After two days of declines the markets rallied after each memorial service and as the clock ticked down on the possibility of another terrorist attack. As it became apparent there had been no terrorist event the markets began to creep upward from the morning dip. They ignored negative economic news and low volume to retest 9500 and 1850 once again. Fear of darkness took hold at 3:PM and the indexes began giving up their gains.
The morning started out badly with the Jobless Claims coming in well over 400,000 as we expected. The official consensus estimate was for a drop to 395,000 but the headline number rose to 422,000 instead. Last weeks number was revised up to 419,000. If you have been reading my articles you know I was expecting something in the 425K range for this week and I was not far off. Not only are more workers being laid off but the number of continuing claims rose +61,000 to 3.67 million. This was the largest number since July 12th. The four-week moving average rose to 407,250 and the highest level since July-26th. 29 states reported rising claims. The Jobless Claims were very negative to the bullish case but after the initial drop in the S&P futures to 1009 on the news at 8:30 they rebounded to almost 1016 before the open.
Helping confuse the issue was a +0.2% rise in Import Prices. This was less than expected at +0.3% but when taken in context of a +3.9% increase in energy prices it left most investors scratching their heads. The lack of a major change in the headline number would indicate the trend to lack of inflation is still intact despite the higher energy prices. Should the energy prices suddenly drop the number could quickly go negative.
The Trade Deficit increased once again to -$40.3 billion in July and $11.3 billion was to China. This ever increasing black hole is about to find a bottom if the current China legislation passes. The war over the devaluation of their currency will have some serious fallout. Companies that design products in the U.S. and then manufacture them in China could see a huge jump in their import tariffs. One version has a +27.5% tax on all imports from China in order to level the playing field. Currently China's currency is kept at artificial levels to give it a competitive advantage in the marketplace. They have refused to let it float and one U.S. threat is to remove their favored nation trade status and associated benefits. Tom Clancy, the author of many fiction novels about China and its economic attacks on the U.S. has got to be jumping up and down saying I told you so. Of course most of his books end up with a shooting conflict where the U.S. wins and I do not see that in the immediate future.
Traders also shook off a downgrade on IBM by Salomon Smith Barney at the open. SSB said the stock price had gotten ahead of fundamentals and that the CSFB assessment was wrong. CSFB had upgraded IBM saying that it would benefit from a late year turnaround in IT spending. SSB said that investor sentiment had gotten ahead of revenue growth and lagging services bookings would hurt IBM. SSB said bookings might be strong in the 3Q but down for the entire year. They recommended clients take profits in IBM now. IBM shook off the opening drop to $86.40 and finished slightly positive at $87.90.
The banking index rebounded from yesterday's drop with a jump back to 870.51 intraday but dropped at the close to 864.69. It was still positive for the day but the oversold bounce was weak. The pressure from yesterday came from multiple warnings of falling loan demand from businesses as well as a sudden drop in mortgages due to the rise in rates. Key Bank, National City and Washington Mutual all warned that demand was slipping and conditions were worsening. The rebound was likely bargain hunting but the volume was weak.
Thursday was a throw away day in my opinion. The drops for the last two days were due as much to worries about a potential terrorist event as much as profit taking from the big gains. The constant break away to memorial events and the numerous sound bites for politicians and reporters kept the volume on the exchanges to a minimum. The price action was based on small buy/sell programs pushing the indexes from one range to the next with no defining trend. The volume ended with the lowest full day of trading since Aug-28th and about -16% below Wednesday.
This light volume relief bounce of +22 points on the Nasdaq after a drop of -50 points (-2.6%) on heavy volume from Wednesday was far from conclusive. If anything it was an oversold bounce and brought us back to neutral for Friday. We are approaching the middle of September, the most volatile month of the year for the markets and we are moving into the most active weeks of this warning cycle. The valuation dogs are lose and the IBM downgrade this morning should be followed by other analysts wanting to get their 15 min of fame. We get earnings from Oracle at the open on Friday and while nobody expects them to miss estimates it will be interesting to see how they spin their guidance. Larry Ellison is tied with John Chambers for his ability to spin the news to Oracles benefit. The majority of analysts expect ORCL to announce inline at 8 cents on revenue of $2.14 billion. The dissenters think ORCL will make their earnings on cost cutting instead of revenue increases above the expectations. The real answer is sure to impact tech stocks tomorrow. Announcing inline has not been a winning strategy lately.
The bond market absorbed another huge inflow of government paper this week with bid-to-cover ratios still high despite the continuing uncertainty. With a few earnings warnings beginning to appear on the fringes and the continuing drop in employment the bond junkies are feeling better about holding inventory.
The Dow rebounded from yesterday's test of 9400 to test the high from yesterday at 9500. That test failed with a drop that split the difference with a 9457 close. One trader said it was a patriotic bid under the market more than anything else. I believe it was traders coming back into the market after taking profits on Wednesday to avoid any attack risk. Much of the volume for the day came in the last 30 min of trading. Futures volume rose significantly on both sides of the market. I have received numerous emails from readers who feel serious distribution is in progress and the chance for a major up move from here are becoming weaker every day. I received numerous other emails pointing out the bullishness of the limited drop and instant reversal when considering the distance we have come and the calendar. Unfortunately I agree with both. It is bullish that the markets are holding up as well as they are at these levels. I watch the volume flow through the Eminis on Wed and at the close today and I was impressed at the number of buyers. This is definitely not a normal rally or a normal September market.
Friday may not give us a real clue to direction either. We have several economic reports at the open in addition to the ORCL earnings. We have the PPI and Retail Sales at 8:30 and Michigan Sentiment at 9:45. I do not expect a big move from these events. I would think traders would watch them from the corner of their eye but they are focusing on the Fed meeting next Tuesday. With Bernanke and Ferguson being renominated to the board they are probably hoping Ben will be carrying a bigger stick into the meeting in an effort to fight that deflation monster with another rate cut. Do not hold your breath. There is a possibility with the nonfarm payrolls down -93,000 and Jobless claims well over 400K for the last two weeks but that chance is still very slim. According to the Fed funds futures the next change is expected to be a 25 point hike in April 2004. While the Fed may want to head off the deflation monster they have clearly shown they do not want to move until they have to. Cutting another 25 points now would endanger billions of dollars currently held in money markets. With MM yields already only pennies above zero any further cuts could make it unprofitable for funds to continue to offer any return to holders. We could see a massive shutdown of money market funds and that cash withdrawn for other purposes. Shucks, some of it might even find its way into the stock market. (Are you listening Ben?) Maybe the Fed still has one more ace up their sleeve that nobody is counting on but that ace cannot be played without exacting a terrible price on the investment community. I doubt Greenspan will allow it without a strong reason. Either way traders will be either holding their breath until Tuesday afternoon or buying the hope for that surprise cut.
The anniversary is over and the terror alert was never raised. The fear of another event is slowly dwindling but somewhere in the U.S. there are people alive today that will eventually die in the next attack. Next week, next month or next year, eventually there will be another attack. It will probably come when we least expect it. We need to use every anniversary of the WTC attack to motivate us to go the extra mile to prevent them from being so massive. Just today there was an article about a canister of 15 pounds of highly radioactive depleted uranium being smuggled into Los Angeles by ABC reporters for the second straight year while doing an investigative piece on lax border security. Despite the obvious radioactivity and the ease at which it could have been detected it arrived at its destination right on schedule. The package was designed to emit radiation in a form and strength of a more dangerous device. It was shipped from Jakarta, a terrorist hotspot, in a shipping container all the way to the final destination in Los Angeles. If a radioactive device, active or otherwise, can be shipped without discovery then how simple would it be to ship C4 or some germ warfare component right through the security screen. There are an estimated 10,000 containers offloaded in the U.S. each day and only a very small fraction are searched. Our borders are porous and cannot be fixed. 65,000 people gather together at more than a dozen locations each weekend for football games and offer prime targets. 25% of the weight on scheduled passenger planes is unscreened commercial shipments. If an idiot can ship himself home for the holiday in a shipping crate without being found then what else is shipped each day that could be dangerous. We may be a harder target than we were two years ago but for anybody with a death wish the security will never be enough. Our best defense is a strong offense and the refusal to let these people impact our daily lives. I leave you with the battle cry from the passengers on the fourth plane who refused to see their plane used as a weapon. Let's roll.
Enter Very Passively, Exit Very Aggressively!