Dow 9000 continues to be support and very tough support at that. The market has clung to this level for a week and every attempt to sell it off is met with failure. A soaring bond market and multiple earnings warnings may have kept it trapped in a very narrow range but the end result was another banner day on strong internals.
Dow Chart - 60 min
Nasdaq Chart - 90 min
The economic calendar was very light with the only real report the Richmond Fed Manufacturing Survey which came in at -5 for May and much improved over the -18 for April. Any negative number indicates contraction but it slowed significantly from last months drop. All the manufacturing components remained negative including shipments, new orders and backlogs with only the six month outlook positive at 42. The improvement in the internals was dramatic with order backlog improving +20 points, new orders +15 points and shipments +13 points. All were still negative but greatly improved. The -5 headline number returned to near the same level as March at -4 which indicated the -18 in April could have been a numerical fluke or a direct relation to the war worries. Either way this report was seen as a positive improvement. Lower energy was helping relieve companies of the pre war cash crunch and while they are not seeing a large pickup in demand the pain of internal costs were easing. Pay attention to the "was".
The only other economic report was the weekly Chain Store Sales which fell -0.3% for the week ended June-7th. Year over year growth dropped -1.0% due to cool weather and steep discounting. Ah, yes, the discounting spiral. I wrote about this several times over the last couple months that due to the excess inventory the retailers had been reporting they would have to offer strong discounts to move it. The Mothers Day and Easter weekends were dismal in many areas with cold, rain and even tornados depending on your state. The excess inventory must now be dumped and that makes the sales comparisons more difficult. It will also cut into profits for the current quarter. This is not necessarily bad news. Consumers will feel better about getting more bargains for less money and consumer sentiment will improve. Also the bargains will draw money out of the wallets of those tight fisted consumers who were worried about war and unemployment.
On Wednesday we will get the Fed Beige Book and the Mortgage Application Survey. The Beige Book measures economic conditions across the different Fed districts and could be a market mover. With every economic report recently showing signs of improvement there is the potential for a negative report to take some wind out of our sales. This report covers the late April and May period. The prior report was mostly negative and the odds are good traders are expecting better news this time around.
The markets shook off the warning from Motorola and accounting clouds from FRE and started off on the positive side. The incentive appeared to come from various comments from Fed officials that there was still aggressive stimulus in the pipeline. Kohn said that inflation was falling faster than the Fed models had predicted. (Since inflation is near zero already any continued falling would mean deflation.) He said that while the Fed preferred conventional methods for dealing with economic stress a Fed Funds rate of zero might constrain the Fed's efforts. If he is thinking that an interest rate of zero is going to possibly constrain the Fed then he could be telegraphing a stronger than expected rate cut. He repeated the Fed's ability to use "other" instruments to direct policy but their choice would be to NOT use them. Again, the potential for an aggressive rate cut in our immediate future. Lyle Gramley, a former Fed Governor, spoke out against deflation today saying it was very remote. One Fed head says the rate of inflation is dropping rapidly and the other (former) says deflation is remote. Either way there is definitely a rate cut in our future.
The next Fed meeting is a two day affair on June 24-25th and as of the close today there was a 100% chance of a 25 point cut and a 30% chance of a 50 point cut. If they do not cut by 50 points at this meeting there is a 77% chance of another rate cut by the September meeting. There was a rumor all day that the FOMC was holding an emergency meeting and a rate cut was imminent.
Greenspan also spoke today on natural gas prices and energy in general. Natural gas has risen in price by 75% this year and oil is back up to $32 a barrel. Before, during and after the war Greenspan was on record that energy prices would fall once the war was over and that would help take the pressure off manufacturing costs and provide a boost to the economy. Today he said there was no near term relief and implied the higher energy prices would be a damper to the economic recovery. Oops! Energy costs rising with no relief in sight? Sounds like yet another case for more stimulus to offset the energy gains. We may not be floating on a sea of oil but on a flood of dollars.
The bond market hit yet another new 45-year low with the yields on the ten year treasury closing at 3.19%. Is there no end in sight? It appears not as long as the Fed keeps talking about a zero fed funds rate and using "other" instruments to keep rates down. With the huge spike in bonds it is a miracle the stock market did not implode. If I was a bettor I would look for a monster bond sell off if the ten-year yield dips below 3.00%.
Instead the Dow got help from GM, which took the unusual step of suggesting that analysts get out of "chicken little" mode because things were not as bad as they were reporting. GM affirmed estimates for $1.20 for the 2Q but said their full year estimates for $5.00 were uncertain due to the unstable economy. Maybe you can speak out of both sides of your mouth at the same time. They have continued to raise incentives to attract buyers with very lukewarm results. The stock did well today and helped power the Dow out of some midday doldrums. However, it may not last as all the car companies are faced with rising inventory levels and a model year coming to a close. There is going to be a gunfight during the summer as competing 2003 models duke it out for the few remaining buyers. Buy one get one free works for me.
The market struggled all day to remain positive with the bond market soaring. However, a couple of severely beaten stocks rallied to provide support. MSFT suddenly came alive and rocketed from yesterday's low of $23.60 to close at $24.68. MSFT said they were going to acquire the antivirus assets of GeCAD Software to enable Microsoft to offer their own antivirus solution. MSFT will integrate the technology into their various platforms and extend support to other antivirus vendors to combat the problem. The announcement, which provides MSFT a much needed boost in the virus arena, caused it to gap up at the open. This prompted a bout of short covering that ran into the close.
IBM also gapped up at the open on a continued relief rally from the SEC inquiry news last week. After a strong day Monday the gap up provided an exhaustion top and the trend was down the rest of the day. Still the morning bounce helped pull the Dow out of its slump until the Fed jawboning could take control.
After the close TXN joined the SARS ate my earnings crowd and warned that they would post six cents instead of the expected eight for the quarter. They joined TQNT, MOT and NOK in singing the SARS blues. They said cell phone chip demand had weakened and wireless chip sales could drop -10%. Micron surprised traders earlier in the day with comments that the quarter was going a little better than expected. They said customers were shipping more computers than expected. Hello, George McFly? More computers shipping than expected? Suddenly there is a real light at the end of the tunnel. Lest we get carried away let's remember MU has had nothing positive to say for years and a "little better than expected" is not exactly a ringing endorsement. Some of their improved guidance is coming from restructuring and that MU was ahead of its targets to cut costs by 40% per megabit in 2003.
The market day boiled down to a war between 9000 and 9050 with only very small excursions on either side of those lines. That 50 point range smells like consolidation basing to me after two days of drops. Yes, I count Friday as a drop since 10:15 was the high of the day. The Nasdaq traded in a 13-point range until the final minutes. That afternoon bounce had everyone guessing. Exactly at 3:PM the Dow slipped below 9000 to the afternoon low of 8992 when a strong buy program triggered that set off a wave of short covering right into the close. The Dow closed only seven points below the high of the day. At the close everything was pointing to a positive open tomorrow but the TXN warning has soured the futures in after hours. It does not appear serious but there is a slow bleed.
For Wednesday the key will be 9000 once again. Except for Monday afternoon the Dow has traded above and clung to 9000 despite various attempts to sell it off. If the futures can hold the line overnight we have a good chance of moving up again. The market has strong support at 9000 and strong Fed incentive to keep going at least until June-25th. The fly in the soup is the Beige Book but it is not until 2:PM so the morning direction could be rocky. If I had to bet I would lean toward a positive buy the rumor move that the Beige Book could surprise. The market has shaken off the FRE cloud, the IBM SEC investigation, the MOT earnings warning and several other SARS related warnings. It is not showing the weakness you would expect. The internals were better than the indexes are showing with advancers beating decliners 2:1 and there were still 629 new highs. Until the internals change we will continue to buy the dips.
Enter Very Passively, Exit Very Aggressively!