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MORNING COMMENTS WEEK OF 5/31/99-6/4/99

 

6/4/99

Smiles were few and far between after yesterday's close. Surging same store sales figures lifted retail stocks, a bullish analyst lifted the Schlumberger's of the world, banks and brokers steadied, but the luminescence of the Internet stocks continued to dissipate.  All in all, it was a repeat of Monday and Tuesday, with low volume, rate hike skittish traders, and uncertainty ruling the roost.

The market's bad case of Inflation Jitters received an additional infusion after the close when the Fed's head dove announced she would be flying off into the sunset on July 16th to build a new nest at the Brookings Institute. Thoughts of Greenspan surrounded by a circling flock of hawks caused more than one trader to have a restless sleep last night. Around here, we slept fine, consoled by the knowledge that there is nary a lummox at the Fed.  The departure of Rivlin does not suddenly tilt the tables in favor of a rate hike sooner rather than later.   With, or without Rivlin, the Fed will wait to act until it receives its cue from the numbers.

The release of today's employment numbers, upon which those who have been stricken by the debilitating plague of Short-termitis have pinned their hopes and dreams, has the potential to add fuel to the building inflationary bonfire, but it will not be enough to force the Fed's hand--there is still the CPI to be dealt with before action is possible.

The two scenarios for today's trading are common knowledge by this point, but we would keep a close eye on the market if today's numbers come in weaker than expected.  If the market rallies strongly in the morning than fades in the afternoon, we are likely to see the market go slip sliding away in a downward lurch into the release of the CPI.  On the other hand, if the market is able to sustain a strong rally to the close, we will see a short lived rally early next week before the rate hike jitters once again gain the upper hand ahead of next Friday's PPI and Retail Sales numbers.  A sustainable resumption of the market's upward path will remain out of reach as long as the interest rate outlook remains negative.

The intense focus of market participants and hangers-on (the soundbyte hungry financial media) on the 'will they or won't they Fed' has caused another potential roadblock to higher stock prices to go largely unnoticed: The Evaporating Euro.  The continued decline of the euro this year, with the currency now down 13% and showing no signs of stopping its decline, bears watching as the second quarter draws to a close.  The dollar is now at its highest level against the mark this decade, a fact that is likely to impact the earnings of U.S. multinationals with heavy European exposure.

If the Fed's negative effect on market sentiment doesn't lead the major averages back towards their 200 day moving averages, the euro's negative effect on corporate earnings just might.

6/3/99

An intraday roller coaster of emotion was hidden behind yesterday's muted closing numbers.  A stronger than expected New Home Sales report had the major averages doing the Rate Hike Flight from the opening bell, but in the end it was silence that proved to be golden for traders.

The market pared its losses after Fed Chairman Greenspan remained silent on the future course of interest rates during a speech in Boston, with the Dow recovering from a 120 point plus loss to end the day down just 18 points, and NASDAQ turning a 42 point selloff into a 20 point gain.

While Greenspan's silence all but deafened the chatter about an immediate rate hike, the odds of a rebound in the fear wracked bond market were greatly diminished by yesterday's New Home Sales figures.  Rising interest rates have failed to diminish the consumers appetite to spend beyond their means, and last month's surprising jump in home sales increased the odds that someone, either the bond market or the Fed, will be forced to apply the breaks with full force later this summer.   Particularly worrying in yesterday's report was an inflationary 4% jump in the average price of a new home.

The housing figures weren't the only disturbing aspect of yesterday's trading however.  Volume, or lack of it, remained weak, with only 727 million shares changing hands on the NYSE.  The continued departure of the smart money, as represented by the persistent weakness in the brokerages, remained a negative, as did the continuation of the market's pattern of one day sector rotation.  Without leadership, and without capitulation by the sellers, the market is essentially running in quicksand, with each step forward taking it one step down.

Today the wall of uncertainty will continue, with the release of Initial Unemployment Claims and Factory Orders providing only a temporary diversion as trader's gear up for the release of tomorrow's employment numbers.

Beyond the U.S. inflation watch front...

On the overseas front, the market's chief nemesis The Unexpected is testing the waters for a possible return to prominence.  This time The Unexpected has donned the guise of an exporter, a Chinese exporter to be specific.   When China ruled out a devaluation last Fall, it left the door slightly ajar for a future devaluation if events warranted.  China has been left behind during Asia's recovery this year, with Chinese exporters becoming increasingly uncompetitive in comparison to their Asian neighbors, and the Chinese economy continuing to weaken.   While a devaluation would be premature at this point, we do think that one is likely later this year if conditions continue to weaken in China.

6/2/99

Fear regained the upper hand yesterday following the release of a stronger than expected NAPM survey.  The prices paid component of the index rose to 52.2, its first move above 50 in 17 months, sending bond traders scurrying for the exits, with the yield on the long bond shooting up to 5.93%. Adding to the day's inflation jitters were hawkish comments by Fed Governors McDonough and Rivlin.

While the day's numbers increased the odds of a move at some point by the Fed, we think talk of an imminent rate hike remains premature.  The statements by McDonough and Rivlin merely acknowledged that the risks of inflation developing had increased, they were not warnings of a Fed move. The inflation picture remains inconclusive, with its perceived threat changing with each new set of economic data. 

We still believe the Fed prefers to let the bond market do its work for it, and will only act if  the rise in bond yields fails to slow the economy or if economic data begins to show a clear pattern of inflation building within the system. If this month's employment report, CPI, and PPI all show clear signs of building inflationary pressures than the Fed will be forced to act at its June 29-30 meeting, but if the inflation data remains inconsistent and inconclusive then no action will be taken.

Low commodity prices are also providing the Fed with some breathing room and helping keep inflation at bay for the moment.  Crude oil has backed off its spring highs and is at a 2 month low, copper prices are tumbling as oversupply makes its mark felt, and gold is at a 20 year low.  It will likely take a combination of rising commodity prices and wage pressures before inflation is let out of its cage.

The continued lack of commodity pricing power should be a concern for investors who indiscriminately bid up cyclical stocks yesterday.  We don't expect the earnings of basic materials and metal companies to pick up until commodities end their decline.

The market's day to day flight from cyclicals to techs and back again should be a concern for all investors.  The stock market continues to suffer from the lack of leadership which has plagued it over the past few weeks. Friday investors flocked to the financial and tech stocks and away from the cyclicals following a weaker than expected Chicago purchasing managers survey, yesterday the tables were reversed.  The short term one day sector rotations which are now occurring continue to be consistent with patterns seen at past market tops.

While we don't expect an imminent move by the Fed, we do expect uncertainty to continue to exert a downward drag on sentiment.  The continued low volume seen on days when the market sells off, with only 685 million shares changing hands yesterday, is telling us that the market's fall still has further to go.  We will likely need to see widespread capitulation by investors, with a string of 2 or 3 days with steep selloffs and billion share plus volume before this downward move ends.

6/1/99

Add a weaker than expected Chicago Purchasing Manager's report to the market's usual dose of preholiday cheer and you have the ingredients for a powerful rally, which is what the major averages delivered on Friday, with the NASDAQ bounding up 51 points and the S&P 500 tacking on 20 for good measure.  Financial commentators everywhere were quick to proclaim an end to the correction (of course we heard the same thing following Wednesday's rally).

Experience tells us it's not that easy.  While the end of day numbers were impressive, the results should be disregarded for three primary reasons: 1. you should never declare a bottom is in place when the market rallies on the day before a 3 day weekend, 2. you should never declare a bottom is in place when a rally occurs on the weakest volume of the year, and 3. the sellers take 4 day weekends (reread reason #1).

The one outcome of Friday's action which can't be disregarded however is the boost to sentiment that the day's partial recovery in Internet stocks provided.  The blind faith placed on a pitchman's promises that has fueled the Internet stock explosion is likely to resurface in this week's early trading.  The Internet Faithful held on through thick and margin call last week until they were rewarded by a 14 point rise in Yahoo on Friday, and their bullishness towards the .Coms of the world will receive a further injection this morning in the wake of the E*Trade/Telebanc Financial hookup.

Overlooked by investors in the Internet stocks this morning will be a negative cover story on Amazon.com in Barron's over the weekend (a story which, we might add, failed to mention one-time fast revenue grower Boston Chicken and its ultimate fate....), and a report in today's WSJ that Merrill Lynch plans to become more aggressive in growing its online business.

The move by Merrill into the online arena (and a similar announcement by Hewlett-Packard) should be seen as a warning of what is to come. While we have never questioned the importance of the Internet to business in the future, we have disagreed with Internet stock investors on who the ultimate victors will be.  As the Internet gains acceptance and market share, we expect the traditional industry leaders to increasingly make the move to the Internet and retain their market leading positions, pushing the majority of the present .Coms into oblivion.  The future isn't spelled Bluefly and fashionmall.com, it is spelled Wal-Mart and Federated.  Likewise the future of online banking isn't Telebanc or NetBank, it is Citigroup and Chase.

High flying sentiment in the Internet sector and a full plate of mergers on the table this morning provide a safety net for the market as we enter the week, but it is a precarious safety net that could quickly be broken by today's NAPM report and Friday's Employment numbers. We would wait to call a short term bottom until after the release of this week's economic data, and the release of PPI on the 11th and CPI on the 16th.

While it is premature to call a short term bottom, keep in mind that it is not too early to call a long term top.  Any relief rally will quickly meet with the glass wall of an unfavorable interest rate policy.  A move to new valuation extremes would only be possible if the Fed were to reverse its recent change of bias, the likelihood of which is slim to none.

5/31/99

U.S. MARKETS CLOSED FOR HOLIDAY.

 

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Last modified: April 02, 2001

Published By Tulips and Bears LLC