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MORNING
COMMENTS WEEK OF 8/2/99-8/6/99 |
|
8/6/99 |
Optimism
resurfaced for a brief moment yesterday afternoon, the anticipated bounce
in Internet stocks we mentioned on Wednesday pulling the market higher,
buoying spirits, temporarily bringing traders out of hiding, sparking talk
of a new leg up.
The rally occured despite a productivity
report which showed a sharp deceleration in productivity during the second
quarter, with annual growth slumping to 1.3% from 3.8% in the first
quarter. The recent signs that wages are rising at an accelerating pace
were once again present yesterday, as labor costs jumped 3.8%.
A sharp rally in the bond market,
prompted by a flight to quality, cushioned the impact of yesterday's
productivity data and allowed the market to put aside its recent
worries.
All hope for a rally died with this
morning's release of July employment data, which reinforced the picture
that had begun to emerge in the past week--that of an expanding economy
with an inflationary gun to its head, of a labor market on the brink of
experiencing a sharp escalation in wage pressures, of Goldilocks living on
the edge of trouble.
Today's employment data showed a gain of
0.5% in average hourly earnings and 310,000 new jobs added during July,
both figures far above the consensus estimates of 0.3% and 220,000
respectively. Signs of the much hoped for slowdown were nowhere to
be found in today's data.
Perhaps most worrisome was the renewed
strength in the manufacturing sector, with the sector experiencing its
first gain in a year as it added 31,000 jobs during the month and
manufacturing overtime inched up to 4.8 hours from 4.7.
With the manufacturing sector springing
back to life, we are likely to see labor market tightness escalate, and
the pace of wage growth accelerate in the coming months unless the economy
slows significantly.
The pressure is now on the Fed to act
swiftly to prevent the gathering storm of economic imbalances from
developing further. The market's next major tests will occur with the
release of CPI and PPI, both of which we expect to surprise on the upside
due to the recent rise in oil prices and continued tightness in the labor
market.
With a 1/4 point hike in rates at
the next FOMC all but a done deal at this point, the question now must
turn to whether the Fed's expected next move will be enough to slow the
economy. The consensus says yes, we say no.
As we have said before, to slow the
economy the Fed must slow the consumer, a consumer who continues to spend
beyond his means, a consumer whose thoughts and wallet remain locked in
the age of Perpetual Prosperity despite the signs of trouble on the
horizon.
We expect the pace of economic growth to
pick up from last quarter's 2.3% as inventories are replenished and the
consumer continues to spend. This acceleration in growth will lead
to an acceleration in wage pressures, and ultimately, to a third move by
the Fed.
We would expect any additional move by
the Fed to come sooner rather than later. Y2K jitters will put
pressure on the stock market in the last two months of the year, and the
Fed will seek to avoid adding further to an unstable market
environment. Boxed in by rising economic imbalances gathering steam
and nipping at the economy's heels and Y2K jitters on the immediate
horizon, the Fed will have a short time frame in which to act, thus we
would expect the third hike to come at the October meeting, or in-between
FOMC confabs if conditions warrant.
As the Fed strives to slow the economy,
and prolong the expansion, it must act quickly, but it will do so on a
veritable tightrope, with any misstep causing chaos in the markets.
The odds of the Fed succeeding are stacked against it, historically the
market's moves from states of "irrational exuberance" to the
historical mean have over swung on the
downside. |
8/5/99 |
Stocks
are sliding, the .coms have turned from magic elixir to dreaded curse,
yields are rising, and yet the consumer keeps smiling.
The latest chain store sales show that
the consumer remains in top spending form despite the recent rise in
interest rates and declines in the stock market. The fear,
uncertainty, and early stages of panic that now grips much of the street
has yet to spread to Main Street.
The relative complacency of the
individual investor remains both the market's greatest stumbling block to
forming a bottom and its greatest asset. The faith of the individual
in the 17 year long bull market continues to act as a safety net under the
market, cushioning the blows that it is being dealt by the twin evils of a
negative interest rate environment and fading euphoria.
We are unlikely to see a meaningful
bottom before the individual throws in the towel and joins the Jitter
Brigade. With consumer sentiment remaining near historic levels
despite the market's recent downturn, we will likely need to see much
lower stock prices before the fear felt by many pros spreads and reaches
its final destination.
While the Dow is down 5% from its highs,
and NASDAQ 10%, both indexes remain significantly above the rosiest of
forecasts made by Market Seers at the beginning of the year. At the
beginning of the year, the average year end 1999 forecast for the Dow was
9500, a level which we will likely need to fall beneath before the
consumer puts the breaks on spending and starts selling in earnest.
It is the consumer, and not the Fed, who holds the key to curing the
uncertainty which is currently infecting the market.
As long as the wealth effect continues
to chug along at an unrelenting pace, the market will remain in a state of
fear, and the need for the Fed to be pre-emptive against building economic
imbalances will remain.
While we expect the transformation of
the individual from 'buy on the dipper' to 'sell at any pricer' to be a
gradual one and the market to decline at an orderly pace, thus avoiding a
crash, the record use of margin by many investors has created the
potential for a slow letting out of air to turn into a decline that far
overshoots on the downside.
Lesson number one when overusing
leverage: Gravity exists. |
8/4/99 |
When
the possibility of attaining a dream ceases to exist, the memory of what
could have been lingers on, temporarily preventing the dejected dreamer
from leaving the lost cause behind and moving on to greener more fertile
pastures.
Thus the investor, entranced by a dream
he has been sold, often stays long after the possible has been transformed
into the impossible, clinging to hope on the descent into darkness, only
giving up hope when the bottom is at hand.
The path from top to bottom, from dream
to nightmare, is not a smooth one in the investment world, but rather it
is one that proceeds in fits and starts, the path from departure to
arrival strewn with a plethora of mirages that temporarily elevate hope
and act to rekindle the emotional ties that the investor feels to the
memories of what could have been, in the process lengthening the time
needed before a final separation from the previous trend can occur.
For the neophyte, the investor or trader
who has known nothing but the previous trend and fully believes that what
he has experienced is the full extent of what the market has to offer, and
who has been lured to the playing field by dreams of a better future, the
dreams die harder and the losses grow wider before reality sets in.
In today's market we are witnessing this
holding on to hope in the face of mounting adversity primarily among
investors in the Internet stocks, where in many cases the dreams of Spring
have been relinquished only by a forced exit from the playing field in the
form of an unmeetable margin call.
The separation process from the
unattainable dream of an easy path to riches began in April, with
sentiment enduring an initial bone shaking rattle that endured into June,
before the mirage of a benign Fed appeared to instill hope once
again. With each fit and start (some would say wave) that sentiment
is subjected to on the downward path, the ability of hope to be elevated
to former levels is diminished (and the ability of the effected sector of
the market to rebound is similarly diminished).
With sentiment damaged from the initial
thrust downward, the June-July rally was only able to retrace 50% of its
fall from the top before fear once again set in and the now dominant down
trend once again resumed.
The fear resulting from this latest wave
down is now reaching a fever pitch, with the prior uptrend's pitchmen,
from television commentators to quotable technicians, recanting their
previous beliefs and now singing a different song, a song of doom.
With sentiment turning decidedly bearish
towards the Internet stocks, but with panic still far away on the distant
horizon, the stage is being set for the next countertrend move, a move that
could retrace 25-38% of the decline from July. The number of investors
willing to participate in this final upward countertrend rally will be
diminished from the number that took part in the last rally, with
sentiment weakening on each false ray of hope that is offered. After
this one final countertrend rally, we expect the Internet stocks to start
their final leg down, a leg that could see many of the weaker stocks in
the sector break below their lows of last October as panic sets in and
signals an end to the sector's decline.
|
8/3/99 |
A
morning short covering rally, and then an afternoon jitter-led fade marked
a day when the majority of participants, buyer and seller alike, remained
on an extended weekend.
The first of this week's major economic
reports, the NAPM, provided a bit of early relief to the short term
oversold market, but underneath the headline number the report proved to
be a bit of a mixed bag, unlikely to move the Fed either way. While
the new orders and employment components of the report eased, signs of a
pickup in pricing power were evident, with the prices paid compnent rising
to 54.7% from 53.5% and the suppliers delivery component moving up to
54.2% from 53.1%. While the pace of growth eased from the prior
month, the report still painted a picture of an expanding manufacturing
sector with increasing price pressures.
With the NAPM out of the way, the next
two days are virtual throw aways, days when the sidelines will be more
crowded than the trading floor as traders await Thursday's productivity
figures and Friday's employment data.
While today and tomorrow would be better
spent at the beach than in the trading pit, there remain a few things to
watch over the coming two days: AOL, IBM, the Internet stocks, and volume.
We would keep a close eye on both AOL
and IBM in today's trading. Both stocks closed at important support
levels yesterday, AOL at its 200 day moving average and IBM just below its
55 ay moving average. A break below these support levels by either
stock could spark a renewed sell off in their respective sectors: the
Earthbound Internets and the Richly Valued Big Cap Techs.
The Internets could enjoy a bit of
upward movement today on the backs of a Yahoo/@Home rumored combo, but the
sector has seen its better days, and is likely to resume its history
lesson shortly (the lesson that parabolic rises always result in swifter
parabolic declines).
The most profitable opportunities for
taking part in the sector's downward push are likely to be in the shares
of the companies that benefited the most from the sector's rise to
glory: the online brokers. With average trading volume having tailed
off from its early year pace, and the market now in an intermediate term
downtrend, the online brokers could be in for a period of multiple
contraction, the end of which will see their multiples fall into line with
the rest of the traditional brokerage industry. |
8/2/99 |
Earnings
season is gone, the expected share price boom gone bust, and with its
passing the market's fate passes into the hands of The External
Unbelievers.
Early this year, as Chatroom Cowboy
Billy and his pals were gathering headlines with their daring Internet
stock "trading" exploits and Mr. Quotablebearguru was prophesizing
doom to any available camera in hopes of landing a client or two, another
group sat quietly by watching the unfolding carnival. The presence
of this group of partygoers, who had been swept ashore by the fast
moving tides of a sea of liquidity, allowed the spectacle to continue and
flourish.
Distrustful of Goldilocks and her
carnival entourage and increasingly fearful of the outcome of the last
act, and yet with no where else to go, The External Unbelievers
remained at the show, their eyes remained firmly focused on the raging
storms in the outside world, awaiting the inevitable calm and the
appearance of a new less risky playing field.
Spring bloomed, and with it a sense of
calm began to descend across the globe. One by one, the
opportunities began to sprout forth and beckon in the lands beyond the
Fiefdom of Goldilocks.
As summer arrived, a clear divergence
became apparent between the beliefs of the natives and those of The
External Unbelievers. The natives were fully caught up in the game,
their excitement growing by the minute, rushing to place their money,
sometimes earned and more often borrowed, upon the playing field, fully
believing that the fun would never end.
The External Unbelievers meanwhile, had
grown weary of the game, the pursuit of which they now saw as more fraught
with risk than reward, and increasingly their eyes gazed homeward, to a
land left behind which now beckoned with rekindled promise.
As the first trickle of non natives
began to depart not an eye was raised by the euphoric natives. As the
trickle gained force, the natives began to sense that something was amiss,
that perhaps the headline grabbing Cowboy Billy and his friends were but
minor players in the game, and it was the departing External Nonbelievers
who held the deciding hand. They began to fret as they realized that
one of the primary drivers of their long lasting prosperity was now
returning home, taking with them the suitcases stuffed with dollars which
they had brought.
As the week begins, and the market moves
from economic report to economic report, keep in mind that one of the
market's primary supports: the inflow of foreign funds has now been
reversed and is unlikely to return until the risk/ reward picture once
again favors the U.S. market. While the market may rally on weaker
than expected economic figures, that alone will not be enough to turn the
tides of liquidity.
While valuation concerns have
largely been forgotten by many U.S. investors, the historically high
valuations of the U.S. market have increasingly weighed on the minds of
foreign investors. With many foreign markets now offering better
risk/reward ratios than the U.S. market does, and with the game in many
markets just beginning rather than long in the tooth, the odds favor
a continuation of the recent repatriation of funds, and with that
continued outflow of funds the pressure will remain on the U.S. stock
market. |
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