Five Year High
Believe it or not but it has only been a week since the power went out in the Northeast and the markets set new highs today. Not five year highs but new highs. The Philly Fed was the high stepper that blew away numbers for the last five years but the markets did not match its performance. However, if the economics keep up this rate it will not be long before the markets catch up.
Starting the morning off positively was a Jobless Claims number that surprised some traders. There were only 386,000 new claims registered for the week that included the blackout. Does that give you a clue where I am headed? The prior week was revised up to 403,000 but nobody seemed to care about the old news. Nobody seemed to consider the 54 million people without power on Friday who were unable to apply for benefits. Those same people were probably more interested in keeping everything in the freezer from spoiling instead finding the unemployment office. Getting gas to go to downtown was also a challenge. The Labor Dept said that the states with the biggest claims were not in the Northeast and therefore they did not expect a major revision. Ok, while I do not think we will see a major revision over 400,000 for this week I would be concerned that next week could be a shocker. Still we will not begin to see the real picture until the week after Labor day when the real work begins. Vacations will be over, summer help back to school and the last quarter push for holiday money begins. The 4-week moving average fell to 394,250 and the lowest level since Feb.
Also providing a boost to the markets was the Leading Indicators for July which came in at +0.4% and the fourth consecutive month of gains. This was inline with estimates. Five of the ten components rose which was slightly less than the 8-of-10 in May. The Conference Board even went so far as to compare the current performance with late 2001 when the index bounced and then failed to hold as the economy fell back again. This was an unusual step for the Board to suggest that there was a downside potential. They stress the index shows an economy poised to rebound but that rebound is far from certain. This less than cheerful outlook was completely ignored once the Philly Fed hit the wires.
The Philadelphia Fed Survey exploded past estimates of +10 with a very strong +22.1. This is completely unheard of to see such a bounce in manufacturing conditions in one month. The index jumped to a five year high and internal components were strong. Shipments rose to 16.3 from 9.1, New orders 14.6 from 10.4 and six month outlook to 62 from 56.9. Not rising were the average work week at 4.7 from 5.1 and employees to -8.7 from +0.8. Also surprising was the jump in prices paid to 16.0 from -6.5. Obviously the jump in manufacturing has not been enough to translate into new jobs with capacity utilization at 75%. Inventories remained low at 6.4 and show no confidence in future demand.
The bad news bulls did not know how to react to the good news and after the initial spike the markets trended lower the rest of the day. This was surprising when you consider tech stocks got some help from Craig Barrett the CEO of Intel. He said it was too early to call it a recovery but they were seeing some buying "here and there." He qualified specifically with "We're not seeing a big upgrade cycle and we're not seeing IT budgets being raised." Still techs raced higher at the open and closed at a new 52-week high of 1777. The semiconductor sector found the most excitement and raced to a new high at 435 and a +13 point gain. Over the last ten days the SOX has climbed from 366 to 435 and nearly a +19% gain. Helping to power this gain was a report that the capacity of chip factories had risen to 85.9% utilization for the period ending in June. This is a new high since the 64% bottom in the 3Q-2001. This has been the worst slump in the 50-year history and analysts suggest the capex dam could burst next year if the trend continues. Much of the increase in utilization has come from the closing of plants do to the glut. The survivors are now poised to rebound out of the slump and back into boom time. All they need is demand. Considering most chip companies are expecting 3Q demand to be less than previously expected it would appear somebody is wrong.
Also providing some sentiment gains before the open was the news that Chemical Ali had been captured in Iraq. He was number five on the most wanted list. He had initially been thought to have died in a bombing of his palace but recent intelligence had brought him back to life and pointed out his location. The continued discovery of Iraqi top-level fugitives due to tips from informers suggests the noose around Saddam is getting tighter on a daily basis. He is said to be moving every four hours and that alone exposes him to many more eyes than hiding in a basement somewhere.
Financial instruments were credited with some of the market gains. The dollar rose to a four-month high with a +2% gain over the Euro and some analysts were crediting stock gains to the dollar strength. Did I miss something? I thought the majority of blue chips actually hit earnings estimates last quarter based on the benefits of a falling dollar. Our products are cheaper and the currency translations produced extra profit. AMZN for instance said they made $54 million in currency exchange due to the weak dollar. With the dollar at a four-month high it would seem to me that benefit has expired. Bonds came under pressure today with yields rising on the 10-year note to 4.49% and right back at the key 4.5% level that tends to bleed money from equities. Financial stocks, which had been strong, sold off from the opening high on worries that a bond failure is still lurking in the darkness and we could begin to see some earnings warnings soon from bond losses.
Bonds also took a hit after the minutes of the June FOMC were released. There was considerable discussion about using alternative means to provide stimulus if they ran out of rate cuts. However, the general consensus of opinion was no alternative methods were necessary and that took the pressure off bonds. If they feel the Fed is powerless or gutless when it comes to taking future aggressive steps then there is nothing to keep rates low. It was also learned that 3 of the 12 Fed banks wanted to cut rates by 50 points instead of 25. The minutes provided a look at a very confused Fed that was puzzled about the lack of growth and going to do nothing in the foreseeable future to add more stimulus. Parry was eventually the lone dissenter on the vote to cut only 25 points. His recent publicized appearances echoed his comments in the minutes that he has not yet seen any evidence that a recovery is really underway. This is not a bullish picture being painted by the group.
Also hitting new highs was gasoline with a +9.5% move and a move not seen in 19 years. With refineries running at over 95% capacity and no reduction in summer demand the prices keep moving higher. This is going to translate into lower profits for shipping companies, airlines and any company that spends a lot of money on transportation. The consumer may also be finding less money in their pocket from that reduced tax withholding with the addition of the price hikes. Commuters are going to be less bullish when the sentiment surveys hit them and I would bet those numbers take another energy hit.
Some well-known drug stocks took a hit starting with Pfizer. Their estimates were cut due to generic concerns for two of their well known products Lipitor and Viagra. PFE fell to $29.75 and a new five-month low. SGP warned after the close that 2004 earnings would be less than 2003 and they were cutting 1000 jobs. They also cut their dividend from 17 cents to 5.5 cents. Prior to the cut SGP was in the top 10% of high yielding S&P companies. The stock went out at $16.50 and the announcement was made after trading was closed.
The Dow came within 2 points of closing at a new 52-week high but did make a new intraday high at 9481. It was not a boring day for the Dow with the spike to nearly 9500 at the open. About 11:00 AM a large sell order in the S&P futures pushed the Dow to its low of 9391, almost -100 points off the high and were it not for the Philly Fed blowout the results could have been much different. Those numbers calmed the bearish sentiment at the time but never completely cured it. The Nasdaq blasted off to a new 52-week high at 1783 but ran into a dead end and was not able to break 1780 the rest of the day. The Nasdaq run has been amazing and it is up +76 points for the week mostly on the strength of the semi stocks. Despite the indexes finishing off the highs there were 815 new 52-week highs and only 56 new lows.
Friday should be a tossup. There is so much bullishness the bears are afraid to short. Those holding stocks with strong profits are afraid to sell. It is a catch-22. Current shorts are trying to cover but nobody holding wants to sell. It is a bullish scenario made in heaven, as long as it lasts. The daily new highs continue to fuel new interest in buying but the low volume is keeping new buyers on the sideline. Traders are holding their collective breath and hoping for a pullback to enter. Professional traders are extremely confused by the lack of a summer sell off. When the market continues to go up when it should be going down all the rules go out the window. Everyone but Abby Joseph Cohen thinks stocks will have a tough time hitting the aggressive earnings estimates in light of the weak demand. Abby raised her estimates for 2003 and 2004 in light of the solid growth in the first half of the year. Abby is definitely reading from a different playbook than many others.
The only economic reports on Friday are the ECRI Weekly Leading Indicators and Internet Commerce Sales. Neither has any real market impact. YHOO, EBAY and AMZN could be impacted depending on the Internet Sales numbers but it is not a broad market mover. With large gains and extreme levels for the week it will be interesting to see if we get a bout of profit taking or another round of panic buying by the shorts. We have had some big Fridays in recent months in both directions. Until the actual selling begins on strong volume I would continue to dance until the music stops. Once it does stop the race for sideline chairs could be frantic. If August and September are the two worst months of the year and this is the bad news than I can't wait for the good months that follow. But then we still have September and October in our path.
Enter Very Passively, Exit Very Aggressively!