Tuesday's Stock Market WrapUp (borrowed from another thread)...
LEISURELY OBSERVATIONS
Recently, I took time off to attend two investment conferences and a family wedding. My trip was partly business, partly pleasure. The first half of the journey took me to Las Vegas to attend the FEE (Foundation for Economic Education) Conference and the ISI Money Show. It was my first trip to Las Vegas. I never had the desire to go to Vegas because I thought my odds of winning were much better in the financial markets. My first impression as we drove into the city was that it was an adult version of Disneyland. Everything and anything you wanted in the form of entertainment was there for the asking. As magnificent as many of the hotels and buildings were, you knew they were paid for by those who bet their savings in the hopes of winning "The Big One." The odds always favor the house, which is why the hotels were big and luxurious.
I found it fascinating to observe the players at each table and the rows of slot machines with eager participants exercising their biceps. Some of them looked intense as this was serious business. Others had blank stares on their faces, zoned out with visions of prosperity, or simply trying to forget their financial troubles. Many looked happy and seemed to be enjoying themselves, never believing they were there to make money. They were the wealthy ones. They were there to be entertained. Whether they lost or won money made no difference. But there were definitely a few who were there with the high hopes of improving their fortune.
I did very little gambling. I knew the odds were against me. I prefer calculated risk where the odds are in my favor. My wife was different. I call her the Queen of the Slots. She has been to Vegas three times including this recent trip. The last two she has come home a winner, managing to win the Jackpot on her second day of battling the one-arm bandits. She had a system, she had a plan, and she never played with more then she was willing to lose, although I did ask on the drive over just what amount we were willing to sacrifice to the gods of risk.
While my wife played and battled the slots, I attended investment conferences. My first was the FEE conference, which gave me hope for this country. At this conference, real economic ideas were presented by those who adhere to the Austrian view of economics. Liberty and a free market economy was discussed, which I found refreshing. So much of what we read or hear in the news today is devoid of any rational thought. What we see and read each day is mostly economic nonsense, statistics, and monetary babble that I don’t believe anyone completely understands. Even the so-called experts are befuddled by the day’s economic and financial news. Can anyone explain rationally why the Dow went up 300 points last Wednesday and then lost ground last week? The financial pundits tried because that was their job, but their countenance revealed a look of surprise more than it did any degree of intelligence.
Over several days I got the chance to converse with some of the best thinkers at the conference, including a few authors I’ve interviewed on my radio show. The next conference was scary. The exhibit hall was filled with vendors who were all selling a magic "black box," a software program that contained the secrets to making money in the markets. Row after row of exhibits were filled with software vendors, newsletter services, book sellers, and a few mutual fund families that all promised investment success. Most of the software programs were based on technical trading systems with each vendor claiming that his "black box" was better than their competitors. If you had bought their system, you would have been making money instead of losing it, which is what has happened to most investors these last three years. The one common denominator was every system was based on trading and not investing. I am not sure whether many of those who attended the conference understood the difference between speculation and investing. The odds favor the investor over the speculator because of philosophical differences over risk. Not that I’m against trading; it is just that I have met very few wealthy traders in my lifetime. I have known many wealthy investors.
It was appropriate, I thought, to have the conference in Vegas. Today, the American financial markets have much more in common with Las Vegas. The stock market has become more of a casino than it has an investment market for capital accumulation. The daily trading, the odds of winning and the risks inherent in the market are no better than those at the casino. We all know the odds favor the house. In a bear market, the odds of winning are stacked against the investor, or in today’s market, the trader or speculator. The bear market, which is now in its third year, has many more losers than it does winners. Just like Las Vegas, most investors go home each day a little poorer. I thought of all of those who crowded the investment seminars and the many who bought the magic "black boxes" hoping they had bought the alchemist's stone. Black boxes are worthless unless their users have a general understanding of the big picture: macro and micro economics, and general fundamentals. Otherwise, they simply follow existing patterns and are oblivious as to when those patterns will change. They only become aware of them when a 10-sigma event occurs and their charts gap up or gap down.
There is a storm that is brewing and gathering force in the financial markets and so many seemed to be unaware of it. Most of the attendees I met fully believed in technology and the magic boxes. If there was storm brewing, they hoped the magic boxes would tell them well in advance. Unfortunately, they were buying software and not barometers. So when that 10-sigma event occurs, it will take them by surprise no matter which black box they bought.
After leaving Las Vegas we drove to Phoenix. We drove by the Hoover Dam and went through three security check points. Hoover Dam has been identified as a terrorist target, a possible 10-sigma event not factored into any of the black box formulas. When we arrived in Phoenix, I was once again struck by the real estate boom, which apparently has spread to all metropolitan areas. Everywhere we looked there was new construction. The construction could be seen in all venues of real estate -- from residential homes to strip malls, major shopping centers and new office complexes. Since I left Phoenix in 1982, it has grown to become the sixth largest city in the U.S. It was evident everywhere we drove that the town was still growing. I did notice, however, the preponderance of for sale signs in the more tony parts in town.
At the hotel I had a copy of the local rag delivered to my room. I was struck by the headlines of the day. The headline read, "Payoffs of low inflation." The article discussed the recent Producers Price Index for April, which was up only 0.2%. The article went on to extol the blessings of low inflation and how it would benefit consumers. The article talked about how television sets had dropped in price from $399 for a 25-inch set in 1974 to $199 today; an LED watch was $29.95 in 1976 and only $7.99 now; a gallon of milk had gone up only $0.02 I since 1987. The article said that with low inflation, the Fed would not have to raise interest rates as previously expected. As I read the article, I once again thought about how economically illiterate our nation has become. The gist of the article was there was no sign of inflation to be seen anywhere other than food and energy prices, which were excluded from the report and dismissed because they are more volatile.
Nowhere was there any mention of gasoline, utility and water costs that have risen substantially over the last three years. There was no mention of housing prices that were up by 20% over the previous year, and up close to 50 to 60% over the last five years. The restaurant we ate at on our second night cost $26 for the main course, on top of the $12 for the Caesar salad, $5.50 for the glass of wine, and $6 for the cappuccino. That was about $5 more than what I remembered paying for a similar dinner the year before.
For my sister, it was her second wedding in two years. I was in Phoenix at the same time the previous year for the wedding of my other nephew. She lamented that everything from the rehearsal dinner to the limousine, the tuxes, and the boutonniere were more expensive than the year before. So were the education costs for her only daughter, who is into her second year of college. The wholesale and consumer price indexes were all telegraphing the message of no inflation. On Main Street, however, the prices were much higher. The trouble with most inflation indexes is that they measure and weight the prices of a hypothetical basket of goods of which nobody buys repeatedly. Those inflation indexes bare no resemblance to reality or cost of goods and services most Americans spend their money on. In the real world, taxes and inflation have been rising every year. That is why both parents work and go into debt just to make ends meet. The husband’s check pays the bills, the wife’s check goes to taxes, and what can’t be met by wages is paid for with borrowed money. That is reality. What we hear and read about as inflation is nothing more than economic drivel designed to bolster confidence with the masses.
The rise in the stock market between 1995 and 2000, and the present rise in housing prices these last four years, are one and the same. They are simply another manifestation of inflation. Inflation, thanks to economic illiteracy, is now completely misunderstood. Inflation has and will always be a monetary phenomenon. Inflation is not a general rise in the cost of goods and services. It is an increase in the money supply. It is manifested through higher prices which is the symptom. The root of the problem is excess money and credit in the economy and financial system. When inflation is seen in higher prices in goods and services, it is referred as a sign of inflation. When it is seen in the price of rising housing values or rising equity prices, it is called a bull market. In many respects, we look at the symptoms of the disease rather than the disease itself, which produces the physical symptoms. The only way to stop it and cure it is to prevent the supply of excess money into the system through the credit creation mechanisms of the Fed and the financial system, which creates credit through securitization.
The reason for writing about these musings is that I believe we are going to get more of it in the year ahead that would accelerate the force of the storm front now building up in the financial system. As the economy remains weak and the U.S. continues its fight against terrorism, we will see higher monetary growth and deficit spending -- a prescription that will lead to further financial troubles ahead. It may not be seen as inflationary because the government, when they report in August, will begin using a new inflation gauge that will be even more inaccurate than the present one in use. It will be designed to keep COLAS on pensions to a minimum. It will also be used to disguise the real costs of inflation. What you will read about in the future will be designed to bolster domestic confidence in consumers and investors. Things will look good, but they will be experienced differently. Hold on to your wallet because the cost of basic goods and especially raw materials are about to go up at an even faster pace.
Today’s Fiction in the Markets
Stock prices rose for a second day as a better-than-expected retail sales report and a better earnings report from Wal-Mart helped to shore up confidence in an economic rebound. The government’s report helped bolster confidence that consumers will lead the turn around in the economy. Retail sales are up and consumers are still spending money, which is the good news. The bad news is there is still no sign of a capital investment boom from business. Even the consumer news and retail sales numbers have a drawback. Those purchases are financed out of debt that keeps growing larger as a percent of disposable income. The real question that hasn’t been asked is: When does the debt level get too high and the consumer no longer able to shoulder the burden of debt payments? This must certainly be on the minds of today’s banker.
Technology stocks lit up the Nasdaq on expected news that Applied Materials would beat analysts’ expectations. The company reported profits of $0.03 a share, beating analyst estimates of a profit of $0.02 a share. Second quarter profits fell more than 86% while sales fell by 46% from a year ago. Sales fell sharply because semiconductor makers cut equipment budgets as demand for computers fell. Gross margins also declined from 46% to 40%. The company is holding a press conference tomorrow where it is widely expected to announce further layoffs of personnel. The stock rose 6% for the day and helped spark a rally in the tech sector because the news was better-than-expected. They beat estimates by a penny, even though real earnings fell by $0.16.
Given the dismal outcome of this quarter’s earnings reports, analysts are already trimming back dramatically their estimates for the next quarter. The benchmark for earnings are being lowered to such a point that we could actually see another round of better-than-expected results that are worse than the year before. Earnings estimates have dropped from 9% for the second quarter to 6.8%. That is before next month’s earnings game begins again. Remember that what analysts and the financial media call earnings aren’t the same earnings of the past. Today, those earnings can mean anything but the bottom line. With interest rates on the rise and consumer and corporate balance sheets loaded with debt, I doubt we are about to see miracles.
Nonetheless, the markets moved on expectations. Speculators sold off gold, utility, and tobacco shares and jumped on techs. Traders were buying chip, Internet and software issues on the news of better-than-expected earnings from Applied Materials. It is another Cisco story that spun the markets, even though the real news portrayed a different picture. It didn’t matter with investors in a buying mood. It is just the first inning of the earnings game. Stocks are hyped up and investors are filled with hope. Then next month reality sets in as the first wave of warnings hits the markets. It is a familiar game played over and over like the slot machines in Vegas.
In the broader market, shares of brokerage, biotech, airlines and retailers rose. Oil shares pulled back as the price of oil rose to an even higher level of $29.19 on the NYMEX. Volume rose to 1.41 billion on the NYSE and 2.59 billion on the Nasdaq. Market breadth was positive by 22 to 10 on the big board and by 24 to 11 on the Nasdaq.
Overseas Market
European stocks rose after a better-than-expected U.S. retail sales report fueled optimism about a recovery in the world's largest economy. The Dow Jones Stoxx 50 Index rose 55.04 points, or 1.6% to 3523.85. That only narrowed its loss since March to 4.6%, though. All eight major European markets gained during today’s trading.
Japanese stocks rose, led by Toyota Motor Corp., after the world's biggest carmaker by market value posted a record full year profit and said it will buy back up to 4.7% of its outstanding shares. The Nikkei 225 stock average rose 0.7% to 11,417.12, snapping its two-day, 2.5% decline.
Treasury Market
Government issues got hit hard following the release of the robust retail sales numbers. Yields on long dated issues shot up to their highest level in six weeks. Fed tightening expectations were immediately ratcheted up after being sliced over the past six weeks. The 10-year Treasury note declined 1/2 to yield 5.295% while the 30-year government bond slumped 27/32 to yield 5.75%. Tomorrow will be another busy day for economic reports. On Wednesday's docket will be March business inventories, April consumer price index and the April industrial production and capacity utilization figures.
© Copyright
Jim Puplava
May 14, 2002 |
