Market Smells Dollar Trouble Ahead? -->
From the Prudent Bear
Asia was higher last night as Japan rose a percent and Hong Kong rose a touch. Europe rose a percent this morning, and the US futures were a little higher. We opened flat, danced around a little and then rallied a bit. Then, we pulled back near the lows and launched again to new highs for the day. The remainder of the day was spent slowly sliding lower back near the open with the SOX and NASDAQ leading the way and closing back near Tuesday’s lows. Volume was beefy (1.3 bil on the NYSE and 2 bil on the Naz.) Breadth was just shy of 2 to 1 positive on the NYSE and slightly positive on the Naz. Big winners were in the golds as the HUI rose 7 percent. Big losers were in the semis as the SOX fell 4 percent.
Early this morning there were really only 3 pockets of weakness: the semi equips, the kinky chips, and the optical area. As the day wore on, the weakness spread like a bad disease. That was interesting considering that INTC was out early this morning ahead of their analyst milk and cookies party talking about their second half recovery fantasy and reiterating their ludicrous $7.5 bil cap ex number, which normally would spark a huge rally. The important thing about these statements is not so much what was said (we’ve heard it before) but how the market reacted. The equipment shares never could get going on the reiteration of the cap ex number and by the end of the day they were solidly in the red. INTC itself never could get going either and ended in the red by a percent. With INTC saying all the good things a bull would want to hear, the SOX still ended down 4 percent and back at Tuesday’s low, which once again sets up the dreaded island reversal that was aborted yesterday. A gap down tomorrow for whatever reason would be a very ugly development indeed. The optical sector was also weak all day. JDSU was a standout loser falling 10 percent and below Tuesday’s low where they warned. Optical equipment maker NEWP was also a standout loser falling 12 percent. Other than GTW, which rose a percent, PC names were weak across the board as CPQ continues to leak. In total, it was not a pretty day for tech and even those names that were up still managed to close on their lows. Speaking of sellers, even the NASDAQ itself has now turned seller. Today the Board of Directors of The NASDAQ Stock Market, Inc announced that they were going public (ie- they’re selling out.) That is after all what an IPO is. It’s an insider selling to the public. Like NYSE exchange seats falling in price, that’s not exactly a bullish development. Financials started the day strong but faded into the close. The BKX spent most of the day in the green but turned to close on the low and down a hair. The XBD closed up 2 percent but like the banks, it faded dramatically from its highs. GS in particular came under some pressure late in the day, so we may want to keep an eye on it over the next few days. GE rose 3 percent, and credit cards were generally higher. Retailers were a little higher with the RLX rising 2 percent.
Oil rose $1.15 to $28.44. The XOI rose a percent to another new high, and the OSX rose 5 percent. Gold rose $1.90, and lease rates pulled back after 2 days of moving up. The HUI rose 7 percent and is closing in on a new high for the move. The Johannesburg All Gold Index in South Africa did rally to a new high for the move this morning, which is often a leading indicator for gold shares in general. The recent strength in gold shares as well as commodity-oriented companies such as AA, PD, IP, etc could be an indication of the market smelling dollar trouble ahead. This weekend we have a G-7 meeting and any time these guys get together you have the potential for some sort of major financial move. There’s no way to know until after it is done (such as with the Washington Agreement in 1999 concerning gold leasing), but to me it looks like the market appears to be sensing a dollar devaluation coming. Whether this means market forces will push the dollar lower after a G-7 meeting where no “solutions” to the current problems are found or the G-7 will “agree” to push it down remains to be seen. Currencies have been such managed affairs over the last 15 or so years (and it’s one of the reasons that gold has been so dead,) but with Europe and the US being at such odds over interest rates and other economic matters recently, the stage is set for that “management” to possibly break down. If the dollar does take a tumble, it would be an extraordinarily bearish development for US financial markets despite it being actually beneficial for the world economy in the longer term. Speaking of the dollar, the US dollar index fell half a percent on the day. The euro flopped around on both sides of the 90 cent level all day after the ECB left rates unchanged this morning (still above the Fed funds rate) and turned higher into the close to close firmly above 90 cents. Treasuries were a little higher on the day.
Treasury Secretary Paul O'Neill said today in front of a Senate panel that he was not worried about a rising U.S. trade deficit and followed up by saying that rising productivity levels would take care of it. Huh? That’s a little strange since productivity growth typically slows during a slowing economy even if you believe we’re going to be able to avoid an outright recession. This would bother me a little if I were a foreign investor watching the sagging dollar and seeing US financial markets erode and the economy slow. Tomorrow morning we get the GDP number and then this weekend we of course have the G-7 meeting. The SOX and NDX once again went out today poised for an island reversal. Should we gap lower in the morning in stocks and the dollar and the golds gap higher, the market could indeed be signaling trouble is coming for the US dollar this weekend. Whether the bonds have fully discounted such an initial break in the currency after already selling off on each of Al’s rate cuts is unknown because the impact on financial markets will most certainly be negative and possibly cause a flight to treasuries, but such a break in the currency would most certainly be bearish longer term for the bonds. This is of course all speculation on my part about the G-7 this weekend, but with the tech and financial tape acting so badly and these gold shares on fire during a period in which the bulls have very little standing in their way of a party until the FOMC, there’s reason to look for a possible surprise coming. And there’s most certainly fundamental reason for the dollar to fall as we have discussed before, with or without the approval of the G-7. Tomorrow’s trading will be most interesting… |
