great lewis piece tonite on sorting the complexity
May 21, 2003
Stocks Flop Around As The Dollar Tries To Stabilize
Asia was mixed last night, with Japan falling half a percent. Europe was off a little over a percent this morning, and the US futures were a touch lower. We opened down, stutter stepped a bit, and then launched to fill the gap. Once the opening gap was filled, we backed off again and then rebounded back to that morning high, where we proceeded to gyrate around in a tight range into the close to end near the best levels of the day. Volume backed off just a touch (1.4 bil on the NYSE and 1.6 bil on the NASDAQ). Breadth was slightly positive on both exchanges.
HPQ reported basically flat sequential revenue and reaffirmed estimates, saying that second half estimates were doable as the economy recovers (wink, wink). Carly and company were so confident of a pickup in business that they also indicated that the company would continue cutting jobs. The important part of HPQ’s release last night was that the company reconfirmed for everyone that IT spending continues to bounce along the bottom. On the call, HPQ said, "Looking ahead we see no short-term catalysts for improvement in IT spending." Thus, we continue to see no signs of the second half rebound in IT spending that hopers continue to try and discount into tech stocks. Don’t forget that these hopers have been buying tech based on this “theory” and hoping for it to appear since last October. HPQ opened up almost 9 percent but would fade to the low of the day to end only up 5 percent, apparently indicating that the market is beginning to demand more in the realm of results rather than just hope and promises.
According to a report in the Commercial Times, TSM, the largest foundry in the world, told the Taiwan government that it may delay its China investment plans due to less-than-rosy prospects for the mainland’s foundry sector (recall that these guys were just out a little over a month ago telling everybody it was the “bottom,” just as they have 3 or 4 times in the last 3 years). Obviously, this is bad news for the semi equipment industry since expansion in China has been this sector's one hope.
The equips were a little softer on the back of that, although there were a few scattered winners. The chips bounced a little for the most part, but gains were small and what I would term just “snapbacks” from recent losses. The SOX was flat.
MSFT fell 2 percent on heavy volume to a new low for the move on the back of a large block for sale being shopped around. As MSFT is still the big cap tech leader, we may want to keep an eye on this.
The speculative bid continues to wane, as evidenced by the fact that the Internet trash continued to either sink or drift today. This sort of action once again confirms for me that the peak in stocks has likely been seen.
Financials were mostly higher. The BKX rose a percent, and the XBD rose 2 percent. The derivative king rose a touch, and GE fell a percent. Mortgage lenders and insurers were a touch higher for the most part. FRE and FNM both lost a percent.
Retailers were mixed. The RTH was flat, while WMT lost a touch. Interestingly, neither WMT nor the rest of the retail sector has bounced much after falling rather precipitously from their recent peaks. Homebuilders were mostly a little higher, with the HGX bouncing a hair.
Crude oil rallied another 62 cents (we’ve now rolled to the July contract). The XOI rose 2 percent, and the XNG rose 3 percent to a marginal new high. The CRB rose a touch. Gold opened flat in NY and marched higher throughout the entire session to end virtually on its high of the day, up $5.70 to $373.20 and another new high for the move. The HUI rose 2 percent to a new high for the move.
Recall that we discussed RGLD back on March 3rd after the stock plunged on the back of a hatchet job in Barron’s that claimed the stock should be trading in single digits or lower. The stock had rallied enormously ahead of the story and was due for a big correction. The Barron’s story merely served as an excuse for that correction. As I mentioned at the time, I bought some RGLD after the selloff, and I continue to hold the stock. Since that time, the stock has retaken all of the losses that it suffered on the back of the Barron’s story and added on another 5 percent today to move to another new high for the move.
The reason that I bring this up is that a lot of freshman short sellers appear to have jumped into the stock on the back of the Barron’s story. The wild part is that even as they continue to be wrong (the stock’s low was basically the day the story broke), they continue to add to their short positions, as the size of the short interest continues to rise and is now at nearly 20 percent of the float. Now, I would never recommend buying a stock simply because of a high short interest, because many times the shorts are there for a very good reason. As I discussed in my March 3rd column, however, I believe the bearish argument written up in Barron’s, in addition to being based on a faulty set of facts, is completely wrong. Consequently, the added boost from a potentially enormous short squeeze could make RGLD an outperformer during the current gold rally. Thus, I think it’s an intriguing opportunity on a risk/reward basis. As always, everybody needs to do their own homework, but I still think the stock is worth a look even after it has risen 60 percent off of its March low where we discussed it last. Remember, with gold shares, and especially with a leveraged royalty-based company like RGLD, it’s all about the future expectations for the price of gold.
The US dollar index rose a touch. The yen fell half a penny, and the euro also slipped half a penny. Uncle Al refused to comment on the dollar when asked about it today, just as we suspected. Following that refusal, the dollar briefly sunk into the negative but obviously recovered later in the session for the close. That recovery may be worth noting.
The dollar continues to be rather oversold, and with a high profile “mover and shaker” like George Soros revealing yesterday that he is short the dollar, I find it interesting that the dollar has been able to basically “hold up” over the last couple days despite all of the negative press. No doubt a good amount of intervention from the BOJ has helped matters, but the bottom line is that the dollar may be sold out for a little while and ready for a bounce. It’s also worth noting that US stocks may not necessarily rally on a stronger dollar nor gold and its shares necessarily be crushed. A bounce in the dollar doesn’t change its longer-term bearish trend, and as we’ve discussed before, intertwining markets don’t always move in lockstep. Based on the way the gold shares and general equity market act, I doubt a bounce in the dollar is going to lift stocks or do significant damage to the gold shares at this stage of the game, but we shall see.
Treasuries were hit fairly hard in the short end (the yield on 3-month T-bills jumped 5 percent), while losses in long end were rather modest on the back of Uncle Al’s mentioning of “nontraditional forms of monetary policy” (meaning the monetization of the long end of the curve) was still a valid option should the Fed choose to do so (more on Uncle Al’s appearance below). The yield on the 10yr rose to 3.39%.
Investor’s Intelligence revealed that bulls jumped again last week to a new 52-week high of 56 percent. The highest level of bullishness recorded for this indicator over the last 15 years (which is as far back as my data goes) is just over 60 percent. So, we’re bumping up against the ceiling so to speak. In that same vein, bears slumped to 20.9 percent, an 11 year low. From there, you have to go back to the spring of 1987 when it a level of around 19 percent. Thus, this indicator is bumping up against the basement floor so to speak. Put the two together, and it’s another fairly solid indication that some sort of important peak has been put in for stocks.
Uncle Al was on the hill today and said one of the silliest things that I have ever heard. After many “memorable” quotes over the years, this quote is certainly up there with my favorites. When asked about the possibility of the dollar falling off a cliff, Uncle Al said he found that possibility unlikely. He said, “Dollar assets are so huge… [and] the ability to move them around is fairly limited.” Therefore, he concluded, “Adjustments don’t occur off the cliff.” Huh? Sometimes I wonder if he visits the bar ahead of visits to Congress. The ability to move dollars around is “fairly limited”? In what way? Last I checked, in this wonderful world of technology that Uncle Al is always talking about, money moves around the globe at the speed of light. This is the same guy that didn’t think we had a bubble in the stock market, thought interest rate cuts would solve our problems after the bubble popped, thinks housing is not in a bubble, and thinks the consumer continuing to lever up is a positive thing. So, now he thinks “adjustments” won’t occur “off a cliff”? Hmmm… I know I’ll be putting this quote in my “Irving Fisher File” for a potential revisit later in the year.
Despite some “green” in the averages today, stocks acted rather heavy I thought, considering the damage done earlier in the week. I think there’s a good chance that we can sell off further ahead of the coming 3-day weekend, but even if we manage to bounce a little more, I think lower prices are still in store before any sort of significant bounce is likely to show up. But as always… we shall see.
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Disclaimer: Lance Lewis periodically publishes columns expressing his personal views regarding particular securities, securities market conditions, and personal and institutional investing in general, as well as related subjects.
Mr. Lewis is the president of Lewis Capital, which manages a hedge fund in Dallas, Texas. This fund regularly buys, sells, or holds securities that are the subject of his columns, or options with respect to those securities, and regularly holds positions in such securities or options as of the date those columns are published. The views and opinions expressed in Mr. Lewis' columns are not intended to constitute a description of the securities bought, sold, or held by the fund. The views and opinions expressed in Mr. Lewis' columns are also not an indication of any intention to buy, sell, or hold any security on behalf of the fund, and investment decisions made on behalf of the fund may change at any time and for any reason. Mr. Lewis' columns are not intended to constitute investment advice or a recommendation to buy, sell, or hold any security.
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