Gold Could Be Whispering Something
Lane Lewis
February 1, 2002
Asia was lower again last night with the Nikkei falling another 2 percent in Japan. For those that like factoids: the Nikkei is now below the Dow for the first time since 1957. Europe was up a touch this morning, and the US futures were flat ahead of the unemployment data. The unemployment number came in at 5.6 percent, which was a bit better than expectations. Of course, the reason it came in better was because the labor force shrank by around one million people (i.e.- one million people gave up on looking for a new job.) Still, the market didn't seem to like that number, and that's all that really matters. The futures dipped into the red on that news, and Europe began to leak as well. We opened down and danced around a bit while we waited for the NAPM (now called ISM) and University of Michigan consumer sentiment number. The Jan ISM hit, and it rose again to 49.9 from 48.1 in Dec (just ever so close to being above 50 which would indicate expansion.) The Jan University of Michigan Sentiment number also rose to 93 from 88 in the Dec. We tried to rally on that data for all of five minutes before sellers came in and knocked us back down to a new low for the day. We drove down to just shy of yesterday's lows where a bounce ensued. The bounce never even made it back to the open, and we spent the remainder of the day just flopping around to go out in the middle of the day's trading range. Volume backed off from the frantic pace we saw earlier this week but was still respectable (1.4 bil on the NYSE and 1.7 bil on the NASDAQ.) Breadth was slightly positive on both exchanges.
Last night, CELL (a big handset distributor) reported and basically confirmed what NOK told us last week about the handset channel (around 70% of CELL's handset sales are NOK phones.) So, it appears NOK may have been telling the truth for once (NOK rose a hair on the day.) Contract manufacturer CLS reported last night also. Revenue was up 14 percent sequentially, and management seemed encouraged but said, “there hasn't been a breakthrough of the rebound yet.” CLS rose a percent on the news, but the rest of the contract manufacturers weren't so lucky. SANM and JBL both fell 4 percent, and FLEX fell a percent.
MU had a milk and cookies party for some analysts this afternoon and expounded on how DRAM prices were firming and inventories were declining, saying that 2002 would be a great year for MU. Basically, MU seemed to repeat the same rosy outlook that it gave us in Q1 of last year. DRAM prices have had a big bounce, but MU is still going to lose money even if this price holds (which I doubt), and MU trades at 8x sales and is trading at 25x some ludicrous earnings estimate of $1.44 for Aug of 2003 that assumes 300% year over year earnings growth (the estimate for Aug of 2002 is a loss of 71 cents.) PC shipments fell by 5 percent last year. That was the first time since 1985 the PC shipments shrunk year over year. What it comes down to is that we're in a weak post-bubble economic environment, and there is no driver to boost PC demand. Windows XP is D.O.A., and everybody basically has a PC and all the computing power that they need at the moment. The upgrade cycle that used to drive PC demand just doesn't exist anymore. You knew that when MSFT rolled out Windows 2000, and nobody cared. Those looking for a big rebound in PC sales this year are in for a major disappointment, and MU is going to suffer as a result as well. Still, for today at least, MU managed to rally 3 percent.
The rest of the chip and chip equipment companies were mostly weaker but not overly so. The SOX fell a percent. CSCO fell 3 percent ahead of its earnings out next Wed, and JNPR fell another 2 percent to a new low for the move. MSFT was off a percent, DELL off 3 percent, IBM up a hair, etc. There weren't any real big movers or news items moving anything for the most part. Tech was just mostly heavy, but nothing was being really spanked.
Financials were mostly lower as well. The BKX fell 2 percent, and the XBD fell a touch. The derivative king (that's JPM for newbies) was smoked for 6 percent and is now closing in once again on a new low for the move. JPM's poor action continues to be very ominous. GE fell a percent. FNM and FRE both rose a touch. Retailers were off a little as the RLX fell a percent but continue to hold together relatively well.
Oil rose 90 cents. The XOI rose a percent, and the OSX fell a percent. Gold rose almost 4 bucks. Per the COT report released today, as of Tuesday commercials had cut their net short position in gold by 40 percent from the prior week, which is bullish. The HUI rose 5 percent to just shy of a new 52-week high. Gold shares continue to act very well, and are moving well in advance of the metal (which is common during a bull market in gold.) HGMCY was one of the few gold shares to trade down, as it gave back its gains mid-day and ended down a percent after it revealed that it was going to be forced to pay more than expected for the Anglo assets that it was acquiring. The US dollar index fell a touch to reverse yesterday's rally. The yen rallied a full penny, reversing yesterday's decline, on talk of Japanese repatriation. The euro edged back up above the 86-cent mark. Treasuries were a touch higher as the yield on the 120yr fell to 4.97%.
As I titled Tuesday's summary (“Something Is Different”), there are some peculiar things happening in the market right now, Tuesday's sudden and brutal selloff ahead of the Fed meeting being the first. It was as if someone was saying, “I know something.” Copper is beginning to act bullishly as well, as it moved up to an 8 month high today after successfully retesting its 1999 low back in November. Short rates have begun moving higher in the last few weeks even as equities have declined (let's all remember that the Fed FOLLOWS the market and doesn't lead it.) The gold shares are going bananas and are far outpacing the gains that we are seeing in the metal. I'm not sure what it all means, but the market clearly smells something coming. And I don't think it's a massive economic recovery. It could be related to the war effort and Iraq, but I would think that oil and oil shares would be moving more in that case. It could also simply be misplaced optimism that the economy turning around, but it doesn't appear that way. The moves in these gold shares are not a short-term phenomena. We'll have to wait and see if we get more clues next week, but it could all be pointing to trouble coming for the dollar.
There's a G7 meeting coming up on the 8th and 9th in Canada where all the central bankers will be present, and meetings like this have been known to have surprise announcements (look no further than the Washington Agreement of 1999.) Currencies are so managed these days that big G7 moves never seem to happen through pure market forces. Judging by the way the market acts, we could be in for a devaluation of the dollar (something that American manufacturers have been complaining to the White House about quite vocally of late.) We'll have to wait until we get more data in the form of how the dollar, gold, bonds, and equities all trade next week going into the meeting, but something appears to be afoot. Should the dollar be devalued, this would obviously be bullish for gold, bearish for bonds, and (due to the run that equities have already had) bearish for stocks as well. With valuations as high as they are, a push up in long-term interest rates combined with foreign liquidation of US stocks would cause stock prices to move lower on such an event despite the obvious inflationary bounce in the economy that you might get from exporting with a weaker currency. It's hard to say how everything would net out on a move like that, but I don't think it would have the bullish effects that policy makers might intend. Every action has consequences, and a lower dollar means higher interest rates and higher commodity prices in the US, which a “priced for perfection” stock market that's 130% of GDP simply cannot stomach even if earnings bounce a bit from the pickup in export activity. That all goes back to the valuation issue that I keep harping on in these tech stocks that are all discounting a rebound in growth that simply isn't going to happen. Uncle Al has been slashing interest rates and exploding the money supply (MZM is up 20 percent year over year.) He's trying his best to inflate his way out of the debacle we find ourselves in, but the currency is not cooperating as the dollar continues to strengthen. Maybe the powers that be have finally decided to give it a helping hand?
But let's not get carried away. We'll have to revisit this next week and see how things are setting up before we can come to any firm conclusions. A drop in the dollar will be the absolute worst thing imaginable for US financial markets. There's really no good option to take once you are in a predicament such as we currently find ourselves, but a lower dollar is one of the steps back to rebalancing the US economy as well as the globe after the biggest bubble in history. So, it's going to occur at some point, but like a drug addict recovering from years of drug use, the road back is not easy and often quite painful.
Let's see what happens next week… |
