MORE MARKET COMMENTARY
geocities.com
et Commentary: 12/19/97
Market News:
Friday was a triple witch expiration of stock index futures,
stock index options and options on individual stocks. Triple
witch expirations occur four times a year on a Friday in the last
month of each calendar quarter. The Fed held the line on interest
rates last week. With bond yields and commodity prices moving
lower while the yield curve continues to narrow there is some
speculation that the Fed's next interest rates move may be lower
rather than higher. At their November 12th policy meeting the Fed
felt that the economic risks remained tilted towards rising
inflation. November industrial production increased .6% following
a .5% increase in October and is up 5.6% from last November.
November manufacturing capacity utilization was 82.9% its highest
level since September 1995. December single family home sales
remain strong supported by low mortgage rates. November housing
starts increased .8& and are up 8.6% from last November. November
sales of Southern California homes are at their highest level in
a decade while prices continue to move higher at their fastest
pace since February of 1990. The Bond Market Association is
projecting calendar 1998 U.S. gross domestic product at 2.5%,
inflation at 2.7%, unemployment at 4.8% and the yield on the
thirty year t-bond at 6.3% as the economic problems in Asia
pressure U.S. growth but keep the Fed from raising interest
rates. The October trade deficit declined 13.7% supported by
strong exports but moving forward the trade deficit is expected
to increase sharply as Asian countries increase exports to help
solve their economic problems. The recent sharp decline in Asian
currencies will reduce the price on Asian imports making them
very competitive. We are two months into the federal fiscal year
and the budget deficit is making gains on last years 23 year low
but the administration continues to project that the 1998 budget
deficit will increase to $58.3 billion from $22 billion in fiscal
1997. There is some speculation that the market problems due to
the economic crises in Asia may put the January effect on ice.
The Russell 2000 small cap index peaked in mid-October at 465.21
moving lower to close Friday at 420.03. Federal regulators
continue investigating price fixing on the Nasdaq while major
Wall Street firms are negotiating a $900 million settlement with
investors. Banks continue moving to the securities business. In
1997 bank owned securities firms will account for approximately
19% of all new stock issues up from 7% in 1996. Last week U.S.
Bancorp announced that it will buy Piper Jaffray for $730
million. Four companies received the most recent Malcolm
Baldridge National Quality Award: 3M Dental Products Division,
Solectron Corp., Merrill Lynch Credit Corp. and Xerox Business
services. Microsoft continues battle with the Justice Dept over
whether Microsoft's Internet Explorer 4.0 should be bundled with
the Windows 95 operating system. At stake in the litigation are
legal principles that many experts believe will shape the future
of the internet and whether Microsoft or its competitors will
dominate browser access to the internet the way Microsoft
currently controls the Pc operating system market.
Shorting against the box used to be an effective way to postpone and
reduce capital gains taxes. Shortening against the box is a
relatively simple procedure where you short your stock to lock in
a capital gain until you close your long and short position. The
Tax Payer Relief Act of 1997 section 1259 placed considerable new
restrictions on shorting against the box. Under the new tax rules
if you substantially eliminate the risk of loss or gain the
position is treated as a sale and the gain or loss is recognized
at the time you lock in your position. Under the new rules a new
risk management technique that is attracting considerable
attention is the zero-cost collar which provides more flexibility
in the level of risk management.
Market Indexes:
U.S. market indexes moved lower last week The Dow closed
Friday at 7756.29 down 82.01 for the week. The last two weeks
have put a big damper on the year end Christmas rally. The Dow
received some support early last week when the Fed did not raise
interest rates on Tuesday but Wednesday the Dow started moving
lower over concern with the economic problems in Asia. Year to
date the Dow is up 20.28%. If the Dow can end the year above the
20% level it will be the first time ever the Dow has recorded
three consecutive 20% plus annual gains. Friday volume on the New
York Stock Exchange was the second highest in history with 782.06
million shares traded. On October 28th following the blue Monday
market crash 1.2 billion shares were traded. Friday's Dow close
puts the index 503.02 points below its closing high of 8259.31
set on Wednesday August 6th and its looks very unlikely we will
see a new Dow closing high this year. Friday the Dow was down a
sharp 269 points before recovering later in the day to close down
90.21 points. The Dow transportation index moved lower last week
but year to date is up 39.35%. The Dow transportation index
companies are very sensitive to fuel prices and should receive
some support from the recent decline in oil prices. The Dow
utility index moved higher last week reflecting the recent
decline in long term interest rates. The broader S&P500 moved
lower last week but remains up 28.30% year to date. Investors are
concerned that the market gains the last three years may decline
or be reversed by the economic problems in Asia due to diminished
U.S. exports which pressure corporate profits. Wednesday Nike,
Inc. said that due to declining Asian demand for its shoes and
clothes its most recent quarterly profits declined 20% and that
next years profits would be less than projected. Secondary
markets moved lower last week but the move down was more
constrained than the move down in the Dow. For example on Friday
when the Dow was moving sharply lower the Nasdaq composite index
managed to close up 1.55 points.Year to date the Russell 2000
small cap index, Nasdaq and Amex composite indexes trail the
performance of the NYSE indexes.
Bonds & Interest Rates:
The bond market continues to post strong gains and a good
example of this is the narrowing of the yield curve as thirty
year treasury bonds remain strong. Friday the yield of the thirty
year t-bond closed at 5.93 up .01 for the week. The U.S. bond
market has received considerable support from the economic
problems in Asia. The bond market should remain strong as long as
the problems in Asia continue. Considerable speculation remains
over whether the situation in Asia is under control or will get
worse. Last week the economic problems in Japan continued with
the bankruptcy filing by Toshoku Ltd a major Japanese food
trading company. The most recent two week decline in the U.S.
equity markets has been pushing money into the bond market. While
the U.S. bond market receives support from the economic problems
in Asian the Asian bond market is taking a beating which means
they have to pay substantially higher interest rates to attract
money. Last week the Korea Development Bank a benchmark bond
issuer had to postpone a $2 billion bond auction after investors
failed to show interest at the yields the bank was offering.
Monday and Tuesday of next week The Treasury Dept will auction
$26 billion of new two and five year notes.
Foreign Exchange:
The dollar was mixed against the mark and lower against the
yen last week. Wednesday the dollar dropped sharply against the
yen after the Japanese government announced its most recent
economic program to turn their economy around. Wednesday the
dollar closed at 127.08 yen following Tuesdays close of 130.78
yen. Thursday and Friday the dollar regained some of Wednesday's
decline closing Friday at 128.93 yen. Wednesday's surprise
announcement by Japanese Prime Minister Ryutaro Hasimoto of a one
time two trillion yen or $15.73 billion dollar income tax cut
pushed the yen and Japanese stock market sharply higher. But by
Friday the consensus on the new Japanese economic initiative was
that while they are taking action the action they are taking is
not enough and the dollar gained on the yen while the Nikkei-225
closed Friday at 15314.89 down 589.41 for the week. Late last
week it was rumored that the Bank of Japan was actively
supporting the yen. Speculation is growing that the sharp decline
in other Asian currencies will place considerable pressure on the
yen as it tries to hold stay below the 130 yen to the dollar
level and still remain competitive with the other devalued Asian
currencies. If the yen is devalued it would have significant
worldwide economic and market implications. Friday the Canadian
dollar closed below the seventy cent level for the first time
since March of 1986. The Canadian dollars all time low is 69.17
cents set of February 4th, 1986. Canada is doing reasonably well
and Finance Minister Paul Martin suggested their currency should
move higher over the next few months.
Commodities:
The CRB commodity index closed Friday at 233.38 down 2.48
for the week. Many commodity markets have been under pressure
recently. Energy prices remain lower. Oil prices have not
recovered from OPEC's recent decision to increase production
quotas. Friday soybean prices moved higher on an announcement by
Agriculture Secretary Dan Glickman who indicated that the Dept of
Agriculture would use support credit programs and all other
resources available to maintain agricultural exports to
economically troubled Asian countries. Thursday's bankruptcy by
the Japanese commodity firm Toshoku increased speculation over a
decline in Asian agricultural commodity exports. Corn and wheat
prices remain weak on soft export projections. Friday coffee
prices plunged 4% after a respected coffee forecaster projected
that Brazil, the worlds largest coffee producer, would harvest
its largest coffee crop in more than a decade. Palladium futures
declined to five month lows after Russia shipped unusually large
amounts of Palladium for this time of year. Cotton remained under
pressure last week on speculation that exports to Asia will be
sharply lower. When the dollar crashed on Wednesday gold bounced
higher. February gold futures were up 6.30 for the week but its
way to early to tell if gold's putting in a bottom. The Coffee,
Sugar and Cocoa Exchange is removing daily price limits from its
deferred contracts. Eliminating limits puts the exchange at
greater risk because the exchange and the clearing broker is
responsible if their customer defaults. Clearing firms and
exchanges may require more margin to cover their additional risk.
Copper prices moved to four year lows last week. Since the start
of the economic crises in Asia this summer copper has been moving
sharply lower. Orange Juice futures moved higher early last week
due to heavy rain in Florida. Per an article in Wednesday's Wall
Street Journal the commodity exchanges are having a difficult
time recruiting and retaining employees. Like many other
businesses in this tight job market the exchanges are having to
spend more money to attract talented people. March cocoa moved
lower last week as speculators took some profits. Moving into the
Christmas and New Year holiday season the next two weeks expect
trading activity to decline as traders take leave and start
closing out their accounts for the end of the year.
Foreign Markets:
European markets were mixed last week. The English FT-100
closed Friday at 5020.20 down 25 points for the week. The German
DAX-30 closed Friday at 4055.34 down 6.56 for the week. The
French CAC-40 closed Friday at 2822.90 down 7.36 for the week.
U.K. November unemployment declined to 5.1%. U.K. Tony Blair
stated that he has no plans to back down from a controversial
plan to cut Britain's welfare benefits. U.K. November retail
sales declined .4% but are up 4.8% from last November. German
Bundesbank President Hans Tietmeyer has indicated that he thinks
the German recovery is on track but can be absolutely sure this
is the case. Germany is expecting 2.5% growth in 1997 and 2.75%
to 3% growth in 1998. The Bundesbank left interest rates
unchanged at their latest monetary policy meeting. Germany's
Lombard rate is at 4.5% and its discount rate at 2.5% historic
lows that have been in place since April 18th, 1996. The Lombard
rate is the rate at which banks can borrow emergency funds from
the Bundesbank. The Lombard rate acts as an effective ceiling on
overnight rates. The discount rate is the least expensive form of
bank refinancing. French October industrial production increased
3.3%. Ernest-Antone Seilliere CNPF chairman said the German and
Italian plan to take over AGF France's second largest insurer was
clear evidence of the weak state of French capitalism following
decades of government hostile to business. Seilliere is fighting
a French government proposition to shorten the work week to 35
hours from 39 hours a week. The CNFP(Counseil National du
Patronat de France) or French employer's lobby meet in Paris last
week and elected Seilliere to replace Jean Gandois who quit in
August.
Asian markets moved lower last week. The Japanese Nikkei-225
closed Friday at 15314.89 down 589.41 for the week. The Hong Kong
Hang Seng closed Friday at 10495.81 down 208.85 for the week. Its
interesting to note that since the U.K. turned Hong Kong over to
China early last summer the whole area has come unglued
economically. Japan's Liberal Democratic Party adopted plans for
a $6.54 billion dollar tax cut a key part of their economic
proposals designed to shore up it battered financial system. They
also want to remove a tax on securities transactions, freeze the
collection of land taxes and raise cigarette taxes. They would
also like to issue $77 billion in bonds to shore up troubled
banks. Japan is projecting its gross domestic product for fiscal
1998 that begins in April will be 1.9%. Japan's November
merchandise trade surplus increased by 58.7%. Japans monthly
trade surplus has increased for eight consecutive months. Japan's
central bank will loan $1.28 billion to South Korea extended
immediately through the Bank of Korea. Japan's loan cam one day
after the International Monetary Fund(IMF) approved a $3.6
billion dollar short term loan to South Korea their second this
month. Japan will be reducing its five year military defense
program by 3.66% or $7.13 billion dollars to help reduce their
budget deficit. The Bank of Korea indicated it has enough foreign
exchange reserves to cover $14 to $15 billion dollars of debt due
in December. For many years Japan has sustained much of
Southeast Asia's economic miracle through heavy investment and
purchases of its products. But Japan's current recession have
slowed Japan's investment in Southeast Asia. Friday the Nikkei-
225 declined 5.24% to 15,314.89 the index's lowest level since
November 14th pushed lower by the Toshoku bankruptcy and an
overnight 110.91 point Dow decline. |
