Here is some great commentary on the market.
From The Prudent Bear
April 20, 2001
Posted Daily Between 5 and 6:30 PM EST
by Lance Lewis
Expiration Brings A Pause In the Melt-Up
Asia was lower last night as Hong Kong and Japan both fell a percent. Europe was down a percent once again this morning as we rolled around to the US open where the futures weakened in front of the open, after being fairly strong all night. We had a little selloff at the open as most index options expired and then a small snapback rally followed by another selloff down the low of the day, which was right at yesterday’s low. From there, we spent the rest of the day slowly grinding back up to the middle range of the session for the close. Volume was beefy as it was an expiration (1.3 bil on the NYSE and 2.5 bil on the Naz.) Breadth was almost 2 to 1 negative on the NYSE and slightly negative on the Naz. Big winners were in the oil services as the OSX rose 3 percent. Big losers were in PC oriented names as the HWI fell 4 percent.
MSFT reported last night and guided earnings down just a hair. The standard cautious outlook on the future was retained: “Despite this quarter's solid performance, we continue to be mindful of the current economic climate and the impact it may have on business and consumer demand.” They also discussed PC demand and said, “We now think the full year '01 growth rate for PCs worldwide will be a few percentage points below those levels,” referring to comments made in January where MSFT said 2001 fiscal year PC sales would grow by “10 percent at best'.” MSFT rose a percent, but finished well off its best levels of the day. SUNW also reported last night, and its revenue was a little light after having already guided lower. SUNW said, “Our results reflected the sharp decline in capital spending in the information technology sector, principally in the United States, although we did see some moderation of demand in Europe and Asia Pacific.” Here again we see the continued theme of US-centered weakness that is slowly spreading. SUNW fell 5 percent. NOK and ERICY reported this morning where NOK told us that everything was hunky dory (as usual) except that they were guiding revenue growth lower from the previous range of 25%-30% to 20% for the year. Once again as usual, we got no inventory data. We’ll want to watch closely what CELL has to say next week to see where all the NOK phones are going. NOK was flat on the day, but two of her big suppliers, RFMD and TQNT, were flying. ERICY coughed up a loss and was also light on revenue for the quarter. ERICY said that they see “no signs of a short-term turnaround” and consequently announced job cuts. ERICY ended down 16 percent. With the rate cut jam ending for the most part with the expiration of index options on the open, bad news appeared to start to matter again to some extent, although there were a few screamers here and there that apparently still remain in “nothing matters” mode. For example, communications semis took off like a scalded dog after PMCS reported an 84 percent cliff dive in earnings year over year and an analyst said that Q3 “should be the bottom” for their businesses, which is rather interesting since CSCO’s inventory numbers suggest that they probably won’t be buying parts for a year and there was no guidance whatsoever from PMCS. On the way up these guys were all saying, “the trend was your friend,” but not now? But even then, the screaming didn’t last long as PMCS, BRCM, and AMCC all came back in from their best levels and ended near their lows but were still up nicely at 4 to 8 percent on the day. Semis in general, however, were weaker with the SOX slipping 2 percent and the equipment shares being the weakest. Other than those patterns, it was just another day of chaos in tech-land. With equity options expiring at the close, a lot of today’s machinations were expiration related so there’s really not much to get out of the reactions to data yet. Financials were weak on the day and the underperformers for the second day since the surprise rate cut jam, which is not bullish. The BKX and XBD both fell 2 percent. The derivative king (JPM) performed in-line, falling 2 percent. GE was off a hair. Credit cards were generally lower, although PVN rallied 4 percent for some nutty reason. Credit insurers were weaker again today as ABK and MBI both began to break down badly on the charts, with both dropping around 5 percent. So, something continues to be afoot there, and it’s certainly not bullish. Retailers were a little weaker with the RLX falling a percent.
Oil fell 62 cents. Unleaded gasoline finished the week at new highs after having broken above a multi-month top, as there are continued constraints on refining capacity even as demand continues to rise and we go into the busy Summer driving season. This is not a healthy development for the US economy or inflation as the Fed continues to “print money” like it’s going out of style. The XOI rose a percent and is nearing new highs, and the OSX rose 3 percent. Gold fell 60 cents but ended near the high of the week. Lease rates were quiet. The HUI slipped a percent. I’ve gotten a lot of emails lately regarding my feelings on gold. For a long time I had thought that the way in which the unwinding of the bubble might play out would be for stocks and the dollar to break big and then gold and its shares to rally hard afterwards as monetary authorities attempt to reinflate. That appears to now be incorrect based on the Fed’s recent activities and statements to the effect that it would keep cutting rates no matter what, and all of this is occurring before stocks have broken badly. After all, the Dow is still above 10,000 for goodness sake? Sure, the NASDAQ has been leveled, but those stocks are still ludicrously expensive. So, with the Fed throwing caution to the wind concerning the currency and the bond market, gold may have its day now. I suspect gold and its shares will be moving sharply higher over the near term unless some sort of deflationary force such as a sudden and large stock break were to take place, in which case the metal will likely rally as the currency breaks, but the shares may have already discounted the move. For wrong or right, that’s what I see. Speaking of the dollar, the US dollar index fell another percent today as it goes into the weekend rather perilously on the charts. A break of 113 would be very bad from a technical perspective, which matters a lot to currency traders, and we’re currently at 114 or so. The euro recovered the 90-cent level and, like gold, ended on the high of the week. There were rumblings of default in Argentina, so that might be something to watch next week. Treasuries were a little weaker again as the bonds continue to eye gasoline, the faltering dollar, and what in the world rate-cut-happy Uncle Al is going to do next.
After this week’s rate cut jam in the stock market, bond and dollar holders have been forewarned. Stock holders got a bit of a warning as well because the Fed cannot hold up stocks with repeated rate cuts forever. They’ve only got so many bullets till we hit zero. Stable financial markets are all about confidence, and Uncle Al’s action this week on the back of a strong industrial production number on Tuesday and repeated statements that the economy is “turning around” by various Fed heads suggests either complete confusion or desperation, and I am not sure which is worse when it comes to confidence. Uncle Al appears to be attempting a repeat of the 1998 jam that was accomplished that October where stocks were jammed by a surprise rate cut into an expiration and equity markets globally exploded in one huge bubble in order to forestall the mounting economic problems in Asia. Those actions then have now taken the US economy to the brink, Japan has still not recovered, and Europe is still basically just flopping along. Europe is the spoiler here this time. Unlike in 1998, the ECB is not playing ball with the global printathon because they are worried about inflation, and rightly so considering the moves in petroleum prices, which we know always feed through to the rest of the economy eventually. That’s why this 1998-style jam by the Fed is simply not going to work, and it’s better to know that now and deal with the reality of the situation rather than later after everybody figures it out because it’s obvious and prices have plummeted to reflect it. The big question now is can we hang around up here at these levels in stocks while the bonds sell off, the dollar droops, and gold rallies? Or, do those events occur concurrent with a further, epic break in stocks as the dollar snaps and US financial markets go into liquidation mode in general? We’ll just have to watch and see, but now that the expiration is over, trading early next week will be very telling I think. If we give back all of the latest rate cut jam for whatever reason, things could get ugly very quickly. In the meantime, we’ll want to watch closely early next week to see if we’re still in “nothing matters/the Fed will save us with more paper” mode or if we have returned to facing reality now that the expiration is over. We’ll soon find out… |
