A partial moment of truth is upon us.
With great anticipation, the PPI figures from May and retail sales figures will be released tomorrow at 8:30 EST, which investors hope will expose or expunge signs of inflation. Concerning the PPI, the expectation is for a .2% increase overall, and .1% increase net of food and energy. Whatever the outcome, the $64,000 question really is will the Fed raise rates or won't they come June 30, the date of the next scheduled Fed meeting. Even if the PPI is on target, skittishness could remain if the retail sales indicators point to continued increases in consumer spending. Take a moment to de-couple from the speculative noise surrounding the June 30 date. To wit, the CPI figures will be released the morning of June 16, which should be a bit more conclusive on inflation. It's probably no accident that Greenspan scheduled a meeting for himself in front of a Congressional committee on June 17, giving Alphonso The Great an opportunity to unequivocally warn of the Fed's intention to raise rates. He can always change his mind up until the June 30 meeting. The interest rate specter, so prominent all week, hasn't changed since yesterday. Investors are still holding their breath for tomorrow's numbers. So let's get started.
Japan released its GDP information this morning, which showed some improvement in their economic activity last quarter. At the open, Wall Street didn't gather any moss in sending the indices lower. Their fear is that if Japan is doing better, business and consumers will have to spend more for Japanese goods and services, ala inflation and upward pricing pressure here in the U.S. Not only that, but with businesses now more profitable in Japan, we may have to raise interest rates to keep capital from leaving the U.S. Just like last night, it's another monster under the bed. Let's keep things in perspective. Mathematically speaking, for every $1000 you borrow, you will pay another $2.50 in interest annually with a rate hike of 25 basis points. . .no big deal. But the market doesn't care. It's scared and indecisive as reflected by another day of light trading volume. Such was the backdrop for today's action, which continued to send the bond yield up to finish the day at 6.05%. Bonds are definitely putting a lid on action in the equity market.
A day without a Fed comment is like a day without sunshine, right? We don't know about you, but we have a sore jaw from getting nailed with a Fed elbow every day this week. Today, Roger Ferguson stepped to the podium at a New Jersey Chamber of Commerce meeting. Do the words "tightening may be painful, but the Fed must be "preemptive" in order to avoid trouble later on" mean anything to you? (Paraphrase courtesy of briefing.com) Thought so. Others did too, as the Fed Governors comments put another damper on the day. No wonder everyone is convinced that the Fed will act to raise rates. There are however, still those (us included) that think there is no inflation on the horizon, and that the incessant jawboning is the Fed's "preemptive" action. Scudder-Kemper's chief strategist doesn't believe the Fed will actually act to raise rates. Remember, it was just 6 months ago that pundits were wringing their hands that deflation, born of unused worldwide production capacity could ruin us. The point is nobody knows for sure if the Big "I" exists, except Greenspan, and he's not talking (yet).
In the spotlight of weakness today, we have drugs, consumer products, financials, computers and telecom, the last 2 having no follow through on yesterday's mild rally. Pity poor Pfizer, who was whacked for $5.38 on more than 3 times its normal volume. This follows 2 previous down days, with today's poor showing as a direct result of an FDA warning that notes PFE's new antibiotic, Trovan, causes liver damage! Couple that with 3 major brokerage downgrades, who were quick to note that Viagra sales are dropping, and we have a recipe that boils down to a 30+% drop in value from its high.
Most Internets saw red ink today too. Perhaps AOL set the tone when Merrill Lynch's Henry Blodget, following conversations with AOL brass, noted that international subscriber revenues are not growing quite as well as planned. Somewhat offsetting that notion though, domestic subscriber revenues are growing better than expected. It still adds up to a chink in AOL's armor, even though he didn't change his revenue or earnings expectations. Other Internets also spent the day and closed in the red on lower volume, Amazon excepted, who tacked on $1.94. That news pales in comparison to CMGI, who reported earnings after today's close that can only be described as ugly. The Street was expecting a loss of $0.13. Instead, CMGI announced a loss of $0.29. We don't have any details, but in after hours trading, CMGI was down over $5 from the close. Though this could be seen temporarily as really bad news, other issues seemed unaffected. To balance out the negatives here, we could see some positive comments tomorrow from the Paine Weber Internet conference. Remember too that this is a typical weak point in the Internet quarterly cycle and is probably no cause for alarm.
Now for the pillars of strength. . .semiconductors had another solid day of gains paced by Intel, up $2.50. Metals, paper, and drillers also got in on the action. Surprisingly absent again was gold, which lost more value to close around $261 today.
The meat: The DOW closed down 69 points at 10,621 on almost 717 mln. shares, still considered light, but better than the rest of the week. The advancers got a poke in the eye from decliners by almost a 2:1 margin.
More meat: NASDAQ closed the day at 2484, down 34 points on volume that would make a snail proud - only 800 mln. shares. Again decliners over advancers, this time 8:5.
Let's pull an interesting tidbit off the shelf that some of us financial news junkies regularly turn to - earnings warnings. In short, there just haven't been many compared to previous quarters. Whether we like it or not, earnings drive stock prices. Normally, we could expect 13% of the S&P to pre-warn by now. Slightly less than 8% have pre- warned this quarter, from which we can infer that profits will likely remain strong. The outlook is pretty good. No matter, when investors want to behave negatively, they will. Again don't fight the trend.
What for tomorrow? Probably more of the same, though if PPI meets expectation (which it should), we could get a rally, size and duration unknown. The wildcard is retail sales. If they are strong, look for more choppiness, as investors will consider it inflationary. If they are weak, it could add to any rally. Any rally will nonetheless advance cautiously until we get confirmation next week from the CPI. In short, plan for a small rally, but wait to see volume as a confirmation before venturing in. Check your risk profile and don't be afraid to sit out until you confirm market direction. Of course, use stops and sell too soon.