Market Wrap, Saturday, 06/04/2005
15 Minutes of Fame
by for the first time ever.
HAVING TROUBLE PRINTING?
15 Minutes of Fame
The new kid on the block got his 15 minutes of
fame this week and the instant
notoriety was far more than he bargained for. Dallas Fed President, Richard
Fisher, stunned investors and analysts alike with his eighth inning sports
analogy on Wednesday and the talking heads will not let him forget it. It was
the sound bite of choice every 15 min for the rest of the week. Word on the
street according to Greg Valliere of The Stanford Washington Research Group, Mr.
Fisher was reprimanded rather harshly for his off the cuff comments. With
Greenspan trying his hardest to push rates higher using his patented Greenspeak
approach I am sure he was not happy with the one-and-done suggestion from
Fisher. In the space of about 60 seconds Fisher destroyed the continued rate
hike risk and bonds headed into the stratosphere. The measured pace language had
speculators predicting something in the 4% range for year-end and Fishers ninth
inning scenario erased that potential in the minds of investors. As of Friday
the Fed Funds
Futures are showing less than a 50% chance of two more hikes by
year-end much less four. Odds are good Fisher will not be doing any on camera
interviews in the near future.
Dow Chart - Daily
Nasdaq Chart - Daily
Chart - Daily
We all know what the market did within seconds of Fishers comments. The Dow had
weakened from Tuesday mornings open at 10540 and was looking like a world-class
cliff diver getting ready to take the plunge after a disappointing ISM report.
The Fisher comments prompted better than a +200 point spike to new two-month
highs just over 10580. As Jonathan would say, it was a real bear-be-que. Shorts
had just settled in for the summertime swoon and were rudely awakened by a
massive short squeeze. The spike did not last the day but dip buyers struggled
hard on Thursday to provide support. That support finally crumbled on Friday
morning and all the gains for the week were erased despite what was called a
market friendly Jobs report.
The Jobs report showed a net gain of only +78,000 jobs
in May compared to
estimates of +185,000 and a whopping +274,000 in April. There was no positive
way to spin the drop in jobs but everyone with a microphone tried very hard. The
two main retorts were "if you average the last five months you get +180,000 per
month" and "over the last two years 2.5 million jobs have been created."
Personally I don't think it makes any difference to the market how many jobs
were created in 2003 or even 2004. The market wants to know
which direction the
economy is headed today, not last year. Secondly, the +274,000 jobs in April
were bolstered with an adjustment of +207,000 jobs. This was the "estimated"
jobs created by the birth/death fudge factor. Removing the 207,000 government
guesstimate leaves only +67K in April. If you want to get really serious nearly
two million of the +2.5 million jobs over the last two years were "guesstimate
adjustments" based on that scenario.
The way I understand
it the government tries to guess how many news jobs were
created by new businesses being born as well as how many jobs were lost by
businesses being closed. These small businesses are not covered by the actual
payroll survey and it boils down to a calculated guessing game. These numbers
are added to the actual survey numbers to provide the final tally. The internals
of Friday's report were ugly. Service companies only added +64,000 jobs and well
below the +232K reported in April.
Also, March jobs were revised down by -24,000
to +122K from +146K. Manufacturing payrolls fell again as they have for seven of
the last eight months. April's loss in manufacturing was revised even higher to
The people in the administration tasked with facing the reporters tried to focus
attention to a drop in the unemployment rate to 5.1% as strong evidence of a
rising economy. Sorry, Ms Chao, but the unemployment rate fell not because of
hiring but from a rising
percentage of dropouts. Those are workers who have
given up on finding a job or have exhausted their benefits. They are removed
from the total "workforce" numbers making the unemployment ratio better than is
actually is. Elaine Chao tried to claim that 5.1% was the low for the last
decade but Ron Insana reminded her that 3.9% was the low during the dot com
The May Jobs number was the lowest monthly jobs growth since Dec-2003.
growth is expanding rapidly with wages up +3.3% in the last
By Friday morning the one-and-done crowd had morphed into a two-and-through
stance and by Friday afternoon the majority of analysts were returning to the 4%
fold. Several Fed heads had been approached and none were seen ready to rebut
Fisher or agree with him. The gag order had gone out and Fed governors were
avoiding the microphone. Edward Gramlich was trapped into a couple of hurried
after several refusals to answer he finally said he did not know
what inning the Fed was in and then bolted for the safety of closed doors.
Another analyst commented that Greenspan may have to penalize investors for
Fisher's remarks by using stronger language to reemphasize his continued
measured approach. Greenspan was rumored to be speaking Sunday night and the
bond market raced to square up positions as they neared Friday's close. The
actual time of his speech is 9:PM ET on Monday
night when he does a remote video
speech to Beijing China. Unfortunately he is going to do a Q&A session after the
speech and you can bet Fisher's baseball analogy will get its fair share of
coverage. Translators should also have their hands full as Greenspan will
definitely try to set the record straight without actually saying anything
definite. Considering how hard he is to understand in English I would hate to
see how the translation comes out in Chinese. Greenspan will speak
Thursday when he gives testimony to the joint economic committee in Washington
and you can bet he will be grilled by the members on live TV.
We also got the ISM Services number on Friday and like the earlier ISM number it
fell unexpectedly to 58.5 from 61.7 in April and well below consensus estimates
of 61.0. This was the second consecutive monthly decline. Export orders were
mostly responsible for keeping it from being much lower. Exports rose to 62.0
52.5 and were the only component with a decent gain of more than a point.
Bonds saw some serious buying with yields on the ten-year notes falling to 3.81%
shortly after the open. This was a 15-month low and appeared to show substantial
worry by investors that the economy was slipping fast. Fortunately there was a
key reversal of fortunes about 10:AM and the yields rose to close at 3.98%.
Still under 4% as they had been for three days but it was a sizeable sell off.
30-year bond yield fell to 4.15% a level that matched the June-2003 dip and
an all time low for that issue. Given the effort by Greenspan to push rates
higher this has got to be giving him some serious heartburn. The housing bubble
he has been battling got a serious boost with rates back at decade lows. Tough
to cool off that sector when the fires are being fueled by 4% money.
The Fed has a real challenge ahead for the June meeting. The economy is clearly
slowing but rates
are still well below where Greenspan wants them. Does he
continue the measured pace language or sharpen the tone to offset the Fisher
comments? The ISM on Wednesday came in at 51.4 and just enough to give him one
more free rate hike. The Fed has never hiked rates with the ISM under 50 and
odds are very good the June number, due out on July-1st, could break that 50
level. With the FOMC meeting on June-28th they can legitimately take another
hike with ISM and Jobs not until the following
Offsetting the dismal economy blues has been a two-week spike in copper prices.
Copper rose to $1.55 on Friday and levels not seen since 1989. If bull markets
have a copper roof then we are very close to a strong rally. The $1.50 ceiling
we have seen in 2005 was shattered and the most likely direction from here is
up. According to analysts the recent copper inventory levels have fallen to
30-year lows. With 400 pounds of copper in every new home a new building
powered by low rates should push those inventory levels even lower.
Another commodity soaring this week was oil. The July contract closed over $55
and +$7 from its lows last week. Falling inventory levels of heating oil,
multiple refinery outages and global production problems continue to push prices
higher. Two refineries producing over 500,000 bbls each per day were hit with
problems. Prices were also fueled by comments from the U.S. Energy Information
director John Cook. He said oil will set new all time highs soon and
prices could average over $60 before the year is out. He said rising demand will
easily burn through the current inventory and production was not increasing as
hoped. Russia said that their production would only increase by +3% in 2005-2006
compared to +11% two years ago. The problem is declining production in existing
wells and insufficient capital to increase exploration and completion of new
wells. Putin is feeling
the cash squeeze after his Yukos takeover. Nobody wants
to play in his backyard and risk having their toys confiscated. Three OPEC
countries have been falling behind their production quotas due to declining
output from existing wells. Saudi, Kuwait and Iran are trying to cover the
shortage according to the EIA. This confirms in part the analysis released by
FRO last week indicating that oil shipments from OPEC nations were decreasing.
FRO is a holding company primarily engaged
in operating oil tankers. It was also
reported that a new record in jet fuel consumption was set in May. With the
summer travel season upon us both gasoline and jet fuel consumption should rise.
There was also a long-term weather report earlier in the week that predicted a
stronger than normal hurricane season in the Caribbean. Last year's hurricanes
removed 40 million bbls from production and helped send prices sharply higher. A
repeat of that calamity this year could be a serious problem
given the already
tight supplies. If you took my advice to add to positions when oil dipped under
$50 you had plenty of time to act in mid May and it is very doubtful we will see
those levels again this year.
On Sunday there will be a movie on TV called Oil Storm. This is a docudrama
suggesting what would happen given several very plausible events. Oil prices
could rise to $150 a bbl according to the film if a hurricane hit Port Fourchon
LA crippling production in
the gulf. The nation turns to Saudi for help but
terrorists chose that time to cripple output given the emergency demand. (check
out Fox for times in your area)
Copper Chart - Daily
Oil Chart - Daily
Nasdaq spent three days at 2095 resistance, which dates back to multiple
breakout attempts in the first quarter. This was a very strong rebound for techs
given the sub 1900 dip in late April. The Nasdaq has seen gains in 19 of the
last 23 days. Much of the gains came on the back of the SOX, which rebounded
sharply to strong resistance at 440 and a long jump away from its 376 low in
late April. Intel was a strong supporter of the SOX with gains on 15 of the last
Unfortunately the wheels may be ready to come off this chip rally.
Nearly all analysts feel the chips have come too far too fast and far too early
in the cycle. The SOX lost nearly -6 points on Friday and there is a serious
pothole ahead. Intel gives it's mid quarter update on Thursday night and while
they are not expected to cause waves there is always fear of the unknown. A late
report out on Friday showed that laptops/notebooks outsold desktop PCs in May
for the first time ever.
Another analyst said channel checks showed those sales
rising rapidly due to the wide acceptance of the Wi-Fi standards and
proliferation of hot spots. It was estimated that portable computers could post
a 3:1 margin over desktop deliveries by 2006. This is very good news for Intel
and Dell. Intel has the largest share of the laptop market and that share is
very high margin. It stands to reason that Intel could be reaping the profit
rewards of this new trend. For that reason I would
not bet against Intel next
Thursday but I would not bet on them either. They have returned to very strong
resistance at $28 and it will take a strong report to push them higher.
Despite the Nasdaq dive on Friday the markets are not in that bad of shape. The
Dow is the weakest link this time around and ended the day clinging to 10460 as
support. I mentioned on Tuesday night that without a catalyst the path of least
resistance was down and I would short Dow 10550 and S&P
1195-1200 if given the
chance. Well the catalyst came with the Fisher comments just before 10:00 on
Wednesday and gave us an excellent short entry at 1203-1205 on the S&P. The
futures traders in the Futures Monitor loaded up at 1205 on Friday and are
looking good this weekend. The Dow is hard to use as a market indicator this
week because of the volatility within its 30 stocks.
A better view is seen using the Russell-2000 and the Wilshire-5000. The Russell
at 625 resistance but did not fail far with a 620 close. The Russell has
been uncharacteristically strong for an early summer. The rebound to 625 put it
just a strong week away from a potential break to test the highs. The
Wilshire-5000 came within rock throwing distance of 12000 and its resistance
highs. Both of these indexes suggest the market breadth is much stronger than
the Dow/Nasdaq would suggest.
Russell Chart - Daily
Wilshire 5000 Chart - Daily
While I have not entirely lost my bearish view there is a lot of bullishness
building in the market despite the calendar. The selling on Friday was due in
part to simple profit taking given the three-week rally. Most of
that rally was
built on short squeezes prompted by sudden news events. Still any way you look
at it the markets have held up rather well given the circumstances.
For next week the challenge is going to be the Fed and Intel. Greenspan has at
least two chances to blame Fisher's comments on irrational exuberance from the
new kid on the block. He will likely restate the measured pace party line and
could punctuate it with some sharper comments just to remind everyone who is
in control. This means there is substantial event risk surrounding the
Greenspan appearances. Everyone has their party hats on to celebrate the end of
rate hikes and Greenspan could easily cancel the party. Secondly the Intel
update needs to be very strong to push techs higher. Any inline comments could
be seen as insufficient justification for further tech buying. The Intel bar has
been set high after the news on notebooks this week. Everyone will be expecting
a strong upward
revision and I doubt they will be happy if Intel says desktop
components are piling up in the warehouse.
There are no material economic reports next week so we will have to get by on a
daily rehash of the ISM/Jobs while waiting for Greenspan's testimony and Intel's
update on Thursday. I am neutral on the market for direction. It still feels
heavy to me but the natives are getting restless. I plan on remaining short
under 1205 but would go long on a break over that level.
1205 has become my
short/long indicator and that keeps me from having to make a trading decision
over and over again as the week progresses. I only have to worry about one
number and then follow the market from there. The challenge I see is the lure of
only one more rate hike. Historically investors like to buy the market with only
one rate hike to go. Up until Wednesday that was projected to be somewhere in
the November time frame. Now they have been promised an early Christmas in
and any reference to a bag of coal instead of the desired end of hike scenario
is not going to sit well. Cash is always a position. Definitely enter passively
and take profits quickly.