April Fools Spotlight
The spotlight is shifting from Iraq to Asia with the SARS virus taking center stage. Saddam pulled a disappearing act on the world again after Iraq said he would appear to speak to the people and somebody else showed up instead. The economy increased downward speed with very bad news from the ISM report. Despite all this bad news the market rallied on all fronts. Welcome to contrarian investing.
Dow Chart - daily
Dow Chart - 30 min
Nasdaq Chart - 30 min
One reader said it clearly in an email today. "Thursday will have higher jobless claims followed by a terrible nonfarm payroll report on Friday. Look for a +500 point rally on the wonderfully bad news." That is how I feel today, battered and bruised from fighting the trend. Obviously bad news continues to be greeted with buyers with every possible excuse for the market action. When Saddam was thought killed the market rallied last week. When he was thought alive the market crashed again. This week the potential for him to speak on live TV caused a market bounce. When he did not show and the rumors started again the market bounced again. Go figure.
The economic day started off terrible with Chain Store Sales falling -1.4% to levels not seen since December. This was also the largest weekly decline since Dec-7th. Sales were below plan and traffic flow was weak. Not only are consumers cutting back on durable goods and high ticket items it now appears they have started cutting back on entertainment and restaurant spending. Movies and restaurants reported up to 7% drops in sales due to consumers staying home to watch the war and the SARS fears, as well as the prior reasons of unemployment and high gas. BBY, PIR, FD and others started the month guiding analysts lower due to war worries and fear of crowds. The National Retail Federation lowered their sales growth numbers to +3.8% for the entire 2003 calendar year. This was a -2.0% drop from their prior +5.8% estimate.
On a positive note the mass layoff numbers dropped to -85,000 for March from -138,000 in February. The drop in mass layoffs was attributed to reservists leaving for Iraq and uncertainty about the potential for a quick war from two weeks ago. With the press setting everyone up to think we were going to walk in and have everyone throw down their weapons, manufacturers were cautious about letting trained personnel go. It will be interesting to see how April layoffs fare if the war continues through April. The lower layoffs is not an improvement in the economy but just a news related lull.
Construction Spending fell -0.2% in February but this was actually much better than expected at -0.7%. It was still the first monthly decline in six months. Since construction lags recovery this number could be weak for months to come. Private construction rose +0.7% to rescue the headline number from a serious fall. Without the private sector, buoyed by multifamily units, it would have been a much different story.
The worst report for the day was the ISM report which showed a drop to 46.2 compared to last months 50.5. This is the first month of decline since October's 49.7. It is the largest monthly decline since November 2001. A number below 50 shows a decline in manufacturing and all three production related sub components new orders, back orders and production are solidly in contraction. Contrary to the Challenger Layoff report the ISM employment number at 42.1 is indicating the pace of layoffs to be accelerating. Nothing in the ISM cold be taken as a good sign other than the very low inventory levels.
In the better than expected but still bad news column was Auto Sales. Ford dropped -7.9%, GM -3.0% and DCX -3.0%. However, the annualized numbers came in at 16.2 million units and much better than the 15.7-15.9 million units expected. Sales were off but not as bad as expected due to the war. GM took the offensive today and went with a zero interest option for up to 60 months on everything but Hummers. Even Corvettes, generally exempt from sales incentives, were included. This is bad news for Ford because they do not have the financial position to match GM heads up for the remaining buyers. The pace for February was 15.4 million units and the 16.2 for March was a significant improvement. Analysts were reporting it was cheaper for car makers to make the cars and sell them at cost than cut production and layoff workers thereby hindering production in the future if sales picked up. The problem will continue to be who is going to buy them at higher prices in the future if everybody buys them for cost or less now? They are killing their future profits to keep the doors open now.
Jumping in front of the war worries is the fear of SARS, which is spreading through Asian countries. The news was full of pictures of an American Airlines plane quarantined at the San Jose airport. The flight was from Hong Kong and according to the pilots five people on board were experiencing symptoms of the disease. Only three people were removed and taken by ambulance to emergency rooms but the damage to the public sentiment was already done. There are serious fears this disease could spread globally faster without adequate controls. There are numerous flight cancellations into Asian countries and many companies are canceling travel to that area.
I am hearing from readers that all flights out of the afflicted areas in Asia are full and flights in are being cancelled in large numbers due to lack of passengers. Hong Kong is in almost a panic state. Schools and apartments are being decontaminated and shift workers are being told to stay home in some instances. Motorola night shift was told to stay home today on fears that some workers could already be infected. With many tech fabricators in the Hong Kong, Taiwan area it is feared that the disease or just the fear of the disease could impact delivery of components.
The SARS problem is a serious problem but not the end of the world. According to the CDC only about 4% of patients die but when talking about potential tens or hundreds of thousands of patients it is very serious. Analysts are talking about huge drops in GDP for Asian countries as meetings, shopping and travel is cancelled. It is reported to be the type of virus that can be passed or contracted from infected surfaces for 3-4 hours after those surfaces were touched. With it passed by air or touch the potential is serious. Hopefully the countries got control of the problem soon enough to prevent a widespread outbreak but Asian markets are already sick.
At 7:PM the Central Command announced the recovery of a single US POW in Iraq and the futures rallied +11 points before the actual news was even known. Just a rally on the rumor of news after CentCom said they were going to make a positive announcement at 4:AM in the morning. This shows the volatile nature of the market. The immediate sell off once the news leaked told us everyone was disappointed it was not a Saddam obituary instead.
The market is very news oriented and is not trading on traditional fundamentals. We get terrible economic news and the market rises on war news. We have positive stock news and some casualty report knocks us back -100 points. This is not an investors market. It is not even a traders market. The uncertainty is frustrating everyone. Next week we will see earnings begin to flow in volume and there were many warnings and general downgrades this morning as fears of the current economic environment increase. Make no mistake, despite the bad news the bulls are waiting on the sidelines and ready to pounce on good news. The bears are scared and are not applying as much force as in the past. It is clearly a volatile market that may bleed points while waiting for something important to happen but has explosive potential if it does. The bounce today was nice for the bulls but it was due after a four day losing streak.
The current down trend is still in place and the rally failed right below the down trend line. The Dow resistance level is at 8100 and the Nasdaq is at 1355. Neither of these levels provides much room to run. Unexpected good news could of course make this resistance history in a heartbeat but that is where it exists tonight. I suggest traders maintain a careful posture with an eye to the downside unless something changes quickly. Of course that is about every 30 min lately!
Enter Very Passively, Exit Very Aggressively!