Don Hays Market Comment
January 10, 2000
It has started, first Time Warner, and then the world. Watch out Jack
Welch you might be next, as the magic of the Internet is certainly working
its way at warp speed into the old-line corporate structure. Can you
imagine "Amazon Jack," a perfect fit in name, to say the least? On Friday,
we mentioned that it would be very interesting to see how the market reacted
to higher wage costs, a further reduction in available workers, and very
high profile Lucent Technology warning of lower revenues and earnings. It
was interesting as stocks not only ignored the ominous overtones, but took
off like a rocket. The McClellan oscillator soared to +165, a very
overbought level. This is the same level that produced topping action twice
in the last year, but even so this is not always such a negative factor.
Sometimes, these very overbought levels on the McClellan oscillator are
simply measuring a very powerful bullish force that leads to much higher
levels. Is this one of those times?
I was asking myself that all weekend, and looked for clues in all the
normal places. First, I looked at a lot of charts. True, there are a few
stocks, i.e. Federal Express, that seem to be coming out of the doldrums,
but the vast majority have not changed for the better. In fact, most of the
technology stocks that had been doing the lion's share of the heavy lifting
in this bull market were not able to move back to levels of previous weeks.
So the story is not yet in yet, and Friday's big prominent rally has to
still be taken in context with the rest of the market. There still are only
27% of all the stocks on the New York Stock Exchange trading above their
200-day moving average.
It is true that some of the old time kind of stocks that are not technology
names have moved up some, but don't forget that those stocks often move up
during the last days of a business cycle. So don't put too much credence in
that just yet. There can be little denying that the Fed will have to apply
more braking to the monetary growth in the months ahead. Even though the
employment numbers were largely ignored, we don't think even Mr. Greenspan
can ignore the vanishing pool of available workers. The same exact message
was being told by the National Association of Purchasing Managers, as the
prices paid component moved up to 65.7, and the supplier delivery index
showed slower deliveries by moving to 56.9 from its previous 55.9. It is
not just in the US, as it was reported this morning that the German consumer
price index moved up more than expected, increasing the odds of another
round of Euro tightening. With the monetary chieftains all over the world
putting on the brakes, the environment has changed from five months ago when
they were throwing money at anyone who would take it.
That feeding frenzy certainly found a lot of willing participants, with
credit and money growth exploding. So far, the Fed has raised interest
rates three times, and even though the feeding frenzy is still in process,
the higher interest rates are beginning to bite somewhat. This is so
visible in the new home statistics. Overall sales were down by 7.1% in
November, but that does not tell the story. When these numbers are broken
down, you see the impact the stock market has had on who is buying the new
homes. For instance, sales in the $80,000-$100,000 category are down 33%,
in the $120,000-$200,000 category down 16%, but are actually up in the
$200,000 and above category. So if the stock market ever does decide to
live by the normal rules, the magnifying effect will work on the other side
of the cycle as well.
There is a lot of new money that comes available for investments in January
of each year, so that practically guarantees a lot of volatility. But when
the smoke clears, I believe that the old-time rule of "Don't fight the Fed"
will prevail, and last week's numbers, and the market's flaunting of those
numbers, puts even more certainty that the Fed will raise rates several more
times before they are finished. When you look at the numbers from even the
last few years of hyperventilated market index performance, you find that in
those few times that the Fed did try to neutralize a prior over exuberance
in money and credit growth, the market at the least took a brief sabbatical. |
