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another great lewis tonite... nothing but clarity
July 24, 2003
Stocks Tumble And Gold Rumbles… Again
Asia was mostly higher last night, with Japan rallying half a percent. The yield on the JGBs rose to just over 1%. Europe was up 2 percent this morning, and the US futures were higher as usual. Weekly jobless claims were out before the open as they are every Thursday, and claims fell below 400,000 finally, which got people really excited and caused the equity futures to squirt even higher. How anybody can make any sort of conclusion one way or the other concerning the economy based on a weekly number is beyond me. You’ll note that I don’t usually even mention it, despite the fact that claims have been rising every week since 2000. It’s noise as far as I am concerned.
Anyway, we gapped up big at the open and basically flopped sideways for the entire day, while the bond market probed its lows once again. We finally jumped off a small cliff in the last couple hours on what appeared to be simple exhaustion and basically drained into the close to end on our very worst levels of the day. Volume was a little chunkier (1.6 bil on the NYSE and 1.9 bil on the NASDAQ). Breadth was slightly negative on both exchanges.
The semis began the day higher but closed lower virtually across the board by 2 to 3 percent. The equips similarly opened higher but closed lower by a percent or two. That brings us to another nugget from a friend of mine in the semi equipment industry. Yesterday, he said:
I know of an equip manufacturer that is in the process of making 18 million dollars worth of machines, yet has no orders! They are embarking on a "lets show the world things are turning around cause we have all these orders" ruse and hopefully, it will lead to real activity down the line, thus real orders and eventually, this tail will wag the economic dog. Sorry folks, it isn't going to stick. The only tangible result will be stockrooms full of finished goods collecting dust. P.S. Most of this equipment is large enough and heavy enough that it can be used as boat moorings once it is written off and carted away as scrap.
But I am sure these stock analysts up in NY that have been (and still are) calling a “bottom” in the industry for 4 years now and been wrong know more than he does, right? The SOX fell 2 percent.
The Internet trash was on fire for one reason or another today. I suppose it may have been excitement ahead of EBAY’s report tonight. EBAY, which trades at a modest 115x trailing EPS and 25 sales, rose a percent, while YHOO and AMZN both rose 3 percent. The tier 3 trash was even friskier. SINA launched 27 percent to a new high (can we say “short covering?”), while NTES was up a more modest 15 percent. Moves like this are another reason why I never tangle with trash like this on the short side. It’s a one-way ticket to the poorhouse if you’re early. But that’s just me. After the close, EBAY beat its little number, guided up, and announced a stock split. Yet, the stock is down $6. That may just be indicating that today’s craziness was the last hurrah in these little piggies. We shall see…
Financials were lower. The BKX fell a percent, and the XBD was off a touch. The derivative king fell a percent, and GE rose 2 pennies. Mortgage lenders were lower again, although none as much as NCEN, which imploded for 12 percent to a new low for the move. FRE fell 3 percent to a new low for the move, and FNM fell over a percent to just shy of a new low for the move. Where there’s smoke there’s fire? There’s no way to know for sure, but based on things I am seeing and hearing, I smell an accident brewing at these two mortgage giants.
Retailers were mostly lower, with the RTH falling a percent. FBN, which is the largest US manufacturer of furniture, has some interesting things to say today. The company said:
The soft business environment the residential furniture industry has been experiencing for nearly three years continued in the second quarter of this year… Once again we see nothing, either in our order trends or in our conversations with retailers, that leads us to believe a near-term sustainable rebound in business is in sight. Retail activity over the Memorial Day weekend was strong, but was bolstered to some degree by extensive promotions. Order trends in the month of June were slightly favorable against last year, but the results on the July 4th weekend were mixed, and we have not seen a continuation of June's positive trends in the first part of July. In short, we still have every reason to believe our sales will be essentially flat year-over-year in the second half of this year.
Does that sound like an economic recovery has begun? Note that FBN is not speculating here. Like so many other companies, FBN is simply saying that it’s a fact that business has not picked up, and it’s a fact that order trends don’t even mildly indicate that anything is going to happen either. Unlike many other companies though, FBN does not appear to be blindly hoping that some sort of economic miracle hops out of a box in the next couple months. The question that we probably should be asking ourselves is: What does the lack of hope say about what they really think? In any event, FBN was pounded for 11 percent and a new low for the move. ETH fell in sympathy by 3 percent.
Remember, refi and homebuilding activity is what has sustained the consumer and supported the economy. With rates no longer falling, that game is over, period. Business spending will not be picking up unless demand accelerates. And with the rest of the world still soft and the US consumer losing his mortgage bubble lifeline, what’s going to be there to catch the economy? The answer is “nothing.” The second half fable is just that, a fable.
Homebuilders were mixed and continue to drift near their lows for the move. The HGX was off just a touch.
Crude oil rose 55 cents to back over $30. The XOI fell a touch, and the XNG fell a percent. The CRB rose a touch. Gold opened flat in NY, dipped a little as stocks and the dollar strengthened on the weekly jobless claims data, and then began rallying as the dollar’s strength faded. The rest of the session was a steady march higher, but there was a slight giveback at the close, sending the metal out up $3.60 to $361.60 and another new high for the move. The HUI rose 3 percent to a new multiyear high, and the XAU and GOX indexes also finally hit new highs for the year. Silver rose another half percent, and PAAS rose 4 percent to a new high for the move.
The US dollar index was flat after being higher early on. The yen was flat, and the euro was up an eyelash. Treasuries were lower once again in the long end, as the 10yr fell back to its low for the move. The yield on the 10yr rose to 4.16%. Is the bond crash over? I don’t think so. I tend to think one or more of these big mortgage players (hint: they both start with “F”) are caught on the wrong side of this recent move in the bond market, and I think we’re very close to having some sort of major “accident.”
The VIX finally broke below the 20 level today and printed a low of 19.63. You’ll recall that the VIX has broken below 20 at or shortly after the peak of every major rally of the bear market. This was the only “indicator” that had yet to confirm that a top was in, although we discussed at the time that it might “confirm” well after the actual peak in prices. Sure enough, despite the fact that the vast majority of stocks peaked last month and the major indexes peaked back on the 14th of July, the VIX finally rung its bell today. So, we now have just about every sentiment indicator telling us that stocks have likely seen their best levels and are now headed lower. I still sort of doubt that stocks are ready to go down “well” just yet, and the VIX could still dip even lower. But I tend to think we can get that 5 to 10 percent selloff that I’ve been looking for off the “peak” in the next few weeks.
Whatever stocks do over the next month or so is really irrelevant to be honest. The game is over, and that’s going to be reflected in the markets this fall. With interest rates no longer falling, refi and mortgage activity have begun to collapse. That's why the market is burying stocks like NCEN and these homebuilders (add FBN to that list as of today too). That’s why the advance/decline line topped on the day the bond market topped and has been sinking steadily every day since. The market knows that the game is over, but hopers just don’t know it yet. And they probably won’t figure it out until it hits them in the face like a falling anvil in the form of hard data in the fall. But that’s pretty much par for the course I guess.
With the VIX dipping below 20 today, I took the opportunity to buy some more deep out of the money fall puts on some tech, retail, and cyclical names, for those that are interested in what I am doing.
While I cannot provide personalized investment advice or recommendations, I welcome feedback and observations by subscribers.
You can email me at Lance Lewis.
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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