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June 5, 2003
The Dollar Slumps And Gold Jumps
Asia was mostly higher last night, with Japan rallying a percent to a new high for the move. Europe was higher ahead of the expected rate cut out of the ECB but slid lower by a percent once the 50 bp cut was handed out. Meanwhile, the dollar slumped on the news of the ECB rate cut, and the US futures were off a touch. We gapped down and immediately began marching higher. April factory orders came in down 2.9 percent, which was weaker than both March and the consensus, but that’s fairly dated data so I’m not sure it matters so much. Stocks didn’t seem to notice anyway, and we continued marching higher. We hit a new high for the move around noon and then took a little breather before beginning a closing romp that would take us up to a new high for the day and the move, sending us out at our very best levels of the session. Volume was beefy once again (1.7 bil on the NYSE and 2.4 bil on the NASDAQ). Breadth was slightly positive on both exchanges.
XLNX’s midquarter update was a yawn last night. The company said it expected revenue to rise 1 to 5 percent sequentially, which was unchanged from its previous guidance. That’s worth 9x sales isn’t it? Gee, I am so excited about that bargain. XLNX fell a percent. Speaking of earnings and valuation, I received several emails last night (which I am a little behind on by the way, but I will be getting to soon) that asked what the phrase “hockey stick expectations” means. If you were to chart out analysts’ and most investors’ earnings estimates for the majority of US companies (especially tech), what you end up with is a picture of something that looks a lot like a hockey stick. What I am referring to is the big rise in analyst estimates in the second half of the year. Picture a chart where the estimates are flat throughout the first half of the year, and then all of a sudden they explode higher in latter half during the fabled second half recovery. It looks like a hockey stick. That hockey stick has been what everybody has assumed would happen for the last 3 years, and instead every year the hockey stick turns into either a flat line, or a ski slope.
MXIM spit up a tiny little hairball last night and said that revenue would come in at $295 mil (up 3.1 percent sequentially) instead of the expected $300 mil. MXIM fell a measly 2 percent on that, as the current lack of evidence of any sort of massive ramp-up continues to matter very little to hopers as long as the fabled second half is still far enough away in time that some sort of miracle explosion in revenue and earnings might just occur out of the blue if they click their slippers and wish hard enough. MXIM’s ugly twin, LLTC, was also off a couple percent, but the rest of the chips for the most part were higher, including INTC, which rose 2 percent ahead of its midquarter update tonight. The equips were on fire once again. KLIC led the group with an 11 percent vault to a new high for the move.
MSFT fell 3 percent and back to just shy of its May lows after the contents of an internal email authored by CEO Steve Balmer were leaked last night in which Balmer discussed the threat that Linux posed to MSFT. He noted that the economy continues to be soft (he obviously didn’t get the memo about the second half fable) and technology budgets remain lean, so customers are attracted to free, open source software, such as Linux and OpenOffice.
IBM’s action was worth noting today in that it fell another 3 percent to a new low for the move despite the strength in the broader market. This is also the first time in quite a while that I can recall a tech stock (or any stock for that matter) issuing bad news and then making a new low for the move in the days following the initial reaction to the news. As I mentioned Monday, I put out a few shorts on Monday after having none out for quite a while other than for extremely short periods of time. I had actually been fortunate enough that one of those shorts was IBM. After the SEC news broke, I covered it and the rest of my shorts, because ex-IBM, most everything didn’t really go down all that much. And I covered IBM because I expected the usual “we don’t care because the second half is going to be great” snapback rally after its SEC-related drop. When that rally didn’t appear, I resold IBM today. IBM is a company that I’ve been short on occasion many times over the last three years due to not only its poor business fundamentals but also its highly questionable accounting practices and weakening balance sheet. The point here is that if an important Dow component and megacap like IBM can keep sliding after its bad news is already out and amidst a stronger tape, it may mean that the strength of the imagination factor is finally waning, and the rally is nearing its final days. Stay tuned…
The Internet trash continued to levitate but it was slow going. The IIX rose half a percent. The Chinese net triplets were higher, but only SINA was a big mover, posting a 6 percent gain to a new high. This area continues to plug along as if the craziness will never end. The blowoffs in the single digit midgets continued once again also. A friend pointed out a stock to me today that perfectly embodies the environment we’re in: MTOH, a provider of paging and other wireless services. This bulletin board stock has been riding the WI-FI speculation of late and has exploded from around a dollar about a month ago to $117 today. I could barely even find any data on the company, but in what I could dig up, I couldn’t find a single reason to explain a meltup of that magnitude other than rampant, red-hot WI-FI speculation (which has been the hot topic of late among tech gamblers). The level of speculation that is going in single digit midgets and bulletin board trash continues to be downright stunning.
Financials were higher. The BKX and XBD both rose a percent. JPM rallied a percent, and GE also rose a percent. Mortgage lenders continued to melt up, despite mortgage ticking up a little. TMA launched 4 percent to a new high, and CFC rose a percent to a new high. FRE and FNM both fell a percent. The continued distortion in the mortgage market that the Fed is engineering and encouraging is truly astounding. But the stupidity of those engineering it is even more astounding. Uncle Al and his merry men down at the Fed are laying the foundations for an almost identical bubble in the housing market to that which they spurred on in technology in the late 1990s. The massive imbalances that were created in tech are still causing problems today because the debt that was used to fund that massive misallocation of capital is still around. Likewise, there are the human costs of lost jobs and displacement and other wasted resources as a result of developing a product or service that was simply unsupportable in the longer term by the real economy. Everybody remember free web service? Or Internet companies that had no assets and no revenue? The list goes on...
Once again, those same imbalances are building up in housing, and the bust is going to be worse than what we saw in tech by a factor of 10 because so many more people are exposed to it. A home is the biggest single “investment” for the majority of Americans after all. Yet, Uncle Al, in his wisdom, thinks manhandling mortgage rates lower and keeping the housing boom going is a good thing because it allows the consumer to lever up more and drag this heap of an economy along a little longer before the bottom falls out. Of course, he thought the Internet and tech bubbles were good things too, so I don’t know why I am surprised. It’s truly sickening when I think about how badly this is going to end. We’re all going to suffer, and we can all thank Uncle Al and the Fed for it too. What they are doing is truly unconscionable. It’s really quite sickening when you think about it. But I digress…
Retailers were mixed after releasing mixed data regarding May sales. Best Buy (BBY) for example said same-store sales rose 2.2 percent and tightened up the Q2 earnings range from the previous 14 to 20 cents to a new range of 19 to 21 cents. However, Circuit City (CC) said same-store sales were down 10 percent and guided down to a loss of 23 to 25 cents. So, the data was sort of neutral regarding the consumer, which once again doesn’t fit the hockey stick pattern that everybody continues to expect for the economy. The ending of the Iraq skirmish/war has not brought the 1991 snapback in consumer spending because the war was never the problem in the first place. But as we’ve said, that reality doesn’t matter right now because liquidity supports imagination, and that imagination factor continues to rule the day at the moment. The RTH rose half a percent. The homebuilders continued their blowoff. HOV’s rise continues to be astonishing, as it posted another 6 percent gain today, rising to a new all-time high. The parabolic charts on these homebuilders are simply breathtaking. As a friend of mine joked today, I guess I should sell my house and put all of the money in HOV? The HGX rose 2 percent to another new high.
Crude oil rose 69 cents from yesterday’s pause to refresh and is now right back at its high for the move at $30.82. The XOI and XNG both fell a touch. The CRB rallied a touch. Gold gapped up $2 at $364.50 in NY and continued to melt up to over $370 before falling back and consolidating near the highs and then inching back up towards its best levels of the session for the close, up $5.90 to $369.70. The HUI rose 4 percent to close on its very best levels of the session and at a new high for the move, making it now once again positive on the year and just 5 percent away from a new high. I would also note that the XAU and GOX gold indexes also made new highs for the move in what was a very strong day for the gold shares in general. I expect further gains are quite likely over the next several weeks as well, and they could be explosive if this is move in them that discounts a new range in gold around $450, as I think it likely is.
As we’ve been discussing over the last couple days, I had thought there was a high probability of an ECB rate cut being the catalyst for some sort of big move down in the dollar and also spark a big move in gold and the gold shares. Sure enough, that’s exactly what happened, proving once again the old adage that even a blind squirrel finds an acorn every now and then. But now that we’ve seen the market react this way to the ECB’s easing, I think it will likely spook a lot of people and could set off a lot of dominos. An easing by the ECB is obviously bullish for gold since it feeds on low interest rates. But the inability of the dollar to bounce on the rate cut also introduces a new factor into the equation: one of fear, fear that what is wrong with the dollar is not just low interest rates. And that fear could really drive some big money into gold. Foreign central banks are already being forced to print money to support their dollar-export centric economies, and they can’t just sit back and allow the dollar to collapse due to the chaos that it would cause. So, like Japan, they will be forced to eventually try and print massive amounts of money to support it. Now, that action won’t stop the dollar from falling. It may slow it though. But it will also cause gold to rally in those foreign currencies as well, setting up the best of all conditions for a monstrous global gold rally.
An ugly unemployment report tomorrow will no doubt ensure even more drastic measures will be taken by the Fed to turn the dollar into confetti, and that could be the catalyst for further gains in the short-term for both gold and its shares. I would continue to focus on financially solid, multi-mine, and importantly producing names like AU, GFI, HMY, NEM, GLG, and IAG. I would also continue to suggest that readers take a look at royalty companies such as RGLD (which we’ve discussed in the past and the short interest on once again rose last month incidentally) or the closed end gold mining fund ASA, which was also trading below NAV by a percent or so as of the most recent data. ASA, when trading at a discount to NAV, is always an attractive way to gain discounted exposure to its two biggest holdings (AU and GFI), which make up over 50 percent of the fund’s assets. Most of these larger cap gold miners will likely double on a move in gold to $450, and that’s the next big level that I think the metal is headed for and will be discounted into the shares, so while everybody needs to do their own homework as always, the names above at least give you a place to start. I added to my gold shares once again this morning for those that care.
The US dollar index slumped almost a percent and a half in reaction to the ECB’s 50 bp cut, which brought its key rate to down to 2 percent, still well above the fed funds rate of 1.25 percent (although I think we can expect that to fall to 1 percent at this next meeting where Uncle Al will hand out some more rate cut candy). The yen rallied almost a penny, and the euro rallied over a penny and a half, bringing it back to its high for the year. A lot of people had been of course expecting the euro to sell off in response to the rate cut. With the euro moving in the opposite direction, we could begin to see some real fear build up around the dollar, setting the stage for possibly an enormous move to the downside. Should the dollar extend its losses on tomorrow’s unemployment number, we could be in for some rough sledding next week in currency-land.
Treasuries slipped a bit in the long end, as the yield on the bond.com rose to 3.33%. When will the falling dollar finally matter to the bond market and cause Uncle Al’s bond bubble to pop? It doesn’t appear to be anytime soon, but we shall see…
The inmates continue to be in control of the asylum as far as stocks are concerned, although we are heavily overbought and could correct at anytime. Part of the rally today was no doubt in response to the rumor that the drunks down at the Fed were considering an intermeeting rate cut tomorrow morning if the unemployment number was an ugly one (which I suspect it will be). Now, I doubt even the maniacs down at the Fed are that crazy, but if they did do something like that, I think it would be sold like nobody’s business. Tonight, we’ll get what I expect will be a very long yawn of a midquarter update from INTC because there is unlikely to be any change from what they said just a couple weeks ago. But there is always the "happy talk" factor I guess? So, let's see what the nuts do in response to it as well as the unemployment report tomorrow. Liquidity, liquidity… it is an intoxicating thing. Hopers are drunk on it right now, and the hangover is going to be of epic proportions.
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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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