today's lance lewis on the "end" of the war among other things
April 9, 2003
Statues Fall And So Do Stocks
Asia was lower last night, with Japan falling a percent and headed back towards Nikkei 8000. Hong Kong also fell 2 percent and is once again challenging its lows for the year. The excuse may be SARS, but the general Asian market weakness of late definitely bears watching. Europe was off a touch this morning, and the US futures were also a little weaker despite the fact that the US military had said that the Iraqi regime was no longer in control of Iraq and that the campaign had reached a “tipping point,” meaning that we were closing in on the end game.
That is to say that the futures were weaker until TV news stations began broadcasting jubilant Iraqi civilians pulling down a statue of Saddam Hussein in Baghdad. Suddenly, the futures caught a bid, as Heehaw (that’s CNBC for new readers) gleefully pronounced that a big rally was due when the statue fell (I kid you not. That phrase actually came out of somebody’s mouth). We opened higher and quickly sold off back to the morning’s lows in the futures when it appeared to be taking too long to drag down the statue. Finally, we made a slingshot move back to the highs as the statue was pulled down by a US tank, and that was the high for the day.
We quickly rolled over and sunk to a new low for the day and the week as the “news” that the war was effectively over was sold. A bounce unfolded from there and retook about half the day’s losses until a selloff in the last 30 minutes sent us plunging to new lows for the day, taking us out on the very worst levels of the session. Buy the cannon, sell the trumpets is the old adage about stocks and wars. Today once again proved that old adage to be true. With the fall of the statue, the war is symbolically over. The trumpets sounded victory, and down we went. As we’ve noted over the last few days, the market has clearly been anticipating this already, as positive war news has had less and less of an effect on financial markets in recent days. Volume was just OK (1.3 bil on the NYSE and 1.3 bil on the NASDAQ). Breadth was slightly negative on both exchanges.
The semis spent most of the day trying to bounce back after yesterday’s pounding but in the end were dragged under along with everything else. Losses were small in most cases, however. The equips were similarly stronger for most of the day but gave up the ghost in the afternoon and were generally under a little more pressure than the chips, with losses of 2 to 4 percent being the norm. The SOX fell 2 percent to a new low for the move and just shy of its early April low.
The rest of tech was weak across the board. MSFT played a bit of catch-up and fell 4 percent. The Internet trash finally ran into some trouble as well. AMZN fell 6 percent to a new low for the move and the month. EBAY slumped 3 percent. YHOO fell 4 percent and back to its low for the month ahead of its earnings to be released after the close. Even the Chinese Internet trash (SOHU, SINA, etc) was smacked around to the tune of 5 percent on average. Tonight we’ll hear from YHOO. What the company reports and guides to is irrelevant. At 130x trailing and 14x sales, just about anything good they could say is more than fully discounted. All we are interested in is the reaction. If bad news is sold or good news is not bought, then we’ll have another sign that the market is ready to soften up on next week’s guidance from the rest of corporate America. Let’s wait and see what happens, but judging by the breakdowns in these Internet stocks today (as well as the biotechs, with the BTK making a new low for the month), the rally has hit the wall, and trouble is on the way.
Financials were also weaker. The BKX and XBD both fell 2 percent. The derivative king fell a percent, and GE fell 3 percent. Credit insurers were off a percent on average and continue to hold together fairly well. FRE and FNM both fell a percent.
Retailers were weaker across the board, with the RTH falling 2 percent. WMT also fell 2 percent. Homebuilders resisted the general market selloff and were mostly higher by a percent or so despite HOV guiding full year 2003 earnings above its own previous guidance but below consensus estimates, which I must admit is somewhat of a bullish sign. The market appears to believe that homebuilding will continue to be strong as long as interest rates remain low (there’s also typically a spike in building even as rates rise off a low because people rush to lock in rates). So, perhaps the homebuilders can revisit their highs over the next several months? I’m not so sure about that, but it’s possible I suppose. The mortgage bubble continues to somehow miraculously hold together and may continue to do so until long-term interest rates begin to rise.
Crude oil rose 85 cents or 3 percent after US inventories unexpectedly fell and OPEC made noises about cutting production at its April 24th meeting. The XOI fell a hair, and the OSX rose a percent. The XNG rose a freckle. The CRB rose a touch and is closing in on a new high for the move off the March 26th low. Gold opened up a dollar in NY this morning and then sold off a couple bucks once the statue toppling nonsense started in the equity market. Once the statue had fallen though, the metal began rallying and steadily marched higher for the rest of the session to a new high for the day. There was a small giveback before the close, but the metal essentially ended on the highs, up $3.30 to $326.50. The HUI rose 4 percent to a new high for the week and just shy of a new high for the move off the March 13th low. The gold shares continue to outperform the metal, and I expect further gains in the coming weeks. The catalyst for further gains may be just be a bit of post-war inflation.
The US dollar index fell a touch to a new low for the week. The yen slipped a touch, and the euro rose to a new high for the week. Treasuries were up a touch, with the yield on the 10yr falling to 3.9%.
Investor’s Intelligence revealed that bulls have risen to 51.1 percent, which is back to their highs seen in late November of 2002, while bears have sunk again to 31.1 percent. Here again, sentiment readings continue to signal danger, but then again, they have been signaling danger for some time.
Today marked the de facto end to the war I think, and the market’s reaction was predictably to sell the news. We’re still in the twilight period between the war rally and what I expect will be a renewed focus on economic and company fundamentals, but I do think there’s a good chance that next week’s lukewarm guidance will be sold. Tech will likely be hit the hardest since that’s where valuations are stretched the most in an environment that continues to see no pickup in IT spending. Looking further out, I do think we’ll see some sort of global consumer economic blip due to post-war relief (throw in some dying down of the SARS hysteria, and Asia could really see a pop), so retailers may or may not hold up a little better. All of that is inflationary for the US of course, and I doubt the bounce in consumer spending in the US will last very long (an inflationary move in commodities right in front of a US recession is fairly common historically). That should of course be a big positive for gold and its shares, and I expect new highs in the shares at some point over the next few months. As I have said before, the Fed is inflating; don’t fight the Fed. Now, that doesn’t mean “buy stocks,” because inflating doesn’t guarantee economic or earnings growth, but it does guarantee higher basic commodity prices and a lower dollar.
So, let’s see how the market digests YHOO tomorrow and whether the selling continues or not, but I suspect we have a pretty good chance of revisiting the lows of the 9-month trading range over the next couple weeks as the pleasant distraction of the war fades away. “Investors” (and I use that term loosely in this market) will now have to turn once again and focus on absurd US equity valuations in the face of nonexistent earnings growth as we stand on the brink of a consumer-led recession. It’s all part of the post-bubble world. You either “get it” or you don’t, as a friend of mine is fond of saying. Of course, we can’t expect too much focus on reality. Hope for the fabled second half should keep things from getting too out of hand to the downside. But, let’s not get too ahead of ourselves. The March 31 lows need to be taken out before we can say with any certainty that some sort of top is in.
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Disclaimer: Lance Lewis periodically publishes columns expressing his personal views regarding particular securities, securities market conditions, and personal and institutional investing in general, as well as related subjects.
Mr. Lewis is the president of Lewis Capital, which manages a hedge fund in Dallas, Texas. This fund regularly buys, sells, or holds securities that are the subject of his columns, or options with respect to those securities, and regularly holds positions in such securities or options as of the date those columns are published. The views and opinions expressed in Mr. Lewis' columns are not intended to constitute a description of the securities bought, sold, or held by the fund. The views and opinions expressed in Mr. Lewis' columns are also not an indication of any intention to buy, sell, or hold any security on behalf of the fund, and investment decisions made on behalf of the fund may change at any time and for any reason. Mr. Lewis' columns are not intended to constitute investment advice or a recommendation to buy, sell, or hold any security.
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