Bubble Ornaments Weigh on Economy's Christmas Tree
By Bill Fleckenstein
12/09/2002 17:14
Index Close Change
Dow 8473.41 -172.36
S&P 500 892.00 -20.23
Nasdaq Composite 1367.14 -55.30
Nasdaq 100 1014.84 -51.13
Russell 2000 386.29 -10.43
Semiconductor Index (SOX) 307.62 -23.73
Bank Index 751.49 -16.20
Amex Gold Bugs Index 125.76 -0.68
Dow Transports 2322.67 -66.14
Dow Utilities 200.44 +1.49
NYSE advance-decline -1,432 -765
Nikkei 225 8828.05 -35.21
10-year Treasury Bond 4.05% -0.043
Jumping Ship to Money Train : Overnight, the foreign markets were under pressure, as were our stock-index futures. I'm not sure what caused the weakness, other than perhaps the awareness that Friday's attempt at buying the bad news may have been a little too transparent. Turning to today's news, we now know that John Snow, CEO of CSX Corp. CSX , will be the new Treasury secretary, and Goldman Sachs' former co-chairman, Stephen Friedman, the new White House economic adviser. As I said Friday, I don't really see how bringing in another cast of characters can change things very much.
Eureka, More Paprika : In any case, the market started off with a thud, made one attempt at a rally, and then sold off rather aggressively, such that a couple of hours into the day, the Nasdaq was down 2.5%, and the S&P and the Dow were down about 1%. As for the little flurry that preceded the selling, credit goes to the Bureau of Labor Statistics. Shortly before 10 a.m. Eastern time, it decided to take a Mulligan when it announced that the September payrolls were reported using incorrect seasonal adjustments, and that, of course, it will be necessary to revise September, October, and November. Anyone who's ever followed these numbers knows that the government is always changing them. When it makes such a big deal as this, you can assume that the revisions will be to the upside. If not, that will be news.
SOX Hosts Bearberry Jam Session : As the day wore on, selling begat selling, and there was hardly a bounce to be found. The market, in essence, closed on the low tick, with the SOX the lead loser, down about 7%. I didn't really see any port in the storm. I guess the only thing slightly encouraging for the bulls was that volume was not particularly heavy, though this is a pretty thin reed to cling to, on what turned out to be quite an ugly day.
Away from stocks, the metals were slightly weaker, the dollar was kind of unchanged, and fixed income was higher.
Take Up the Slack, Buy More Slacks : Shifting to the hibernating-consumer department, Wal-Mart WMT announced a piece of negative news this morning that failed to make the big headlines it deserved: Same-store sales for last week grew only 3%, vs. expectations of 3% to 5%. The significance of this, I believe, looms even larger, because the holiday season has six fewer shopping days than usual. So, if retailers are going to see any kind of halfway-decent Christmas, people will have to put in some double overtime in the aisles -- which heretofore this season they have clearly not been doing.
Of Upscale and Downtick : In fact, Wal-Mart's news, along with last Friday's report of a surprisingly smaller increase in consumer credit, tends to corroborate my view that the consumer is about to weaken, and the economy is not looking too good for next year. That was underscored further up the retail ladder by Federated FD , which announced a little disappointing news, and by Gucci GUC , which said it would cut its earnings forecast.
Whither Wither the Rally? : Meanwhile, hopes for the stock market rally appear to be fading, and with it, the prospects of a strong holiday season. I continue to be struck by the fact that, with the exception of a big squirt for about a week in the Nasdaq and a couple days for the Dow and S&P, the Fed meeting/surprise Republican victory in early November was basically the high for the market. Obviously, the speculative playthings did a little better in the Nasdaq surge that broke through those highs. But for all intents and purposes, this rally was completely about speculation and the power of OPM, and nothing of substance.
Ingest, Inflate or Diet : Speaking of trifling, an Op-Ed piece in today's Wall Street Journal by James (Dow 36,000) Glassman, titled "Invest, Innovate or Die," goes to show just how clueless the new-era apologists tend to be. In a prime example of whistling past the graveyard, Mr. Glassman weighs in on why the market will face a third down year in a row: "Onereason is that investors, not having seen a bear market, overreacted."
Well, I agree that investors haven't seen a bear market in a long time. But that has resulted in more denial, rather than overreaction. Most people continue to hope, near as I can tell.
The Cupboard Is 'Bear' : In any case, when citing how corporate profits for the S&P have dropped 27% in the last year or so, Mr. Glassman then goes further astray by calling the cutback in business spending "a mistake." He thinks that corporate America should just continue to make capital investments. After all, as his simplistic little slogan says, either "invest, innovate or die." The problem is, in the aftermath of the bubble, we have a surplus of just about everything, from retail stores and restaurants to semiconductor-fabrication facilities. And even if corporate America had something it needed to invest in, the misallocation of capital spawned by the bubble has left many of its businesses lacking the wherewithal to do so.
Glassman's Menagerie : When I note that all of these problems cannot be fixed by the government, and that time is needed instead, it's just a shorthand way of saying that a number of things have to occur to get us back on track: Enough time must pass in order for consumers to retrench and rebuild their balance sheets. To do the same, corporations must close the capacity that's never going to be utilized, and to let demand pick back up to where supply is. Again, there is no shortcut to accomplishing this. Time, and the creative destruction side of capitalism, will do what Mr. Glassman's animal spirits cannot. I hope that clarifies the point. |
