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That
is the thought, which no doubt dominated traders' minds last week as
they watched the market punish their full faith in Intel. This week
should be more fun as earnings season rapidly descends upon Wall Street
like the sun that has already set and it is suddenly nightfall. As politicians
woo different industries and jump on all sorts of diversions to distract
you, keep an eye on how gold prices fare this week after a bullish close
on Friday. Isn't this week the one-year anniversary for the Washington
Agreement, by the way?
The problem is always too many dollars
A dangerously flawed and incredibly inflationary argument is that higher
oil prices and a strong dollar will do the slowing for the Fed. Wrong,
wrong, wrong. Notwithstanding that such a position also argues for easier
money at precisely the wrong time, maybe we have already reached a crisis
point for the strong dollar. Should it rise further, the almighty buck
threatens to crack the Euro wide open, but should it fall precipitously,
the excess dollar (or inflation) problem can reveal itself quite quickly.
Keep this contention in mind while reading the next section.
It isn't manipulation
It might be called US investment policy, though. Last week ended on
a quasi-bullish note for the stock market as the Administration
and the Treasury took controversial steps to give Wall Street
what it apparently wanted, the prospect for lower energy prices and
a coordinated intervention to boost the Euro. And, both came ahead of
the G7 meeting this weekend, possibly suggesting that the timing of
the inevitable moves might have been prompted by Intel's surprise announcement
and subsequently, its expected collapse on Friday. Actually, such politics
may have undermined the bulls, which have literally been pleading their
case for a selling climax (or shakeout) to attract fresh capital as
their prognosis for the next market leg. They have so large a vested
interest in this stock market that they are reluctant to throw any meaningful
new capital at it themselves, I suspect, until at least a vicious bear
assaults the Dow 10200 support and they are confident that the level
will hold. Psychologically and technically, I sense further selling
is therefore needed before any such new confidence can even be aspired
to. So, unless oil prices actually collapse this week, and unless the
Euro firms considerably, do not expect to see much enthusiasm from Wall
Street on this political platform.
Still, many bulls (perhaps the young ones) have been systematically
anticipating and buying every selling climax since last Tuesday, albeit
at lower and lower levels. By Thursday, I understood why. Market psychology
was getting set up for a bounce. A well-known NASDAQ anchorman (initials
T.C.) last week declared, "It is not a strong dollar problem, but
a weak Euro problem." Well it is now. Great spin though!
Bear with me (pun intended) and assume for the moment that there is
a Master of the Universe Spin-Doctor, weaving all sorts of "interpretative"
commentary through a media source that he owns and "everyone" watches.
Hypothetically then, here is how that kind of spin might work. If you
all perceive that it is a weak Euro problem rather than an inflationary
Dollar policy, and then the Euro strengthens on (a well-planned in advance)
G7 intervention, everything will all look Ok again, right? In other
words, because the focus has shifted to the Euro, the US stock market
decline which was already en route (don't let anyone tell you otherwise)
can be blamed on the Euro collapse, and maybe, just maybe, the party
can go on after a good old fashioned shake out in both the Euro and
the stock markets.
Oh brother, maybe I am pushing the boundaries a little, but could such
arrogance exist out there somewhere? Put it this way, surely Mr. Costello
does not have express permission to just interrupt someone else's broadcast
so as to convey "his personal" views on the air in the form of a news
flash, does he? If this hypothetical media group were to notice a decline
in their ratings at any time soon, perhaps they ought to consider not
treating their viewers like sheep. It is ironic though, that it is the
shepherds that increasingly look the same…your morning smile!
Global Equity Markets
A look at the main index charts will leave you with the uncomfortable
feeling that there certainly has yet to be any kind of a selling climax
in US stock markets, though the technical condition appears to be weakening
and weakening further by the week. Note the increasing gravitational
quality of the 200-day moving average in nearly all of the main index
charts.
Excluding
Microsoft and Intel, the Dow Industrials were up almost across the board
on Friday, as both presidential incumbents have succumbed to courting
Wall Street bulls with calls, particularly for more R&D spending in
the drug and biotech area. Ironically, who ever will win the election
will wind up with one hell of a stock market problem on their hands.
That is to say, if the developing technical picture proves to be wrong
in the interim and the stock markets have yet to succumb to their own
fate by then.
Aside from the rare exception (six at most), a close inspection of the
30 individual Dow charts will reveal that Friday's late session market
bounce did not of course enhance any other component's technical condition.
Promises for grander R&D budgets drove biotech issues higher on Friday
and even promoted drug stocks like Merck (a Dow component) onto investors'
radar screens. Other Dow components, such as Boeing who Mr. Bush has
perhaps been courting with higher military spending promises, General
Electric, and McDonalds (whose stock should benefit from a higher Euro
and lower oil prices, courtesy of both Al's), also ended the week well.
In my opinion, none of these components reveal any real new leadership
potential resulting from Friday's activity however.
Conceptually, I have to concede that there is some room for growth in
bullish psychological capacity within the biotech sector as new discoveries
are made, but it would be isolated, unless we were to someway envision
the United States becoming a kind of hospital for the world. Don't let
Kudlowians get a hold of this one. Seriously though, if I were a bull,
which I am not, not only would I be chasing nurses, but I would be looking
for a bounce in McDonald's shares this week, particularly if the Euro
holds its short term trajectory and oil prices actually do soften over
the next few days.
Alright, Back to Reality
Market breadth continues to materially deteriorate for the speculative
technology issues. Note the new lows in the Nasdaq A/D line last week.
The hope for a bottom in the NYSE advance/decline line, similarly, may
before long turn into a pleading if the bulls don't make a stand soon.
Perhaps most noteworthy of the generally disconcerting technical developments
in US equity markets, is the action in the Volatility Index (VIX), which
has spiked again to the upside in September. In other words, the volatility
has come back on the down side (for stock prices); such as it did in
early April 2000, mid October 1999, and in August 1998. I suppose that
in the end, this kind of indicator may prove to reflect nothing but
the suddenly permanent existence of a jumpy investor class. Perfect
for a free market system that is trying to allocate its resources efficiently,
wouldn't you agree? Perhaps when they become more confident in their
abilities they won't be as jumpy, right?
As if confirming
this bearish tone, European stock markets sold off sharply and decisively,
through not only their 200-day moving averages, but also through serious
intermediate technical support. Asian markets, similarly, have taken
a turn for the worse this week.
Even the
mighty Canadian stock markets have busted through a nice upward trending
price channel, in which they have been losing momentum anyway.
Naturally, if the world were to suddenly wake up to the fact that US
stocks have really been in a bear market for the past year and a half
or so, it might even solve the paradox: why many investors haven't
been able to make money in the stocks even though the statistical averages
just keep going up?? Were such an epiphany to overcome Wall Street,
the wild Canucks might have to take a few steps back in search of their
own roots. Hopefully they will find them, because a fierce bull market
lies that way for them someday, maybe soon.
Trivia: Did you know that during the late stages of the inflationary
seventies, this index outperformed the Dow, hands down? I believe that
was also the last time that the Canadian dollar reached parity with
the US dollar.
Oil priced in Euros?
Frequently, with this administration, you can never tell whether they
have made a real decision or not because they tend to like to throw
ideas out into the marketplace first, and watch for a reaction. So,
if oil prices react bearishly enough, they will probably really start
selling. In my view, this is precisely the event that should suck them
into actually doing so. You don't actually believe that they are vain
enough to sell a portion of their SPR into a rising market do you? What
would it say to speculators if the US government cannot actually make
oil prices decline?
The Strategic Petroleum Reserve's current size is 570 million barrels
of heavy (not light) crude. Daily global oil production is roughly at
80 million barrels per day, of which the US consumes about 15 million
daily barrels (imports approach 10 million barrels per day, while domestic
production approaches 6 million - International Energy Administration).
The US shortfall then, is 9 million b/d, which is imported. Together
with other domestic stocks of crude, should a real crisis develop, Americans
can theoretically live well for about three months before they will
be forced into siphoning energy secrets (read supplies) from each other
in quiet suburbia.
That said; the "Gore" plan was originally to start releasing up to 5
million barrels, from the official stock of oil, directly into the market
in tranches. After enough criticism, some more serious number crunching,
and declining polls, the new idea is to release 1 million b/d from the
SPR over the next 30 days. What this means is that, for all intents
and purposes, the crisis may have already started, by virtue of this
simple political deliberation. Clearly then, Al Gore is fixed on doing
Europe a big favor. For who is going to be buying the oil? The American
Petroleum Institute says that domestic refiners are up to their eyebrows
in heavy crude, running at 95% of their capacity. The institute also
heavily opposes selling the reserves directly into the market, though
I have no idea what else can be done with them. My only question is
to wonder if the Euros will give it back when the Dollar gets into trouble?
Ever asked yourself, why it is that the Europeans have to buy dollars
in order to buy their oil? Ah yes, US investment (the strong dollar)
policy. The English are said to have some good ideas on investment ideas
themselves, only they won't quite tell us what they are. The BBC reports
that "The IMF Hints at Oil Deal." According to the report, the IMF's
main policy committee, chaired by the UK's Chancellor of the Exchequer,
Gordon Brown hinted that the proposal would be for a way to bring consumers
and producers closer together. Excuse me? Here, I've got an idea for
them: why not set up an online oil inventory management system and tout
the Internet as the world's savior, or simply price mid-east crude in
Euros?
U.S. PPP - Purchasing Power Policy
Larry Summer's days are numbered through no fault of his own; the day
is already approaching when America will need to weaken the dollar if
it is to ever grow again. When that day arrives, Mr. Summers will either
continue to publicly support the "strong" dollar while his superiors
secretly undermine his policy, and thus, his credibility, or he will
publicly announce the change in policy and get thrown out of office
for causing a collapse in the USD. These forces are already in place,
and Rubin knew it. What a trader!
Meanwhile,
the US dollar (currently the global reserve currency) continues to lose
its general purchasing power in terms of most everything but other fiat
currencies and the wonderful array of cheap goods and services priced
in Euros. You saw the commodity index last week.
This weekend in The Australian:
"European Central Bank president Wim Duisenberg said the currency intervention
was designed to create an 'orderly reversal' of the recent exchange
rate transactions. 'We came to the (shared) conclusion that the recent
forex movements had gone far beyond what was justified by the fundamentals,'
he said. 'The instrument of intervention remains in our arsenal.' The
US decision to join the push also surprised market analysts, who thought
the Clinton administration would not want to be seen writing down the
greenback in the lead-up to the presidential election."
This is the Plaza Accord in action. In another G7 communiqué, perhaps
intended to illustrate the potential for further intervention, Duisenberg
said that,
"In light of recent developments we will continue to monitor developments
closely and to cooperate in exchange markets as appropriate."
If all G7 members agree that the Euro is undervalued, we mustn't forget
that they all obviously acknowledge the overvaluation in the dollar
as a necessary consequence of that position.
A SafeHaven Run
To where? Long bond yields are going higher. Shouldn't a safehaven run
push yields down? Yes, but not in the speculative 30 year if you are
running from inflation.
The yield
curve is still inverted, but while the long end is beginning to normalize,
the short end hasn't budged, maybe revealing some hedging activity likely
related to upcoming corporate supply. But also, some anxiety is probably
pushing money down the curve and into the five and ten year government
paper. Presumably, this is going to be a tough week for economic readings,
starting with home resale data this morning, consumer confidence tomorrow,
and a whack of other output numbers ending on Friday with the Chicago
Purchasing Manager' index. This explains the move into the middle of
the curve, but again, the interests of the stock market and the bond
markets collide. Should oil prices stay generally firm and should the
equity bulls show up this morning, expect long yields to rise even higher.
Sincerely,
Edmond
J. Bugos
The GoldenBar
Global Investment Climate is not a registered advisory service
and does not give investment advice. Our comments are an expression
of opinion only and should not be construed in any manner whatsoever
as recommendations to buy or sell a stock, option, future, bond, commodity
or any other financial instrument at any time. While we believe our
statements to be true, they always depend on the reliability of our
own credible sources. Of course, we recommend that you consult with
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