Monday, February 28, 2005

FEBRUARY 28, 2005

Have to make it short and sweet today. Energy stocks call the tune. They ran up, sold off and then recovered and the rest of the market followed along. Energy stocks made a higher high, a lower low and lower close than Friday, so profit taking may be the order for the rest of the week. The rest of the market should follow along.

Bonds got hit hard on the PCE deflator being higher than expected. Looks like we may be ready to test the spike in 10yr yield that we made in December, around 4.42. The homebuilders did not like this especially with new home sales down much greater than expected, down 9%. Walmart couldn't hold its gains even though it reported its best SSS since May, very suspicious.

Friday, February 25, 2005

FEBRUARY 25, 2005

Led by the home builders the market had an afternoon spurt and finished on its highs. The Citibank strategist Lekovich, helped as he put out a call for the S&P to move to 1300 and said that might be conservative. Of course as usual the oil stocks were also very strong. Also helping was today's GDP figure, which everyone expected to be revised higher.


Bonds, gold, the dollar and even oil were small movers. Oil held up in spite of bearish inventory data. Its hard to believe that the reaction of the stock market to oil cracking $50 on the upside Tuesday, can be so easilly forgotten. It is hard to argue that we are not in a goldilocks environment. Economic growth is good but not too good. Inflation is not too low anymore nor too high. Profits are good even though their growth rate may be slowing. The dollar is weak, but not crashing and the multinationals love that. Long term interest rates are very supportive, to housing to stock valuations, to consumer borrowing.


All the major problems are in the future and do not seem to be affecting the here and now. Budget deficits, current account deficits, savings rates, consumer debt, oil prices, the slowdown in Europe and Japan, and worries over job growth. All these things, it is said cannot continue without impacting our well being. But, as the old saying goes, it doesn't matter until it matters. What should we be on the lookout for to see when it matters? Look for any or all of the factors to start to slow housing and auto sales, weakness in low end consumer spending, the budget deficit coming in higher than forecast, inflation numbers higher than expected, profit margin squeeze due to higher costs, and consumer debt distress showing up among the sub-prime lenders.
Until then, this week is probably a good microcosm of how the market will behave.

Thursday, February 24, 2005

FEBRUARY 23, 2005

Not to much to say about yesterday, an oversold rally. If oil stays over $50, a definite dead cat bounce. The rally retraced 50% of the selloff in the S&P and promptly turned. Because of the president's holiday we get the oil inventories today, if they don't turn oil lower, look for a down day. As most everything was ralling, Walmart broke $52 a long standing support level. It being a leading indicator of the low end consumer< I think it's sending a message.

South Korea reminded me of a Gilder Radner skit, in that when apprised of what the market would do because of its statement on reserves, it said "never mind". That is one central banker that ought to be canned. Funny though, the dollar did not gain back what it lost even after their retraction, because the cat was out of the bag. This might also get many of the smaller central banks around the world thinking, they might want to get through the dollar diversification door before the big boys start. They used to say higher oil prices were good for the dollar as countries had to scramble and buy more dollars as oil went up. Not true anymore, if George Soros is right and the recipients of those dollars, middle east producers and Russia, are diversifying their reserves.

The bonds stay range bound. Bill Gross said he is convinced yields are 100 basis points too low along the yield curve. As I have enumerated many times, there are a long list of reasons this year and last to have expected yields to rise, and they have not. Huge budget deficits, trade deficits, a weak dollar, fed tightening, higher inflation have not done the job. Central bank buying, pension and mortgage buying, and economic fears have kept yields low. In the ongoing debate between inflationists and deflationists I am starting to favor the deflation scenario. This debate could take pages to do justice to, which I won't do now. To begin though, 70% of business expenses are wages and benefits. It is hard to get ingrained, escalating inflation without wage inflation. Globalization and the indutrialization of China and India with the accomanying labor arbitrage and outsourcing, make wage inflation unlikely. The huge debt to GDP ratio that the U.S. now has is very deflationary, and its effect will be exacerbated in any economic downturn.

Tuesday, February 22, 2005

FEBRUARY 21, 2005

Today was pretty obvious. Everybody got it. Which is why the magnitude of today's move was so large. One salient point however, after the open the S&P rallied from 1196 to 1202, a respectable rally. The market came unglued when oil broke $50, a big resistance level on the charts. There was also big volume on this move down, a harbinger of things to come.

South Korea"s central bank making comments about diversifying reserves away from the dollar, knocked the buck down big. The euro closed at 1.3252, up .0178. This gave gold an $8 lift and of course gold stocks had a good day. Bonds did not like the reserve talk either and finished lower.

Oil inventory data and the CPI tommorrow could derail the market further. If the data support oil staying over $50 and the CPI keeps yields creeping higher, look for further downside followthrough, if not, a respite is in order. In my last comments, I said it was a strong possibility that the market had put in a double top and the combination of higher oil and rates was dangerous. I also said a couple of post's ago that if gold stocks moved higher rather than consolidating their gains, it may me a warning of trouble ahead. It looks like the latter is the case.

Friday, February 18, 2005

FEBRUARY 18, 2005

Has the stock market put in a double top? Higher oil prices and higher long term interest rates are creating a witch's brew that make it a strong possibility. Greenspan, scared the bond market so it fell significantly yesterday and today. The 10yr yield is now at 4.27. The April oil contract closed at 49.01. If oil moves over $50 and the 10yr breaks 4.5%, in my opinion we are in a real danzer zone. My simple index is that any combination of oil prices and 10yr yields that adds up to and index level of 10 is a sell signal, for example March of 2000 oil was $34 and 10yr was 6.8% adding them together gives you and index value of 10.2. Our economy is probably even more leveraged now so we may not even have to get that high.

The euro, gold and gold shares rested today which was very encouraging. They all could have fallen significantly on the higher rates. Oil stocks are on fire and probably represent one the few sectors where a buy and hold strategy applies. Even if your timing is wrong time will bail you out.

Barrick has been one of the strongest major gold stocks. Good earnings and guidance, increasing production. Surprising how few buy ratings on the stock.

Next week- will CPI do the same damage as the PPI did? Will GDP be revised higher as the rumors advertised.

Thursday, February 17, 2005

If we had to listen to the House interrogate Greenspan every day I don't think the market would ever go up. I found it very depressing, trade deficits, budget deficits, trillions for social security and medicare, a problem several times in magnitude of social security. The sky was falling and the market can't like that. The saving grace of course, is that it won't happen tommorrow. No doubt we will forget about it soon and start worrying about the next earnings report.

By now, everyone knows that Japan is in recession, for the last 3 quarters no less, after they revised their data. Not to worry though, they announced today they are not revising their forecast showing a pickup in February. The same confidence is proffered by the Germans who seem confident growth will pickup next quarter. Where this confidence comes from I don't know. The trends in place look strong to me. Japan did say they are poised to stop the appreciation of the Yen in case China revalues. Now that is the kind of tlalk gold likes

The euro, gold and the stocks had a nice move higher today, overall they've had a nice bounce from being oversold. The way I read the charts they are now close to resistance and will probably mill around here for awhile. If they continue to move sharply higher I think they will be telling us there is trouble ahead.

Greenspan said little about bonds today, but they still fell modestly 19/32 iin the 30yr. The one thing that really bothered me about his testimony, was his answer regarding the large foreign ownership of our securities. His response, that foreign purchases reflect the fact that we are the safest and most liquid securities, was an answer of omission. He knows that China and Japan have all those dollars with which to purchase securities because they sell us more than we sell them and they want to keep it that way. If they were to sell those dollars to invest in gilts or eurobonds that would weaken the dollar further eventually putting more pressure on their currencies, which is exactly what their trying to prevent. Private fund flows are receding, which he knows. Saying that official flow are increasing because we are such a great place to invest is somewhat disingenous.

Wednesday, February 16, 2005

FEBRUARY 16, 2005

Germany reported their GDP dropped in the 4th qtr by .2% and the 3rd qtr was revised lower bringing growth for the year to 1.5%. Don't tell the stock market, it's as high as it has been since 9/2002. The Euro as well finished up on the day by .42 to 1.3012. one of the reasons the Euro is so strong in spite of the poor economic growth is illustrated by a comment by their central banker. Stephen Roach in his latest commentary said that, while in Davos for the economic forum, he asked 'Trichet point blank if he could ever contemplate a situation when European monetary authorities would be willing to provide special support to domestic demand if their externally led growth model were derailed by a further strengthening of the euro. His answer was an unequivocal no." They have a single mandate unlike the Fed. They are charged with maintaining the integrity of the financial system, by fighting inflation to protect the value of their currency, period. It reminds me a lot of the 70's where the strongest currencies were those with the strongest central banks and not the strongest economies.

A lot of Greenspan testimony will revolve around the deficits and social security. I don't expect anything exciting. His view on these are well known. He favors cutting spending to raising taxes. He favors reinstituing pay-go rules to enforce budget discipline. He thinks benefit cuts are part of the social security solution, particularly raising the retirement age. I've heard him so often I almost think I could give his testimony for him.

In Morgan Stanley's Stephen Roach's latest comments he makes the case that nothing much has been accomplished toward resolving the world's current imbalances and everyone is content to let the current games go on and hope that we grow our way out of all our problems. I guess this should not be too surprising. Looking back on history, nothing much gets done until their is a crises. Also, I think its quite clear that Bush has patterned his presidency on Regan's, both strong on defense, tax cutters, supply siders, big budget deficit creators. Both had a weak dollar and large trade deficits. The question is will it end the same way. The reason for doubt is that in each recovery the job growth is weaker and the leverage is higher. Can taxes be cut further? Can interest rates go lower? Can the trade deficit grow wider. Can consumer debt ratios go higher. Most importantly is the economy now self sustaining, becuase if the answers to the previous questions are no, then the question becomes how deep is the recession. Roach's point is, it seems we've but all our eggs in one basket.

Monday, February 14, 2005

FEBRUARY 13, 2005

The rally in stocks on Friday that CNBC attributed to rumors of the North Korean dictator stepping asside, I think was more a result of Congress moving closer to tort reform. The Senate passed a class action reform bill that as I understand it will send more of these actions to federal courts which have been less kind to class action suits. This is very business freindly. As you remember the market rallied strongly after the election and I thought at the time that tort reform, tax reform, health care reform, and social security reform all themes Bush articulated in his acceptance speeches and all very corporate and wall street freindly were the reason then. If indeed these measures move closer to fruition, they will provide support to stocks and the dollar as they will have a meaningful impact on corporate America's bottom line.

The only other market to show meaningful net change was gold up $3.30. I don't argue with those that say gold and gold shares have bottomed, I just don't see an imminent broad advance until the economy weakens, China revalues, or we have some kind of financial crises.

I usually never write much about individual stocks.I'm more interested in the macro, the big picture as in general most of a stock's movement is dependent on the overall market. I'm not interested in outperforming or underperforming, only in absolute returns. So let me say right up front these comments should not be construed as advice and are informational only. Now with that common disclaimer out of the way I can't help but comment on Alan Abelson's column in Barrons where he mentions "a shrewd technician friend of his professes to find Walmart intriguing as a great story that's topping out. He warns that should the stock fall below 50-51, a level at which it has gathered support whenever it started to fade in the past year and a half, that would signal the trend is definetly down; he also suggest that for obvious reasons, including its stature and size, the action of Walmart's stock could be a barometer for the consumer, the economy and the market as a whole".

I,ve been following Walmart closely for the last several years exactly for those reasons. From a fundamental point of view I've noticed the following:
Fiscal yr 2000 2001 2002 2003 2004 2005
SameStoreSales% 7.7, 5.1, 6.1, 5, 4, 3
Total Sales% 19.8, 15.6, 13.9, 11.6, 11.5, 11.2

Clearly same store sales are slowing. No surprise then that on the CFO's last appearance on CNBC he said they were going to de-empahasize SSS and focus more on total sales. He acknowledged that their current strategy cannibalizes sales from other stores but they do gain market share. He is right, but this is the first sign of saturation. Secondly, their SSS used to grow at nominal GDP, but in the last few years that has not been the case. Nominal GDP the last three years has been 3.8%, 5.2%, and 6.5%, increasing as their SSS have been declining. The growth in total sales is also slowing albeit very slowly the past few years. This is occuring in spite of all their international expansion and turnaround of SAM's clubs. This shows that the U.S. is still at the core of their operations and maybe the law of large numbers is begining to take effect. It is becoming increasingly a market share game. Unlike many of our other big multinationals, retailers fates are tied to the economy. Walmart's customers, as they have stated are particulary impacted by energy prices. Retailers as a group are one of the most interest sensitive sectors and any upward change in the Chinese Yuan can't be good as it would squeeze profit margins or hurt demand. Finally, S&P is changing the weighting of their indexes to account for actual float, eliminating shares held by governments and insiders. Walmart will be the stock most affected in the index and will reduce its weighting to 1.35% vs 2.16%. Half of this take place at the end of March and the other half at the end of September, I believe. A lot of index holders will have to sell a lot of shares.

Walmart is a well managed company, their pre-tax margin is still rising, but the hill is getting steeper to climb. I agree with Abelson's freind and believe they are a barometer for the consumer, economy and market. When the consumer slows down, one month we will see negative SSS. Twice this year we came close. SSS we up only .5% in Aug and .7% in Nov. Two months, in one year that close to zero, I don't believe has ever happened before. Since the consumer is 70% of the economy, so goes he goes the economy, earnings and the market.
Of course that doesn't have to be tommorrow, next week, or month, but keep a sharp eye out.















Friday, February 11, 2005

FEBRUARY 10, 2005

It was a Dow kind of day . That average, powered by AIG, CAT,UTX,XOM, was stronger than all the rest. the transports actually down. It feels like there is finally a move to quality afoot. It makes sense. The market seems to be on precarious footing with nothing on the near term horizon to act as a driving force higher. The budget Bush released has no credibility. The cuts won't happen, just like they didn't last time. The military spending will be greater than estimated. Rates are going higher, so is inflation. Oil is staying above $45. We've never had a period where oil stayed above $35 for a period of time and not had a recession, except for now.It different so far because the Fed lowered rates as never before. Earnings growth is slowing, comparisons are tougher.

I don't want to sound alarmist, but it does remind me a lot of 1987, which I remember well. Nothing mattered until it did. The dollar was crashing, Yen went from Y200 to the buck to Y165 and then Y130 in 1988. Swiss Franc's went from .48c in 85 to .75c in 87. Gold went from $360 in 86 to $420 in 87 and $520 in 88. The CPI was 1.1% in 86 and 4.4% in 87. The CRB went from 228 to 258 in 87. The budget deficit was 4% of GDP. The current a/c deficit was at a then record 160 billion. GDP growth was about 3.5%. Fed Funds were rising. Stocks in the face of all this kept floating higher until they droped. Trade frictions were very high and the drop was triggered over a weekend by Treasury Secretary Baker telling the Europeans in so many words. You have to stop raising rates, you have to stimulate your economies by easing rates. You have to buy more stuff from us to help ease our trade deficit, we can't be the only economic locomotive in the world. If you don't, I'll let the dollar crash.

Wednesday, February 09, 2005

FEBRUARY 9 2005

As I write, the 10yr thouches 3.99 in yield, and stocks are down in spite of a nice gain in Hewlett Packard. As I've stated before one of the best things that can happen for stocks, is low long term interest rates.It was no accident that the bull market of the 80's and 90's was accompanied by the biggest bond bull market in a generation. Unless we start seeing economic weakness or financial distress, which the bonds may be telling us is coming, these rates should provide support. Unlike last time, when they had a run there is no fear of deflation this time around, an important distinction. However, it could be different this time. Since this is one of the most levered economy's ever and financials are the largest sector in the S&P, and many other company's get a significant portion of their profits from financial activities, it is logical to think that the unwinding of the carry trade, the flattening of the yeild curve may have a greater impact on the economy and profits than ever before.

The dollar is modestly lower at around 1.28 the Euro, probably in part becaue of the trade figures due tommorrow. They are expected to improve modestly, but they surprised us last time. Gold was little changed, but the stocks were up modestly the South Africans more than most. Marc Faber, a pretty smart guy, says with the Rand at this level, they can't compete with China. In the Barron's round table he advocated shorting the currency. Obviously, if he is right that would make those gold stocks very attractive. I still believe, absent a financial crises gold and the euro won"t start a new run higher until the U.S. econonmy starts showing signs of weakness.

Monday, February 07, 2005

FEBRUARY 7, 2005

Well the range in the S&P was about 4pts, 1200-1204. It doesn't get much tighter than that. Certainly not good for all those E-mini day traders. The action today was in the bonds and the gold shares. GLD the gold ETF, itself was only down the equivalent of $1.20. The gold shares however fell a lot more. Placer Dome 5%, NEM 2%, ABX 1 1/2%. The news was that the IMF was going to sell some gold to help the poor countries with their indebtedness and Mr Greenspan said some soothing things about how the current account deficit is going to get better. Those things certainly added a little push, but this is just a continuation of what we've been seeing. The dollar is correcting from oversold levels because our money market rates are going higher and theirs are not. Our economy is stronger and theirs is weakening. They did keep the heat on the Asian currencies over the weekend at the G-7 finance minister's meeting, saying they favor greater flexibility in exchange rates. Of course later in the the day China again balked at doing anything now. If and when China does widen their bands or floats, it will take a lot of pressure off the Euro and we could see it weaken significantly.

The action in bonds continue to mystify most people, much like they did last year. Just about everything that happened last year should have made bond yields go up. The Fed raised rates, the dollar fell, inflation went up, the economy strengthened, oil prices shot the moon, but still, yeilds did not rise. The question is, does foreign central bank buying account for everything. Someone certainly needs to buy long duration assets. One other thing could be at work that no one has mentioned. During the bubble everyone's asset mix got out of whack with historical experience. Bonds used to be a much larger portion of assets held by pension funds, insurance companies and other instiiutional investors than stocks. But during the bubble, stock weightings increased to levels never seen before. Those holders, need long duration assets and maybe the pendulum is swinging the other way. Last months payroll number wasn't that much different from this one and we did not get this kind of reaction.

Looks like a quiet week ahead. The big stuff is behind us, earnings are winding down, slow news week, volatility is low. The dollar will probably deep rising and oil could keep falling to provide catalysts for now.


Friday, February 04, 2005

FEBRUARY 3, 2005

Not a lot to comment on today from a macro point of view, as you know if you've been watching the markets today. The president of the EU central bank, Trichet did make comments today indicating he was going to maintain interest rates at six decade lows for awhile. With U.S. rates higher now and the Fed continuing to tighten, the dollar and gold were the big movers. The ECU fell .74 and gold fell $4.40. Nothing else moved.

On the economic front, chain store sales were good at 3.6% vs 2.7%. Jobless claims were down to 316m vs 327m. These good numbers were countered somewhat by factory orders coming in at .3% vs .5% consensus and the non-manufacturing ISM at 59.2 vs last months 63.9.

Tommorrow we get the jobs number and I must be the only one on the planet that thinks if payrolls show a really large increase that it won't be good for stocks. To me it means higher unit labor cost, lower profit margins and faster Fed tightening.

Wednesday, February 02, 2005

FEBRUARY 2, 2005

The range for the S&P was 1189-1195, but for most of the day more like 1190-1193. The day traders are not going to get rich on that. It was no better in bonds or gold or the dollar. Even oil was realitively subdued. It did close below 47.50 so I take that as a bullish omen for equities.

Oil has me puzzled in the short run. The chart looks like a head and shoulders, but the XLE has been making new highs and in the past it has led the commodity. Oil has been the most volatile of the markets lately and has the capacity to influence all the others. We are also in the period where we transition from the heating season to the driving season. Venezuela is rattling her sabre at us, threating to sell her U.S. assets and sell more oil to China. It has a lot of leeway. It can trade between 40-50 without breaking major support or resistance. In the long run, its a buy period. I think a great trade would be to buy the December 2008 futures contract on selloffs. It closed today at 40.02.

The markets need new catalysts. The dollar has sold off and bounced, gold has come off its highs and stabilzed. bonds have been steady, stocks sold off and have now retraced half of that. Interest rates have moved up but they are still low, growth has slowed but is still good, the budget deficit is large, but we are cutting it in half, the Iraq elections are over but the violence continues. I think a lolt of the blue chips fall into the category of having had pretty good earnings but uninspired guidance. The market reflects this. There is no crises of any kind, but nothing to get excited about either.

Tommorrow brings the retailers reports, jobless claims and factory orders. The U.S. consumer is the lynchpin of the world economy so it will be important to see how he did.

German retail sales fell sharply in December and have been falling on a YoY basis since July of 2003. German unemployment hit its highest level since December of 1998. These numbers should make for a lively debate at the G-7 finance ministers meeting this weekend. I wonder if China will criticize the EU the way they did us if pressure is brought to bear on them over their currency peg. As I have mentioned many times in the past Europe and Japan's economies are faltering. They can't seem to generate any internal demand and are totally relying on exports for the growth they have. That is why the dollar bounced and with the Fed raising rates I don't expect a renewed decline until our economy starts to serioulsy slow.









Tuesday, February 01, 2005

February 1,2005

Well it was all stocks today. Bonds, gold and the dollar we very quiet in comparison. In spite of a lower ISM manufacturing survey and oil above 47.50 for most ofthe day, it did finish at 47.20, lousy auto sales, stocks went on a tear. Volume was good at almost 1.7 bil shares, new highs picked up to 360 vs new lows of only 12, breadth was pretty good. In general you can't argue with the internals today. The market closed on its highs as well.

I thought with that background the market would have a tougher time. But the mergers, spinoffs, momentum and the rumor that GDP would be revised jup .5% in the next few days due to technical problems in accounting for Canadian trade accurately overcame all obstacles. It was a good day not great.

Tomorrow we get the oil inventories and of course the Fed raises rates a quarter. A few days ago I said I'm a seller of rallies with a stop at 1196 in the S&P. Tomorrow I think will provide a low risk opportunity to try the short side.