The tale of 2 realities
A lie if repeated many times becomes a belief, and gains credibility by its constant repetition. It was just last Wednesday that the market was hitting new highs on its belief that interest rate hikes by the Federal Reserve (The Fed) were finished for this year. Investors were convinced that with a 25 basis point hike last week, the Fed wouldn't dare move to raise rates again until after January 1, 2000, based on Y2K fears. Besides that, the inflationary signs requiring the Fed to issue a preemptive increase just weren't and still (in our opinion) aren't present. So why is this market all of a sudden going in the tank?
Let's cut to the chase. The bond market now believes that there is a strong likelihood of a third 25 basis point increase before the end of the year. It is the bond market's belief that the Fed believes inflation resulting from asset bubbles (a.k.a. overvalued stocks) will be an inflationary problem for the Fed, who will thus act to raise rates again. How could anyone believe that this would happen, especially after last week's dogmatic belief that increases were over for the year? The answer appears to be that the financial press completely misreported Alan Greenspan's comments from last weeks Fed Conference in Jackson Hole, WY. What? You've gotta be kidding. Everyone in the press got it wrong? Not quite. But in short, press karma ran over investors' dogma. Based on what appears to be mis-reporting by an overeager press, the mischaracterization of Greenspan's comments has gripped the market. In response, the bond market sent the 30-year rate from 5.98% to 6.06% today.
Here's the reality. You may recall that last Monday, we said that there would be a Fed Conference in Jackson Hole, WY where 2 of the topics would be "What's the Appropriate Role For Monetary Policy In The Presence Of Asset Bubbles And Financial Crises" and "Practical Experience With Financial Bubbles". We questioned whether or not this portended the Fed's actual thinking, or represented just a mental exercise in Fed-think. The press (CNBC, WSJ, Baron's) reported the former. Now listen to this from Greg Jones of briefing.com, who was one of only a few to actually attend the conference, unlike his brethren who merely read and (mis-) interpreted an early distribution copy of Greenspan's speech. (commentator's note: for those who haven't seen briefing.com, it is a highly informative live market news and analysis site, started by former senior managers and analysts of Standard and Poors MMS International - no lightweights here.)
To quote, "The Fed of course will react to changes in the real economy which might well be precipitated by changes in stock prices, but Greenspan made it clear that the Fed would not react directly to stock prices. That's not the message you heard from the media on Friday, but then few in the media even took the time to read the speech. I was there, I heard it, I read it. And I can tell you that central bankers treat the proposition that they should attempt to rein in stock prices as preposterous."
Furthermore, "Greenspan will not make any attempt to drive down asset prices. There was a clear theme running through the first two panels of the conference. Virtually everyone in attendance thought it was obvious that central banks could not determine if an equity market rally was a bubble, and even if they could it wasn't clear that anything should be done about it. Panel member Rudi Dornbusch began his speech by suggesting that the question before the panel was whether or not the Fed should target lower equity prices, and specifically lower prices for Internet stocks. His remark drew laughter from everyone including Greenspan precisely because it was accepted that targeting equity prices was ludicrous." (italics, ours)
Translation: even board members scoff at the idea of intentionally controlling asset prices through monetary policy.
The press, in a hurry to get a story that would move the market, completely misreported the facts, according to Jones. Need more?
He concludes early on, "The rest of the day followed the usual pattern for the media. Once the markets react negatively to the headlines, it becomes a game similar to "telephone", in which a bunch of reporters who have never laid an eye on the actual speech compete to see how far they can veer from the truth. CNBC reported at day's end that Greenspan said that equity prices were "inexplicable," a word that didn't even appear in the speech."
Even Abbey Cohen of Goldman Sachs, one of Wall Street's most respected and credible bulls noted that she now thinks the Fed will raise rates another 25 basis points. (Even so, she confirms that she's still a bull.) Surprisingly, this is not the official position with G.S, who confirmed with CNBC that while they think a rate hike is possible, it is not currently anticipated and not part of their official outlook.
There you have it. The misrepresentation gained credibility by its constant repetition. Unfortunately, the market reacts to that which is perceived, not necessarily that which is the true. The reality is that the Fed was just getting some mental exercise in the postulation. Nonetheless, we can't say it enough. The market isn't right or wrong; it just is. We have to play the hand we're dealt. The purpose of option investing isn't to be right. It's to make money based on market trends, borne of market sentiment. Right or wrong, we have to acknowledge that. OK. . .lecture over. Let's move on.
Certainly, there are other factors that effect the market. . .like volume , for instance. Want volume? Don't look here. The NYSE traded just 610 mln shares today. NASDQ traded just over 799 mln. There's been a lot of complaining about a lack of volume lately, due to vacationing traders. We concur somewhat. The summer, which typically ends on Labor Day weekend, isn't over yet. It's pretty hard to read anything into the numbers. The only thing that can be concluded is that with lack of volume, the market becomes much choppier, subject to more severe updrafts and downdrafts, alike. For you pilots out there, it's kind of like flying at minimum controllable airspeed. That's where if you fly any slower, your plane would stall. At that speed, the controls are mushy and there is delayed reaction to pilot input, which can result in over-correction, which exaggerates the problem from which you are trying to compensate. There just isn't enough air over the control surfaces to get the plane to respond well. Such was the condition of today's market. If you look closely, you can see some of the bigger than usual spreads on the bid/ask of some stocks. TXN actually closed at $80 bid/$80.75 ask. Normally, the spread would be about $0.13. What's happening down there is that the buyers have orders to buy cheaper than the bid price, while sellers have orders to sell greater than the ask. Nobody appears willing to compromise on the sale, thus the low volume. As we've said before, vacations don't help, and there probably won't be any relief from this condition until next week.
Here's a recap of today's NYSE action. The DJIA opened at 11,087. No excitement here, as the average fell below 11,000 by lunchtime, held for an hour or so, then resumed its steady descent to 10,902, encountering a little bitty bounce in the final minute of trading to finish at 10,914. As noted earlier, volume only trickled in at 610 mln shares. Decliners ran away from advancers 2137 to 836. Only 28 new highs showed up to compete against 106 new lows. While these numbers are exceptionally unimpressive, the move down of almost 400 points in the last 3 trading days appears to be slightly greater than a 50% retracement from where we started in early August near 10,550, something that should light the candle of hope for chart technicians. Remember, the market tends to run in cycles - a few days up a few days down, and never in a straight line. Perhaps with such a steep descent over 3 days, investors may choose to come up for air as early as tomorrow, at least temporarily. We aren't making that prediction; merely pointing out that it becomes more likely given the nature of trends.
The NASDuck (humor) had some feathers plucked too. From an opening at 2763, the index fell to 2703 before bouncing in the last minute to close at 2712, down 46 points. Like the DJIA, it too made an attempt to rally during lunch hour, but that was short lived. In the end, 2413 decliners performed a web-footed rendition of "Swan Lake" on the tail-feathers of 1453 decliners. Volume. . .you already know. . .799 mln. shares. Surprisingly, 83 new highs bested 73 new lows. Again, we offer this reminder that with volume this low, exaggeration is the order of the day, and we can't draw any real conclusions from this alone.
Happenings in the news today wouldn't be complete without a couple of mentions. First, AT&T entered the long distance price wars today, as Michael Armstrong took the airwaves announcing that AT&T would offer 7 cent per minute long distance rates 24 hours a day, 7 days a week. They've apparently borrowed a page from their wireless business, (which has been wildly successful) in offering a true "1-rate" plan to compete against WCOM's and FON's 5 cent a minute plans (yes, but only during certain hours on certain days if the moon is full, etc. - just more customer- confusing rate structures). While this is ultimately good for AT&T in that it will get customers to make more calls and bring in more new customers, the Street got myopic in thinking that revenues would fall, hurting their future revenue prospects. Yes, but only in long distance, which everyone is going to offer free in the not too distant future anyway. Armstrong also went out of his way to note that AT&T will meet the Street's revenue, EBITDA and earnings expectations through the year 2000. The fact is data, video and Internet revenues are growing like a weed, far outpacing any loss in long distance revenues. Until the market figures this out, AT&T and WCOM will remain on our put list.
Second, just so you know, new housing sales for the month of July were released this morning, reflecting a .1% increase to an annual rate of 980 K - a pretty healthy clip that once again (rightly or wrongly) caused speculation of an overheated economy.
In summary, interest rate fears (again) and low volumes are keeping the lid on the market. Further pressure will come from the anticipation of the NAPM report due Wednesday morning, and the employment figures on Friday. By the looks of things today, this isn't shaping up to be a very good week (unless you are willing to play puts). Support and resistance are almost meaningless without volume willing to react to it. Conversely, nothing drops in a straight line, and we could see a technical bounce (perhaps at 10,800 where we've found support in the past), allowing investors a breath of fresh air following the last 3 days 400 point loss. We'll leave you with a mildly opposing view from briefing.com.
"Whether reduced rate fears allow the market to rebound from the weakness seen late last week will depend importantly on upcoming economic reports. The NAPM index will be released on Wednesday and the Employment Report is out on Friday. The price index in the NAPM report and hourly earnings in the Employment Report will be the key to the direction of both the stock and bond markets this week. We expect good news on both fronts. With a holiday weekend ahead and Y2K fears looming, we wouldn't look for any huge break to the upside, but stocks should be able to post modest gains this week.
Good luck! Sell too soon.