1/06/01 Investment House Daily
* * * *
TONIGHT:
- Markets sell on domestic and global financial worries, CSCO fears,
earnings warnings.
- Volumes lighter on the selling while defensive issues rise on low
volume.
- Fed: Futures contract shows another rate cut by January 17.
- Economic numbers continue to be a mess.
The markets were under fire before the open from a number of fronts, but
the one that had everyone spooked was the Bank of America story. It was
rumored that BAC was in trouble from holding a wad of PG&E paper when PG&E
might go under from the abysmal attempt at 'deregulation' (a clear
misnomer) of California's power market as well as derivative positions BAC
had taken. Then there was a story about Russia not meeting payments on
external debt. This had shades of the 1998 credit crisis on top of the
lack of liquidity that currently exists in the stock market: a double
threat to the market.
The markets responded as would be expected: they were diving as the fear
was whipped up by the likes of CNBC. While CNBC discussed the issue, the
Dow selling accelerated with the Dow falling from about 70 down to 200
points down in 20 minutes. Then BAC came out and debunked the story and
there was some recovery. But for the Fed cut on Wednesday, the indexes
were close to meltdown and the Nasdaq would have been at 2000 or less
Friday morning.
There was some recovery, but then a rumor came out that CSCO was in
trouble because, get this, it had talked to analysts it did not normally
talk to. The perception was that something must be wrong as CSCO was
'reaching out' to different analysts to prepare for the coming quarter.
Did it occur to anyone that CSCO was doing this because of the new SEC
regulation about disclosure and that it was just making sure it was
showing no favoritism? Of course not. The mood in the market was sour so
a non-event was suddenly a sign of a major warning upcoming. Utter
nonsense. After hours CSCO came out and said the rumors of a special
board meeting and other rumors were completely inaccurate.
On top of that the employment numbers had the skittish spooked even more.
As discussed below, they were not good, but as we have often discussed,
these figures lag the economy and the most disturbing one (the higher
hourly wages) is probably already heading lower. Still, that added fuel
to the fire for the day.
The fear and selling that seemed to mark the day were not that great.
Things looked bleak in the morning and the market sold down again in the
afternoon after a brief rally attempt over lunch. As always, we were
looking at the hard numbers, looking at the actual stories and how stocks
were performing as the day progressed. What the television portrayed as a
really bad day looked more like slowing selling to us. The vast majority
of the key tech stocks sold down on lighter volume and the telecoms we are
tracking, the ones that have seen huge institutional interest last week,
pulled back to support on lower volume just as we wanted. Overall index
volumes were lower as well. Meanwhile, the defensive stocks tried to
rally, but they did so on weaker volume across the board.
This was important to us. First, selling on lower volume is always what
we want to see in the big picture. Moreover, it was corresponding to what
we thought was going to happen: some selling after the huge move on
Wednesday on lower volumes with the defensive sectors moving up on lower
volume. That shows us that there was no rush back into defensive issues
by the key players, i.e., the institutions, just as there was no rush out
of the beaten up sectors that are showing signs of life after a Fed cut
(e.g., telecoms). Even with all of the negative news, the institutions
were not bailing out of what are the potential leaders of the market in
the coming months, nor were they piling back into the defensive sectors.
It was a day that could have been really ugly with the bad news out there,
but it was not used to dump shares. That was a positive in our books, and
it had us taking positions at the end of the day as we often like to see
how stocks finish the day as an indication of the future. Again, no heavy
bets, but just averaging into positions in anticipation of better things
to come.
Fed Futures Contract foretelling another rate cut soon.
There is one 'good' thing the poor economic news is telling everyone:
another rate cut is coming, and it is coming pretty fast. Most say it
will happen January 31 at the next FOMC meeting; that is the safe bet.
After all, would the Fed move inter-meeting twice in the same month? Odds
seem against it based on everyone's view of the Fed, but as of Friday the
Fed Funds Futures contract for February was pricing in at least a 25 basis
point move by January 17, and possibly a 50 basis point cut by that date.
That is usually a very accurate measure of what the Fed is going to do,
and it is pricing it in for that time.
That belies those on the television who were worried about Friday's
employment data that showed the unemployment rate holding at 4% and
average hourly wages rising 0.1% greater than expected being impediments
to the Fed cutting rates again anytime soon. That is good news for more
reasons than the immediately obvious ones. In almost all cases, the first
Fed rate cut has marked the turn in the markets. In a few historical
cases (4 out of 21 rate cutting cycles), however, it has taken a second
rate cut to actually turn the markets back up. In those four times the
economy was early in a recession, much as the U.S. might now be starting.
The second cut turned the markets, the one exception being in 1929 where
the second cut sent the markets up before they ultimately crashed in the
Great Depression. The world economy does not look great right now with
the one leader now suffering a dramatic drop, but we are not ready to say
we are going into world recession. Thus, a second rate cut will be more
of the surefire fix that the markets need, along with a continued push
toward a meaningful tax cut.
THE ECONOMY
Credit crisis proves illusory for now, but the conditions could appear.
Japan is showing renewed weakness and Russia has missed a payment on third
party debt, at least for the moment. Domestically there is real concern
over California utilities going bankrupt and the ripple effect that has on
those banks holding their paper given an already pensive economy.
Further, even in a time of prosperity we have recently seen the filing of
bankruptcy by major corporations. Were they just laggards with bad
management and business plans? Also at home we see continued layoffs as
AT&T and ADCT are both cutting jobs after Wednesday there was a reported
tripling of layoffs in the private sector.
Lagging employment report shows things still okay.
The current administration was angry Friday about talk of a weak economy,
citing the jobs report as proof positive that things are just fine here.
If you live your life reflecting on the past and not planning for the
future we suppose you could draw that conclusion. However, even the
current labor secretary voiced concern over what the numbers showed.
Action is needed.
Yes the unemployment rate held at 4%. The weekly jobless claims, however,
the realtime ticker on the job market, are spiraling higher, hitting
levels not seen since the Asian crisis was unfolding in 1998. The private
sector only created 49,000 jobs in November. The monthly job growth the
last three months has been just 77,000. A pathetic performance as
demonstrated by the 187,000 jobs per month created January through
September 2000. Total hours worked were down as companies work employees
less rather than lay them off, and that kept the numbers from being
higher. But, less work from employees means lower productivity as well,
another indication the that the GDP will not be very robust in the fourth
quarter.
What raised our eyebrows was the rise in average hourly wages, showing a
0.4% gain versus an expected 0.3% gain. Not too bad, but given the
weakening in the dollar, the fewer hours worked and less spending on
technology, that rise is not good. At 4.1% year over year, it is just
over the 4% rise for the previous year. That squeezes corporate profits
even more. We think this is Fed-caused. There were no wage rises, at
least not anywhere near the relative level we are seeing now, until the
Fed tinkered with the economy.
What the Fed did was dry up money supply to the point where corporations
could not continue to invest in their businesses and thus could not keep
the supply of goods flowing to consumers. You will argue that
corporations would just have to raise prices to cover the cost of
borrowing to get the extra cash to generate the goods that were in demand.
Problem is, even with the supposed massive consumption binge the U.S.
consumers were on (according to the Fed), corporations could not raise
their prices. That does not sound to us as if demand was outstripping
supply as the Fed claimed. What happened was supply was choked off,
corporations could not raise prices, the rate hikes impacted consumer
demand, and corporate profits started to get squeezed. Before that,
however, we saw the spikes in the CPI in March 2000 that made the
Fed-lovers gush "gee, glad the Fed was raising rates" and the slightly
faster creep in wages. These are the lingering problems from the Fed rate
hikes that could turn into a problem on top of the potential world
economic problems.
Still, these numbers are way behind the economy. Some pretty smart
economists were saying that the wage numbers have probably already relaxed
with the sharp rise in jobless claims the economy is showing. Another case
of bad news being used to soften the effect of other bad news. In any
event we have a very tight path to walk over the next six months.
We said it several months back: as the U.S. goes, the rest of the world
goes.
That is the greatest concern we have. There are plenty of danger signs in
the economy here at home. We have seen the litany over the past several
months. Friday saw new home sales fall 2.2% in November as ever lower
mortgage rates could not stem the tide. We saw average hourly wages rise
0.4% versus a 0.3% expectation; still not showing a massive increase, but
just cracking over the top of the range for the past year with a 4.1% year
over year gain. Auto plants are closing plants for months at a time,
layoffs rising higher and higher. Unlike 1998, the U.S. is not the
economic stalwart anchoring the world. It will be harder for us to rush
to the aide of other countries, especially with a weaker dollar.
That is why we as citizens have to worry about what is good for the U.S.
In 1960 and 1981 it took tax cuts as well to get the economy back on
track. Both of those years were ones in which the Fed had to cut rates
twice for the market to get started, and it took tax cuts as well to get
the economy really back in shape. The same situation looks to be brewing
here, yet our leaders on both sides of the aisle in Congress are waffling
on the tax cut that we need. The Republicans are saying they want to
eliminate the marriage penalty; great, but that is window dressing and
does not come close to anything meaningful. Some Democrats are saying a
cut will have to be bigger than they wanted, but the $1.3 trillion over 10
years planned is too big. Some call it "huge", others "massive."
It is neither. As a percentage of GDP, this cut is just 0.9%. The 1960
cut was 2%. The 1980 cut was 3.3%. As a measure of GDP, the proposed cut
is small. As for what we need for the economy, it does not go far enough.
Bush seems to realize this saying it needs to be moved up, i.e., phased in
over fewer than 10 years. Democrats are going to try to stop it, claiming
it is still too big. Senator Daschle stated that the proposed tax cut is
"substantially more than we've done in the past." Cut the spin. The
above numbers show that not to be the case; we have a bigger economy now
and in relative terms it does not approach past cuts that were needed just
as much as this one.
As citizens we cannot let our elected leaders lose sight of what is
important to our future. We are not talking about ordinary times: the
U.S. has economic power because we have consumers. We won't have the same
number of consumers in 10 years. We have to get the economy going and
stretch our technological lead while we can. That means putting money
back into the system now and giving incentives to do so rapidly. That way
we can insure our economic future for our kids and our sound retirements.
We need the full tax cut now, not some watered down version that has the
actual effect of doing nothing. That is the old political ploy: toss the
masses a bone to shut them up, and then lets spend all of their money
behind their backs on pork. Surplus? Only until some other use comes
along that is too irresistible for Congress to pass up.
THE MARKETS
More selling again on Friday, but as noted, on lower volume. Several were
saying this was just like all other previous rally attempts in the bear: a
big move up and then it is sold off. But for the Fed action we would be
saying the same thing. The Fed cut might not end all of the bleeding, but
it does change the game, and we are using that as a chance for more
positions as we average into stock and option positions. Again we look
for a confirmation move Monday through Thursday (1.5% increase on rising,
above average volume). Again, this won't be any rocket ship ride up, but
we are playing the Fed, and history is on our side.
Overall market stats:
VIX: 32.03; +2.07. Volatility climbed back over 30, and when it has hit
34 the past few months it has led to reversals to the upside. Some more
weakness on Monday could do the trick, and that might be what the market
needs to continue to move for awhile.
Put/Call ratio: 0.63; +0.08. Inching its way back up, but never showing
the spike that it usually does (a close at 1.0 or better) to mark a strong
reversal.
NASDAQ: Volume continued to slacken and for a second session, selling on
most key stocks was on lower volume (CSCO with a yet another rumor and
AMCC with a 'we love this stock but we are lowering our target' analyst
call were notable exceptions). The rally started on Wednesday is still
alive, but it needs to start showing some life again. Earnings are going
to start coming faster and faster; that is bad and good. Bad because the
market is still having trouble absorbing all of the bad news and good
because we feel we will see some good earnings from the strong stocks.
Overall earnings are going to be low (First Call said 4%, but is now
saying it could be lower, even flat overall). That makes it all the more
important to look at the leaders we talk about: AMCC, BRCD, GLW, JNPR,
EXTR, PMCS, VRTS, SEBL. They have great positions in the best sectors of
the market.
Stats: Down 159.18 points (-6.2%) to close at 2407.65. Giving back half
of Wednesday's gain.
Volume: 2.104 billion shares (-19.4%), just above average volume as the
index pulls back after Wednesday's record session. 1.748 billion shares
to the downside versus a mere 296 million to the upside.
A/D and Hi/Lo: Decliners retook the lead 1.72 to 1. New highs fell to 58
(-34) while new lows rose to 80 (+33). On any strong turn back up, we
want to see advancing issues overtake decliners 2 to 1 or better.
The Chart: investmenthouse.com
Breaking back down, but still holding above the low where the rally
started (2291.86). The index continues to be mired in its downtrend and
did not even give the major down trendline now at 2725 a test.
Dow/NYSE: Stalled again at 11,020, the Dow fell sharply Friday right back
to the 10,600 support level. Volume was finally lower, but you can see
the result of Thursday's churning on high volume: it tried again to break
resistance, but just ran in place on high volume. High turnover (e.g.,
high volume) when there is no real price movement shows that institutions
are selling while others are buying. It is like running in place: you go
nowhere and eventually tire out and fall down. Volume was down no the
NYSE, but many of the Dow losers sold on higher volume. Only six winners
on the index with only JNJ and PG gaining more than $1.
Stats: Down 250.4 points (-2.3%) to close at 10,662.01.
Volume: NYSE volume was still above average, but fell to 1.431 billion
shares (-32.8%). Down volume was 971 million shares versus 425 million
upside.
A/D and Hi/Lo: NYSE decliners took over, 1.35 to 1. New highs fell to
187 (-85) while new lows rose to 13 (+6).
The Chart: investmenthouse.com
The Dow stopped at the 50 day moving average after tapping support at
10,600 on its low (10,627.75). In the process it broke back below the
down trendline connecting the September, November and early December tops,
and it also broke back below its 200 day moving average (10,732.55). The
Dow continues to struggle in this range, and until it can break over
11,020 on strong volume and hold that move, it is going to struggle. If
10,600 does not hold, may test 10,300 one more time.
S&P 500: The big caps blew lower, popping the 1335 level once again with
ease. The NYSE volume was lower, but that was little salve for the point
licking it took. Volume was still well above average, and the index could
find the 1270 level once again on some more quick selling next week before
it rights itself.
Stats: Down 34.99 points (-2.6%) to close at 1298.35.
Volume: NYSE volume was lower but still above average at 1.431 billion
shares (-32.8%).
The Chart: investmenthouse.com
THIS WEEK
The Producer Price Index (PPI) is out on Friday, and it is expected to be
basically flat. Retail sales are also out on Friday, and they are going
to be anemic for a December. Still, that is expected; we just don't want
numbers much worse than expected.
As for the indexes themselves, we may see some more downside action early
on. We want them, especially the Nasdaq, to turn back up before
undercutting the start of the move on Wednesday. For the Nasdaq that is
2291.86; the Dow, 10,646; the S&P 500, 1283.27. The Dow has already
undercut this point intraday, so its chances of holding are problematical.
The big problem will be the continued negative news on the earnings front.
As of yet there are still plenty of negative experts out there who are
forecasting that the markets cannot recover for some time, basically
saying that the bad economic news and earnings news will keep stocks down.
That is always possible. As we discussed in the market summary, there are
occasions where the first round of Fed tightening did not result in a
sustained market rally. That could be the case here. Still, we have a
Fed ready to help the economy, and part of the problem the Fed is dealing
with is the lack of liquidity in the stock market. Indeed, there were
many economists and financial experts talking with the Fed about that very
lack of liquidity right before the initial rate cut. The Fed Funds
futures are showing another quick rate cut. Moreover, the markets tend to
look out to the future at least six months at a minimum, and usually 12 or
more.
Thus while the near-term earnings reports and economic news makes the road
harder, we were saying that much as soon as the Fed cut rates. Thus, we
are averaging in on additional positions on great stocks we want to own
long term, and continuing to maintain shortened time frames and profit
objectives on our split plays and other short term plays. Monday we are
going to be watching for some more possible weakness as an opportunity for
a few more positions to average in on, but we are also going to be very
interested in those sectors showing life, e.g., the telecoms. We have
some plays that pulled right back to where we wanted on Friday, and we
started some positions. We will continue to look there on Monday given
the huge volumes they showed before Friday. They are not breaking out,
not ready to lead the market, but money is flowing there and they can show
us some great gains.
Remember, help is here and it is only going to get better down the road if
the Fed and our elected leaders make the right moves. Fed moves to soften
are not isolated events, and the indicators are showing us another one
coming pretty soon. So far the Fed is making the right moves, but our
elected leaders are waffling a bit. We need to hold them to the fire.
Support and Resistance Levels
Nasdaq:
Resistance: Some at 2600. The big point ahead is the down trendline at
2745.
Support: 2200 down to 2000.
S&P 500:
Resistance: The down trendline at 1345 and previous resistance at 1360.
Support: 1270 is possible support. 1254.07 is the 2000 low.
Dow:
Resistance: 11,020. After that, 11,400.
Support: 10,600 and then 10,300. After that, 10,000.
Weekly Economic Calendar (All times Eastern). The figures are the
consensus expectations, not ours.
1-8-00
Consumer Credit for November (3:00): $8.0B versus $16.7 B prior.
1-10-00
Wholesale Inventories for November for 1/6/01 (10:00): 0.3% versus 0.3%
prior.
1-11-00
Initial jobless claims for December (8:30): 375,000 versus 375,000 prior.
Export Prices (ex. Ag.) for December(8:30): -0.1% versus -0.1% prior.
Import Prices (ex. Oil) for December (8:30): -0.1% versus -0.1% prior.
1-12-00
PPI for December (8:30): 0.1% versus 0.1% prior.
Core PPI for December (8:30): 0.1% versus 0.0% prior.
Retail Sales for December (8:30): 0.0% versus -0.4% prior.
Retail Sales (ex. Auto) for December (8:30): 0.3% versus 0.2% prior. |
