Recipe for disaster.
Would everyone who would like all the Fed heads to stay off the airways and keep quiet, please call 1-900-NO-SPEAK and we will use the $1.00 contribution to pay the Fed heads to be seen and NOT heard. In case you live under a rock and did not hear, the market tanked again today after Fed member Edward Kelly said "it would be premature to assume the Fed is done raising rates for this year. The Fed remains intensely vigilant in seeking out inflation and monitoring U.S. asset price bubbles." That coupled with earnings warnings from several high profile name knocked over -200 points off the Dow in the first hour of trading.
The good news was the rebound off 10740 not once bu t twice and the appearance of strong support at this level. The Nasdaq also dropped over -50 points but came roaring right back to finish only -16 for the day.
Besides the verbal thrashing the market got from Mr. Kelly, the minefield of earnings warnings took its toll as well. Starting off the morning was Dow component Sears with a strong warning that they would miss estimates substantially due to slow sales and increased competition. Sears promptly dropped more than -10% to a new multiyear low. Rumors began circulating that Sears was in danger of being dropped from the Dow. OOPS! Right behind Sears was Martin Marietta Materials with a warning of their own. Citing lower construction demand and the impact of hurricane Dennis on coastal quarries they said the drop could be as much as -.19 per share. Rounding out the trio of market bombs today was JC Penny who announced their version of the "poor business blues" after the close. Batten down the hatches people, we are just getting started and this earnings warning season and storm clouds are in the forecast.
Yes, the market cratered on news events today but the volume was lousy and nobody still trading this week wanted to place any big bets the night before the August non-farm payrolls. Take equal parts of sharply rising wages in July, production slowing, earnings warnings and negative Fed speak. Mix together and simmer overnight. Tune in at 8:30 ET tomorrow and see if your recipe turned into a breakfast, fit for a king, or a serving of rotten eggs. With labor costs last month up +4.5%, the highest in five years, investors are hoping it was a statistical abnormality. If so then costs should drop in tomorrows report and average out safely. Back to back spikes in the labor costs would guarantee another rate increase and a retest of recent market lows. Reports out today showed that productivity for 2Q had dropped to only +.6% instead of the +3.6% previously. Productivity was the focal point for no rate hikes for months as higher productivity and low wage increases provided Mr. Greenspan with a puzzling picture of inflation growth. With the numbers turning negative on this recent trend the Fed is likely to react strongly and maybe one more increase in October is not enough. Numbers very far away from the estimates in either direction tomorrow may have you reaching for the Rolaids to help this meal go down better.
Other major market events include the continuing dollar/yen battle. Cheaper dollars make goods imported into the U.S. more expensive. This is another thorn in the bulls hoof. After the close today a high ranking Japanese official with the nickname of Mr Yen, because of his influence on the Yen, came out against a stronger Yen at this time and raised the possibility of government intervention to prop up the dollar and ease the building concern.
IBM declared war on Intel again today. IBM announced a new chip for networking which is programmable even after it is installed. IBM claims it's chip is superior to the Intel chip announced earlier this week but what else would you expect? IBM claimed it was dedicating 350 scientists and engineers to this chip project. IBM does not want a repeat of the microprocessor saga. One company, Intel, captured almost the entire market and everyone else was captive to their architecture for a decade.
Micron (MU) was upgraded by Gruntal today and they said it was possible for MU to double again in the next 12 months, even after the great run they have already had this year. The reason for the upgrade was the rise in memory chip prices. The price for a 64 megabit chip is now around $10 and up from lows of around $4. This represents the demand placed on memory by Internet and networking applications.
If you liked Qualcom at $193 on Tuesday, you have to love it at $157. After an almost $40 haircut on negative comments by one analyst, the stock tanked big time on profit taking from it's recent record run. It is amazing since the analyst is still expecting great things from QCOM and his estimates are +.01 over the street average. He just said that cheaper cell phones may put pressure on margins and QCOM simply may not be able to beat estimates by as wide a margin as in the past. We spent a lot of time researching QCOM to decide if we should drop it tonight and could find no valid reason. If you look at the volume in the sell off and the very heavy volume today on the dip which was met by heavy buying then we feel you will agree. This COULD be an incredible buying opportunity BUT sentiment is the key. The business did not change, just the view of one analyst. BUT, if it does continue down, DO NOT HOLD IT! Never fight the trend.
The key for tomorrow and next week is simply the non-farm payroll report tomorrow morning. That will be the signpost. The next mile markers will be the PPI due out next Friday. Cautious investors should wait until next Tuesday before starting any new positions. Traders should be back from end of summer vacations and the market should start returning to some semblance of normal. "Normal markets", now there is an oxymoron.
Pick your entry points carefully, sell too soon.