dailymarketsummary.com
June 10, 2003
Stocks Bounce And Gold Is Smoked
Asia was mixed last night, with Japan off a touch. Europe was up a percent this morning, and the US futures were also higher. We gapped up slightly at the open and proceeded to gyrate around. We eventually filled the gap and then began a slow rise back to the morning’s earlier highs. Sellers then once again reappeared and took us back down to the lows in the afternoon, in what would be a fairly tight trading range for most of the day. That is to say that it was a tight trading range until the last 30 minutes or so when a rampjob appeared and squirted us to new highs for the day, sending us out on the very best levels of the session, in a move that I would term as rather “squirrelly.” Volume backed off a little once again (1.3 bil on the NYSE and 1.8 bil on the NASDAQ). Breadth was over 2 to 1 positive on the NYSE and slightly less than that on the NASDAQ.
NOK had its little analyst milk and cookies party this morning and said that handset sales growth would be at the low end or below its previous 4-12 percent year over year range. The company cited dollar weakness as well as weakness in Asia, where of course SARS apparently also ate its homework in that region (I’d also note that the first SARS case in the US was confirmed in North Carolina today, so this problem isn’t exactly “going away”). NOK did, however, say that revenue at its networking business would only decline 5 percent yr over yr vs. previous guidance of a 10 percent decline. That still didn’t seem to impress anybody though, and NOK slipped over a percent.
CDWC said that May sales fell 3.3 percent year over year but tried to spin it as better if you look at “average daily sales.” That little stunt alone tells you what sort of promotional management team we’re dealing with here. The company did say, however, that while their public sector business remained strong, the “corporate sector” remains “slow.” In other words, there is still no pickup in IT spending. CDWC rallied 6 percent on the news after some analyst said this was “better than expected.” The fact remains that CDWC trades at around 5x the valuation of its nearest competitors in an IT environment that is, shall we say, “less than forgiving.”
The semis began the day a little lower but recovered for the most part on a combination of news of a small earthquake in Taiwan as well as MU management throwing around some “happy talk” at some conference. The earthquake was a nonevent of course, but it no doubt encouraged shorts to cover for fear of hopers with money to throw around thinking this might cause a shortage of chips (as they always seem to during every quake) and therefore chase chip stocks. MU’s comments were just the typical yapping that they do around this time of the year about how they think PC demand might be better than everybody thinks. MU rose 7 percent to just shy of a new high for the move.
The equips began the day heavier on the back of a downgrade out of some house. By the close, however, most of the equips managed to cut those losses. But the group still ended heavily red, having made new lows for the move on an intraday basis that morning. The SOX rose a percent.
The Internet trash was all over the place during the session but ended up a touch in most cases. The BTK likewise traded to a new low for the move in the morning, but recovered to close up a percent. So, the speculative trash is still managing to hold together pretty well but not resuming its trip higher as of yet.
Financials were mostly higher. The BKX rose a percent and the XBD rose two percent. The derivative king rose a percent, and GE rose over a percent to a marginal new high for the move. Credit insurers bounced back a touch today from yesterday’s big losses, but not much. FRE bounced almost 3 percent, and FNM fell 2 percent to another new low for the move.
Back to our discussion of FRE yesterday, this smells a lot like an Enron. In other words, it may take a lot of time for all the dominos to fall. If agency spreads continue to widen as people move away from anything associated with FRE, it’s almost a self fulfilling prophecy (as happened with Enron as counterparties shied away from the company), and it is going to cause all sort of problems in the derivatives arena as well as the unthinkable: a rise in mortgage rates that could pop the mortgage bubble. This is the importance of the FRE news I think, and why this situation should probably be closely monitored going forward.
Retailers were mostly higher, with the RTH rallying a percent. The homebuilders bounced across the board, with the HGX rallying 2 percent and completely reversing yesterday’s losses. The mighty HOV rose 6 percent, but I would note that it was on lower volume. I tend to think the top may be in for the homebuilders, but again, we won’t know for sure until we some sort of failed rally in the wake of a peak.
Crude oil rose 28 cents to another new high for the move of $31.43 ahead of tomorrow’s OPEC meeting. The XOI rose a percent. The XNG rose a touch on the back of Greenspan visiting the Hill and discussing the problem surrounding the shortage of natural gas (something we discussed here this time last year). The XNG natural gas index in fact peaked several days ago ahead of Greenspan’s appearance on the Hill today to discuss the natural gas shortage (as if this guy is some sort of expert on natural gas anyway?). With all the publicity of late surrounding natural gas, it’s pretty tempting to suggest that natural gas stocks may be due for some sort of extended correction. We shall see.
The CRB rallied half a percent and continues to hover in a very tight range. Gold gapped down about $3 in NY this morning, triggering sell stops at $360. Those stops set off selling that took the metal down another $7 over the course of the session to take it out on the low, down $9.80 to $352.70. The HUI was off as much as 4 percent on intraday basis but recovered to end down only 2 percent. As I mentioned yesterday, it was a good bet that a decline like this was due in the metal, but I wasn’t sure how badly the shares would be hit. So far, they’ve shrugged it off fairly well, which is quite impressive. The metal could trade as low as $340ish I suppose before this correction is over, but I’m not sure it makes it down that far. In fact, we could see some sort of low as soon as tomorrow if the intraday bounce in the shares into the close is telling us anything. The South African central bank is meeting over the next two days and is expected to cut its overnight rate by 100 bps and possibly more on Thursday morning. As South African interest rates are currently in the double-digit range (why else would anybody sit in the rand?), a big reduction of interest rates should put further pressure on the rand against the dollar. And that means that we could see South African shares like GFI, HMY, DROOY, and even AU and ASA all outperform on the next leg up in gold, as the South African shares’ mostly rand denominated expenses will fall and their dollar denominated revenue will rise, giving them double the punch in earnings growth.
The US dollar index rose a touch. The yen rose a touch, and despite the BOJ’s best efforts to force it down, is approaching an 8-day high. The euro slipped over half a penny and appears to be set to possibly correct even further over the next few days. Treasuries rallied all across the curve, as the short-end appears to be trying to discount a 50 bp cut at the upcoming FOMC. A 50 bp cut is going to be pushing it for many money market funds that will be at or below breakeven after expenses at that point. Obviously, if money market funds began generating negative returns, there would be a run on these funds, and I don’t think the Fed wants to deal with all the problems that will set off. Thus, should the Fed cut 50 bps, the rate cut gun will likely be empty, and the only monetary policy step left for Uncle Al and his merry men to take is to begin monetizing treasury debt, otherwise known as “printing money.”
Speaking of which, the bond.com rallied to a new high today, as the yield on the 10yr fell to a new low of 3.19%. It’s really too early to even think about this, but I will say that it’s been a hunch of mine for a while now that this blowoff in the bond market might end around the same time that the Fed eventually announces officially that it will begin monetizing the 10yr (which I think will most certainly happen at some point). We’ll see, but it would be perversely ironic that just about the time that most bond bulls would feel invincible (after the Fed has said that it will openly help their positions) the behemoth known as the treasury market would top and go the other way, and keep going that way for a long time to come. We may find out in a couple weeks.
We had a nice little bounce today, and the speculative trash held together pretty well once again. Importantly, however, the speculative stuff did not continue to move higher and merely bounced. Thus, I still think that with sentiment measures and such being where they are and the panic buying by the public that occurred on Friday, probability still favors some sort of peak being formed late last week. But, we probably need to see a break to a new low for the move tomorrow as well as see the speculative trash come unglued before we can really say that with any confidence. Again though, even if we did see the peak last week, it’s probably going to be slow going to the downside for a while, as the hopers still have a window of imagination (and a booster shot from the Fed in a couple weeks) that is going to make downside movement sluggish at best.
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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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