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MORNING COMMENTS WEEK OF 10/11/99-10/15/99

 

10/15/99

Part 1

Hope springs eternal, especially when it has a 12 year track record of profitably rewarding the faithful. Although hope is eternal, the medium in which it is embraced by, and conveyed to, an eagerly awaiting populace is not, rather it changes with the passing of time.  In every era there is a new guiding light, a beacon that calms and provides sustenance, drawing the crowd in, giving them the faith to press forward despite mounting risks, to overcome their fears, to climb to yet higher heights, to set new records.

Once upon a time, in an era far removed but yet very similar to today, in a time when today's average portfolio manager was knee high and spent his days dreaming of the video arcade rather than stocks and bonds, in a time when the bulk of the money invested in today's market had yet to enter, in a time before technology had rewritten the rules of market history, the public found a new source of hope, a new bulletproof method of mitigating risk, a sure fire way to always win and never lose.

This new practice helped build confidence, instilling in citizens near and far the belief that the good times would always come, that the only thing to fear was not being in the market, that the risk of suffering unforeseen career ending losses was a thing of the past.  The time was the summer of 1987, and Portfolio Insurance was king of the hill.

The days of Portfolio Insurance's reign proved to be numbered however as subsequent events caused the public to move on, to seek a new method that would provide them with the necessary hope needed to climb new peaks and would at the same time quell the debilitating fear of risk.

The search for a new method proved to be a short one, and the successor to Portfolio Insurance has enjoyed a long and profitable tenure.  Since the dark days of October 1987, Buying on the Dips has become the public's guiding light, providing investors with an increasing sense of confidence and at the same time diminishing their fear of catastrophic loss, providing them with the same sense of comfort that Portfolio Insurance once gave to their predecessors.

Despite the stock market's recent decline and five months of interest rate uncertainty, this faith in Buying on the Dips remains as strong as ever, and confidence in the ability of the market to replicate the above-historical trend success of the past 5 years remains strong, with many investors clinging to the belief that "you can't lose money by investing in the stock market, it always goes up". 

Part 11

After sitting patiently on the sidelines for two days, a restlessness began to stir in many investors on Thursday, a desire to participate.  Better than expected results from Apple and Altera caused the initial spark, a healthy report from Boeing, declines in Oil and the CRB (and yes, in coffee prices) and a better than expected headline Retail Sales figure fanned the flames of hope.  After the Dow Industrials bounced off the September lows, reversing their morning decline, the urge to participate grew irresistible, and the talk grew louder that a bottom was in place.

To many investors, it was time to execute their time tested strategy, it was time to Buy on the Dip, a feeling that only grew stronger after Sun Microsystems released better than expected earnings after the bell.

But was it really time to buy on the dip?

Leaving aside for the moment Alan Greenspan's post-close chatter of tulip mania and asset bubbles, talk which has pushed the S&P futures to a double digit loss, but talk which we have heard before to no effect, there was little to like in yesterday's market.

It was one of those days that instills a false sense of confidence, one of those days when newscasters across the country are heard to say, "the Dow reversed sharp early losses to end the day solidly on the plus side", one of those days where the performance of the major averages masks a continued deterioration of the broader market.

As has become par for the course, the underlying technical picture was anything but healthy, with decliners leaders advancers 18 to 11, new lows swamping new highs 27 to 367, and the Dow Transports and the S&P 500 losing ground even as the Dow Industrials and NASDAQ perked up....and then there was the bond market.

The bond market remained on full inflation alert, with yields on 30-year treasuries pushing up to 6.31%, a level which essentially mutes any prospects of the stock market embarking on a sustainable 'next leg up'.

Yesterday's bond market woes, as well as the continued market-jarring  saber-rattling of the Fed, can be placed squarely at the foot of the unrelenting strength of consumer demand.  A closer look at yesterday's release of retail sales paints a far different picture than the headline figure would suggest. Core Retail Sales shot up at 0.6% during September, twice the expected increase, as consumers remained undaunted by rising interest rates.

It is the inability of two Fed rate hikes to curb the growth of consumer spending that spells further trouble for the U.S. stock and bond markets.

While the release of today's PPI numbers has the potential to spark powerful bond and stock market rallies if the numbers come in better than expected,  any such rally is likely to enjoy a limited stay before the jitters once again return to dampen spirits.

Until consumer demand eases from its torrid pace, the threat of inflationary bottlenecks emerging will remain, and uncertainty will dominate the markets, with the prospects of further rate hikes by the Fed looming.

Since consumer spending remains undeterred in the face of surging interest rates, further action will be needed to tame its growth.  In order for consumer demand to ease, consumer confidence will have to drop from its near record levels, a drop which will only be brought about by one, or a combination of, three events: rising unemployment, a severe stock market selloff and a contraction of still near record P/E ratios, or sharply higher interest rates.

Unemployment is unlikely to rise, nor is labor market tightness likely to ease, before consumer spending drops off, and so the fear of job loss can be ruled out as a factor that will cause consumer spending to dip.  The burden thus rests on the stock market, and/or interest rates,  to slow consumer demand.

The path to the end of the market's 5-month battle with uncertainty, and the path to the end of the current Fed rate hike cycle, will likely not be in sight until market conditions deteriorate much further.  The above trend portfolio gains of equity investors in recent years have helped to ease the impact of this year's rise in interest rates, and thus a rise in long bond yields to 7% is not out of the question, for it could take rates this high before the consumer begins to feel the impact.

In order for a stock market decline to impact consumer spending, any decline will have to be deep and sustained-- a short-lived, sharp v-shaped bottom like last October's will not do the trick of slowing demand.

To answer our earlier question, now is definitely not the time to be Buying on the Dips

 

10/14/99

NO COLUMN PUBLISHED.

10/13/99

When the market turns sluggish and indecisive, the phrase most often used to explain the situation is, "uhh (smile for the cameras), the market's suffering from a lack of leadership...".  There are times, however, when a lack of leadership would be preferable to the leaders who step up to the plate.

Today is one of those days.

Today, there is no shortage of candidates who are willing to step forward and offer the market a sense of direction.  Leadership is in abundance but unfortunately all of today's leaders are of the same genus: the causa malignantus declinus. The leaders, who come from varied walks of life, go by the names: $XOI, $XAU, CRB, $TYX, INTC, KCZ9, and Musharraf.

As tempting as it would be to blame the market's current case of jitters on caffeine deprivation caused by the surge in KCZ9, the December Coffee futures, which have soared from 80 on October 1st to 119 today, we somehow don't think higher coffee prices are the source of the market's two day decline.

Army chief General Pervaiz Musharraf, leader of Pakistan's military coup, has caused a few jitters on the world stage, but we see little long lasting impact on the U.S. market from his emergence.  The military has long held the silent upper hand in Pakistan, staying in the background, occasionally making its presence felt with a backroom maneuver when the country's perennial problems with government corruption got out of hand.

The military's emergence from the back room to the foreground will create uncertainty in the region, and it likely spells the end of the record bull run by the Bombay Stock Exchange's BSI in neighboring India, but the uncertainty is unlikely to spread beyond the region.  With the coup's impact likely to be localized, we are also inclined to rule the General out as the culprit behind today's market debacle...

...which leaves us with the true culprits behind today's selloff: INTC, $TYX, and the CRB (this includes the CRB's ringleader $XOI, along with minor players $XAU, KCZ9, among others).

The rebound in oil prices (and in the $XOI) from last week's correction set the wheels in motion for yesterday's bond market selloff, and spelled an end to the Dow Transports dead cat bounce. As we said last Wednesday,  "Falling commodity prices and a rising dollar have been two of the great facilitators of the inflation-free zone known as the Goldilocks economy. With commodity prices having reversed their long downtrend, global economies on the mend, and the dollar under pressure, the pillars of the inflation-free zone are being rattled."...

...and with that rattling of the pillars, the pressure on the Fed to act to stem rising inflationary pressures is increased, which is bad news for the bond and stock markets.

We have spoken in the past (see our September 22nd column) of an adjustment process that stock market investors have been going through this year: an acclimatization to a new hostile environment, an ability to pick up the pieces after complacency has been blindsided, a gradual increasing of their pain threshold as they adjust to each new level of pain (i.e. higher bond yields) that is introduced.  We have also said that eventually there comes a breaking point where that tolerance for pain, the ability after a brief moment of uncomfort to adjust to the new environment, reaches its limits.

That breaking point appears to have been reached now as yields on the 30-year long bond surged to 6.288% today.  Bond yields have now reached a level where it becomes impossible to ignore, or become acclimated to, this year's sharp runup in yields-- a very negative turn of events for the stock market.

Perhaps not as negative though as the bomb Intel dropped on the market yesterday, a hostile missile that blew a hole in the wall of complacency that had built up in anticipation of earnings season.  Earnings season thus far is proving to be a washout in terms of its ability to rally the troops.  In short, this earnings season bears an uncanny resemblance to the last one: everyone bought in beforehand in anticipation of stellar earnings, and now that results are being released there's no one left to buy, with the result the inevitable selling on the news.

The Dow finished today down 184.90 at 10232.16, its second straight selloff.  The index now appears ready to test its September lows, and with earnings playing a second fiddle, a survival of the test of the lows depends on the tomorrow's Retail Sales figures and Friday's PPI coming in better than expected.

10/12/99

Hawkish comments from a central bank governor and signs of an uptick in inflation at the consumer level pushed stocks into the red this morning.  An analyst downgrade of a major technology stock sent a shiver through the tech sector, adding to the days woes.

Granted, these events took place in the UK and Europe, a world seemingly far removed to the many whose vision has narrowed as earnings season has approached, but the game has reached the stage where the myopic will be penalized, a stage where events on the global front will impact the U.S. economy and stock market more than the latest "blowout" numbers from Yahoo and its comrades will (although to be fair to our pals at Yahoo, the stock's current price is only discounting the next 5 years of earnings growth at this point, a veritable bargain in our books...).

While the mere mention of "The Fed" sends a jitter down the spines of the populace, the mention of the Fed's like-minded pre-emptive counterparts, the European Central Bank and Bank of England, elicits not a stir in these parts, a bit of insular shortsightedness that could prove costly in the coming months as an expected rise in European interest rates puts pressure on the U.S. dollar and bond market, and in the process further weakens two of the stock market's primary supports.

Rising European interest rates have the potential to deal U.S. markets a debilitating blow, even if the Fed were to decide to hold rates steady through the end of the year.

The odds of the Fed standing pat, however, continue to narrow ever so subtly as the days pass and new tidbits of econodata emerge.  This morning's release of the latest survey by the National Association for Business Economics has caused many to rethink their initial analysis of September  non-farm payroll numbers.  Today's survey showed that employers were having a hard time filling jobs due to widespread shortages of both skilled and unskilled workers during the third quarter.  As we said last Friday, the sharp drop off in non-farm payroll numbers was more than likely attributable to a shrinking pool of qualified available workers, rather than to a slowdown in the economy.

The NABE survey also indicated that many businesses are now regaining their power to raise prices.  This renewed pricing power, along with signs of increasing labor market tightness, is yet another red flag waving before the pre-emptive eyes of the Fed.

This morning's inflationary NABE survey and a sharp rebound in oil prices (we'll admit that although we said on Friday that last week's steep decline in oil prices wouldn't last, we expected the recovery to take a bit longer than it has) have sent bond traders scurrying for cover, with 30-year yields rising to 6.23%.

The bond market's steep decline has temporarily dumped a cold bucket of water on the stock market,  perhaps proving that when push comes to shove,  interest rate uncertainty will hold the upper hand over earnings season frenzy in determining the market's next direction.  The inability of much better than expected results from Novellus to spark a tech sector rally today should be viewed as a cause for concern.  We would keep a close eye on the spillover effects from Intel's and Motorola's earnings tonight, if the companies beat expectations but fail to rally the troops behind them, the fate of this earnings season will be sealed. 

Also a cause for concern today is the Dow, which after butting heads with resistance for two days seems to have lost the battle, falling dangerously close to the psychologically important 10500 level.

Earnings and economic reports will battle for the starring role over the remainder of the week, but from the early readings, earnings season has been relegated to second fiddle as the jitters remain in control.

Finally, we will reserve comment on the bevy of after-the-fact downgrades of a certain drug store operator which crossed the wires this morning following yesterday's earnings warning by the company.  We will also reserve comment on any correlation between after-the-fact downgrades and the current labor market. 

10/11/99

Adrift in a sea of uncertainty while half the crew sleeps, the passengers on the good ship Lollystock spend the day going through the motions, awaiting the arrival of the first of two carrier pigeons bearing messages, messages that will help determine the ship's next port of call.

The first of the two birds due to arrive will carry an eagerly anticipated message of hope, a nautical map to the land of plenty, the journey to the distant shores charted by the gleaming stars of the Earningsamongstus Constellation.

It is a journey that will take the passengers past the storm ravaged isles of Intel, International Paper, Merrill Lynch, and Seagate on Tuesday, with a scheduled refueling stop at the recently renovated resort of Motorola scheduled for late in the day.

The reaction of the ship's passengers to the gleaming sights they will encounter on their journey is uncertain, with the appetite of many sated at a pre-castoff party, it is unclear how many will remain on deck to take in the sights and engage in further indulgence as the long anticipated trip begins to unfold.  If the passengers' reaction to last week's short jaunt through the sparkling waters of the Straight of Alcoa-GeneralElectric is a clue, it will likely take much more than the expected to lure many of the passengers from their cabins.

While the arrival of the message borne by the first carrier pigeon has long been eagerly anticipated, the message carried by the second bird is one that most would rather not receive, for it charts a new course for the ship, one that could potentially steer it away from the land of plenty and towards the Isle of Despairandjitters.

The sights to be seen along this leg of the journey are much less hospitable, the navigation treacherous as the ship passes through the shark infested waters off the coasts of the isles of Retailsales, Producerpriceindex, and Capacityandutilization.

With two birds bearing two different messages due to arrive this week, the good ship Lollystock is likely to find itself still adrift in the same sea of uncertainty from which it began its trip as the week winds down, unable to chart a sustainable course to its next destination, awaiting further directions.

 

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Last modified: April 02, 2001

Published By Tulips and Bears LLC