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Gap Up

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     07-02-2003           High     Low     Volume Advance/Decline
DJIA     9142.84 +101.89  9148.30  9043.54 1.75 bln   2497/ 720
NASDAQ   1678.73 + 38.60  1678.77  1648.13 1.87 bln   2354/ 874
S&P 100   500.74 +  5.84   500.86   494.90   Totals   4851/1594
S&P 500   993.75 + 11.43   993.78   982.32
RUS 2000  458.89 +  9.72   458.90   449.17
DJ TRANS 2433.27 + 16.97  2435.24  2414.41
VIX        21.14 -  0.15    21.74    16.38
VXN        31.05 +  0.83    31.21    30.25
Total Volume 7,245M
Total UpVol  5,424M
Total DnVol  1,821M
52wk Highs     586
52wk Lows       27
TRIN          0.79
PUT/CALL      0.77

Gap Up
By Jonathan Levinson
Click here to email Jonathan

Today was a very bullish day for stocks, with the Nasdaq well on its way to challenging its year highs, the indices truncating their downphases with yesterdays bounces off their ascending trendlines and today's breakaway gaps to follow through. The Nasdaq is often said to be the "leading" index, and quick comparison between the oscillators on the Nasdaq below and those on the Dow above looks quite bullish for the Dow. Daily Chart of the INDU

Daily Chart of the COMPX

It was reported today that factory orders rose 0.4 percent in May, exceeding analysts expectations for no change over the April number of a revised 3.0 percent drop. Non-defense capital goods fell 0.8 percent, the second consecutive monthly decline. Excluding transportation, new orders for factory goods rose 0.8 percent in the month, up from a 2.7 percent decline in April. Excluding defense, new orders for factory goods rose 0.8 percent in May, up from a 2.7 percent decline in April.

The Energy Department reported an unexpected 2.1 million barrel drop in U.S. crude reserves for the week ended June 27. I have yet to see analysts not surprised by the week's data. Total inventories are 282.1 million barrels, 11.5 percent lower than for this week in 2002. Gasoline inventories dropped by 3.2 million barrels to 205 million barrels, while distillate supplies stood rose 300,000 barrels to 109.7 million barrels total. Surprisingly, August crude closed lower by $.25 at $30.15.

The Mortgage Bankers Association (MBA) announced this morning that seasonally-adjusted demand for mortgage refinancings, the MBA refinancing index, rose 4.8 percent to 8,599.1 in the week ended June 27. Demand for loans with which to buy homes, the Purchase index, rose 6.6 percent to 438.4. The MBA's market index, an overall measure of mortgage activity, rose 5.2 percent to 1,635.5. The average contract interest rate for a 30-year fixed rate mortgage rose to 5.23%. The MBA estimates that banks will make $3.3T worth of mortgage loans this year, blowing out last year's $2.5T record. New construction dropped .9% in May, however, the third consecutive month of decline.

After our discussion during weeks past concerning the mortgage data and the sources of liquidity for this year's simultaneous rallies in real estate, stocks, bonds, gold and other commodities, I've generated a series of charts to put the current economic environment in perspective. I've relied on data published by the St-Louis Fed.

The first chart, which we've been following for several weeks, is the MZM, and is one measure commonly used to gauge the money supply.

MZM chart

This 13 year chart speaks for itself- the supply of money has tripled during this period.

Chart of Fed Funds Rate

During the same time, the Fed Funds rate has dropped precipitously to its currenty 45 year low at 1.0%. In other words, the cost of money to banks is at its lowest level in nearly half a century. It was reported today that U.S. money market funds are now yielding a record low 0.58 percent on average.

Chart of Commercial and Industrial Loans

Despite the aggressive devaluation of money by Chairman Greenspan's Fed commencing in year 2000, loans to business and industry have decreased in tandem with the Federal Funds rate during that time. Where, then, has the money reflected in the skyrocketing MZM chart gone?

Chart of Real Estate Loans

Chart of Total Consumer Credit

It has been loaned to consumers in the form of home equity loans. For the sake of brevity, I have not reproduced a chart of the current account deficit, but we've been tracking its increases to record level after record level. It appears that consumers have been borrowing in order to purchase homes and foreign goods in ever-increasing amounts.

Lastly, the effect of the lack of participation of business and industry in the Fed's tidal wave of liquidity is reflected in the climbing unemployment rate.

I've attached the foregoing charts because I find the current economic context fascinating. I also find the widespread predictions of a "second half recovery" difficult to reconcile with the picture that the above charts paint, though it does help us to understand what the Fed has been trying to accomplish, and its concerns with what it calls "dis-inflation". An uptick in treasury yields increasing the effective interest rates applicable to borrowed money, could be disastrous, and for this reason I expect the Fed to do what's necessary to keep yields down, as Governor Bernanke has said it would.

By the same token, I am not recommending running out and shorting everything with a bid. Fundamentals and technicals are two different worlds as this spring has taught us, and as leveraged speculators and investors, we must choose our time and our price judiciously. The markets are littered with bears who had great ideas and poor timing. As Keynes said, "The markets can remain irrational longer than you can remain solvent." It's much easier to trade with the trend of your choice. If you're bullish on the markets, then the above is the famed "wall of worry". Furthermore, the current situation is nothing new for the past several years since the beginning of this secular bear market, and arguably, it is always darkest before the dawn.

In other news, it was announced on CNBC that the State of California has been placed on negative credit watch by Standard & Poors, but I was unable to find a link to the story anywhere on my wire or in the newsfeeds. The newsday was mostly dominated by upgrades and downgrades, with relatively little hard news. GLD announced that it was granted Food and Drug Administration approval for its new anti-HIV drug, Emtriva. The International Olympic Committee announced that Vancouver, B.C. would be the host city of the 2010 Winter Olympics, beating Pyeongchang, South Korea. Much of the competition will take place at the nearby ski areas around Whistler and Blackcomb, and Intrawest, the developer and operator of Whistler, was up strongly on the news.

For tomorrow, we have the following economic data due before the bell:

              Report                     Briefing  Market   Prior
                                         Expects   Expects
Jul 03 8:30 AM Average Workweek Jun -     33.8      33.8     33.7
Jul 03 8:30 AM Hourly Earnings Jun -      0.3%      0.2%     0.3%
Jul 03 8:30 AM Initial Claims 06/28 -     415K      412K     404K
Jul 03 8:30 AM Nonfarm Payrolls Jun -     -15K      Unch     -17K
Jul 03 8:30 AM Unemployment Rate Jun -    6.2%      6.2%     6.1%
Jul 03 10:00 AM Factory Orders May -      0.3%      0.0%    -2.9%
Jul 03 10:00 AM ISM Services Jun -        55.0      55.0     54.5
With a shortened trading session ahead of the 4th of July weekend, I expect to see thin trading and the consequent wild volatility that such can cause, helped along by the above full slate of economic reports. I expect any good news to be taken very bullishly by equities, on the heels of today's very strong session. See you at the bell!


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