Today's WrapUp by Mike Hartman 08.20.2003 Mon Tue Wed Thu Fri Archive
The Dow Struggles to Hang On
The bellwether index for stocks in the USA, the Dow Jones Industrial Average, has struggled in the red all day long, but continues to show resilience to bad news. The Dow desperately clings to the gains of the War Rally, refusing to break down as Hewlett-Packard missed their sales and earnings target for the second quarter. HPQ shares are being punished today by a solid 10% to below $20.00 per share after yesterday’s report. There is lots of competition in the technology sectors which is putting a squeeze on corporate margins. There is very little pricing power for manufacturers to make a profit with companies like Dell Computer slashing its prices on certain business and consumer products by as much as 22%. Dell shares were off by $.54 to $32.28 at the close.
Also in the news today, R.J. Reynolds Tobacco has told employees that they could lose their jobs as early as next month. RJR warned last month that its profit and sales have fallen sharply from year-ago levels and has also warned that their earnings could fall below projections for the full year forecast. On the brighter side, shares of Petco Animal Supplies (PETC) gapped up for a gain of 14% today adding $3.41 to close at $27.94. Petco reported earnings of $0.25 per share versus $0.17 a year ago and raised its outlook for the full fiscal year.
Overall for the day, the Dow Industrials fell 31 points to close at 9,397, the NASDAQ Composite finished flat for the day at 1,760 and the S&P 500 is still flirting with the 1,000 level to close the day at 1,000.30, a loss of two points. It seems to me that tensions are running very high. Investors are anxious to get some definitive direction out of stocks. We’re still in no-man’s land to see if stocks break lower, or gather a base to break-out of the current very narrow trading range.
Endurance Test for the Bears
If you are in the bear camp for equities, it has been a grueling ordeal to watch the indices pulled higher in the futures pits. I watched it happen three times yesterday and the same garbage today after the gap–down open, and again in the last thirty minutes of trading. Frankly, I almost got frustrated enough today to pull my short positions, but I’m going to stay the course. This stock market has no substance. Pro-forma earnings are now outpacing GAAP earnings by a full 60% according to Dresdner Kleinwort Wasserstein Research. Pro-forma earnings are a joke! Rather than watch the earnings numbers, it makes more sense to watch the Fed repo numbers (Federal Reserve Repurchase Agreements). According to Mike Bolser of GATA the Fed repo pool grew by $5 billion yesterday bringing the total to $36.25 billion. Above $30 billion the repo pool has an “uplifting” effect on the broad stock market, and it looks like the Feds do not want to see this market go down. Please excuse me, but I’m a bit nauseated by capitalism and free markets. Enough said. The market will win in the end. It always has.
To sum up a few of the extremes that we see today, I have extracted my ten favorite ALL TIME RECORDS from capitalstool.com. They are as follows:
* Ratio of insider selling vs. buying: 32 to 1. An all time record.
* Bullish Percent divided by Fear Gauges: All time record.
* Number of stocks trading above 200-day: Over 90% for 2 ½ months. New record.
* Money supply: All time record.
* Gold sold short or leased out: All time record.
* Number of penny stocks up 50%+: All time record.
* Trading volume as a % of GDP: All time record.
* Number of companies “tapping the bond market” for new funds: All time record.
* Number of phony appraisals and stated incomes on mortgage apps.: New record.
* Level of emotional hysteria, confusion, and bewilderment among investors.
(You decide if the last one is an “All Time High!”)
Inflation is Coming
Treasury bonds and notes sold-off today supposedly in fear of good economic reports that are due out tomorrow. New claims for unemployment benefits are expected to remain below 400,000 and the numbers from regional manufacturing are expected to improve. With the expectations of further improvement in the economy, the 30-year bond fell to 106 22/32, down 21/32 or 0.6% to yield 5.29% and the 10-year note fell 20/32 to yield 4.45%. The spinsters on Wall Street want you to believe that interest rates are rising because of the expected economic improvement.
I think the bond market is pricing-in inflation expectations, or at least stagflation expectations. Remember that inflation occurs when the total supply of money increases. The result of the inflated money supply is higher prices (more money chasing the same amount of goods). In the ‘70s the excess money supply showed up in consumer prices, whereas the excess money supply created these days ends up in the financial markets, pumping up the “value” of paper assets. That’s where we end up with the most sophisticated of financial terms called, “Bubbles.” Inevitably, bubbles pop.
According to Mr. Doug Noland of the Prudent Bear, “The broad money supply (M-3) surged $49.9 billion last week. This increased the 16-week money expansion to $389 billion or 14.7% annualized. Since early last October (43 weeks) money supply has inflated $642 billion or 9.3% annualized. Money creation is tracking at roughly a 10% increase, but inflation is reported around 1.5% thanks to hedonic deflators and all sorts of mathematical wizardry. It’s the system we live in, so we gotta’ go with it!
Actually, you can see why we need to create all this extra money, or rather, borrow it into existence. The U.S. federal budget deficit grew to $54.2 billion in July, up from $29.2 billion a year ago. So far in fiscal year 2003, the federal deficit has totaled $324 billion versus $146 billion a year ago. I guess that’s one way to keep a country’s economy from officially going into recession. Just borrow more and spend more to keep things going.
Oil, Gold and Silver
Like I said, just go with it. That’s why precious metals are showing signs of strength. In fact, today was a great day for commodities across the board. The grains were all higher except for wheat, crude oil closed over $31 per barrel and natural gas closed more than 3% higher at $5.13 per million BTU’s. Gold touched $367.00 intra-day and closed at $365.00 for a gain of $3.60 per ounce and silver added two cents to close at $5.01 per ounce. Between Mr. Greenspan and Mr. Bernanke, they overwhelmed the financial markets with threats of deflation, thereby giving themselves room to print lots of extra money as pointed out by Doug Noland. The Feds were screaming to increase the supply of money, and they got it. Since then, they said that it didn’t look like they would need to subsidize the bond market, which effectively unwound all the money that was pushed into treasuries. Since November and December of last year the Fed has consistently stated that we will inflate, inflate, and inflate some more….and even more if we have to! That is extremely gold friendly.
Governments around the world are expanding the supply of money to re-inflate the world. When currencies are debased investors eventually go to the safe haven of precious metals, since paper currencies do not work well as a store of value. We are now in a time when currencies will fall in value relative to physical goods. In fact, if you have been in the silver market, I have good news. So far silver has been rising in U.S. dollar terms, but not across the board in all currencies until very recently. As foreign currencies have gained in strength relative to the U.S. dollar, the PM’s have not appreciated as much overseas. In foreign currency terms, silver recently broke its downtrend line and is headed higher. Once silver takes out its recent high of $5.20, it should be off to the races. Likewise, gold will need to clear the high from last May at $372 before its assault on the $400 level.
As far as I am concerned, inflation is guaranteed. Our system cannot function in an atmosphere of deflation…it will implode on itself. More money must continuously be borrowed into creation in order to keep our fractional reserve fiat money system alive. That’s how it works. They can continue to pump the paper markets, but that in itself will be the fuel to launch commodities and precious metals into the next phase of their bull markets. Frustrated on the short side, but very profitable in precious metals. Just look at the HUI Index that closed over 190 today. Nice run and ready for more!
Have a great evening!
© 2003 Mike Hartman
August 20, 2003
AI
