Showdown at Jackson Hole
The markets displayed a bipolar personality on Thursday as traders prepared to get the lowdown at the showdown. Greenspan speaks on Friday morning on Monetary Policy and Uncertainty and by all accounts this will be a pivotal speech. Bond traders are ticked about the hide and seek game that sent bonds to a 45 year high and then no follow through from the Fed. Analysts expect Greenspan to clearly lay out the plan for future policy and a failure to do that could be very negative. Word games are history, they want to hear some hard policy.
The day started out positive with Jobless Claims rising +3000 to 394,000. One more week below 400,000 but only barely. The four-week moving average rose to 396,250 and continuing claims rose +26,000 to 3.657 million. The headline number was lower than I expected after the blackout but we are still two weeks away from the week I expect to reflect the true numbers. The week ending 9/12 would be the first week after the Labor Day holiday marks an end to summer. It is the "back to work" bell and those putting off the task will have to punch the alarm and trudge off to the employment office to begin the hunt again. While the Labor Dept claimed there was no impact due to the blackout last week, they revised that number up +5,000 to 391,000 this week due to the blackout.
The most surprising report for the day was the GDP for the 2Q. It was revised up to +3.1% from +2.4% when everyone expected a major downward revision. The revision was due to higher consumer spending than was previously expected at +3.8%. Corporate profits were up +10.8% and the 3rd consecutive quarterly gain. Durable goods consumption rose to 24.1% from 22.6% in the first estimate. Inventories fell -$20.9 billion, down from the prior estimate of -$17.9 billion. The inventory drop was attributed to fear of a lingering war and the impact on the economy. It is likely this drop in inventories is what prompted the bounce in the July economic numbers as that pipeline was replenished after the quick war and the victory over SARS. This is a very bullish report and shows an economy that is growing much faster than previously thought. The only problem is it reflects the second quarter and we are nearing the end of the third. With all the cautious comments out of the tech companies it is not clear if this bounce has legs or it has already run its course.
Supporting the GDP view was the Chicago Fed National Activity Index which came in at -0.20 and much improved over the -0.32 in June. This was the third consecutive monthly improvement but it is still moving very slowly and indicates a below normal growth trend. Employment was the major laggard and continues to decline at 6.2%.
The most negative report for the day was the Monthly Mass Layoffs which showed there were 2,087 mass layoffs which will put 226,435 employees out of work. With the announcements in July the layoffs will normally occur over the next 90 days. That puts us right in the middle of the actual job cuts now. We will see what real impact this has when the Nonfarm Payrolls are announced next Friday. As usual manufacturing bore the brunt of the pain with -136,410 job losses. This was up from only -40,845 in June. The headline number at 226K was an increase of nearly 70,000 over the June numbers. State and local governments were responsible for 7% of the job cuts as the local budgets are still recoiling from the bubble in tax income. The economy will continue to grow slowly with a constant loss of jobs and rising unemployment. You must have a paycheck to consume more than basic necessities. Forrester Research said they saw 3.5 million white-collar jobs leaving the US over the next ten years with the primary beneficiary being India. This is above the 10 million blue-collar jobs expected to flow out of country in the same period. Tough to pay $20 an hr in the US when you can pay $1 an hour overseas with far fewer taxes and benefits.
Getting a job is still a challenge with the Help Wanted Index still flat at 38 and only barely improved from its May low of 35. The labor markets are not showing any increase in hiring and the headline number is still six points below the July numbers from 2002 when employment was terrible. While the hiring may have bottomed in May it is not growing and it could set a stage for a greater than 6.2% unemployment number next week. The Jobs Report has shown six consecutive months of job losses, nearly -500,000, and the estimates are for a minimal gain of +10,000 in August. I find that hard to believe but analysts are hugging the unchanged line so they can be close to right either way it goes. If the Jobs Report were to show a large negative OR a large positive it would directly impact the current market sentiment in a big way. We are priced for perfection as they like to say.
Friday will be focused entirely on the Greenspan speech despite a flood of economic reports. We have PMI, NY-NAPM, Personal Income, Risk of Recession and Michigan Sentiment again. All but the PMI are before the open. The speech is at 10:EDT and we will probably get the script a few minutes ahead of the intro. Greenspan has typically used this particular speech to explain why he has made the decisions in the past and what decisions we can expect in the future. Considering the concern over his head fake on bonds earlier this year and the resulting implosion he will be hard pressed to prove he is in control of anything but his personal checkbook. This is why analysts think we could see fireworks. This is his best chance to seize control once again or go down in flames for what could be his final fling. There are rumors that he could be replaced when his term is over due to the lingering impact of the stock market implosion. Surpluses turned to deficits and retirement accounts were decimated. The rumor is that Bush may want to cut the ties to Greenspan's handling of the event and put a new horse on the hot seat. Ball is in your court, Alan. Art Cashin said on Thursday that if Alan disappoints traders will be fleeing the market in planes, trains, buses, taxis and any other vehicle they can find to escape the carnage. That may have been an overstatement based on Thursday's performance.
Impacting our markets on Thursday was any lingering end of month rebalancing or posturing and we had a couple serious buy and sell programs. The first sell program hit at 9350 and knocked the Dow back to nearly 9250 before it expired. The bounce was not immediate but two buy programs at 11:10 and 12:35 managed to push the index back the 9340 level where it hit a wall for the rest of the afternoon. The Nasdaq broke out of its 1782 resistance at the open and despite the early sell program it rebounded back over that level very quickly. The S&P was fighting a different battle and after hitting the electric fence at 1000 on the initial bounce it struggled all day to return to that level. Strong resistance at 998 kept the lid on it, at least until 3:PM.
Once the bond market closed at the high of the day the stock market exploded past resistance on strong volume. At least strong for a pre holiday Thursday. The Nasdaq led the charge and shot up to close at 1800 and a 17 month high. The rest of the indexes were dragged higher by the tech strength. The S&P hit 1004 and closed very near to that high. The Dow finally broke over the 9340 resistance and ended at 9382 and very close to the 9392 high. This was a very bullish reversal of the decline that began last Friday at 9500. The Dow fell to 9233, a -267 point drop from the high and has now retraced back to 9382. Very bullish when you remember what season we are in. After the closing rally we are priced even more to perfection considering the Friday events ahead of us.
After the close we got mid quarter updates from chip companies NVLS and IDTI. NVLS affirmed estimates with no increase but said they were going to take a $70 million charge to write down excess inventory. The market did not like the concept of inline affirmation and excess inventory and the stock lost $1 in after hours. IDTI affirmed estimates and said revenues would be flat to down -4%. They also lost ground in after hours. Ironically, even after a record day the Nasdaq futures barely even blinked. The SOX has soared back over 450 from its 425 low on Tuesday. It will be interesting to see what happens to it tomorrow. There is a good chance there will be some short covering at the open if Europe/Asia rallies on our performance. If so then we could break 1800 with volume and cause yet another wave of gains before Greenspan even begins speaking. The short interest on the Nasdaq is huge with most professional traders and institutions betting on the historical August and September decline. The bears are going crazy and tomorrow should push them a little farther over the edge. Do they cover at the open or wait and hope Greenspan eats his foot and the market tanks. Tough riding on the bleeding edge and if you are short in front of this market you are bleeding.
The bottom line for tomorrow. It all depends on Greenspan and the betting line is he better have a grandstand performance or we could see some strong weakness. How long that weakness lasts is another matter. The day after Labor Day has been up seven of the last eight years. Do you think the bulls are betting on another repeat and the bears are staying out of the way? Could be. Buy the dips until the trend changes but be aware it could change at any moment.
Enter Very Passively, Exit Very Aggressively!