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The Meehan Notes
Looking for Someone, Something to Trust
By Bill Meehan
Special to TheStreet.com
6/6/01 9:08 AM ET
URL: thestreet.com
Federal Reserve Chairman Alan Greenspan says not to worry about inflation. He's a New Economy, productivity-miracle kind of guy, although he can't hold a candle to Bob "New Era" McTeer, the Dallas Fed president. Yet, signs of mounting inflationary pressures abound. However, Northern Trust's iconoclastic economist Paul Kasriel wonders why Greenspan is paying good money to fund the Cleveland Fed's "median" inflation data, which show quite the opposite. Greenspan seems intent not only to pick and choose the economic data that suit him at any given moment, but also to apparently decide to ignore any data that contradict his point of view.
The Fed has abandoned its charge of maintaining price stability, instead focusing all of its power to keep the economy from eroding further. Won't that again lead us toward the imbalances that worried the Fed so much when inflation mattered? Flooding the economy with liquidity helped to fuel a destabilizing bubble, and pursuing that course of action again is now igniting an accelerating inflation rate. And, while high energy prices might abate some, I can't see how they'll fall enough to treat the issue as a temporary condition. It will take quite some time to build out the infrastructure necessary to bring down the cost of energy to end-users.
Checking the Data
A few of the data points in this sparse week for important economic indicators were worse than expected. First-quarter productivity was revised down to minus 1.2%, which was twice as much as expected, and unit labor costs surged 6.8%. Factory orders fell by 3%, about in line with consensus, marking the first monthly decline since January. Factory inventories rose 0.1% after falling 0.8% in March, and finished goods inventories increased 0.5%, while factory shipments fell 2.5%. Lastly, the National Association of Purchasing Management nonmanufacturing business index slipped to 46.6, its lowest reading ever, indicating that the economic slowdown has crept into the service sector.
The bondsters certainly liked the weaker-than-expected data, as the last thing they want to see is evidence of a robust economic recovery, brushing aside the implications of higher unit labor costs for the inflation outlook. Stock bulls also liked the data, as they all but assure another rate cut in three weeks. Hope that another 50 basis-point easing is in the offing bubbled up, but that seems unlikely. Not only has Greenspan recently mentioned the Fed's strategy of "front-loading" rate cuts and that the full impact of its actions have yet to be felt, but he's not so oblivious to believe that inflation "remains contained." He's also aware that junk-bond spreads have narrowed to the lowest level in 17 months, even as new issues in the first five months increased 300%. Does he really think that long-term economic health will be fostered by a further explosion in money-supply growth or by more aggressive short-term rate cuts?
So, whom do you trust? The bond ghouls looking for continued anemic growth or the bulls looking for a much more rapid recovery? If history is a guide, the bond ghouls are generally ahead of the curve, as many on Wall Street are swayed by the fear of falling behind their benchmarks and peers.
Overview of the Action
Based on Tuesday morning's rather modest volume, the rally appeared to get started by shorts scrambling to cover and perhaps was abetted by the SelectNet outage. Declining open interest in the S&P 500 June contracts indicates that more than a few hedge funds were getting out of bearish trades. As was the case all day, technology, including biotech, led the way.
Talk that a settlement in the Microsoft case was imminent and positive comments by Lucent also led traders to play the long side. With little resembling a pullback all day, technical types added to the exuberance. I continue to believe that optimism about tech stocks, especially the semi complex, is overdone, and would consider shorting the Merrill Lynch Semiconductor Holdrs (SMH:Amex), risking a couple of points. However, Wednesday's action might be very important. The S&P 500's advance negated a potential head-and-shoulders pattern, and further upside Wednesday would do the same for the Nasdaq Composite and Nasdaq 100. In addition, an advance more modest than Tuesday's may turn my momentum indicators positive. In other words, I might have to admit that my call for a near-term correction was wrong. However, the precipitous declines in the Volatility Index, or VIX, and the QQV, which measures the volatility of QQQ (QQQ:Amex) options, remain troublesome.
Without any important economic data, the focus will remain on earnings guidance and preannouncements. Intel's (INTC:Nasdaq) quarterly update Thursday might be the key. RealMoney.com's Herb Greenberg reported Tuesday that CS First Boston's Charlie Glavin believes that the chip giant has been offering discounts to customers that take cargo-freight rather than air-freight deliveries, possibly allowing it to stuff the channel with about 10 days' worth of product. Intel has lowered guidance at quarterly updates three consecutive times, so it's not farfetched that it will pull out all the stops not to have to do so again. Surely, the nonoperating "operating" income won't continue to grow as it has from recognizing capital gains. However, if it is aggressively pushing to make second-quarter expectations, one might expect that it'll have a problem in the third quarter unless PC demand increases significantly.
All in all, Tuesday's action leaves my forecast of a decline to establish a wider trading range shaky at best. The excess liquidity might well keep the S&P 500, the Nasdaq Composite and the Nasdaq 100 within the more narrow range they've been in over the past six weeks or so. Still, I don't believe we'll see any major surge until there are signs that the economy has really bottomed and analysts begin to revise estimates higher. I continue to believe that won't happen until the fourth quarter. That said, from a technical perspective, I tend to agree with J.P. Morgan's positive take on biotechs. On our internal call Tuesday, I suggested trading Amgen (AMGN:Nasdaq), Biogen (BGEN:Nasdaq), Genzyme (GENZ:Nasdaq) and MedImmune (MEDI:Nasdaq) from the long side. They still look good in the short term for aggressive traders. As for the overall tech sector, I'll be closely following Wednesday's action and its effect on my indicators 'cause they're one of the few things in this market that I can trust.
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Bill Meehan is the chief market analyst for Cantor Fitzgerald, a Manhattan-based institutional trading and research firm, and writes daily for the Cantor Morning News. Before that, he was a market analyst for Prudential Securities. At time of publication, Meehan was long Microsoft, long Intel puts, long SMH puts and long QQQ puts, although holdings can change at any time. He appreciates your feedback at bmeehan@thestreet.com. |
