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Market Wrap

The Day After

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     07-16-2003         High     Low     Volume Advance/Decline
DJIA     9094.49 - 34.38  9153.42  9042.19 2.16 bln    595/1518
NASDAQ   1747.97 -  5.24  1767.90  1734.14 1.95 bln    731/1200
S&P 100   501.07 -  3.00   505.89   498.85   Totals   1326/2718
S&P 500   994.09 -  6.33  1003.47   989.30
RUS 2000  473.68 -  3.25   477.97   471.93
DJ TRANS 2597.51 + 23.54  2597.54  2569.41
VIX        22.29 +  0.45    22.74    21.62
VXN        33.94 -  0.01    35.48    33.63
Total Volume 4,360M
Total UpVol  1,370M
Total DnVol  2,908M
52wk Highs     471
52wk Lows       33
TRIN          1.08
PUT/CALL      0.70

The Day After
By Jonathan Levinson
Click here to email Jonathan

We were treated to a second day of Alan Greenspan's testimony, and the markets obliged us with a second day of large moves. The initial move was hard down for equities, and if you missed it, you spent the remainder of the day chasing a tight range rich with temptation and menace.

One year daily candle chart of the INDU

In honour of the broad, macroeconomic issues being discussed by lawmakers for the past two days, I've zoomed out to the yearly chart of the indices for some perspective on where we sit. We see the Nasdaq fresh off a recent yearly high, with the Dow lagging behind, having just failed to break its previous top. The lower oscillator high on the INDU is particularly worrisome for bulls, and in terms of risk/reward, the better bet appears to be to the downside. For a more detailed analysis of the indices and the day's action, I have covered the US Dollar, gold, treasuries, as well as the Dow, Nasdaq and S&P futures in tonight's Futures Wrap.

One year daily candle chart of the COMPX

The Commerce Department reported that U.S. businesses inventories dropped by 0.2 percent in May as sales declined. This was the first reduction in business inventories since April 2002. The inventory-to-sales ratio remained flat at 1.40. Inventories were unchanged in April while sales sank 1.7 percent. Inventories were expected to be unchanged from April to May.

The Federal Reserve reported that industrial production rose 0.1 percent in June. Manufacturing output rose 0.4 percent. Capacity utilization of US factories, mines and utilities remained at 74.3 percent, indicating massive ongoing idle capacity.

The Consumer Price Index rose 0.2 percent in June, while the core rate excluding food and energy costs remained unchanged. The CPI was inline with expectations, while the core rate disappointed by 0.1 percent. The CPI was up 2.1 percent year-over-year, while the core rate increased 1.5 percent. For the first six months of 2003, the CPI has increased at a 2.2 percent seasonally adjusted annual rate.

The American Petroleum Institute reported a 4.8 million barrel drop in crude inventories for the week ended July 11. The Energy Department had reported a drop of 3.6 million barrels, a welcome consensus after last week's disagreement between the two sources. The AIP reported that supplies now stand at 277.7 million barrels. Gasoline supplies rose by 5.2 million barrels to 209.4 million barrels and distillate inventories reached 113.4 million barrels on a gain of 4.8 million barrels from the previous week.

The Mortgage Bankers Association (MBA) announced that seasonally- adjusted demand for mortgage refinancings, the MBA refinancing index, dropped 1.6% for the week ended July 11. Demand for loans with which to buy homes, the Purchase index, rose 8%. The average interest rate for a 30-year fixed rate mortgage fell to 5.33% from 5.37%. Note that the previous week was a shortened holiday week, and so the decline in the refi index compounded a very poor showing the week before. The National Association of Home Builders reported that its index for current sales rose to 69 from 67, its index for buyers' traffic rose to 50 from 47, and its expectations index rose to a two-year high of 73 from 70 in June.

In our continuing glance at macro issues, I have updated the MZM money supply chart, and have added some others. I encourage you to look at the past two Wednesday Market Wraps for greater perspective on this subject.

Chairman Greenspan addressed the Senate Banking Committee today, discussing the usual plethora of pertinent issues, including the retirement of the baby boomers, currency intervention by central banks, the revaluation of the yuan, rising deficits, tax cuts and unconventional measures. He held out sufficient hope of the latter to give a boost to sagging treasury bond prices, which had started the day continuing the slide from yesterday's selloff. I find these issues fascinating and could discuss them ad nauseum, but will instead continue the analysis of these broader issues by looking at the latest data.

The first set of charts demonstrates the efforts made by the Federal Reserve to stimulate the economy. The inflation of the money supply, which is an effective tax or devaluation on the intrinsic value of every dollar in circulation, is demonstrated in the 13 year chart of MZM:

MZM chart

The Fed's ongoing interventions are reflected in the 13 year chart of its open market operations, also very inflationary. Note the scale on these charts, as they reflect multiple hundred percentage point increases.

Chart of overnight and term repurchase agreements (repos)

The effect of this inflation of the money supply by the Fed has resulted in stock and bond market rallies. The Fed has helped this along by lowering the Federal Funds Rate to 45 year lows.

Chart of the Fed Funds Rate

Here is another effect of these operations. As the Fed has Lowered the cost and value of money, consumers have borrowed increasing amounts of it:

Chart of Total Consumer Credit

Despite these inflationary measures, which the Fed characterizes as "stimulative" to the economy, unemployment remains persistent, and worst of all, the duration of that unemployment is increasing:

Chart of Unemployment Rate

Most disconcerting is that the Federal Funds rate and treasury yields, which determine the "price" of a borrowed dollar, are arguably seeking or have found a bottom, with the ten year note yield breaking above its 200 day moving average yesterday, and are now ticking higher. While the Fed has succeeded in lowering the value of the greenback, the economy remains shaky, most so where we live. Congressmen Sanders and Paul harangued Chairman Greenspan on this issue yesterday.

Chart of US Bankruptcy Filings

Once again, note the scale of these charts, as they reflect large trends.

Chart of State and Local Surplus or Deficit

Last week, this is what I said:

"Lastly, the selling in treasuries since the Fed's last quarter- point rate cut has caused a spike in yields. In light of the rising number of bankruptcies during the past year and the 45 year low federal funds rate, I believe that the single greatest current danger to the economy is higher interest rates. Given the Fed's strong words about its intention to keep rates down, I do not expect the selloff in treasuries to go much further. "

In fact, we saw just the opposite yesterday, as Chairman Greenspan told Congress that, in his opinion, the economy was showing signs of imminent recovery and that the Fed was not planning on aggressive purchasing treasury bonds. This sparked a selloff in bonds, driving yields up nearly 25 basis points. It was news the last time the Fed lowered the Fed Funds rate by that amount. The statement that the Fed has been "pushing on a string" once again came to mind. With the 12-month change in the Consumer Price Index at 2.1%, the current 3-month T-bill rate of 0.9% is -1.2% in real terms. Judging from this, the Fed is pushing very, very hard on that string, to the detriment of savers who must put their money at risk just to keep up with price inflation.

In corporate news, AMR reported an improved Q2 net loss of $75 million, equal to 47 cents per share, compared with Q2 2002's loss of $495 million or $3.19 per share. Excluding special items, including a $358 million cash payment from the Transportation Security Administration, Q2's loss was $2.26 per share. The stock gained nearly 10% on the news.

The House Capital Markets Subcommittee Richard Baker, R-La., cancelled a hearing scheduled for Thursday on regulatory reform of Freddie Mac (FRE) and Fannie Mae (FNM), citing an alleged lack of cooperation on the part of the companies. Baker said, "Their lack of cooperation is unfortunate and raises questions about their seriousness. I may have no choice but to consider extending a different form of invitation." Sounds like possible subpoenas to me.

After the bell, AMD reported a smaller than expected loss, losing 40 cents per share vs. -.54 estimated and estimating next quarter's sales to increase by an unspecified amount. AAPL beat by 2 cents, coming in at .05 per share, but announcing Q3 profits lower by 41 percent. It expects a "slight increase" in Q4 profits and sales notwithstanding. IBM met estimates of .98 per share, up 10% y-o-y on acquisitions and cost-cutting with gains from foreign exchange, the stock trading down over 1$ as of this writing. QLGC met estimates as well at .33 per share EPS, with net revenues for Q1 up 28% over Q1 2002. CDWC missed by a penny at 51 cents per share.

COF beat by 13 cents at 1.23 cents, and estimated EPS of no less than $4.55 for 2003. ALL announced a 70 percent increase in profit in Q2 2003, posting net income of 84 cents per share vs. estimates of .76. ET met estimates of .14 per share, its profit falling this quarter due to restructuring and other charges.

We have the following economic data due tomorrow:

              Report                     Briefing  Market   Prior
                                         Expects   Expects
Jul 17 8:30 AM Building Permits Jun -    1.850M    1.790M  1.803M
Jul 17 8:30 AM Housing Starts Jun -      1.830M    1.750M  1.732M
Jul 17 8:30 AM Initial Claims 07/12 -      425K      425K    439K
Jul 17 12:00 PM Philadelphia Fed Jul -     7.0       7.0     4.0

For tomorrow, traders remain acutely aware of options expiration Friday almost upon us, and the ongoing earnings season. The unpredictable chop that characterized today's session is on the menu for tomorrow. I continue to expect the market to be more sensitive than usual to the unemployment data, particularly after the heightened emphasis placed on that issue by members of Congress yesterday and of the Senate today in their Q&A session with Mr. Greenspan. That data is due tomorrow before the opening bell, and will likely set the tone for the open. All things being equal, I expect more downside ahead, but we'll have to be content to trade whatever the market gives us.


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