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MORNING
COMMENTS WEEK OF 8/16/99-8/20/99 |
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8/20/99 |
| Amidst
the backdrop of a gloomy day, a few bright spots did poke their heads out
yesterday, but only a few, and the few rays of light were of the short
term, rather than long term variety.
The utilities rallied strongly after
their brush with death (and their 200 day moving average) on Wednesday, the
Dow and NASDAQ also offered a ray of hope, as the short term trend
remained up for both averages despite the past 2 days declines. The
dollar, despite taking a solid drubbing, also offered a faint glimmer of
hope with its continued ability to remain above support.
The faith of the individual investor
also provided a short term steadying ray of hope for the markets yesterday
as AMG Data
reported that inflows into equity funds reached their highest level in
15 weeks, with net inflows of $6.9 billion. While the inflows will
provide the market with an underlying cushion of cash to absorb its blows,
the cash is likely to further elevate the market's illness: Divergence-initis.
The money continued to flow into the
crowd pleasing sectors of the market, with 59% finding a home in growth
funds, and Internet funds enjoying their largest inflows in 2
months. Yes Virginia, the increasing narrowness of the market
continues to sound a warning gong to us that trouble lies ahead.
The market's recent leaders, the
chipmakers and semiconductor equipment makers, PC makers, oils and oil
service, and the odd cyclical here and there, continue to look like
they've enjoyed their last fling....and then there's that divergence
between the rapidly sinking transports and the industrials, and the
advance/decline line emulating a skydiver without a parachute. In
short, things are not looking good for the sustainability of any rally
that may develop. The Dow may have enough energy left in it for one
last try at its old highs, but the odds of the broader market following
are slim to none.
Just as there are short term rays of
light in the stock market, there are a few glimmers of temporary hope in
the currency market. The dollar's ability to tread water above support,
coupled with a deeply overbought yen, could combine to ignite a short term
bounce in the greenback, but the long term outlook for the dollar remains
as weak as the stock market's long term prognosis looks.
The dollar's negative outlook is in part
due to a bit of negative sentiment towards the U.S. stock market that has
continued to mushroom over the past 6 months in lands beyond these
shores. While the U.S. press and many U.S. investors have spent much
of the year entranced by the golden era they perceived around them, the
view from abroad has increasingly diverged with the notion that "this
time it's different".
This negative sentiment spells trouble
for the dollar in the long term. Even if the Fed were to stop its
rate ratcheting at the second notch, we find it unlikely that foreign
investors would take this as a sign to reverse their recent repatriation
of funds and once again pour money into a market where the risk/reward
ratio is perceived as more risk than reward.
In the short term, despite options
expiration volatility today and the jitters holding court on Monday, a
rally is possible as the market breathes a sigh of relief over a 1/4 point
hike that's largely priced into the bond market. In the long term,
it might be best to start following that trail of foreign cash to shores
where the risk/reward ratio still remains positive, and the economic cycle
is in its early stages.
After their recent pullbacks South
Korea, Singapore, and Indonesia look attractive...and for the die hard
bottom fishers in the crowd there's always Peru and Colombia, where times
remain tough but the worst case scenario is already priced in.
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8/19/99 |
| What
PPI and CPI giveth, the Trade Deficit taketh. Just when a bit of
hope was beginning to emerge among many market participants that a quarter
point would do the trick, today's trade figures arrived to spoil the
victory party.
The trade deficit hit a record $24.6
billion in June, surprising many (including ourselves) who had expected it
to narrow from May's record $21.3 billion deficit. From Japan to
OPEC, from China to Latin America, the U.S. trade gap grew. Imports
jumped 3.9%, more than offsetting a strong 0.5% rise in exports.
The figures are yet another sign
that U.S. economic growth, fueled by a securely employed consumer
with a pocketful of capital gains and borrowed cash, remains strong and
has yet to be impacted by a 125 basis point rise in the long bond yield
since last October.
Today's trade data is unlikely to cause
the Fed to raise rates by more than the widely expected 25 basis points at
next week's meeting, but it does increase the odds that further rate hikes
will be needed before the effect of higher interest rates begins to
impact economic growth.
Today's data also adds to the rapidly
building undercurrent of inflationary pressures that have begun to simmer
beneath the surface of a still benign low inflation environment. As
we have said many times, while the recent benign CPI figures
captured the media's attention, they have little value as a predictor of
future inflationary trends (although they do provide trading opportunities
for the short term trader).
The deflationary tides that fueled this
decade's long economic expansion and above trend growth in stock market
returns are slowly shifting, and while inflation is not an immediate
threat, the danger is building. Commodity prices have reversed their
long decline, wage growth is now on an upward path while productivity
growth is slowing, and perhaps most importantly, an up tic in global
growth is reversing the decade long inflow of foreign funds into the U.S.
bond and stock markets.
At this point, the pressure remains upon
the Fed to act swiftly to avert the building pressures from bubbling to
the surface. The Fed's ability to bring the economy in for a soft
landing without causing the present liquidity fed bubble in asset
valuations to burst remains in doubt. |
8/18/99 |
| The
commencement of the stock market's expected post CPI relief party was
delayed until the final hour of trading yesterday, and the day long wait
proved to be a disappointment. The Dow did gain 70, NASDAQ added 25,
and the S&P 500 tacked on 13 plus, but it was a rally that ailed to
inspire mass participation.
Volume remained anemic at 695 million shares on the NYSE, and our old
friend Mr. Divergence was once again hard at work as the Transports slid
6.66 and the Utilities finished essentially flat despite gains by the
three major averages.
We continue to believe that the U.S. stock market is dancing its last
waltz. With sellers selling into every rally, weak volume as the Dow
makes a second run at its July highs, a select group of stocks streaking
towards their old highs while nearly 50% of stocks are in long term
downtrends, and a strong divergence between the Industrials and the
Transports (which are firmly in a long term down trend), the
sustainability of the current rally is in grave doubt.
The stock market has received a psychological boost from the recent
bond market rally, but rates remain above 6% and stock market valuations
remain significantly above the top end of their historic range.
We continue to believe, as we said last week when, with rates at 6.27%,
we called for a bond market rally, that the long bond's rally will only
carry yields down to the 5.86%-5.89% level before the bond market resumes
its decline as traders once again become ridden with rate hike jitters as
the realization slowly sets in that the consumer's appetite to consume
ever greater quantities has yet to be tamed. The stocks likely to suffer
the greatest damage when the present post-PPI, post-CPI, rally has run its
course are the usual suspects: the large cap growth and tech stocks,
online brokers, and the Internet stocks. We would particularly avoid the
Internet stocks, which you may recall on August 4th we said were poised to
rally (we were a day and a half early on this call), a rally which we
expected to retrace 25-38% of the decline from July's highs. That
rally has largely run its course now, with the majority of the stocks
unable to break above resistance, and we expect the next leg down to
resume shortly. Amongst the Internet stocks, we would avoid those where
a pitchman's hype has far exceeded actual results, particularly the
e-commerce stocks. While we are in total agreement with those who
say e-commerce will become the dominant wave of the future, we question
the sanity of attaching multi billion dollar market caps to unprofitable
pure play e-commerce companies whose annual revenues are less than that
which Dell Computer's online business generates in a day. Finally, today
we will be selling into any rallies that develop, and keeping our eyes on
the galloping yen (now at 113.1 to the dollar) while awaiting tomorrow's
trade figures.
|
8/17/99 |
| The
stock market meandered through Monday's trading in a state of suspended
animation, unable to gather the necessary momentum to move one way or the
other, as it pensively awaited its day of reckoning. The sole exception
to yesterday's broad based lackluster performance was the Dow which gained
73.14 on the day and finished on the positive side of 11,000 as
investors continued to flock to the familiar. The outperformance of the
Dow in recent weeks, and the underperformance of the broader market,
continues to be a major warning flag that something has to give--that the
market is playing out the final scene of its rally from last October's
lows. The market is rudderless without an oarsman to steer it
higher. Its recent leaders the oil/ oilfield service and
semiconductor/ semiconductor equipment stocks are showing signs of tiring,
and there are few sectors standing by to pick up the slack. The
Internet stocks continue to rebound from short term oversold conditions,
but their latest run is missing the oomph of past moves, and they too are
left leaderless as AOL continues to flounder in its own private bear
market. Historically, as a top approaches leadership narrows as
investors increasingly gravitate towards the perceived safety of the
familiar. When breadth grows increasingly narrow over an extended
period of time, as has taken place this year, it is often a warning that
the next move down will be more than your run of the mill correction. The
divergences between the performance of the market's leaders: the Dow (up
20.4% YTD) and NASDAQ (up 20% YTD), and the rest of the market has grown
wider as the year has progressed. The S&P 500 has managed a gain
of just 8.3% this year, while the much publicized small cap rally has
produced a meager 2.9% gain on the year. While excitement is starting to
build as the Dow pushes higher, with pundit and guru alike once again
talking of new highs, the fact remains that we are increasingly seeing a
market that is a bull market in name only. Over the past 20 days the
number of stocks that, like AOL, are in their own private bear markets has
risen from 34.5% of all stocks to the present 49.8% of stocks. While the
market will get a boost from today's on target CPI figures, which showed a
rise of 0.3% in CPI and a 0.2% gain in core CPI, the market's rebound of
the past few days is unlikely to be sustainable. While the release of
today's CPI figures provided a welcome bit of relief for traders, the
numbers in themselves are largely inconsequential as a predictor of the
Fed's next move--a Fed who waits to act until inflation shows up in CPI
data is a Fed who has fallen severely behind the curve. We do not believe
that the present Fed, with the word pre-emptive at the top of their
vocabulary hit parade, will wait for inflation to work its way through the
pipeline before it acts. We
are still likely to see a 1/4 point hike at next week's meeting, and the
odds favor an additional move by the October meeting--an event which will
catch those traders who have focused on the CPI off guard. In
a final note, while the technical deterioration of the market remains
troubling, a contrarian indicator that has a far better record of picking
tops and bottoms has flashed a red light. One of the headlines on
the front page of this week's Crain's
New York Business is: "Wall St. firms back on prowl for office
space"...
|
8/16/99 |
| One
minor speed bump remains before the nay sayers are finally put to rest,
their talk of inflation on the horizon banished from the vernacular, one
economic report to go before uncertainty is put to bed and the market
resumes its march towards Dow 38,957.
Now 38,957 may seem a lofty target for
the bellwether average, but it is below the 40,000 predicted elsewhere,
and it is a number which has a proven track record of curbing
inflation--and of negating the need for interest rate hikes for many years
to come. Figure a 30% annual return on our investments, and the Dow will
achieve its target in just under 5 years.
While we have high hopes of the Dow
achieving our goals, and 60% of investment advisors (the highest since the
Spring, just before Net Mania peaked) also see nothing but rosy skies
ahead, there remains one problem: the Fab 12 down on Greenspan Street also
remember the number 38,957, and their memory is not a pleasant one.
Their memory is of demand allowed to go
to far, and of the downside that results if action is not taken sooner
rather than later. The Fab 12's memory of 38,957 is of euphoria run
amuck on the upside, and of the deflationary economic malaise that
resulted when euphoria had stretched another golden economy to its outer
limits.
As the world cheered Friday's PPI data
and thoughts turned to tomorrow's CPI report, mutterings of distaste were
heard to emanate from the vicinity of the Fab 12's abode. Their
leader, decked from head to toe in the garb of that noted super hero, the
Pre-Emptive Crusader, was heard to say, "Will a weak CPI change my
opinion?--Not likely, I already know what I paid for food, gas, and widget
services last month...the question is, what will I pay for them in the
future if demand keeps growing, the manufacturing sector springs back to
life, the global economy accelerates, the labor market tightens further,
and pricing power returns?".
After listening to the grumblings of the
Pre-emptive Crusader, we've decided that perhaps our goal of 38,957 is not
attainable after all, and that the eagerly awaited CPI ultimately will not
deter a rate hike at the August FOMC meeting. A weak CPI will spark
a powerful stock market rally, but that rally in itself if allowed to go
unchecked will increase the likelihood of further, more severe, action
being needed in the future.
The Fed knows that it must act now if it
hopes to prevent "building economic imbalances" from becoming a
string of bad CPI reports. The Fed also knows from the lessons
learned over the past 10 years in Japan that the short term pain of a
10-15% market correction resulting from its actions is far preferable to
the downside that would result if it remained on the sidelines and allowed
our goal of 38,957 to be achieved. |
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