it's been more than two months since I posted Lance Lewis' missive. I think tonight's pretty well sums up where we are.
dailymarketsummary.com
July 12, 2007
Everything Inflates Up On The Back Of The Dollar’s Continuing Collapse
Asia was mostly higher overnight. Japan was off a hair, while Hong Kong rose a percent to just shy of another new high. China’s Shanghai Comp rose over a percent.
Europe was up over a percent this morning, and the US futures were also sharply higher on top of a higher close in the futures yesterday that was already at a large premium to the cash market, setting up a big gap up opening in the various cash indices.
Before the open, we learned that the May trade deficit expanded to $60 bil from the prior $58.7 bil, but that was also inline with the consensus. And given what oil has done since May, the trade deficit will no doubt be hitting a new high at over $70 bil very shortly. The dollar softened a tad on the back of that data, and gold firmed a little. But basically, there wasn’t much of a reaction, which is pretty typical of this data set.
We gapped up huge in the S&Ps on the open, and we were off to see the wizard… The remainder of the session was a nonstop meltup. And that meltup accelerated into a short covering stampede during the final hour as we broke out to all-time highs in virtually all the major indices, sending us out on the very best levels of the session.
Volume picked up but wasn’t explosive (1.7 bil on the NYSE and 2.2 bil on the NASDAQ). Breadth was just shy of 3 to 1 positive on the NYSE and just shy of 2 to 1 positive on the NASDAQ. New highs swamped new lows on both exchanges (367 to 76 on the NYSE and 211 to 57 on the NASDAQ).
MOT warned that it would lose money in Q2 due to poor sales of its cellular handsets in Europe and Asia, which were blamed primarily on price cutting and more losses in market share. MOT rose a percent despite that news, which isn’t too surprising given the jailbreak that occurred today in the broader market.
The chips were higher across the board. INTC was the biggest leaper and rose nearly 6 percent to a new 52-week high, which probably had more to do with the fact that it’s “big” and “in the Dow” than anything fundamental. The equips rose 2 to 3 percent across the board. The SOX rose nearly 3 percent to another new 52-week high.
The rest of tech was up across the board in what was your standard tech meltup, with both the NASDAQ and NDX making new highs.
The financials ramped as well. The BKX rose over 2 percent, and the XBD also rose over 2 percent. BSC rose 3 percent. GS merely rose over a percent, which is unusually tiny given the size of today’s rally. MER rose nearly 3 percent. The derivative king rose almost 3 percent. C also rose almost 3 percent, and BAC rose over 2 percent. GE rose just over 2 percent.
GM rose nearly 2 percent. AIG rose a percent. ABK rose 2 percent, and MBI rose a percent, but that’s not much of a rebound from their recent losses. The subprime consumer lenders were higher across the board, but not by that much either considering the rally in the broader market. ACF rose over 2 percent, and COF rose just over a percent. CCRT was the biggest mover and rose 3 percent. The mortgage lenders were also mostly higher but not by much. CFC, DSL, LEND, and NFI all rose a percent. AHM was the lone loser and fell nearly 5 percent. The mortgage insurers were higher across the board by a percent or more. FRE rose over 2 percent, and FNM rose nearly 3 percent.
The financials still may not participate much in this rally given the credit rot that is taking hold. Thus, the peaks that area already in place may in fact remain so, even though we may get big bounces in these names as the other indices make new highs. As a result, there may yet be short selling opportunities in these names later in the summer or fall. But for now, I think it’s prudent to give the benefit of the doubt to some sort of relief bounce.
RealtyTrac said today that for the month of June there were 164,644 loan default notices, scheduled auctions, and bank repossessions, led by filings in California, Florida, Ohio and Michigan that all together accounted for half of the total. That’s an 87 percent increase year-over-year. Is that enough to panic the Fed into easing? Perhaps. And it may sound perverse, but maybe that’s also part of the reason stocks rallied so hard today?
The retailers were higher across the board after June retail sales comps turned out to not be a disaster, which is what most analysts had apparently lowered their estimates to given the deteriorating consumer environment. The RTH rose over 2 percent.
WMT reported June same-store sales rose 2.4 percent, which was more than twice the lowered consensus but still roughly inline with the company’s own guidance. WMT rose over 2 percent on that. Don’t forget that WMT also sells a lot of gasoline and food, which have gone up a lot year-over-year in price. During periods of rising inflation, it’s pretty common for sales at retailers of this sort to rise. It’s the profits that often get impacted negatively as margins are squeezed.
TGT said its June same-store sales rose 3.3 percent, which was toward the low end of its forecast of 3 to 5 percent growth. Nevertheless, TGT exploded nearly 7 percent. Elsewhere, BBY rose over a percent.
I didn’t see anything all that exciting in the same-store sales data (this is what Heehaw attributed today’s rally to), but people seemed to be excited about the fact that “expectations” were beat, and again, rising inflation tends to support retail sales (not retail profits) anyway.
So, I guess your interpretation of retail sales comes down to what you believe the real rate of inflation of is. If we look at the pre-Clinton administration’s formula for the CPI, for example, the headline rate of inflation is running at above 6 percent. If we use the CPI version that was in place back in 1980, headline inflation is running at over 10 percent. So year-over–year retail sales increases of 2 and 3 percent aren’t even close to keeping up with the rate of inflation? (Thanks to shadowstats.com for that data). In any event, tomorrow we’ll get the government’s take on June retail sales.
The homies were higher across the board by 1 to 2 percent, although there were a few 3 to 4 percent gainers thrown in as well. Maybe this is the beginning of the bounce I’ve been fearing, but so far it’s not much to get excited about.
Crude oil (Brent) rose 86 cents to $76.30 and another new high for the year and just a little over 2 bucks away from its all-time high of $78.64. The XOI rose 2 percent to a new all-time high, while the XNG rose a percent. The OSX rose over a percent to just shy of a new all-time high. The XLB rose over 2 percent to a new all-time high on the back of another big base metals mining takeover in which RTP offered to buy AL for about $38 bil in cash.
The oil-heavy GSCI made a new all-time high on an intraday basis but only closed up a hair thanks to a slide in natural gas. The CCI-CRB rose half a percent to another new all-time high.
The base metals were interestingly weak, with the GSCI Industrial Metals Index falling a percent. Copper fell just over a percent. So, perhaps we’re finally seeing a more substantial separation between the precious metals and the base metals?
August gold opened up about $4 this morning and rallied up to as high as $671 before giving up some of its gains into the close to end up $6.20 to $668.30 and another new high for the move since its June low. Spot silver rose over a percent to another new high for the move since its June low.
The HUI rose just over a percent to a new high for the move since the recent low and went out on the very best levels of the session. Also keep in mind that EGO fell 25 percent today in the wake of being forced to close one of its major mines in Turkey (which is also a reminder as to why you can never ever own just one mining stock, especially when it comes to the juniors). That drop in EGO accounted for over -5 points in the HUI today, so the gain would have been closer to 3 percent ex that company specific event. Other gold indices, like the XAU (which doesn’t have EGO in it), rose over 3 percent.
Our junior basket rose over 3 percent. MRB and MFN both rose over 3 percent. GSS rose 2 percent. CGR rose a percent, and NSU bested them all with a 7 percent pop.
The XAU/Gold ratio rose over 2 percent to 0.226 and another new high for the move, although the HUI/SPX ratio did not take out its downtrend today due to EGO’s drag on the index and the S&P’s 1.6 percent gain. Tomorrow is another day, however…
Still, gold bulls don’t have to go home unhappy today, because the XAU/SPX ratio did in fact take out its downtrend today. Normally these indexes obviously move together for the most part, (which is why I usually just mention the HUI), but for today, they didn’t move together because of EGO.
So far, so good… The rally in the gold shares appears to be unfolding pretty well so far, with yesterday’s low being the low for the pullback as we had hoped. With the shares continuing to outperform the metal and the HUI making a new high for the move (not to mention the XAU made a new high for the year and is close to “breaking out” of the “trading range” already), all signs continue to point to higher prices for the gold complex in my view. And I think there’s a decent shot that we’ll see further upside acceleration in both the shares and the metal as soon as tomorrow.
The US dollar index slumped a hair to 80.64 and to less than a third of a point from its December 2004 low at 80.39. Again, given that this index is basically a euro-proxy, its psychological importance to the market is quite a bit more than its actual importance. But a new low here could obviously be a big deal as far as shock value goes. Again, maybe we’ll bounce first, but with so many people looking for a bounce here (and so many people taking the dollar’s decline so casually at the moment), we may just blow right through that 2004 low.
Recall that the last time we were at this level on the dollar index back in late 2004, Europe was screaming like a little girl about how the strong euro was threatening its economy. Intervention was even threatened after several emergency meetings of EU finance ministers in early December of 2004. That’s not the case this time, which makes one wonder just how low we have to go before the screams start again and the ECB eventually panics and tries to intervene?
As for the currency proxy that actually matters the most to the US financial system, which is the trade-weighted dollar index, it slumped to another new multiyear low at 102.70. I’m no expert on technical patterns, but that sure looks like a giant “head and shoulders” top to me?
The euro rose a touch to another new all-time high, while the yen fell a hair. The Canadian dollar rose a percent to a new multiyear high, while the Aussie dollar rose half a percent to a new multiyear high. The swissie also rose a hair to just shy of a new high for the year.
Note also that India’s central bank was forced to intervene last night in order to prop up the dollar. As we’ve been saying, this sort of thing is becoming pretty common among US trading partners (not to mention the countries that still peg to the dollar where this prop-job occurs every single day as a matter of policy). The end result is that these countries import US inflation as a result, not as much as we’re seeing in the US, but they still import some by cheapening their own currencies in the attempt to slow the dollar’s decline. The end result is rising inflation globally, which is exactly what we are seeing, and that’s bullish for gold in ALL currencies.
Treasuries were lower, with the yield on the 10yr rising to 5.124%. The 2/10 spread was unchanged at +19 bps, while the 3M/10yr spread widened 3 bps to +21 bps. I suspect the bounce in the bond market is now over. What will be interesting going forward is whether the dollar’s weakness is finally set to trigger accelerating weakness in the bond market or not yet?
The 10yr junk spread to treasuries widened 4 bps to 318 bps over treasuries and just shy of the March 2007 peak. Even though we were obviously looking for this rally in the stock market, if stocks continue to rally while junk spreads continue to widen sharply at the same time, it would suggest to me that this rally in the equity market is in fact a final blowoff top of sorts. As we’ve noted before, credit spreads typically widen for months before the equity market peaks and really starts to come apart. It’s early yet, but with spreads now finally starting to move well above the 200-week moving average for the first time in “forever”, we may be seeing something that is signaling that this time is in fact “different”.
Heehaw wanted to blame today’s rally on the only news item we had today (retail sales comps), which is typical of reporters that need something to blame. But as is frequently the case, I suspect “the reason” is much simpler than that. We’ve noted repeatedly how stocks seemed to refuse to go down. When stocks failed to go down off the downgrades of mortgage derivatives yesterday, shorts started to panic, and they began to cover. Then, the bulls piled on as well, and what we ended up with was today’s jailbreak to new highs.
If you missed yesterday’s column by chance, go back and read the final few paragraphs, because I still feel the same way today. I’ll admit that I didn’t think this broad-based meltup in “everything” would begin until next week, but things do indeed appear to be shaping up like I had thought (for once…). Hopefully, readers were able to avoid this rally if they are short-biased in equities, or alternatively, profit from it in inflationary proxies like the oil and gold shares.
As expected, the bulls have broken stocks out to new highs on the back of a continuing collapse in the dollar. The bond market also appears to have turned over again, while gold is rallying along with the CRB. And the stocks that benefit from inflation are outperforming the broader market. That’s pretty much a clean sweep for our expectations.
My guess is that this rally in stocks has a ways to go (even though we could take a rest as soon as tomorrow), but I would expect the gold and oil shares and other inflationary beneficiaries to continue to outperform. If we see junk spreads continue to widen and the financials fail to join the indices at new highs in the coming weeks, we’ll have more compelling evidence that this is indeed the final leg up before stagflation finally takes firmly hold of the equity market and tosses it off a cliff. But for now, depreciating dollars are still chasing just about anything that isn’t nailed down, except for the US residential real estate and US consumer credit markets.
Stock bulls like to say that there is still a massive amount of “liquidity” sloshing around, and on this point I agree wholeheartedly. The difference between myself and most stock bulls is our perception of what “liquidity” is. Liquidity stemming from too many pieces of confetti looking for something to chase before the value of that confetti drops even more is not bullish for financial assets that are denominated in that particular piece of confetti. And in this case, the primary piece of confetti is the dollar.
Now, that liquidity mass is already avoiding certain asset classes in the US, like US residential real estate and its credit markets. Next comes a liquidity preference away from the US stock market, as more and more “liquidity” moves into “bad stuff” like gold and other hard assets (and yes, even residential real estate again eventually), but long before it gets back into residential real estate again, people should finally begin to see this “liquidity” for what it actually is: a massive inflation. And like all inflations, they are only seen for what they are long after the events that actually precipitated them and sowed the seeds of the inflation.
In this case, the inflationary wave began 6 years ago when Uncle Al began slashing interest rates and effectively monetized the biggest stock bubble in the history of the world. And that inflation continues to feed through to the real world today. We saw that inflation first occur in US residential real estate prices, and we continue to see it today in the continued rise in commodity price inflation and the collapsing dollar. And the Fed can't (and won't) do a thing about it because of the housing bust’s drag on the fragile US economy.
Stocks are still benefiting from this inflationary phenomenon too, thanks to the stronger global economy even though the US economy remains weak, but eventually that won’t be the case once inflation and long-term interest rates (which rise as a consequence of inflation) rise enough to compress equity valuations. Those who were around in the 1970s know what I am talking about. Unfortunately, where exactly “enough is” is unknowable until after we reach it.
What sort of asset performs the best in such a stagflationary environment historically? Answer: "stores of value". And the ultimate store of value throughout recorded history has been GOLD, or in 21st century terms, let’s just call it GLD. I think that about sums it up…
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. |
