lance lewis tonight
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Gold Inches Higher Again
Asia was mixed overnight, with little movement in either direction. Japan fell a touch and continues to underperform. Europe was a touch weaker this morning after German investor confidence fell to the lowest level in two years. The ZEW Center for European Economic Research's index of institutional and analyst sentiment fell to 13.9 from October's 31.3, the biggest drop since November 2002. Economists had forecast a reading of 30. Recall that we’ve been talking about how weak overseas economies are right now and how their stronger currencies are hurting exports and dragging even further on their economies. This sentiment index certainly reflects the growing awareness of that fact by the Germans about their own weakening economy.
Meanwhile, across the pond in “Wonderland” where stocks go up every day regardless of price or business fundamentals, the US futures were off a touch.
We gapped up at the open in the S&Ps (I presume because oil tumbled again but who knows why people panic to buy to stocks these days?) and proceeded to make a straight-up move to a marginal new high. That rally flamed out almost immediately, however, and we reversed the rally entirely. After a brief visit into the red, we ramped again in the afternoon and tried once again to push above the morning’s high. We never made it, however, and rolled over once again into the close to end basically unchanged. Volume was chunky (1.5 bil on the NYSE and 1.7 bil on the NASDAQ). Breadth was slightly positive on both exchanges.
IFX, Europe’s second largest chipmaker, warned that revenue would be flat to down in the current quarter and warned of "substantially lower growth next year". As a result, the company also said it would be discontinuing any businesses that were currently not profitable in preparation for the leaner times that it felt were on the way. IFX said, “In these markets, inventory levels have gone up as compared to the previous quarters… On average, industry experts forecast a reduction of the rate of growth of the worldwide semiconductor market from nearly 30% based on U.S. dollars during calendar year 2004 to a single-digit rate of growth during calendar year 2005. This projection implies stagnation in the industry when looking at sequential average growth for the quarters of [Infineon's current] fiscal year…. In fiscal year 2004, we showed a revenue improvement for every quarter. But now we have to prepare ourselves for a slowdown." IFX fell just over a percent.
The rest of the chips were mostly lower by a percent or so. The equips were also mostly lower by a percent or so. The SOX fell just over half a percent.
The Internuts and the rest of the kinky stuff was pretty mixed. GOOG fell another 2 percent, TZOO rose 4 percent to a new high, and RIMM rose a percent.
CSCO fell a percent ahead of its earnings tonight. What we’ll want to watch for is whether the company was able to work down its bloated inventory levels or not and the guidance. I doubt the news will be good. Whether the market will care or not is another issue of course…
Financials were mixed. The BKX fell a touch, and the XBD rose a touch. The derivative king fell half a percent, BAC was flat, C was flat, and GE rose a percent. The mortgage lenders were mostly higher by a percent or so. FRE lost half a percent, and FNM was flat.
Retailers were mostly a little lower, with the RTH off just a touch. The homebuilders were mostly higher by a percent or two after TOL guided up, although they were even higher earlier in the session (many gapped up) and gave up most of their gains. Still, many like TOL, BZH, and KBH did make new highs once again.
Crude oil fell $1.72 to $47.37 and another new low for the move off the peak, as specs continue to liquidate. The XOI and XNG both fell nearly a percent, and the OSX rose just a touch. The CRB fell a touch, and the CRX was also off a touch.
Gold opened up a dollar or so in the US this morning, and after correcting to fill the gap a bit, it rallied up about $4 to as high as $437.50 before finally easing into the close a bit to end up $2.80 to $436.20 and another new closing high.
The HUI rallied back up to its October peak but gave up some ground in the afternoon along with the rest of the equity market to end up just over a percent. NEM rallied up to a marginal new high for the move and within sniffing distance of a new high. PDG fell over 5 percent after the company’s management decided that this was a good place to monetize some of its high stock price and sell 18.5 mil shares at a 5 percent discount to yesterday’s price. Unfortunately, the deal was undersubscribed by about 20 percent, which is not too reassuring for those of the bullish persuasion, and reaffirms once again for me that the market as a whole is not convinced that the current move in gold is sustainable.
However, as I’ve been saying, that doesn’t prevent the metal from spiking and taking a few of the larger stocks (PDG is obviously no longer in that category due to today’s deal) like NEM along with it for a bit, but even in NEM, one needs to be very careful I think, because if the dollar accelerates to the downside, it could take the US bond market with it, which will finally drive up interest rates. And rising interest rates would probably cut the gold rally short as well as take the equity market down.
Tomorrow morning, we’ll get the September trade deficit (I got mixed up and incorrectly said yesterday that we would get it today, so I apologize if I confused anyone). If it expands once again, which I think it will because of oil, we should see the dollar move lower and gold rally further. If we see that sort of action and the dollar continues to decline in the days following the FOMC, the metal should really get frisky, as there won’t be much in its way until $450 or so.
The US dollar index bounced just a hair. The yen and euro both fell a hair. Part of what supported the dollar a bit today was the fact that the European Commission said this morning that it and EU member states share European Central Bank president Jean-Claude Trichet's concerns about the "brutal" rise of the euro against the dollar. The commission also added that euro zone finance ministers would discuss foreign exchange movements at their next meeting, on Monday evening. Japan’s Tanigaki also repeated overnight that he was watching currency levels daily. So, the steady ratcheting up of “verbal support” for the dollar coming out of both Japan and Europe is being stepped up a notch, as we’ve been expecting, but there’s no sign of any actual intervention by either one, which is something I think is going to probably be required before the current move in the dollar ends. In the meantime, 78-80 on the dollar index (comparable to 1.35-1.37 euro-) still seems very doable if we experience some sort of panic move to the downside in the near term.
On the other side of the pond, Robert Rubin was out this morning warning that the dollar’s decline could accelerate. He said, "If markets begin to fear long-term fiscal disarray and if foreign providers of the capital inflows upon which we have now become so enormously dependent share this fear and also develop a concern about our currency, then the markets may begin to demand sharply higher interest rates on long-term debt and possibly even create conditions of serious disruptions in our financial markets, with all the problems that that can lead to for our economy."
This is precisely the sort of psychology that I think may be developing (finally), which will lead to our bond market joining the dollar in its downward slide, which in turn will collapse the real estate bubble, the equity bubble, give us a correction in commodities, and tank the economy all at the same time. At some point a rise in US interest rates will obviously support the dollar as well and give us some sort of rally but the question is where that equilibrium point is? Thus far though, unlike earlier in the year, rising US interest rates are not supporting the dollar.
Treasuries were lower once again with the yield on the 10yr rising to 4.21%. A break above 4.27% in yield on the 10yr tomorrow, and we’re likely to see a sizeable move in the bond market (down in price / up in yield).
Tonight we’ll hear from CSCO, and then tomorrow of course we have the FOMC. We’ll definitely get another 25 bps tomorrow out of the FOMC. As for the widely watched and panted over FOMC statement, my guess is it will be relatively unchanged. The FOMC will cheer on the economy and repeat the “measured pace” lingo, and maybe mention that employment may be getting better, but who knows really. It’s all guess work what these 7 guys are going to come up with to throw down on a piece of paper. How the market reacts to it over the coming days will be the key. If indeed the dollar accelerates its decline and the bond market falls out of bed along with it, it may finally matter to the equity market… and in a big way too.
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