I haven't posted a Lance Lewis piece in almost two months and tonight's is a good one. Note junk spreads were flat today.
dailymarketsummary.com
Stocks Remain Convinced That A “Pause” Is Coming
Asia was mostly higher overnight, with Japan picking up over a percent ahead of its elections this weekend. We also saw the highest volume ever on the Japanese market last night, which is noteworthy. Europe was up a touch this morning, and the US futures were higher as usual.
We gapped up at the open in the S&Ps, had a little pullback, and then launched about half a percent over the next couple hours to our high of the day, which was just shy of the August peak. We finally leveled out in the last couple hours and went sideways, but we still finished basically right on the best levels of the day. The media will say that oil and gasoline corrected a little, but the bottom line is that people are convince a Fed pause is coming, and they think it’s the best thing since sliced bread. Volume picked up a bit once again (1.5 bil on the NYSE and 1.6 bil on the NASDAQ). Breadth was over 2 to 1 positive on the NYSE and slightly less than 2 to 1 on the NASDAQ.
INTC’s midquarter update was a giant yawn, as the company merely narrowed the range of its revenue guidance but left the midpoint unchanged. INTC fell 3 percent to a 5-month low. TXN, however, guided EPS up to 38 cents from 36 cents and guided revenue up to a midpoint of $3.55 bil from $3.425 bil. Like NSM, TXN cited robust handset chip demand. TXN, however, ended merely flat after opening higher.
The rest of the chips were a mixed bag and mostly up or down a percent. The equips were also mostly higher by a percent or two. The SOX rose nearly a percent.
The rest of tech was mostly higher, but rather unremarkable,
The financials were higher. The BKX rose just a touch, and the XBD rose over a percent to a new high. The derivative king rose half a percent. C rose just a touch, and BAC was off a hair. GE rose just a touch.
AIG rose over 2 percent. ABK and MBI both picked up over a percent. The mortgage lenders were up a percent or two across the board. FRE rose a hair, and FNM rose just a touch.
Retailers were (you guessed it…) higher, as the RTH rose a percent. TGT rose half a percent, and BBY rose 2 percent.
Yesterday’s HOV-inspired tumble was completely forgotten today, as the homies snapped back and were up 2 to 4 percent across the board. The HGX housing index actually even made a marginal new high for the week as if yesterday never even happened. If the homebuilders get back into gear to the upside, it would obviously support the entire stock market potentially moving higher once again. I can’t believe that’s actually going to happen, but the market seems convinced that the Fed will pause and that the housing bubble might be “OK” as a result.
In the real world, however, we continue to see signs that the housing bubble has already popped, so a pause isn’t going to do much for people that stuck with overpriced real estate. Take today’s Condo Uh-Oh, which appeared in the NY Post. According to the story, “The average price of a Manhattan apartment has dropped from $1.332 million in June to $1.145 million by the end of August — more than 14 percent, according to the latest monthly report by the Halstead real-estate company.”
The TRAN was off a percent and fell to a new low for the move thanks to a warning from YELL. YELL, which is a trucker, warned that earnings would be off 12 percent. Three percent of the 12 percent miss was attributed to damage from Katrina, while the remaining 9 percent was attributed to “implementation challenges for new processes”. The company notably insisted that traffic had not yet slowed down yet. Nevertheless, YELL was smoked for 7 percent to a new low. JBHT was hit in sympathy and fell 2 percent.
Crude oil fell 41 cents to $64.08 and back to just shy of yesterday’s lows. As more data comes out, it appears that at least 13 percent or so of total Gulf oil production will be offline through year-end at minimum. We’ve also learned that at least 4 refineries are going to be offline for several months. Despite oil and gasoline coming in some recently, this is obviously going to provide continued supply problems. The only question is what will demand be like, and that’s going to depend on the economy (i.e.- the housing bubble).
The XOI was once again unbothered by crude’s decline and rallied nearly 3 percent to a new high. The XNG rose over 2 percent to a new high, and the OSX rose 2 percent and back to just shy of its recent high. The JOC industrial commodity index rose a percent to another new high. Everything we have read coming out of the Fed suggests that they are going to keep tightening, but given the stock market’s continued rally, I am becoming increasingly worried that I am wrong and that the Fed is indeed going to try and monetize the supply shock that we have seen in energy and many other commodities as well as the coming flood of spending by the Federal government by meeting it with easier monetary policy. And that means inflation is going to accelerate. The XLB rose a percent and may now be set to climb off its lows for the year once again.
Gold opened flat in the US and rallied to as high as $453.60, or just shy of yesterday’s high before finally slipping a touch into the close end up $2.30 to $453.40. The COT revealed after the close that the net spec long position rose only 5000 contracts to 149,000 contracts, which is much lower than I thought we would see. It’s difficult to say that it’s “bullish” because it’s still high, but it does indicate that further upside is possible, especially if I am wrong and the Fed pauses like everybody seems to think they will.
The HUI rose over 2 percent to a new high for the move since the May low. With the shares having made a new high for the move, gold will more than likely make a new high for the move of its own next week. The XAU/gold ratio also made a new 5-month high, so the shares are outperforming the metal once again, which is bullish. It’s hard to believe that the entire gold complex has changed character so violently since 1 day after Katrina when everybody began expecting the Fed to “pause”, but that’s what we are seeing.
Based on everything I have read from the Fed thus far, “pausing” does not appear to be on the table in September, but the stock market seems absolutely convinced that a pause is indeed what lies ahead. If they’re right, and I am wrong, the Fed will be meeting an energy shock and massive fiscal spending with easy monetary policy (exactly what Uncle Al claimed the Fed shouldn’t do the Saturday before Katrina hit). This is exactly the mistake that was made by the Fed in the 1970s, when we had a similar short-term oil shock, namely the Arab embargo. What’s even more amazing is that Uncle Al cited this very mistake as something “not to do” just 2 days before Katrina hit!
We had been looking for the gold shares to begin their next leg up wherever the Fed began to ease once again or perhaps even simply stopped raising interest rates, both of which I thought would only come after some sort of negative event occurred in the financial markets, which is what typically happens. If, on the other hand, the Fed pauses now because of Katrina, that could be our signal that it’s time to get bullish on gold and its shares once again.
I haven’t done anything about it yet myself, but I may begin buying some of the shares next week for those that care. The HUI is basically flat on the year still, so it’s not like we’ve missed much. We’ll see how things go, but if this Fed really is actually irresponsible enough to stop raising interest rates in the face of an obvious inflationary shock and massive fiscal spending, it’s going to be time to put on the gold bull hat once again. Technical confirmation won’t come until the HUI can break out of its 2003-2004 downtrend line around 250ish, but I’d rather not wait that long before adding some exposure.
The housing bubble is rolling over, and it will slow the economy. So, at some point the stock market is still going to crater. That slide will still no doubt hit the gold shares as well just like it always does, but the shares could be much higher by the time that slide comes, as was the case in 2001, 2002, etc. when the gold shares merely corrected in their bull trends as the stock market made new lows. In the meantime, with the S&Ps remaining firm, it’s supportive of a rally in the HUI, and given that it’s an inflationary rally, the HUI (and the oil shares) will likely outperform the rest of the stock market if any rally occurs.
The US dollar index fell just a touch. The yen rose nearly a percent on optimism over this weekend’s elections and its stock market, which remains on fire. The euro, however, was virtually flat. If the Fed is crazy enough to “pause”, I’m more bullish on gold than foreign currencies, because I’m still not sure how everything will play out with interest rate differentials, US corporate repatriations due to the Patriot Act, etc. But a “pause” will certainly open the door to renewed downside risk in the dollar. Next week we’ll get both the July trade deficit and the August PPI on Tuesday (the CPI is Thursday), given the rise in energy prices in August, it’s a good bet that these inflationary numbers will come in hot, and a Fed pause is only going to appear that much more inflationary as a result. The trade deficit will no doubt be a whopper as well. So, early next week could be very interesting.
Treasuries were higher, with the yield on the 10yr slipping to 4.123%. The 2/10 spread narrowed slightly to 24 bps, but that’s still a long way away from the 10bps that we were at pre-Katrina. Given all of the massive Katrina-related spending that the Federal government plans and the energy supply shock we’ve had, a Fed “pause” is likely to be greeted with selling in the long end of the bond market (because the Fed will be inflating), which is only going to put further pressure on the housing bubble.
The 10yr junk spread to treasuries was flat. Since I doubt a pause by the Fed is going to alter the course of the housing bubble, which already appears to be rolling over, I doubt a pause will change the direction of spreads much. They should continue to widen.
The equity put/call fell to .51, so call buyers obviously continue to fully embrace the “pause” rally.
Despite a lot of evidence to the contrary, the stock market appears to be absolutely convinced that the Fed is done. Housing is all that matters for the economy and the stock market, and a Fed pause won’t change the fact that the housing market has already rolled over. But such a pause could generate one last narrow rally in the stock market that is led by inflationary plays.
Stocks are overbought and the leadership continues to be extremely narrow. Oils, foreign ETFs, and scattered commodity shares continue to be the upside leaders, while the rest of the market merely bounces around. Nevertheless, if the Fed (in direct contrast to everything it has said) does indeed “pause” when it meets on the 20th, those stocks that are bouncing from lower levels (like virtually all of the Dow stocks) will continue to “bounce”, and the oil and gas shares will no doubt make new highs… all of which could push the S&Ps to one more new high, which is now what I expect we’re likely to see within the next 2 weeks. After that it may be “all she wrote”, but for now, the “pause” rally seems to be on whether we believe it or not. |
