No more Inflation Monster Under the Bed
Remember what a great feeling of relief you had as Mom and Dad turned on the lights to rid the monster you thought was under your bed? That's how the markets reacted following this morning's release of CPI figures - a relief rally! Finally, the inflation monster is gone, at least for now. Even after the release of Beige Book numbers, the cause of a mild mid-day retreat, bulls trampled bears and "Shorty" ran for cover. Bond guys and economists still are not convinced of inflation's absence, since Greenspan could still throw another elbow to the jawbone tomorrow as he testifies in front of the Joint Economic Committee on the state of the economy and monetary policy.
Of course, we've been pounding the table for some time that the case for inflation is overblown. We got our evidence today, as the CPI figure came in at 0.0%. . . zero, zip, nada, nichts, nothing! That's certainly a surprise even to those anticipating the consensus' benign estimate of 0.2%. The core rate was just 0.1%. The numbers translate into 2.0% annual inflation, the lowest number since 1966! Happily, we will not be sitting down to that crow dinner this week. We still have to clear the FOMC meeting on June 29-30 though.
The remaining question is still by how much the Fed will raise rates. Chicken Littles of the world say a 50 basis point hike is still possible. Others say a 25 basis point hike is more likely, citing various Fed Board members jawboning since the bias tightening last month. The thinking now goes like this: The Fed has to raise rates because they've been telegraphing a rate hike with words like "preemptive action" and need to remain consistent with their comments. Not so fast. We hate to disagree, but we will. Taking a cue from the "Wizard of Weasel Clause Book", "preemptive action" doesn't necessarily mean a rate hike. It could just as easily mean incessant jawboning from Fed members in attempts to get the market to raise rates on its own accord. After all, that fits under the definition of "preemptive" too, right? That action seems to have worked pretty well, which leans us to the "no rate hike" side. Just in case, keep that crow handy. Even if the Fed raises rates by 0.25%, investors appear to have already accepted that as fact and have priced it into the market. Still, we'll be listening closely tomorrow for tidbits from Alphonso the Great.
Other figures came out today too, like housing starts up 6%, industrial production up 0.2%, and capacity utilization down to 80.5%. . . nothing to be scared of. In fact, excess capacity tells us that pricing pressure at the producer level probably can't be sustained, even if producers try to raise prices. Remember, for the consumer index to show inflation, it must first appear on the producer level. It hasn't, and didn't today either.
Ready for some market stuff? OK. Not only did we get a nice relief rally from the CPI figures, Oracle reported earnings last night which blew away all expectations, helping the market with a leg up on a technology rally. ORCL's earnings estimate was for $0.32. They reported $0.36 and were upgraded to buy or strong buy today by no less than 9 brokerage analysts. That's akin to closing the barn door after the animals have escaped, but it helped the sector nonetheless. Jabil Circuit also reported earnings just in-line with estimates and warned that that due to delays in customer delivery, there will be a revenue shortage next quarter. Despite lopping $9 off the price tag in after hours trading last night, JBL recovered $2.50 on heavy volume today, though still down $6.50 from yesterday's close (again, this is why we recommend never holding a position over earnings). SLR, one of our current picks became the baby in the bath water, as Merrill Lynch downgraded a few in the sector, thus handing SLR a measly $0.25 gain. Circuit City also made earnings news by obliterating $0.25 estimates with a whopping $0.39 actual. Then there's that pesky $130 mln. "one-time" charge for dumping support of DIVX, a failed alternative to DVD. No matter, analysts took it all in stride and upped ratings, as the market awarded CC another $8.38 in value. With earnings season just around the corner and a noticeable lack of earnings warnings so far, we may be in for more upside surprises. Still the same discipline applies in most instances. We're not changing the rule and think it's safer to be out of position when a company reports earnings.
In merger/acquisition/alliance news, Sugen (SUGN), an experimental cancer drug developer agreed to be acquired by Parmacia Upjohn (PNU) for $650 mln. in stock. Also, Amazon.com announced they would take a $45 mln. stake in Sotheby's (BID) and form a joint on-line auction site, stimulating a bit of competition with EBAY's recent acquisition of Butterfield and Butterfield. So, how about those Internets?
e-loser.com changed its name to e-winner.com as part of a new plan to drop its hostile bid to acquire AMZN, YHOO, AOL, CMGI, BCST, EBAY, and DCLK (those same companies that on Monday looked like they would be rolled up into 1 giant money-losing company!). (Again, just kidding on the -loser.com/hostil bid stuff.) The market let out a collective cowboy hat-waving, bull-riding hoot! Seriously, all the above tacked on double digit gains today on volume reminiscent of the old days (you know, 6-7 weeks ago). Lots of these were hovering around their 50-200 dma's waiting for a direction in which to break until today. AMZN traded 35% greater than average volume to close up $15.19 at $111.69. The others: YHOO (volume +100%; up $16.38 to $141.62); AOL (+50%; +$11.75, $106.50); CMGI (+125%; +$16.13, $93.13); BCST (-25%; +$14.50, $108.50); EBAY (+85%; +$13.25, $128.75); DCLK (+33%; +$10.88, $86.88). What this tells us is that based on substantially stronger volume, accompanied by double digit gains, we've probably found support and a bottom by bouncing nicely off these averages, assuming Greenspan doesn't lob a cocktail of the Molotov kind into the rally.
While this is certainly good news, try to keep the emotion in check enough to realize that today's gains only brought Internets back to where they were a week ago - still substantially off their highs earlier in the year. Nonetheless, it's probably safe to get back in the water. Just do so selectively and remember, Internet = High Risk!
As for the rest of the market, starting with the NASDAQ, today we got the highest point gain ever (not percent gain, however), as the index gapped open +52 points and added another 51 points during the trading day for a total gain of 103 points. On over 1 bln. shares traded (hooray!), NASDAQ closed at 2517 (its high of the day) with advancers whoopin' decliners 3:2. Up volume was about 5.5 times down volume. This is a big win in our book and bullish for the immediate future.
The DOW looked pretty good too. Out of the chute, the DOW popped up 120 points, while taking the rest of the day to tack on the remaining 69 points. On the day, the DOW finished up 189 at 10,784 on 807 mln. shares, still only average, but much better than anytime in the last few weeks. Again, advancers pounded decliners, this time, 2:1, with 2.5 times the amount of up volume over down volume. Another win.
In short, bulls trampled bears and shorts covered today. Thus, we are likely to see the trend continue another few days, but only if the upward action is coupled with continuing strong volume. Volume is the key to a sustained rally. Use it as sign that money is coming out of hiding and driving prices up again. Any comments from Wild Al Greenspan tomorrow may slow up that process and stop the bull right in his tracks, sort of like a barbed wire fence. Remember too, bond traders are still afraid of the "I" word and could keep a lid on things until the FOMC meeting at the end of the month. While things look pretty good, it's still important to exercise discipline and good $$$ management skills until the air clears. With that in mind, plan your trades, save the emotion for a sporting event or sad movie, set stops to preserve profits, and sell too soon.