Don Hays' column today:
September 17, 1999
You can't say it has been boring. With the current account message totally overshadowing the good consumer price index, the weakness in the dollar continues to feed on itself. Momentum is the watchword as traders pile on a dollar that is laying flat on its back. But in this game they don't get penalized for piling on. We'll be interested to see if Lawrence Summers finally follows the Malaysian Prime Minister who lambasted the hedge funds two years ago when they piled on the Malaysian currencies. We'll have to see if Greenspan and Summers follows the Hong Kong pattern by buying stocks to burn the hedge funds if they eventually pile on the faltering stock market. Poor old Mr. Summers, smart old Robert Rubin. You talk about timing. Robert Rubin knew when to take his Goldman Sachs fortune and head into retirement, while on top. The dollar was king, but almost every day since his retirement, poor old Larry has seen the dollar plummet. We suspect his halo will also dim a little. How could this "brilliant" former Harvard professor allow such a thing?
But Larry is not by himself. Even though the world seems to be focusing on the plummeting dollar vs. the yen, the bottom line is that the dollar has been strong against the European currencies for the last two months, after the extremely strong run in the months prior to that. So it seems that everyone loves owning Japanese currency.
I guess that makes sense, if you only look at the current account numbers, but we suspect momentum has magnified any of the fundamentals, at least for the short-run. But that doesn't matter if you see the effect that the weak US and Euro currencies are going to have on inflation statistics, and the cost of production.
Just in the last three months, while the dollar has dropped from 122 yen to the dollar vs. today's 104 level, the price of aluminum has moved from $0.59 a lb. to $0.73. That commodity is not just by itself, as copper has moved from $0.75 to $0.82. The price of scrap steel has moved up 15%. And to top it off, oil has moved from $16.63 a barrel to yesterday's $24.13 a barrel since early June of this year. In the last 12 months, since Greenspan was trying to pump up Christmas spirits at this time last year, the price of gasoline at the pump has moved up dramatically from the result of oil being at $14.53 at that time.
The rising price of commodities is not all that is taxing the consumer this year vs. last year. Mortgage rates have moved up from the mid-6's to today's level closing in on the mid-8's. We believe that this combination of modest wage increases, soaring consumer debt levels, and higher fuel prices has already been impacting stock prices as the advance decline line makes new lows.
The third quarter earnings this year will have extremely easy comparisons, versus the very weak environment of last year's debacle in the stock markets of the world. But the easy lifting stops there. Even with the easy lifting, we were very shocked to see Federal Express, a pseudo-Internet shopping play announce disappointing earnings. They blamed it on increased fuel prices. That is just one example how the dollar and rising commodity prices are penalizing the economy. And another very surprising market observation is to see the very lackluster performance in oil stocks, even with the rising price of oil. Most of these stocks are either equal to or lower than levels reached back in June when the price of oil was hovering in the $16-$17 level.
Even though weakened somewhat, the alleged bull market seems to have survived the "9999" and "55 days past the market top" dire predictions by some. But now with seemingly good news (CPI) the bull market turns very weak. How the market acts to news is often a very good indicator of future performance. The advance-decline line and the Dow Transports certainly confirm the bear market has already started, but the leading technology giants still refuse to cave in. Tomorrow is "triple-witching" day. I have never found anyone that consistently is able to predict how market action on these option expiration days will play out. But we do read of many prognosticators that believe the big fears of the cataclysmic declines predicted in early September by some have produced a lot of naked short position of call options, or long put positions that have to be closed out in tomorrow's market. This would have a positive affect, so once again we'll have to wait and see if this time they are correct. But even with that possible positive influence, it could easily be overshadowed by the action in this very fickle world situation.
We have just heard that the NYSE has decided to stay open until normal times today, despite worries of torrential rains and flooding. I remember several previous times when weather fears drive most of the floor traders home early, despite the "market" staying open. With no competition, quite often strange market trends occur. So stay very loose this afternoon if trading pits begin to vacate, but trading stays open with very poor liquidity.
Since our travel schedule restricted these comments to be issued on Monday and then this morning, our next comment will be get back to the regular schedule of M-W-F. See you Monday morning. Have a nice week-end
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