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MORNING
COMMENTS WEEK OF 3/29/99-4/01/99 |
|
4/02/99 |
| MARKET CLOSED. NO REPORT. |
4/01/99 |
| The morning's first cup of
coffee and rumors that a BP Amoco-Arco deal was at hand helped traders temporarily forget
their troubles yesterday morning and helped the Dow sprint to a 41 point gain during the
first half hour of trading. A better than
expected Chicago Purchasing Manager's report quickly sent the bond market skidding and
turned the stock market's attention to thoughts of inflation yet to come and higher
interest rates. A tobacco judgement gone bad, a settlement soiree mired in
quicksand, and a lingering case of da-profit-jitters helped reinforce the growing negative
mood. Rumblings from the Balkans in the afternoon were the final ingredient needed
to ensure a down day.
The Dow Industrials, led by a sinking Philip Morris,
tumbled 127.10 on the day, ending at 9786.16. The transport rally proved to be a one
day wonder, with the average giving back most of Tuesday's gains. 30-year rates jumped to
5.62% and are once again brushing against the 5.64% resistance level. S&P 500
member AOL bucked the trend, helped by an analyst who feels the stock would be fairly
valued if it traded at a price/sales ratio of 60 plus.
The market's manic short term sentiment swings are likely
to continue early today with the market jumping at the opening bell. Yesterday's
fears will be temporarily put aside by renewed merger speculation following confirmed
deals by BP Amoco-Arco, Yahoo-Broadcast.com, and an impending CBS-King World marriage.
The market's pre holiday happy hour mood will be tested later this morning by the
release of the NAPM survey and an escalating conflict in Kosovo.
Any stock market downdraft resulting from either today's
NAPM or tomorrow's employment report is likely to quickly disappear next week as earnings
season begins. As we said yesterday, we expect the market to stage a short term
rally during earnings season as diminished expectations are met. With
sentiment remaining at bullish extremes, when investors are greeted with bad news they
tend to see a glass half full, rather than one half empty. |
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3/31/99 |
| Nobody, especially the
stock market, likes it when the fizz dissipates and they are left with a glass of flat
Coca Cola. The fizz went out of Coke's sales growth, and the market's mild case of
earnings jitters returned after a one day hiatus. The
Dow dropped over 100 points in the first half hour of trading in reaction to Coca Cola's
warning and spent the remainder of the day in the red, finishing down 93.52. The oil
stocks and financials, which have provided leadership in recent weeks, were among the
day's worst performers. The oils will likely regain their footing today on renewed
speculation that a BP Amoco-Arco deal is imminent. Volume remained weak on the NYSE
at 730 million.
An upbeat forecast from US Airways and an analyst upgrade
of Delta Airlines helped the Dow Transports buck the market's downward pressure. The
transportation average surged 73.43 to 3367.80, but still remains substantially below the
3461 resistance level. If you're a Dow Theorist don't get too excited by the
Transport's turnaround, the utilities had a miserable day and finished the day just above
resistance at 293.
The day's other notable loser was the XAU, which over the
past 2 days has broken decisively below the 59-60 support level and is likely heading for
a retest of last year's lows. Yesterday's eventless Fed meeting helped ensure that near
term gold will remain in a downtrend. The Fed's decision to continue its neutral
bias did help the bond market however, with the yield on 30-year treasuries dropping to
5.58%.
The bond market will face several tests over the next two
days, with tomorrow's NAPM survey the most important. Friday's Nonfarm Payroll
figures will likely come in weaker than expected due to inclement weather in March, and
are unlikely to give the bond market a clear direction.
The stock market will also be searching for a direction as
we enter the second quarter. Earnings season begins in earnest next week and we have
a sneaking suspicion the market will find an excuse to rally as diminished expectations
are met. First quarter earnings could mark the year's high point for U.S. corporate
earning. The earnings of internationally exposed big caps will likely come under
pressure in the second quarter as the global economy continues to weaken.
Last year growth in Europe helped mitigate the effects of
the Asian crisis. This year European growth has slumped, and U.S. multinationals
will have to rely on increased domestic demand to make up for the shortfall. The German
economy is contracting, the U.K. is stagnant, and today French unemployment figures
showed a surprise jump to 11.5%. Business confidence in France and Germany has
fallen to a 2 1/2 year low.
The hoped for recovery in Japan for the moment remains on
hold. Figures released Tuesday showed that the Japanese government's pumping of
money into the economy was doing little to cure the ailing patient. Unemployment
rose to a post World War ll high of 4.6%, and household spending showed its biggest drop
in 2 years, with the household spending index falling to its lowest level in 13 years.
Recent corporate restructuring announcements are having a negative effect on
consumer sentiment. The Japanese consumer accounts for 60% of the economy and until
they begin spending, recovery is just a distant dream.
With no signs of recovery in Japan and with Europe
slowing, a happy U.S. consumer remains corporate America's chief hope for growth growing
forward-- and the consumer will only stay happy as long as the market continues to
rise. |
3/30/99 |
| The British invaded New
York on Monday. A pair of merger rumors in the weekend British press fueled a rally in the
oil sector and helped the drug sector regain its health yesterday. The broader
market, ever ready to rally on Monday morning takeover speculation, joined in the party.
Tech sector bargain hunters, window dressing portfolio managers, and shorts feeling
the squeeze jumped on the surging bandwagon during the day. The early morning surge
brought visions of Dow 10,000 specials to slumbering financial news producers and editors
everywhere, who promptly rushed their troops to Broad St. to cheer on the traders. Whether
it was the takeover rumors, or the sideline cheering which spurred the Dow on to its first
close above 10,000 we'll never know.
Other major averages joined in the rally, with NASDAQ surging 72.67 and the S&P 500
gaining 27.20 to finish at 1310.00. On the downside yesterday, the Dow Transports and
Utilities registered less than impressive gains, and volume continued on the weak side.
Advancers led decliners 2 to 1 Monday, but one day does not cure a severe case of Bad
Breadth. The fact remains that on a day when the Dow rallied to a new high, only 38.1% of
stock's were trading above their 20 day moving averages.
Today, the Dow and the S&P500 must overcome overhead resistance at 10061 and 1318,
respectively, if they are to continue their march higher.
Perhaps the most important news event that occurred yesterday is one that came after
the closing bell and will weigh on the market this morning.
Coca Cola warned after the bell that slumping international sales and disappointing
domestic growth would cause its sales to decline by 1 to 2% in the current quarter. While
Coke's disappointing international growth (and rumors circulating in Europe this morning
that General Motors is also suffering from the same bug) will likely put pressure on
stocks this morning, we do see a ray of hope for the market in the resiliency of KO's
stock in the face of adversity during the past few quarters.
While Coke has declined from the mid 80's, the stock still remains richly priced for a
company with no sales or earnings growth because deeply ingrained investor sentiment has
been slow to change. A sentiment trend that has been built over the course of years does
not just simply dissipate overnight when times get bad. It takes time, hence the gradual
decline in Coca Cola's stock rather than a sudden crash. Likewise we suspect that the
major averages, where bullish sentiment has been built over the course of 17 years, will
emulate Coca Cola's slow decline when they are finally presented with a trend changing
event and begin their inevitable return to historical valuation norms.
While the decline from sentiment extremes which
have been built over time is often a gradual one, the decline from sentiment levels built
during a mania is always a sudden one. The decline in financial asset values after a
mania has peaked is always a sharp crash that spares no prisoners. So while we
expect the broader market's return to normal valuation levels to be a slow one, the
decline experienced by those sectors which have been caught in a mania will be short and
sharp: i.e. a crash.
To put it in simpler terms, when the bull market has ended
and the sentiment pendulum swings, we would rather be holding a stock where sentiment has
built up gradually like Coca Cola than one where sentiment has been built in a day like
eBay... |
3/29/99 |
| The war continued on
Friday, with neither side emerging the victor. Earnings jitters fought hand to hand
with bargain hunting as the market's internal war raged throughout the session. Downbeat
news from Inacom and Hutchinson Technology sent the tech sector lower from the open, but
buyers stepped in periodically during the day to keep the downdrafts to a minimum. NASDAQ ended the session down 15.48, and the Dow Industrials fell
14.15. Volume was a lackluster 695 million shares on the NYSE, continuing the weak
volume pattern that has been established over the past few weeks. Breadth continued
to be miserable, with 1258 advancers and 1733 decliners. The advance/decline line is
now below its October lows.
The significance of the advance/decline line in today's
market lies not in its absolute level, but rather in the reason why the major averages
have been able to make new highs while the A/D line is making new lows. The reason
is a simple one: a distribution from strong hands (insiders, NYSE members, professionals)
to weak hands (the public). The continued strength in the big caps and speculative
growth issues (Internet stocks) is typical of patterns seen at previous market tops when
the public, late to the game, buys the familiar and the glamour stocks of the day.
Typical of patterns seen at previous tops, insiders at the new Nifty Fifty and the
Internet companies have been selling heavily into the hands of an eager public. The
public's buying of the familiar and the day's hot growth stories enables these issues to
stay aloft while the rest of the market slowly sinks. A shock from the unexpected is
generally required to dislodge the public from its new found love for equities.
The opportunities for an external shock to occur have
multiplied in recent weeks, but we do not expect it to occur this week. This week's heavy
economic calendar presents a series of events that have the potential to weaken sentiment
among professionals, but not among the weak hands. The Fed meeting is largely a
nonevent, with the only question being whether the Fed will retain its neutral bias.
Recent figures on durable goods and trade have tilted the odds against the Fed
changing its bias towards one of tightening.
The most significant events to watch this week remain the
NAPM report on Thursday and Nonfarm payrolls on Friday. A strong showing by either
report could set the stages for an already skittish bond market to selloff.
We would also keep an eye on Japan this week.
Household spending figures come out on Tuesday, and the Japanese fiscal year ends on
Wednesday. We will discover in the coming weeks whether the recent rally by Japanese
equities was merely end of year window dressing by portfolio managers. |
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