

Help...I need the smart people to tell me how this all is going to affect my GNMA fund. (Gulp...even though I'm afraid to hear the answer...)

[steveegg]

Guess the bouncing cat crashed through that 4" glass plate.

[steveegg]

Oops; almost forgot...

We're all going to die!!!!

[razorback-bert]

Here is an important article (Comstock)
South American Crisis Another Major Worry
 
As if the global economy did not have enough problems, a developing economic and financial crisis in South America is becoming another potential drag on world economic growth and stability. The trouble this time started in Argentina, which defaulted on its debt earlier in the year, and is now in its fifth straight year of recession. The nation’s economy is expected to decline another 15% this year and bank accounts have been frozen for six months. Earlier IMF aid was premature and went down the drain. Now the organization is insisting on major reforms that a succession of new Prime Ministers have found impossible to accomplish politically.
 
At first, economists felt that the Argentine problems would not spread, but Uruguay, a small economy dwarfed by Argentina, has now been heavily affected. Its Peso has lost half of its value since March and the cost of its public debt is now 100% of GDP. Bank deposits are in dollars with many of them held by Argentines. A run on the banks is drawing down foreign reserves by $500 million a month and reserves at the end of July were only $655 million. The country has a pending agreement with the IMF for an infusion of funds, but this won’t work unless confidence is somehow restored. Failure would result in default, the second by a South American nation this year.
 
An even bigger problem is Brazil where a currency crisis was caused by the possibility of a market unfriendly candidate winning the presidential election in October. At one point last month the Brazilian Real was down by 33%, pushing up the cost of servicing the debt burden, which is 60% of GDP. The IMF wants an agreement from the main presidential candidates that they will maintain sound economic policies, but the two candidates leading in the polls have so far refused the IMF’s requests. The Brazilian economy is entwined with every other economy in South America, and a collapse would have serious consequences throughout the continent and on global growth as well.
 
Treasury Secretary O’Neill is now in South America attempting to shore up confidence although it is well known that he generally opposes bailouts. Although the continent’s crisis has not been mentioned much as a factor in the U.S market slide it is certainly another major negative factor to add to a pile of other investor concerns.

[arete]

New guy alert.

Richard W.

[arete]

What makes tomorrow significant for the market?<

The barn door is open.

Richard W.

[steveegg]

More reason to be wary, very wary.

It sounds like South America's between the rock of its homegrown socialism and the hard place of the IMF "fatal cure".

[mikrofon]

I'll be the first to admit that, despite my best efforts to understand these things, I'm fairly hopeless when it comes to fiscal matters. (Good thing I'm not that heavily invested in the SM :-)

However, does it seem weird to anyone else that every day we're inundated with analyses in the finest detail from various media financial "experts" who can say EXACTLY why the market behaved the way it did afterwards? It's somewhat like a weatherman reporting that the local temperature dropped one day because Farmer O'Leary's cows 50 miles away pumped more methane into the air due to a change in their feed .... while trying to be taken seriously!

[Lazamataz]

By gum, I think he's got it.

[RightWhale]

How can one invest in a runaway economy, whether it is heavy inflation or catastrophically decreasing GDP? Those countries are ripe for revolution, but which kind will they get?

[Lessismore]

It looks like Bush is being warned -- attack Iraq and the world's financiers will collapse the Latin American economies and that will collapse the US economy. Easy to do, considering the balance of payments deficit that the US is running, the hollow state of the US service economy, and the indebtedness of the US consumer.

[johnboy]

Fixed at 5.125%.

where are you getting this rate? my wife and i have absolutely first rate credit, and we're paying 6 and 5/8%.

[Nuke'm Glowing]

LOL, well in my view the cat was tossed off the 75th floor and has just been bouncing off of ledges until it finally goes "splat". This is going to be a very, very ugly September-October for the markets as things unwind even further...

[SauronOfMordor]

I don't know about the overall economy, but the Dow chart is showing the dead cat bounce. This is excellent news, I think. We haven't seen a bottom without one before this.

The form of this bounce looked suspiciously like market manipulation by the fed, in order to scare off some short-sellers into covering, and give the institutionals and big-boys a chance to leave with their shirts

Maybe there will be another bounce for the morning -- the Dow futures are at +81 even though the Asian markets took a bath overnite

[truthkeeper]

bttt

[SauronOfMordor]

Both S&P futures and Nasdaq futures got goosed at 3am, getting a 3% and 2.5% bounce (respectively) between 3am & 5am.

I guess some of the big boys aren't completely out yet

[Dog Gone]

how this all is going to affect my GNMA fund.

Your GNMA fund is an excellent place to be right now. Don't move it.

[truthkeeper]

Thanks, that makes me feel better. I actually didn't lose anything in it this past week...in fact, I even gained a little. I'm just hoping it's a safe place to be until this all bottoms out.

Wish I understood all these ins and outs better, but that's why I like reading these threads. I always learn something...so here's one more little BTTT.