...psst,
"Inflation is Dead", the whisper that turned to a roar, the
belief that sparked a run at the record books, the rally that will keep
our hero the Pre-emptive Crusader singing a tune of more to come.
A dip in unit labor costs and the second
straight quarter of 5% productivity growth were enough to convince the
ranks of the euphoric that the Fed Hike Nemesis was breathing its last
gulps of jitter infested air--a belief that sent the stock market into
rally mode out of the gate, a rally that proved to be one of unequals.
After an initial surge, the Dow
Industrials wilted on the vine, its gains cut in half by the close.
The Dow, which began the day with 16 of its 30 stocks trading below their
30-day moving averages, ended the day with 17 of its components below the
fabled average--not an encouraging sign on the road to new records. The
out of favor Dow has also become susceptible of late to bumping its head
on overhead objects, specifically resistance at 11070 which the average
has tested on 7 out of the past 12 trading days and failed to close above.
Adherents of the New Era of eWonder may
regard the Industrial's recent underperformance as nothing more than a
passing of the leadership baton from the old economy to the rightful new
heirs to the throne, the wondertechs, but to a more seasoned eye the
divergence between the performance of the drooping Industrials (not to
mention the transports, or the 52.8% of stocks in long-term downtrends)
and the bubble-icious techs is little more than a sign of the distribution
that normally occurs at the end of a long climb as money passes from
strong hands to exuberant weak hands.
The money that is passing from strong to
weak is flowing, some may say gushing into NASDAQ stocks, specifically
technology and the twin bubbles of Internet and Biotech. Here too,
the underlying picture is a little less bright than the headline oohs and
ahs. Despite a 9.6% gain in the NASDAQ 100 since the beginning of
the year, the average technology stock has managed just a 2.5% gain as the
majority of tech sector gains have been concentrated in the hands of the
few.
While the beloved leaders:
semiconductor, Internet, and biotech have been a short-term trader's dream
date, we have a sneaking suspicion that at some point in the not too
distant future the long-term investors who have been lured to these
sectors recently at current valuation levels by analysts' glowing reports
will be cursing their brokers.
This trio of industries may be the apple
in the eye of many an analyst, but for anyone with an investment time
horizon longer than the present, the future spells trouble. Business
is booming in chipland, but the semiconductor industry remains a cyclical
business. When the current day's business is great, there is a
tendency amongst investors in cyclical stocks of all stripes to forget the
meaning of the word cyclical.
As for the current mania for, and
soaring stock prices of, pure play Internet stocks and biotechs...bubbles
grow until they pop. Unless the New Economy has brought with it a
magic formula to suddenly increase in the survival rate of start-up
companies, the billion dollar market caps being sported by many
development stage companies in both industries will only lead to pain as
the law of averages works its way.
While bubbles and divergences may be a
concern, they are not enough to stop the market's current momentum--a
momentum that is being given a boost by the week-long Goldman Sachs
Technology Conference. Shameless self-promotion fests always have a way of
boosting stock prices....
...and besides, even without this week's
tech confab, prices would go up because inflation has been proclaimed
dead...
..but is the threat of inflation rearing
its ugly head really dead?
If time stands still it is, but
otherwise, yesterday's productivity numbers did little to diminish the
prospects of either inflationary pressures developing or the Fed hiking
rates. At most, the data tilted the odds against a 50-basis point hike in
March.
Productivity gains are helping to keep
inflationary pressures under lock and key today, but wages are trending
higher and if output per hour dips from current levels then inflationary
pressures will make themselves felt quickly. With the global economy
in full-recovery mode and soaring stock prices putting consumers in
full-spending mode, productivity growth will likely need to rise above
even its current levels to cancel out the potentially inflationary effects
that soaring demand places on a shrinking pool of labor.
Stellar productivity gains may be the
eighth wonder of the modern world, but there is no guarantee that 5% gains
are sustainable, and it is this lack of a guarantee that dictates that the
Fed's policy of pre-emptive strikes will continue.
Yesterday's celebration was premature.
