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"A notch"

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     07-30-2003         High     Low     Volume Advance/Decline
DJIA     9200.05 -  4.41  9236.54  9164.97 1.64 bln    628/ 960
NASDAQ   1720.91 - 10.46  1733.40  1717.07 1.52 bln    502/ 994
S&P 100   497.29 -  0.56   499.80   496.19   Totals   1130/1954
S&P 500   987.49 -  1.79   992.62   985.96
RUS 2000  472.80 -  0.80   474.23   470.93
DJ TRANS 2606.22 - 12.15  2620.52  2598.15
VIX        20.72 +  0.49    21.06    20.54
VXN        30.86 +  0.70    31.42    30.86
Total Volume 3,342M
Total UpVol  1,163M
Total DnVol  2,096M
52wk Highs     435
52wk Lows       58
TRIN          1.38
PUT/CALL      0.80

"A notch"
By Jonathan Levinson
Click here to email Jonathan

The markets closed lower by a notch, while the summary of the Fed's Beige Book found that the economy edged higher by a notch.

20 day 30 minute INDU

The Dow closed lower by all of 4 points, while the COMPX dropped 10. The narrowing pennant formations are setting the markets up for a big move in either direction, and with a plethora of economic data commencing tomorrow, the break could come at any time.

20 day 30 minute COMPX

The Energy Department reported that U.S. crude inventories rose by 1 million barrels to 277.3 million for the week ended July 25, while the American Petroleum Institute reported a 400,000 barrel decline to 276.6 million barrels. In either case, analysts got it wrong, expecting a larger increase. Gasoline inventories fell by 3.3 barrels to 204.5 million barrels according to the Energy Department, while the API reported a 2.1 million barrel drop to 206.3 million barrels. The big news, however, was the most recent set of data concerning mortgage and refi activity.

The Mortgage Bankers Association (MBA) announced that seasonally- adjusted demand for mortgage refinancings, the MBA refinancing index, dropped 32.9% for the week ended July 24. Demand for loans with which to buy homes, the Purchase index, dropped 3.5% following last week's 1.1% loss. The Application index dropped 24.9%. The average interest rate for a 30-year fixed rate mortgage rose to 5.87% from 5.72%.

As I have been discussing for the past several weeks in our Wednesday market wraps, this trend poses significant risks to the economy and to the market, as the liquidity generated by debt origination has been providing fuel with which to support the financial system. Further more, the rapid rise in interest rates comes against the backdrop posted below. I won't rehash this material, and strongly encourage you to review recent Wednesday market wraps for a more detailed discussion. Here are some highlights:

Chart of Total Consumer Credit

Chart of Unemployment Rate

Chart of US Bankruptcy Filings

Chart of State and Local Surplus or Deficit

Against this backdrop, GE CEO Jeff Immelt made statements in an interview worth repeating (and attributing to him). Note that GE owns CNBC, on which channel the interview took place:

"I'm pretty optimistic. It is not that every thing is perfect. I still see the U.S. on a slow economic growth trend. I don't see anything negative as I look at the economy today..."

Photo of Jeff Immelt

I beg to differ, and while charts are always open to interpretation, those posted above appear pretty unequivocal. The quote was released last night in a Reuters story at 7:05PM. One would be hard pressed to find a clearer example of manifest editorial bias.

The President spoke today and was optimistic about the economy, saying that he expected his tax cut package to stimulate productivity and job growth. "There's still work to do, but I'm optimistic about the future and I believe you'll see more jobs created and that will be good for the country," he said. Regarding the deficit: "We would have had deficits with or without tax cuts for this reason: the slowdown in the economy, the decline in the stock market starting March of 2000, plus the recession, reduced the amount of revenues coming into the federal Treasury."

Donald Grimes, economist at the University of Michigan's Institute of Labor and Industrial Relations, released a study today noting that U.S. economic recovery since the end of the recession in November 2001 has been substantially more drawn-out than the recovery period of the early 1990s. "The current jobless recovery has lasted nearly twice as long and has resulted in three times as many job losses compared to the economic recovery in 1991-92. While most people would attribute the continued weakness to job losses in information technology industries, states that have suffered the greatest during the post-recession period are not technology-based states, but are industrial states in the Midwest," he said. Grimes noted that California, home of the tech revolution, saw significantly greater job losses in the early '90s than it has since 2000.

Rather than rehash the debt and money supply situation, with which material we should by now be thoroughly familiar, the following is a longer term view of the markets we follow. I'm hoping to gain some perspective on the recent market action, particularly as the treasury and commodity markets continue to diverge from equities during weeks past.

SPX 33 year monthly

The long term Nasdaq and S&P 500 charts speak for themselves. Note that the unwinding of the tech bubble brought the COMPX to a 76.4% retracement off its alltime high, while the SPX stopped at the 50% line.

COMPX 33 year monthly

The weekly charts reflect the toppiness that we've been following for weeks in the tri-weekly Sentiment Wraps.

SPX 3 year weekly

COMPX 3 year weekly

Noteworthy is that bond yields have recently rallied very strongly, bonds selling off sharply with no corresponding action in either direction from equities which have drifted mostly sideways during that time. Recall that bonds and stocks rallied together through most of this year, and so the recent action from the larger treasury market is so far baffling. My interpretation is that the selloff in treasuries has yet to reach equities, but I can think of arguments on the other side as well.

Ten year note yield 3 year weekly

The strong uptrend in gold does not bode well for equities, in my opinion. Note that the weekly chart of the Dec '03 contract reveals a continuation pennant forming so far.

Gold 3 year weekly

The Federal Reserve Board's Beige Book was released at 2PM EST, and caused a brief stir of buying for a few minutes. The report found that the U.S. economy is showing some signs of improvement, with 8 out of 12 districts reporting "somewhat stronger growth." The manufacturing sector looked stronger with Philadelphia and Richmond and calling an end to the downturn in production, though goods prices throughout the country still appeared soft. The report noted the jump in automobile inventories in June and July. Overall, the report noted that economic activity had picked up "a notch." There are no doubt windowless offices filled with harried quants attempting to discern what percentage of GDP corresponds to "a notch".

The inability of the report to spark more that a fleeting bid no doubt owes itself to the more negative "hard" data we've been following, including initial and continuing jobless claims, the current account deficit, the CPI and the PPI. Statements like "inflation remains tame" and "consumer spending is lackluster" did nothing to rally bonds, contrary to what one might otherwise have expected. The markets all but ignored the Beige Book, but what I find to be most interesting is its reflection of the Fed's view on current and ongoing economic conditions. The full report can be accessed at this link. http://www.federalreserve.gov/fomc/beigebook/2003/20030730/default.htm

As Jeff Bailey noted in the 3:15 Market Update, "The word that showed up most often was "mixed" and as one subscriber has pointed out in the past, where I use quotation marks too frequently and perhaps improperly, we can envision the late Chris Farley in a Saturday Night Live skit using his fingers to signify quotation marks around today's release of the Fed Beige Book Data, which contains little hard data points..."

The bottom line is that the Fed pulled out the stops quite some time ago. The more than tripling of the money supply inside of 15 years, the lowering of rates to 45 year lows, the aggressive ongoing daily intervention via Fed repo agreements, all indicate a Fed increasingly open to exercising strong measures, while the charts on unemployment, state budgets, personal borrowing and bankruptcies tell a sad tale of the failure of those measures so far. It is my sincere hope that the optimistic "mixed" story in the Beige Book and in the mainstream financial media's spin thereon is both well-founded and an indication of brighter times to come. However, in light of the proliferation of "hard" data to the contrary and the new threats posed by rising rates, a weak dollar, and the other factors discussed above, the Fed's Beige Book sounds more like the placative tone of an airline steward than an objective report of the current and future conditions facing us.

In other news, the Investment Company Institute reported that net inflows into stock funds totaled $18.7 billion in June, topping $11.9 billion of inflows during May. This data follows over 1 year of mostly negative inflows since March 2002. Trimtabs is estimating that the trend will continue, projecting inflows of $8.5 billion for this month.

We have the following economic data due tomorrow:

               Report                   Briefing  Market    Prior
                                        Expects   Expects
Jul 31 8:30 AM Chain Deflator-Adv. Q2 -     1.0%      1.4%   2.4%
Jul 31 8:30 AM Employment Cost Index Q2 -   0.9%      1.0%   1.3%
Jul 31 8:30 AM GDP-Adv. Q2 -                1.5%      1.5%   1.4%
Jul 31 8:30 AM Initial Claims 07/26 -       410K      400K   386K
Jul 31 10:00 AM Chicago PMI Jul -           53.0      53.8   52.5
Jul 31 10:00 AM Help-Wanted Index Jun -       37        37     36

Today's session gave us an inside day following a very light week for economic data. Tomorrow and Friday are much heavier, and with tension building with today's price compression within what is proving to be a persistent trading range, the stage is set for a big move either way. If this year has taught us anything, it's patience and open-mindedness. The markets could blast to the upside as easily to the downside, although I personally find the latter to be the more likely outcome. With the indices just below their year highs, volatility very low and beginning to climb, bullish percents toppy and bears hesitant to go short, the downside appears for the moment to be the path of lesser resistance. We'll keep close on our stops in case The Great Humiliator disagrees.

See you at the bell!



 
 



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