I normally wait two months between times I post Lance Lewis. Tonight's is so good I'm going to post it even though my last one was just one month ago. I hope he doesn't mind. (It's worth subscribing.)
dailymarketsummary.com
Print Version
February 27, 2007
Tear Up The Post-2003 Handbook… Something Is Finally Different
Asia was lower overnight, although not as much as you would have thought given that the media was blaming Europe’s (and later the US) weakness on a 9 percent plunge in China’s Shanghai Composite, which was in turn blamed on China imposing new rules on Sunday to try and dampen stock speculation as well as rumors of further steps. Elsewhere in Asia, Japan was only off half a percent, and Hong Kong was off 2 percent.
Europe was hit even harder than Asia and was smoked for 3 percent, and the US futures were off about a percent ahead of the open.
Before we get too far into the day’s action, I should add here that I tend to believe that China’s 9 percent slide (on the back of a nearly 15 percent meltup last week) was not the “cause” but more of an “excuse” for something that was already set up to occur in both Europe and the US anyway. And the epicenter of the disturbance is not in Asia, it’s here in the United States. It’s called the subprime mortgage meltdown (more on this below).
January durable orders were released before the open, and they were ugly. Durable orders fell 7.8 percent vs. the consensus at -3.0 percent and the prior month at up 2.8 percent. That news sent the S&Ps even lower.
We gapped down at the open in the S&Ps, and we were immediately off to the water park… although the sliding was fairly slow at first.
We then learned that January existing home sales rose 3 percent. But the bad news was that prices fell 3.1 percent for the 6th month in a row, and inventory rose another 2.9 percent. We also learned that February consumer confidence rose to 112.5 from 110.2 and above the consensus at 109. Given how closely consumer confidence follows the stock market though, today’s action likely changed that reading considerably. That news seemed to generate no reaction whatsoever in the markets, and S&Ps continued their unrelenting slide.
About an hour after noontime, the S&Ps were off about 2 percent (recall that we haven’t closed down 2 percent since May of 2003), and then we began a sort of death dive, as the steady tumble turned into a freefall.
As the last hour rolled around we were off about 3 percent, and we lost another percent in the blink of an eye (literally…). Many later blamed that implosion on a computer error, but we won’t know for sure until we sort out the bodies.
That collapse put us down over 4 percent and finally marked the low for the day. The remaining 30 minutes of the day were spent retracing the final hour panic, but the bounce wasn’t much to get excited about, as we essentially went out on the worst levels of the session, with the S&Ps ending down over 3 percent.
Volume was titanic (2.3 bil on the NYSE and 3 bil on the NASDAQ). Breadth was downright horrific at 6 to 1 negative on the NYSE and 9 to 1 negative on the NASDAQ. New highs once again outpaced new lows, but new lows did finally make up some ground, moving up to 48 and a new high for the year on the NYSE vs. 64 news highs.
The chips were down across the board by 3 to 4 percent for the most part. The equips were beat up even more and mostly off 3 to 6 percent. The SOX was crushed for over 3 percent.
The rest of tech was splattered across the board, with the NASDAQ falling 4 percent. Thus, in the blink of an eye the NASDAQ is now down half a percent on the year.
The financials were torched as well. The BKX fell over 3 percent, and the XBD fell over 4 percent to a new low for the year. GS was pounded for 8 percent, and MER fell another 4 percent to a new low for the year. The derivative king was off over 3 percent. C and BAC both fell 4 percent. GE fell 2 percent.
GM fell over 5 percent. AIG fell 3 percent. ABK and MBI fell 2 percent. The subprime consumer lenders were spanked. COF and ACF both fell 4 percent and back to their lows for the year.
The subprime mortgage-back market continued to slide with increasing damage now being seen in the AAA tranche of the ABX indices. as well. Remember when people said that problems in the riskiest of BBB subprime mortgages wouldn’t spread? Well, it is spreading, and I believe today’s slide in equities is another symptom of the financial rot that is taking place under the surface.
The subprime mortgage lenders were hit as well, although the 2 to 3 percent slides we saw there were actually better than most of the rest of the market was experiencing. The mortgage insurers were hit for 3 percent across the board, except for PMI, which was only off a hair. FRE fell 2 percent, and FNM fell 4 percent.
The retailers were down across the board, with the RTH sliding over 3 percent. WMT fell 4 percent. TGT fell 5 percent, and BBY fell 4 percent.
The homies were down 2 to 3 percent across the board, with most sliding back to their lows for the year and breaking their uptrends on the charts since the September low. As we’ve been saying, the bear market rally in the homies should now be over. The rest of the market could still have some more distribution to do to the upside as the Fed moves to neutral, tries to ease, etc. And we are potentially forced to maneuver through all of those various games. But the homies should only bounce on that sort of news I would think. Everybody knows about the defaults that are triggering all the problems in subprime mortgages, but what I don’t hear talked about as much is what these homes now become: They’re more supply. That’s bad news for the homies, and it’s just getting started.
For those that care, now that the homies have returned to their lows for the year and I feel a little more confident that their bear market rallies are over, I plan on adding to my fall puts on them on any bounce we get.
Crude oil opened down about a dollar and then firmed to spend the rest of the session around the slightly positive to unchanged mark, ending up 7 cents to $61.46. For those in the media that believe today’s global equity selloff was sparked by fears of problems in China’s economy (I’m still not sure where this nonsense came from given that China’s moves were directed at its stock market, not its economy), the fact that crude was up on the day would seem to fly in the face of that speculation. The oil and gas shares were caught in the general selling tidal wave just like the rest of the stock market. The XOI fell nearly 4 percent. The XNG fell over 2 percent, and the OSX fell over 3 percent. The XLB fell 4 percent.
The GSCI was off a third of a percent, and the CCI-CRB was off a whole half a percent. Isn’t it interesting that commodities vastly outperformed the equity market on a day when supposedly “China fears” were supposedly driving the panic?
The base metals were mostly lower, but here too, not as much as the US equity market was. Copper and zinc both fell a couple percent.
April gold opened down about $11 on the back of the slide in crude, but as crude rallied, gold rallied back with it to eventually go positive and eventually make a marginal new high for the move at $692.50. For the close, the metal slipped from its highs but still went out near the best levels of the session and only down $2.60 to $687.20. Spot silver ticked down just a percent.
Later in the afternoon’s electronic trading of gold (which is notoriously thin), gold pealed off another $20, as the collapse in the stock market created a “sell what you can” situation in just about all asset classes.
The HUI broke with the stock market in the afternoon after gold’s regular close and tumbled 7 percent, or basically back to where it began the month. Today was a classic case of selling whatever you have (in this case the gold shares) when you can’t sell what you want to. That said, I suspect we got most of that sort of selling over with today (more on that in second).
Our junior basket amazingly fared a little better than the HUI and only fell 5 percent (you may need to refresh the chart). I say “surprisingly”, because typically the junior names are higher beta than the seniors and intermediates. However, today’s action once again shows us where the hedge funds are in the gold shares. They’re in the big caps for the most part, where there’s also been no action, meaning that they aren’t there very “big” either. With most of them being traders or “renters” rather investors, the juniors are just too small for them to trade.
As for the individual junior names, CGR gave up most of yesterday’s leap and fell 11 percent. MFN held up the best and only fell 3 percent. GSS fell 6 percent. MRB fell 7 percent, and NSU fell 8 percent.
It wasn’t exactly on the forefront of people’s minds today, but ABX’s CEO noted at a conference that cost pressures in the industry are finally abating, which is obviously something that we’ve been pointing out here as well.
Now, we had a sort of mini-meltdown in the stock market today, and the golds obviously weren’t spared either, as people basically tossed out whatever had a bid in order to reduce long exposure.
However, I would note that the HUI is basically unchanged on the year, and that’s only because of some of the big caps that have been laggards. Most of the junior shares are still up big on the year. This is in stark contrast to the Dow, S&Ps, and NASDAQ that are now down on the year. Thus, we’re actually beginning to see the gold shares finally show some relative strength. That doesn’t mean that the golds can rally during a “crash” in the stock market, which is almost what he had today, but it does mean that the gold shares can move up even in a stock market that is not healthy, which continues to be what I expect we’re to see.
The fact that a financial disturbance is building is ironically exactly what we’ve been anticipating as gold bulls, because we all know how the Fed responds to these disturbances: it prints money. That’s not necessarily good for the stock market (although it can cause rallies initially), because of what it can potentially do to the dollar and therefore the bond market. But it is bullish for gold.
I doubt the selling is over in equities just yet, and I suspect we’ll see some more downside tomorrow. However, I’d be surprised if we saw much more downside in the gold shares, especially since most of the “renters” probably blew their stock out today.
Let’s not forget that there aren’t that many renters in the golds anyway because the big caps haven’t done much lately. And renters only go to “action”.
Most of the gold shares should now be in what are very strong hands, most of which are leery of the equity market anyway. So, we shouldn’t see much more contagion-type selling.
Additionally, we saw huge volume in many of the golds, which has been coincident with lows in the past. NEM, for example, had the biggest volume day since the September low. GLD had the biggest volume day since its June low, which obviously marked the end of that panic. The next closest runner up to today’s volume spike in GLD happens to also be the January low. Thus, given the heavy volume we saw today in both GLD and the gold shares, past experience would suggest that there’s reason to think we are very close to another “important” low again today.
Also, let’s keep in mind the bigger picture here. The fact that the subprime mortgage rot is finally spreading to some degree and hitting the stock market is going to put even more pressure on the Fed to ease. When one has an asset-price-based economy like the US, it can’t handle both the stock market and the housing market declining together, and the Fed knows it.
That’s not to say that the Fed will be able to prevent that from happening, because it’s coming. But the Fed is sure going to try, and that means rate cuts, regardless of whether inflation has backed off enough to allow them to do so. Yellen’s comments on Friday hammered that point home for anyone that had doubts. Even as the equal-weighted CRB is making new highs and gold and silver are moving back to their highs, the Fed is already finding ways to rationalize inflation away.
Consider that the fed funds futures market raised the odds of a rate cut in the next 3 months from under 30 percent yesterday to between 70 and 80 percent by the close today. Again, I stand by my prediction yesterday that the Fed will be changing its bias to neutral at its March meeting in preparation to cut interest rates.
And that prediction may not be dovish enough, because I could also see the Fed even skipping the move to neutral and cutting rates in March if the stock market gets even messier over the next 3 weeks. Don’t forget that Heli-Ben speaks in front of the House Budget Committee tomorrow too, so it’s even conceivable (although unlikely) that he could give a sort of informal hint at a neutral stance then.
As a gold bull, what I’d like to see tomorrow is for gold to gap down big and for the gold shares to resist the decline as well as resist the equity market’s decline if it continues lower. If we see that, it may be time to nibble on the golds.
We’re getting close to a “tipping point” of sorts I believe, where the Fed’s hand is going to be forced by the housing bust and its ripple effects in the financials markets. And that is going to light a roman candle under gold.
Any day we come in is still a day that gold can suddenly blow through $700, just as today happened to be a day that the stock market could implode over 4 percent. Volatility is picking up, and that means change is in the wind.
The US dollar index slumped half a percent, and like the equity market, returned to its low for the year. The euro rose half a percent, and the yen rose 2 percent to a new high for the year. Again, I think it’s safe to say that we can say “nighty night” to the dollar, but at some point, we’re going to see foreign central banks intervene to support it for political as well as their own trade-related reasons. There again though, that’s also why I expect gold to continue to rally in all currencies too.
Treasuries rallied amidst the financial dislocation in the equity market, but the vast majority of the rally was in the short end, where the Fed operates, not the long end. The yield on the 10yr slipped to 4.511%. The 2/10 inversion narrowed a huge 6 bps to just -7 bps. As we get close to the Fed actually easing, we should see this inversion once again return to a positive spread and then see the yield curve steepen even more, as the Fed cuts the short end but the long end either fails to rally or at some point even sells off along with the dollar.
The 10yr junk spread widened a whole 2 bps to 273 bps over treasuries. In other words, the corporate junk market remains asleep.
The VIX jumped 64 percent today to 18.31. So to say that “the game has changed somewhat” is understatement for those that have been shorting volatility. Many of them may not be returning to work tomorrow. Nevertheless, some perspective must be had. Even though that’s a big jump, it’s nothing like what is likely coming at some point later this year. Recall that a 20-handle VIX used to be “the floor” of sorts prior to 2003.
The overall put/call ratio spiked to 1.7 today (a 3-year high), so there was certainly no shortage of fear today.
I noted yesterday that 5 down-days in a row for stocks had been outlawed according to the post-2003 handbook. But after today, we may have to finally tear up that handbook entirely. We also finally had a 2%+ down-day in the S&Ps today (it was actually 4%), something that hasn’t happened since May of 2003. As a result, my 2 percent rule now says that something is different, and for me, the bulls no longer get the benefit of the doubt.
That said, markets don’t typically “top” with all the indices topping together and then plunging together into a bear market. That’s not to say that it can’t happen that way, but the odds are low. Today’s crashette was likely more of a shot across the bow or a “preview of coming attractions” if you will than a move that locked in “the peak”. Even though I suspect we’re headed lower again tomorrow, the higher probability is for many of the indices to at least retest their highs and fill the gaps that were produced today, even though it’s very possible that we may have finally seen a “breadth peak” for the broader market. That’s not necessarily something to “bank on”, but it is something to be aware of.
The Fed isn’t going to be able to print its way out of the housing bust and the recession that is more than overdue for over 10 years now, but stock market tops are all about distribution. And we may need to see some more of that distribution before the ultimate “peak” is put in. That said, individual sectors, like housing, consumer finance, etc could now be fair game for bears. Mortgage finance has obviously already been fair game.
I suspect we’re going to see more selling in stocks tomorrow morning, especially given that this “event” hit just one day before the end of the month, which could add even more pressure tomorrow for that are under performance pressure. All eyes are likely going to be on Heli-Ben tomorrow for most, but my eyes will be on gold…
While I cannot provide personalized investment advice or recommendations, I welcome feedback and observations by subscribers. You can email me at Lance Lewis.
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. |
