The latest from Don Hays:
MORNING MARKET COMMENTS
by
Don Hays
February 7, 2000
* * *
Even though our switch to PDF files in the transmission of this report was
received with applause by the vast majority of you, it absolutely drove some
of you into submission, unable to open the files and causing all kinds of
hang-ups. We have put all those requested on a "text-only" distribution
list, but it is very awkward referencing charts in one, and not being able
to attach them in the other. The only solution that we can come up with is
to accelerate our plans to start a web-site, so this week will be dedicated
to that end. It will take a week or two, I'm sure, but rest assured that
this delivery problem will be solved. We also find that the delivery to
some servers is being delayed, sometimes even overnight. This is often a
result of an in-house screening program. We can't do anything about that,
but the web-site will help solve that problem as well. In the meantime, if
you want a "text-only" report please let us know.
* * *
Alan Greenspan has to really be proud this morning. Last Wednesday he
really dealt the financial markets a crushing blow, obviously scaring the
speculators and consumers back into submission by raising the fed funds rate
a full 1/4%. This man is cruel. In the wake of that teeny move, we see the
NASDAQ composite moving up 9.1%, the largest weekly gain since 1974. That
paled somewhat when you break down the index into its components. For
instance the weekly gain in the NASDAQ 100 was +12%, in the Morgan Stanley
high tech index +13%, the Philadelphia semiconductor index +16%, and the
AMEX biotech index moved up +12%. He really doused speculation.
We are being somewhat facetious, but not entirely as we see the US and
Japan seemingly caught in a similar contest between the monetary controllers
and the government. You remember the shenanigans that Japan was playing as
their government announced a week ago that they were borrowing $76 billion
from the banks at 2.1% interest, which was about 1/2% higher than they would
have paid by floating new bonds. This appears to be a government that was
giving the banks a big government guaranteed loan as reserves to use as an
incentive to increase more aggressive lending. It was speculated that the
government was combating the slow action of the Bank of Japan to furnish
more monetary stimulus. As a side-note, this brought threats from S&P that
the Japanese credit rating was in jeopardy.
Here in the US we saw the Federal Reserve raise the fed funds rate for the
fourth time. But at the same time the US government released statistics
showing that they were buying in the long bond. This set up all kinds of
shenanigans, as the long bond yield has now rallied from the panic 6.75% of
three weeks ago, to the rally close of 6.15% last Thursday. So just like in
Japan, the government's action is lowering the heretofore restrictive rates
while the Fed is raising their short-term ones. According to the textbook,
I guess it would say that the politicians are easing while the "independent"
monetary chieftains are tightening. But don't believe that "independent"
tag too much. This isn't the textbook.
This does point out, however, that Alan Greenspan is losing his crutch. Up
to this point, for the previous two Fed meetings and most of his recent
testimony, he continually points out how the increase in bond rates was
almost assuredly going to slow the economy, implying that Fed action would
not be necessary. In fact while they were talking tough in the two previous
FOMC meetings, the ensuing directives always added the phrase that the Fed's
action and the bond market's action "should diminish the risk of inflation
going forward." In other words, no further action would be required. Uh
oh!! This month's directive was totally different. It didn't exude that
same confidence. In fact it started talking about the risk of future
inflation. Isn't that amazingly preemptive?
Stay with me for a minute while I spew a few of last week's economic and
inflation statistics. Unemployment fell to 4.0%, the lowest in 30 years,
and average hourly wage gains were up 0.4%. This comes on top of the
previous week's announcement showing big increases in benefit cost.
Non-farm payrolls surged by 387,000, the fastest since September 1997. Same
store sales increased by 5.4% in January, on top of 6.6 % in December and
4.1% in December. Personal income was up 0.3% while personal spending was
up a huge 0.8%. Guess what this does to the savings rate, and guess where
that extra money from spending comes from. Auto sales accelerated in
January to all-time record 17.9 million units. Factory orders were up more
than expected by 3.3%, the largest increase since 12/92, and the leading
economic indicators were up 0.4%, the largest jump since 1/99. Housing
continues to stay close to record levels, with the average cost of a house
in the 4th quarter of this year up 12.4% over 1998's 4th quarter level. The
National Association of Purchasing Manager's revealed that their price index
moved up to 72.6 from 68.3. The last two times this moved above 70 was in
1987-88 and 1994, both periods when the Fed was in a very restrictive mode.
One other gauge that Greenspan use to cite as convincing evidence showed the
Economic Cycle Research Institute's future inflation index moving up to
123.1 in January from121.7 the month before. Their accompanying statement
was "Underlying inflationary pressures rose sharply in the closing months of
the year and continued to rise in January." It was only a week ago that
Greenspan was extolling the virtues of the personal consumption expenditures
as the best inflation gauge, and that revealed an increase from 1.8% to
2.5%. Even the core rate moved from 1.2% to 2.1%.
So in response to all this, Greenspan and his gremlins really let the
market have it with another walloping 1/4 % increase. But don't despair all
you conservative monetarist who worry about the rampaging money supply. The
vigilante's haven't given up yet. The bond market rally did its part last
week to burn the derivative hedgers, and now we see gold (and silver) really
blasting off. Of course, just like the bond market the excuses continue to
roll in to explain gold "false" move. But for chart readers, you just don't
buy the "false" tag. The chart shows the huge blast-off last October from
the low $250's up to $322 in the futures contracts. Then just as the
sentiment got hot, the market did what it always does to fool the majority,
by going dead asleep for the last few months. But did it fall back to new
lows? No, instead it pulled back to almost a perfect support level to its
previous downtrend line, and the rally on Friday and seemingly continuing
today, is blasting off that support. We also see the CRB spot price index
with a similar pattern. This index of spot commodities hit a low last July
at 183, which appears to have been the trough of the reverse head &
shoulders pattern. It then rallied up to the neckline in October at about
205. It moved sideways, forming the right shoulder until the second week of
January when it blasted out for an upside breakout taking it to about 213.
It has been biding its time since then, but my money is on the expectation
of another move up which is an important part of the three vigilantes'.
Remember, the three vigilantes' are bonds, commodities, and currency.
Bonds were first in their signal, and then the currency market started
really squeezing the euro, with commodities confirming the message. Will
the Fed listen? You can bet on it. They don't have a choice. Controlling
money supply has never been harder for a Fed with securitization,
derivatives, and quasi-government agencies priming the pump. But even
though hard, the Fed has the tools to do its work. It is interesting that
the December euro-dollar futures contract is now priced at a 7.25% yield,
implying at least a 6.75% fed funds rate by year-end. That might be what it
takes to overwhelm the extraneous influences on money supply but the three
vigilantes' will make sure that they finally do their duty.
Alan Greenspan obviously is so.o.o.o.o careful about what he says, and
does. He dated Andrea for 12 years before he popped the question. But with
the data that continues to come out weekly it will be absolutely
mind-boggling if he doesn't really take on a somber, tough stance on
February 17, 2000 when he is due to present his Humphrey Hawkins testimony
to Congress. We believe the tempo of jawboning by all the Fed governors and
Presidents will start to take on a URGENT tone. Whereas in 1998 and much of
1999 almost every monetary body in the world was cutting interest rates, now
virtually every country is raising rates. That loosening of monetary policy
was the foundation that today's stock market boom was built upon, and the
new restrictive one will be the girding for what stocks do in the next 6-24
months.
As we look at different stocks and indices, we see a lot of factors that we
don't expect to change. If they do, we will be very surprised, but it would
set the stage for one more bout of speculative blow-off. For example, we
see the NYSE composite index giving all the appearances of a major top. The
S&P 500 is also starting this process, as it can not move up through the
resistance formed since the last few days of last year. The leading
component stocks of the S&P 500 that are also looking like they have made
their final top are GE, Microsoft, WalMart, and Qualcom. The magnificent
seven that included those four, are now being carried by just three of the
seven-Cisco, Oracle, and Nortel.
Admittedly the broad market is acting better, but these late-cycle blossoms
usually are more in desperation that the start of a new trend, as the burned
momentum players are trying to find a safe haven. |
