Reposted from worldmarket.blogspot.com
Lance Lewis
Buckle Up… Turbulence Dead Ahead
Asia was mostly lower overnight, with Japan falling half a percent and China falling 2 percent. Europe was off a percent this morning, and the US futures were also lower. We opened down and it was “off to the water park,” as we spent the remainder of the day slowly sliding lower. The bulls tried to make a stand just below the 200 dma on the S&Ps in the afternoon, but they never really got any traction. The end result was that we edged lower in the last hour once again and went out right on our very worst levels of the session. Volume was a little heavier (1.4 bil on the NYSE and 1.6 bil on the NASDAQ). Breadth was over 2 to 1 negative on both exchanges.
Contract manufacturer JBL reported overnight and “beat the number.” The company’s guidance was also inline (the stock jumped 7 percent and was one of the few areas of green on my screen today). But JBL’s guidance wasn’t what was interesting. The really interesting part was what they had to say about the networking sector. JBL said its networking business dropped 4 percent in its fiscal fourth quarter and said networking sales would drop another 5 in the current quarter. CSCO makes up about nearly 15 percent JBL’s total sales and about 65 percent of its networking business. Thus, we have another dot to connect that leads us to believe that CSCO is likely having trouble in the current quarter and will soon be spitting up a hairball. At 25x trailing EPS and 6x sales, it’s certainly not cheap.
JBL’s call may have also been what awakened one analyst from his slumber because he suddenly downgraded CSCO from “chase it” to “hold it” this morning (although JBL’s call was not cited). The combination of what JBL said and the downgrade hit CSCO for nearly 4 percent.
The chips were down across the board by 3 to 4 percent. The equips were similarly whacked for 4 to 5 percent, while some of the second tier names reversed out yesterday’s outperformance and were hit a little harder (AEIS fell 8 percent, CMOS 6 percent). The SOX fell 3 percent.
The rest of tech was mostly lower, including the really crazy stuff like the biotechs and Internet trash. The BTK biotech index fell 3 percent, and the IIX Internut index fell 2 percent.
Financials were beat once again. The BKX fell a percent and a half, and the XBD fell over 3 percent. The derivative king fell half a percent, BAC fell 2 percent, and GE fell 2 percent. But C’s 3 percent tumble back to nearly its August lows was the big thumping of the day. When the largest financial in the world by market cap tanks like C has done over the past few days, it’s worth noting. A flattening yield curve along with lower trading revenues and prop trading losses in difficult markets are not a recipe for profits at the big financials.
Mortgage lenders were mixed. People appear to be laying the bet that with long-term treasury yields falling and dragging down mortgage rates, both refi and purchase activity will increase. If the refi and housing market are both basically exhausted, as I believe they are, this sector is going to have some big accidents. But it’s too early to say just yet. FNM disclosed that the SEC was investigating them for potential violations relating to their various accounting shenanigans that have come to light of late. FNM fell 7 percent, and FRE was hit for 4 percent in sympathy. Will FNM’s ability to continue to supply credit to the mortgage market be affected by the ongoing investigation and whatever is uncovered? Time will tell.
Retailers were lower, with the RTH falling over a percent. Homebuilders were mixed, as people once again appear to be betting that lower long-term treasury rates will drag mortgage rates down and stimulate the housing market. The Mortgage Bankers Association said its seasonally adjusted market index rose for the week ending Sept 17 by 1.8 percent to 690.7 from the previous week's 678.2. The group’s refinancing index rose for a third week, by 4.1 percent to 2,052.5 for last week from the previous week's 1,972.5. The group's purchase index rose last week by 0.2 percent to 456.6 from 455.7 in the prior week. Thirty-year mortgage rates, excluding fees, averaged 5.66 percent, down .02 percentage points from the previous week and down 0.19 percentage points from a year ago.
Crude oil jumped $1.59 to $48.35 after US petroleum inventories once again had a huge drop. This drop, as with last week’s, appears to be related to damage to Gulf production platforms and pipelines due to Hurricane Ivan. So, they’re more of a short-term problem (the initial response in crude was to selloff on this bullish data), but specs continue to be very big players in this market. And when they find a trend, they chase it for how ever long they can keep it going regardless of the fundamentals, as many late 1990’s tech short sellers can attest to (the few that are still around that is). The difference of course between a commodity market and the stock market is that there is a physical market, which can eventually spoil a party if too much supply hits the market. The oil experts that I talk to tell me that more supply is indeed on the way, and they expect a short-term decline into the seasonally strong period later this winter to begin at any time.
Based on the move the XOI has had over the last few days (assuming the equities are leading the commodity, which they may or may not be), specs are likely going to run crude over the $50 mark in the coming days or at least touch it and double top. The XOI fell a percent, while the XNG and OSX were both flat. Have the oil shares already discounted the current move and are now set to decline with the stock market? It certainly appears that way. The CRB rose half a percent, and the CRX fell a percent.
Many have probably noticed that many of the commodity plays on Chinese demand, like PD, RTP, BHP, N, etc have rallied back almost to their highs of earlier this year, after having collapsed in early Q2 when China imposed credit controls. This is the same pattern that we saw in tech in the year 2000 after a similar year and a half rally off the 1998 lows (the China-related stock rally began on the 2002 lows and also turned into a mania).
You will recall that the NASDAQ topped out in March and crashed into April, but many of the tech stocks bounced back and rallied all the way back to their highs by September. Many even made new highs later in the year. This was despite the fact that after the March/April collapse, it was obvious that the game was over. Does this sound like anything familiar that we are seeing today?
China’s communist government has once again reiterated that it is serious about clamping down on its out of control economy and over-investment and may even raise interest rates in October. Once again, I think it was obvious earlier this year that the China bubble had topped, but people still want to chase commodities and stocks based on the idea that China will be a never-ending boom. Even more amazing are the many people who are bearish on the US economy but somehow still bullish on Asia’s economy. Who do these people think buys Asia’s goods? If the US economy falters, the rest of the planet goes down with it in the short-term. That’s just the way the world is structured. The US is the consumer, and the rest of the world is the producer. The US pays paper dollars for goods that Asia produces. That’s the system, and it is unlikely to change until it breaks down significantly and politicians are forced to try something new, which we’re getting closer to every day.
The reason I bring this up is because I think what we are seeing in commodities right now is the tail end of the China craziness that is “double topping” much like many tech stocks did in the fall of 2000. Speculators are chasing oil, copper (which made a new high today in the Dec contract), and other commodities right now based on this long-term bullishness on China. What they are forgetting is that in the short-term, demand for most commodities could be in for a serious blow as the global economy continues to slow.
Again, I expect the CRB to join the equity market in its decline at some point in the very near future for this reason. With crude looking like it wants to maybe go parabolic once again, perhaps the CRB can make a new high, but after that we may see a steep decline in the CRB in October. Crude may only decline into the high 30s (if it declines significantly at all) because of the of the excellent supply and demand fundamentals we have discussed before, but there is huge risk to many of these industrial metals where supply increases every year (especially copper). Thus, there’s enormous risk in many of these commodity stocks, including oil stocks (but probably to a lesser extent than other commodity producers). Gold and silver shares are somewhat different because of the two metals’ monetary properties, but we’ll get to that in a moment…
Gold opened down about $3 in the US this morning, completely erasing yesterday’s rally. But after making a low at $405.80, the metal rebounded around the same time that crude took off and rallied into the close to end near its best levels of the day and only down $1.10 to $409. Because the dollar rallied today, it appears that gold’s rebound is related to the general bid in commodities, probably more so because of oil’s rally. Without a decline in the dollar though, I doubt it will stick.
On a bigger picture note, recall that even during gold’s secular bull market in the 1970s, its longest bull market from 1976 to 1980, 41 months. The move from 1971 to 1974 was 40 months. A two-year bear market separated the two.
For gold to make a new high in September, it would extend its bull market to 42 months and be a new record, while its peak in April was a 36 month bull market, which is consistent with the length of the 85-87 bull market, as well as the 93-96 bull market. Could gold break the record this time and continue in its bull market without a serious correction? Anything is possible, but I doubt it. I’ve made the case for why gold is probably due for a further correction before its bull market can resume many times in past columns. So I am not going to bore readers by repeating them here, but I think there is a very good case for why gold bulls should very cautious right now at minimum. I, for one, am going to play the odds and stick to the sidelines and wait for a better entry point. But that’s just me.
The HUI fell half a percent, and the decline would have been worse if it wasn’t for a rally in the silver shares, which I think is related to the rally we saw in the base metals today since many consider silver a base metal as well as a precious metal. NEM in particular continues to sink up the joint, as it fell nearly 2 percent. NEM is sort of my proxy for true gold investors that are in gold not as a speculation but as a hedge against a decline in the dollar and general financial distress. When it underperforms, it’s not a bullish sign for the sector. With the stock market likely beginning a decline back to its lows today, the golds are likely to be soon dragged down with it. Gold shares are not a hedge against a stock market decline. Thus far, the post-FOMC action suggests the gold shares’ rally off the FOMC yesterday was probably just a head fake to me.
The US dollar index rallied half a percent and retraced most of yesterday’s slide. We need to see more gains tomorrow and Friday probably to be sure, but it certainly appears that, like the rally in stocks yesterday, the move in the dollar is a “first way, wrong way” situation. The euro fell half a percent and reversed over half of yesterday’s rally. The yen fell over half a percent and appears to have broken out to the downside from a two-month consolidation. With the Japanese economy already slowing sharply over the past few months and the continued slowing in one of its primary export markets (the US), what is the response from the MOF and BOJ likely to be? The answer is sell yen, which the MOF and BOJ already told us just a few days ago was likely. As I’ve said before, these Asian countries are only interested in keeping the game going for now. That will change at some point, but probably not until there is an economic crisis, in my opinion. This is one of the many short-term reasons why I believe the dollar can rally in the near-term (or at the very least, not go down).
Today’s decline was a broad based selloff that hit every sector, including the seemingly bulletproof Transports (TRAN), which fell over 2 percent. Importantly, this single day decline has trapped nearly 3 weeks of trading at higher prices in the S&Ps and other indexes, which gives us a significant reversal. As we have been discussing, yesterday’s rally off the FOMC appears to have capped off the rally. So, we appear to be on the “right page” so to speak for the moment with the market, proving once again that even a blind (and deaf) squirrel can find a nut every now and then.
Today’s selloff should be the beginning of a move back to the bottom of the year-long trading channel (at minimum), and the decline is probably going to be a little faster this time since I believe preannouncements over the next two weeks will be what drives it. I suspect we’ll be back at the bottom of the trading channel before the end of this month as we work our way through more preannouncements. After that, we’ll see, but my bet is that the month of October is finally going to give us a “breakout” from the year-long trading channel in the indexes…. and it won’t be “up.”
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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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