dailymarketsummary.com
September 5, 2003
No Jobs Equals No Fabled Recovery
Asia was fairly quiet overnight, with Japan ending flat. The JGBs fell in yield once again to 1.49%, giving them a now two-day old bounce (in terms of price).
Europe was down a percent this morning, and the US futures were lower for a change despite some gamesmanship from INTC overnight (more on this below). The August unemployment number came in at 6.1%, down slightly from July’s reading of 6.2% (people are falling off the list and this was part of the reason I thought yesterday that this number might be a little encouraging on its face). However, when we got the payrolls data, it was revealed that in reality nothing is really improving on the labor front, as payrolls declined by 93,000 (above the 49,000 that they fell back in July). The equity futures plunged lower on the news, and the bonds got a pop. The real news was though that dollar softened up significantly.
We gapped down at the open, dribbled down to yesterday’s lows, and then the obligatory rally back to fill the opening gap began. We spent the rest of the morning working our way back up to yesterday’s close (filling the gap), and then we promptly had a flameout. From there, we rolled over and plunged to a new low for the day, trapping the previous 2 days of trading (which were made up of extremely high volume you’ll recall) at higher prices. We spent the last couple hours of the day bouncing off the lows but still went out at the lower end of the day’s trading range. Volume was extra chunky once again (1.4 bil on the NYSE and 2 bil on the NASDAQ). Breadth was slightly negative on both exchanges.
INTC had cancelled its call since it had already had one a couple weeks ago, but it still issued a press release last night for its midquarter update. In the press release, the company tightened up the range for its improved revenue forecast from 2 weeks ago from $7.3 bil to $7.8 bil to the new range of $7.6 bil to $7.8 bil. Obviously, we have to give points to INTC management in the category of showmanship for their holding back of this little tidbit until last night (thus dragging out the positive news flow). Everything is a game these days isn’t it? In any case, this “news” amounts to a nonevent, but that didn’t stop hopers from trying to come up with reasons why this was yet another sign of the fabled recovery and a reason to pay 7x sales for this pig. But the market didn’t seem to go for it, and the stock reflected that by going out basically unchanged on the day.
The rest of the semis were lower by a percent or so after opening slightly stronger on the back of INTC. The equips were more mixed with most trading to up or down a percent or so. The SOX rose a percent.
The Internet trash was mostly lower. The tier 1 stuff was off a percent or so on average, while the tier 3 trash was a little more mixed.
Financials were lower. The BKX sunk a touch, and the XBD fell 2 percent. The derivative king fell 2 percent, BAC gave up an early bounce to close off a hair, and GE gave up a percent (apparently having failed in its attempt to “break out”). The mortgage lenders were mixed. FRE was off a percent, and FNM fell a hair.
Retailers were lower across the board. Obviously, if consumers don’t have jobs, they can’t buy retail goods. We can’t all speculate our way to prosperity in the stock market no matter how bad the Fed might want that to be the case. Homebuilders were also weaker across the board by 2 to 3 percent.
Crude oil fell 10 cents. The XOI was off a hair, and the XNG fell a percent. The CRB rose a percent and hit a new high for the move in the futures. Gold opened down a dollar in NY, and that was the low for the day. The rest of the day was spent slowly inching higher and back to its high for the recent move. In the final 30 minutes, we saw a spike higher to well above $380 and a new high for the move, but we had a slight giveback at the close to finish off the highs but still up $4.70 to $378.20. The HUI rallied a percent to a marginal new high. The XAU rallied 2 percent to a new high and also surpassed its peak in 1998. That means that it has now closed (on a weekly basis) above a nearly 6-year base, which could get some chart huggers pretty excited next week. I’m still expecting gold and its shares to move significantly higher in the very short-term, but early next week will tell the tale. We shall see…
Regarding the COT report. I get emails about this all the time. You’ve probably noticed that I haven’t mentioned the COT report for gold in almost 2 years. Since late 2001, commercials have been net short gold, which is also the same period in which gold began its current bull move. Keep in mind that contrary to popular opinion, commercials do not “want” gold to fall when they are take up short positions (and they’re not being “squeezed” as many seem to believe). Based on the way I understand things and have been told by people that are much more knowledgeable about these sorts of things than I am, commercials are in fact long the physical. The short position that we see the futures market is actually a hedge against that physical long. The longer the commercials get, the more they sell short to hedge. The point is that a large speculator position (which obviously takes the other side of the commercial trade in the futures) does open the metal up to severe selloffs as these specs are forced to liquidate form time to time, but it’s not a bull market killer. The bottom line is that gold bull markets thrive on investment demand, period. So, that’s why I haven’t talked about the rising short position and why it doesn’t change my outlook on the metal. If one had been using that short position as a basis to be bearish on gold, they would have missed the entire move from the lows in 2001.
The US dollar index slumped over a percent and appears to have rolled over from its recent bear market rally off of the June low. The yen was flat, and the euro rose nearly 2 full pennies and appears to have put in a solid bottom off of its recent 2-month correction. Treasuries had a significant pop on the back of the weakness in stocks, with the yield on the 10-year falling to 4.35%. And while the bonds may be able to bounce for a week or two if indeed stocks put in an exhaustion top today (stocks collapsing is the only reason that bonds will rally significantly at this point), I don’t think they’re out of the woods just yet. No doubt the Fed wanted to see a bigger rally today after the they had just sent out a army of speakers yesterday to try and talk rates back down, but today’s rally wasn’t big enough to truly “turn” the market.
So, we’re probably going to get some sort of correction in the bear trend of the bond, but it doesn’t appear that the Fed was successful in breaking the rising trend in rates with yesterday’s arsenal of speakers. As a side note, I want to know what in the world was going through St. Louis Fed President Poole’s mind when he said overnight that the Fed could in fact raise rates if the economy really took off? This is on the back of Mr. Confetti (Bernanke) saying the Fed could cut rates and Greenspan saying the Fed would leave rates low even as an expansion got underway. Is this the Fed’s form of good cop/bad cop in order to placate those smarter players in the bonds that understand that the market sets interest rates and are worried that the Fed has offered them up as a sacrifice with their inflationary policies, while still also placating the slower folks out there that actually think the Fed sets interest rates? Or, are these clowns just running willy-nilly and have no idea what they’re doing other than they know the need rates to go down and stocks to go up in order for their miracle recovery to take place? If it weren’t so sad, it would be funny.
Next, I want to touch briefly on the Gross piece yesterday because I’ve received a lot of emails about it (hopefully, everybody has read it or will read it soon). I haven’t mentioned China’s currency peg much because I didn’t expect them to release it anytime soon. They have no reason to and certainly aren’t going to simply because the US sends some treasury secretary over to ask nicely. But whenever it finally does happen, it will indeed mean a lower dollar, rising interest rates (Asian central banks will no longer be recycling their dollars back into the US treasury market), and a higher rate of inflation. It’s just another aspect of the unwinding of the bubble and busted US-centric system of trading paper dollars for goods and services that the rest of the world produces. But like I said, I didn’t see any reason why the Chinese would ever do this at the moment because they have an unemployment problem of their own, and it would take something big to change their minds.
The dilemma for US policy makers and the Bush Administration is obviously that it’s becoming clear that despite the short-term pop to the economy that we’ve had due to all the stimulus that’s been thrown at it; new jobs are not being created in the US. I will also insert here that this is another reason the current economic pop won’t last. Demand is the key to an expansion, and it’s just not there. Consumers have too much debt and incomes and jobs are not expanding to offset that. With the refi crutch gone, the consumer is in deep trouble once the tax stimulus pop flames out in the economy. Obviously, this is a thought process we have been over many times, so I’m not going to belabor the point here again.
In any event, jobs are not going to be created in the US anytime soon despite the dollar’s recent fall against most of the rest of world (ex-China) due to the dynamic that we have discussed before of the world becoming so structured to exclusively produce goods for dollars and the fact that you cannot flip the switch, drop the dollar a bit, and try and move back to equilibrium overnight (especially when China prevents that move to equilibrium by the US ever beginning at all against the Asian economies). It takes time to restructure physical economies, and that intervening period is going to involve a nasty recession on a global basis. That’s why bubbles and the imbalances that they build up are so bad.
But back to Bush’s dilemma. He wants to be reelected, and in order for that to take place, he needs Americans to go back to work. The obvious long-term answer is to have China release its peg, which in theory (given the time factor that we addressed above) will “right the boat” so to speak. However, the righting of that boat won’t be immediate, so the US job market won’t really benefit from it right away. Nevertheless, I get the feeling that the Bush believes pushing for the lifting of the peg will help his chances regardless because he’ll at least look like he’s doing something and maybe the economy will hold together long enough that he can get elected.
Now, in addition to the consequences of a revaluation of the renminbi that I listed above, there is also the often overlooked fact that many US manufacturers have moved their manufacturing facilities to China and are benefiting from the margins that the low cost of production in China gives them. Should the renminbi rise (which means all Asian currencies would rise), earnings at most US corporations would actually fall considerably in the short-term. Even retailers such as WMT that are used to selling cheap Chinese goods would see their margins squeezed if Asian imports rose in price.
So, if indeed Bush is now hell-bent on somehow muscling China into releasing or partially releasing its currency (and the two countries’ leaders do already have a meeting scheduled in late October I believe), the market may begin to discount that in an accelerated fashion, which has obvious accelerated implications for gold, stocks, the bond market, and the dollar, as they continue on their post-bubble paths back to (and likely beyond) the theoretical “equilibrium point” where the global economy is once again rebalanced.
We’ll just have to see how things develop I guess. I don’t see a revaluation of the renminbi as a high probability at the moment because I’m not sure how Bush would muscle the Chinese into doing anything (but there certainly is a growing noise about it and these things have a way of getting a life of their own). The ironic part of this is of course that by the US pushing for the release of the renminbi, it effectively slits its own financial market’s throat because of the consequences of that revaluation that we discussed above. And, as DMS readers know, the financial markets are the economy due to the imbalances that were built up during the bubble. But that corrective process needs to happen if the global economy and US economy are ever going to reach a state of balance again. As I’ve said before, the future should be bright once we pay for the sins of the bubble, but the intervening period is going to be nasty. There’s no easy way around it.
Back to today’s action in the casino though… I mentioned yesterday that I thought we had a shot at exhaustion today, and we may well have seen it with today’s decline in stocks, but it’s just too early to say. My guess is that we could decline into mid-next week before some sort of September 11th anniversary relief rally, but let’s just take things one day at a time and see if we get some downside follow through next week. If indeed an exhaustion top is finally in, then we’ll get some sort of selloff from here that is followed by some sort of bounce (a failing rally). And that’s the bounce that we’ll really want to pay close attention to, because (despite the fact that it’s a very low probability event by its very nature) I do tend to think the next move will be some sort of crash. And it’s going to happen sometime between now and the end of October if this rally is indeed going to finally exhaust sometime this year.
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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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