Good evening to you all. Please find enclosed our weekend review of the
markets
and the upcoming week. Last weekend we stated “we believe this is our most
important review to date and would ask all readers to carefully review our
comments and supporting data.”
Given the extreme volatility we experienced this week, it would appear our
cause for concern was extremely accurate. Specifically, all equity markets
were down for the week, with the exception of the Nasdaq which managed a 0.2%
gain. More importantly, the bond market was the recipient of a major sell-off
and hit a six-month low before recovering slightly on Friday.
Some of the topics covered inside.
1] Alan Greenspan's surprising comments surprise markets and contradict AGORA
analysis.
2] Friday's Commerce Department figures on inflation contradict Greenspan.
3] NSOL commences split-adjusted trading at $90.75
4] Possible acquisition of ATI Technologies trading position
GENERAL DATA - MARKETS PERFORMANCE
PAST WEEK YEAR-TO-DATE
S&P/TSE 60 Dn 2.1% Dn 2.1%
TSE 300 Dn 1.5% Dn 2.7%
DOW Dn 0.4% Up 1.3%
S&P 500 Dn 0.1% Up 0.7%
NASDAQ Up 0.2% Up 4.3%
GOLD Dn 0.7% Dn 0.2%
TED Spread 53.50 Points
GENERAL COMMENTARY - MARKETS PERFORMANCE GREENSPAN AND THE NUMBERS ARE
TELLING
TWO DIFFERENT STORIES.
For several months, AGORA has been very concerned with the possibility of
deflation entering the North American economies and causing great damage to
the
stock markets, as well as, the wealth of the ordinary individual. In support
of this contention, we have supplied endless amounts of data that pointed
stronger and stronger towards this possibility. In fact, we discussed the
real
possibility of deflation before Alan Greenspan and The Federal Reserve Board
finally mentioned it in September of 1998. Alas, we were vindicated and
investors could now take our warnings ever more seriously.
In further and more recent support of our deflation concern, we also reported
the following figures that were released last week:
a) The US Commerce Department. reported 1998 trade deficit figures surged
to an
all-time high. More importantly, 1998 also brought the first actual
decline of
US exports in 13 years, which breaks their established track record of
continually increasing exports while simultaneously increasing imports at a
faster rate.
b) The US Labor Department. reported The Consumer Price Index rose only
0.1% in
January, thus reassuring investors that inflation remained under control.
In Canada, inflation for January was reported at it's lowest levels since 1962
- 0.6%. More importantly, were it not for a cheap Canadian dollar making
imports more expensive, analysts stated prices would have actually FALLEN for
the first time since 1955. This has several economists worried that deflation
is just around the corner and calling for the Bank of Canada to decrease
interest rates. A decrease in rates would encourage further spending by both
consumers and business, thus increasing prices and avoiding the effects of
deflation.
Wow! Now we were on a roll as the data supported what AGORA had been
predicting for several months in advance.
UNFORTUNATELY, the screeching sound of tires you hear are the brakes being
applied to our theory as Alan Greenspan testified before the Senate Banking
Committee on Tuesday and Wednesday. In a surprising revelation, Mr. Greenspan
testified that INFLATION was a greater threat to the US economy and the
Federal
Reserve Board would not hesitate to increase interest rates if necessary.
At first, investors were confused about these comments given the data released
only one week earlier. However, when the bond market spoke on Wednesday
afternoon, the stock markets listened and both proceeded to take a tumble as
both stocks and bonds began a sell-off. Quite simply, the bond market
interpreted Mr. Greenspan's comments to mean there was a greater
possibility of
an interest rate increase, rather than a decrease, in the immediate future.
To clarify the relationship, higher interest rates hurt bonds by making bonds
currently in circulation less attractive and when the bond market thinks
interest rates may go higher, the stock market will almost always follow.
Higher interest rates hurt the stock market because the cost of borrowing for
companies and individuals rises and, therefore, reduces spending.
On Thursday, figures with respect to durable goods purchases and consumer
confidence further supported the inflation theory. Specifically, the sales of
durable goods increased in January to the fastest pace in 14 months.
Similarly, sales of existing homes and consumer confidence both climbed into
record territory.
Having said that, figures released by the US Commerce Department on Friday
completely contradicted Greenspan's inflation concerns. Specifically, despite
the strongest growth in the US economy over the last 15 years, the inflation
measurement tied to the GDP numbers was up BY ONLY 1% FOR ALL OF 1998, THE
SMALLEST INCREASE IN 15 YEARS.
Will the real story please stand up?
OUR COMMENTS WHATEVER THE STORY IS, IT IS BAD NEWS FOR STOCKS EITHER WAY.
The conflicting data paints a picture of uncertainty with respect to the
future
direction of prices and interest rates. The good news is that you do not have
to guess which numbers are right because the one golden rule always
applies…”stock markets do not like uncertainty”. Thus, at the very least, you
can assume investors will continue to remain defensive and keep money on the
sidelines until a clearer picture evolves. Knowing this fact, you should
continue to do the same.
Having said that, AGORA has never been one to sit on the fence during any
debate. In our opinion, we just do not see inflation making its way into the
economy for the following reasons:
1] Consumer spending may be at record levels but we have to remember they are
spending the money on CHEAP IMPORTS. We firmly believe that any effort to
increase prices will be met with an immediate slowdown in consumer spending
because this group has no disposable income left to spend.
2] Durable goods, home sales and consumer confidence figures were reported
for
the month of January. We must not forget that January saw record setting
numbers in the stock market, which tends to make people believe they are
richer
than they actually are. This phenomenon is referred to as the “wealth
effect”. We believe a couple of average or weak months in the stock market
will bring these numbers back down to more reasonable levels.
Based on these two factors, we do not believe the economy is threatened by
inflationary pressures and we still believe deflation should be our biggest
concern. The market also seems to have focused on the 49 year-low inflation
number reported on Friday. As such, the odds are we will see a rally in the
bond market over the next couple of days, which should spur the stock
market as
well.
Having said that, the fact of the matter is that Federal Reserve Chairman has
stated the exact opposite and his comments are not to be taken lightly.
Either
way, neither inflation nor deflation is good for the stock market and the
latter is worse. Stay conservative and protect your capital.
GENERAL STRATEGY
With respect to our individual investments, we are pleased to announce NSOL
will commence trading on Monday morning at its split adjusted price of
$90.75.
Given the fact we acquired NSOL at $150, our new split adjusted cost base is
$75.00 for a 21% gain in only two weeks. More importantly, we now have double
the amount of shares we originally had and will be using our newly acquired
half as a trading position, while holding our core position for the longer
term.
Given our theory that markets should move forward over the next two to three
days (assuming no negative news comes out), we would also wish to advise that
ATI Technologies looks very attractive at its current $20.80 range. Thus, if
the pre-open market activity confirms our thoughts tomorrow morning, we
will be
looking to acquire a quick trading position in ATY.TSE. As such, keep an eye
out for an early morning bulletin.
With respect to our general investments, we continue to remain very defensive
in these markets. In addition to the many factors we have mentioned above and
in prior bulletins, we just do not see any real reason or catalyst to move
the
markets forward. However, we do look forward to taking advantage of general
market volatility for the purposes of trading profits.
We hope you all had a great weekend and look forward to our next bulletin.
Regards,
Agora
agoracorp.com
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