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     06-18-2003           High     Low     Volume Advance/Decline
DJIA     9293.80 - 29.22  9333.66  9232.05 1.83 bln   1248/1986
NASDAQ   1677.14 +  8.70  1685.04  1653.25 2.11 bln   1630/1656
S&P 100   509.65 -  0.91   512.40   507.25   Totals   2878/3642
S&P 500  1010.09 -  1.57  1015.12  1004.61
RUS 2000  457.51 -  0.50   458.65   457.51
DJ TRANS 2477.89 -  4.68  2484.46  2460.11
VIX        21.60 -  0.17    22.67    21.44
VXN        33.15 -  0.46    34.67    32.72
Total Volume 4,189M
Total UpVol  2,349M
Total DnVol  1,733M
52wk Highs  588
52wk Lows    19
TRIN       0.79
PUT/CALL   0.66

By Jonathan Levinson
Click here to email Jonathan

It was a go-nowhere day, with bad news from several Dow components setting up a weak open, the announcement of Tuesday's capture of Abid Hamid Mahmud setting up a flagpole rally, and then a slow fade for the remainder of the session before the obligatory closing uptick. It was the second day of what is either consolidation or distribution following Monday's mammoth bull run.

Daily Chart of the INDU

The indices remain at the tops of their respective channels, leading both bull and bear camps to expect at least a short term pullback, but so far, the sideways drifts of yesterday's and today's sessions are the best the bears can muster. It's either a bullish consolidation, or the deliberate levitation of stocks to permit more effective distribution near the relative highs.

Daily Chart of the COMPX

The Mortgage Bankers Association of America announced today that seasonally-adjusted demand for mortgage requests rose 1% to 1,701 for the week ended June 13, following its 9.3% drop from the previous week. The refi index, measuring demand for loans to refinance existing mortgages was up 1.3% over the previous week, still 4 times higher than its level from this time last year. Demand for home loans was unchanged following last week's 9% drop.

Note that 2 weeks ago set a record jump for the mortgage data, and at that time I theorized that if the debt-creation caused by the jump in mortgage activity fueled by the multidecade low interest rates was causing the tidal wave of liquidity we've been following, then the rally in treasuries and stocks can be tied to the mortgage data. The chart below depicts the relationship between zero-maturity money supply (MZM) and the fed funds rate:

MZM chart vs. Fed Funds Rate

I wrote the following in last week's Market wrap:

"MZM is a measure compiled by the St. Louis fed, and is commonly used as measure of the money supply. There are numerous other charts which all tell the same story, but my goal is to briefly touch on the implications of the multidecade drop in interest rates. Against the backdrop of the fed's continual worries about "disinflation" and its eagerness to run its printing presses, in Governor Bernanke's words, we see the surge in money supply. This coincides well with the more than 20% drop in the US Dollar Index since January 2002, and the corresponding rally in commodities."

I consider the above chart to be the cause. This morning, Jane Fox posted the following chart depicting the effect:

Chart of MBA refi index

I believe that Mr. Greenspan intended for the liquidity bubble created by his aggressive easings to occur in industrial and commercial loans, which would naturally spur employment and, hopefully, productivity. However, the above depicts a bubble in mortgage credit instead. This is relatively "unproductive" credit except to the extent that it has spurred consumer demand, and I believe that this is why the markets have been so sensitive to the admittedly soft-data of consumer confidence and expectations. The rallies in equities and treasuries have been spurred by an ocean of debt-based liquidity, but it appears that this liquidity is in the wrong place for strong industrial and corporate expansion, the foundations of a strong economy. The fed's money has helped consumers bid up the prices of houses and import record amounts of goods from other countries. This view explains why so many market participants have been doubting the sustainability of the rally- the economy does not "feel" the way we'd expect for a genuine economic turnaround, and indeed, it does not look it either.

Chart of Commercial and Industrial Loans (St-Louis Fed)

A parting thought on this topic. If low yields have stimulated consumers to borrow and buy at a parabolic rate, reaching alltime record levels of debt and balance of trades deficits, then an increase in yields can simply not be permitted to occur so long as productivity and unemployment remain at current levels. Although I do not have the data at my disposal, I recall having seen that personal bankruptcies rose double digits over the previous year. Imagine the result if rates begin to actually tick higher instead of falling.

The Energy Department reported that US Crude Oil inventories rose by 3.9 million barrels for the week ended June 13, bringing total reserves to 288.3 million barrels, 10.6% below the equivalent level one year ago. Gasoline inventories dropped 800,000 barrels to 209.1 million barrels in the latest week, and distillate supplies rose by 2.1 million barrels. Crude Oil futures led the decliners on the commodity futures index (CRB) throughout the session.

Before the bell, EDS announced that its restructuring efforts would result in a substantial charge in 2003 and layoffs of 2 percent of its global workforce, generating savings of approximately $230 million. Its pre-tax charges and asset write- downs are expected in the $425 million to $475 million range for 2003, a portion of which may be recognized in the current quarter. EDS reaffirmed its Q2 expectation of 33 to 38 cents a share and revenue of between $5.4 billion and $5.6 billion.

EK warned that Q2 earnings from continuing operations would come in between 25 and 35 cents per share, well below previous forecasts of 60 to 80 cents a share, due to a "significant" drop in consumer film and photographic paper sales in Asia. The company added that economic weakness, reduced tourism and geopolitical turmoil would continue to negatively affect sales and earnings for the remainder of the year. The stock was smoked for over 10%.

Morgan Stanley reported Q2 net income of $599 million, or 55 cents per share, below expectations of 68 cents, including a pre- tax asset impairment charge of $287 million or 16 cents per share. In Q2 2002, MWD reported net income of $448 million, or 72 cents per share. Revenue from the latest quarter was $5 billion, up from $4.97 billion last year but below estimates of $5.14 billion.

Bear Stearns reported an 18% decline in profit, with Q2 quarter net income of $280.4 million, or $2.05 per share compared to $342.9 million, or $2.59 per share in Q2 2002. Its revenue was $1.46 billion, down from $1.61 billion one year ago. BSC's weaker results beat estimates of 1.72 per share and revenue of $1.36 billion.

Clorox warned as well, announcing that it sees fiscal Q4 quarter EPS of 67 to 68 cents and "low single-digit" volume and sales growth. It blamed wet spring weather for a reduction in consumer demand for auto products and seasonal products. It could have added that with the record low rates, consumers are simply opting to buy new cars instead of washing their old ones with Clorox products. The company noted that Kingsford charcoal sales have suffered due to the wet weather, but I'd counter with the observation that the rally in natural gas prices would have cost- sensitive consumers opting for the smokier flavor of briquettes.

The above corporate results kept a damper on the Dow and S&P all through the session, with the Nasdaq and QQQ significantly outperforming.

A sudden surge of buying in mid-morning trading propelled the indices to their highs of the day on news of the US capture of Saddam Hussein's presidential secretary, the Ace of Diamonds in the deck of "most wanted" cards issued by the Pentagon, Abid Hamid Mahmud. He is the most senior former Saddam official captured to date. He is described as the number two man in the Iraqi regime, responsible for Saddam's personal security and all Iraqi defense and intelligence issues. He is expected to be of great assistance in the location of the so-far elusive weapons of mass destruction.

Investors Intelligence released its survey for the week and hit a new bear market low for the percentage of bearish advisors, being 16.1%, vs. 60.2% bullish, a new bear market high for the latter. This reading indicates an excess of bullish optimism which, like very low put to call readings (such as we've had for the past 2 days) is a bearish indication, the thinking being that too many are piled onto one side of the proverbial boat.

For tomorrow, we have a full slate of economic data due before 
the bell:

              Report                     Briefing  Market   Prior
                                         Expects   Expects
Jun 19 8:30 AM Current Account Q1 -     -$142B  -$141.5B -$136.9B
Jun 19 8:30 AM Initial Claims 06/14 -     435K    425K      430K
Jun 19 10:00 AM Leading Indicators May -  0.9%    0.7%       0.1%
Jun 19 12:00 PM Philadelphia Fed Jun -    11.0    4.1       -4.8
Jun 19 2:00 PM Treasury Budget May -    -$90.0B  -$90.0B  -$80.6B

Given the lack of meaningful pullback so far, we can expect downward trading within the current multiweek uptrend to allow the oscillators to blow off some of their overbought readings. However, there has so far been no pressure to sell on the part of bulls or bears following Monday's push to new highs. The full slate of data scheduled for tomorrow promises at least an exciting session, which will be a welcome relief after today's long afternoon. See you at the bell!


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