Financial Sense   Home  l  Market Monitor  l  Market WrapUp  l  Storm Watch  l  About Us  l  Contact Us

ROUGH DAY ON WALL STREET...BUT SAVED BY THE BELL

tock prices took another dive today, especially in the technology arena. Commodity prices were mixed, but generally higher with oil leading the way. Bond prices and the US dollar barely moved with Treasuries fractionally higher and the dollar slightly lower. Monday and Tuesday gave us positive economic reports with record sales of existing homes, new home sales declining less than expected and consumer confidence rising to a two-year high. Today’s report from the Commerce Department on Durable Goods Orders came in weaker than expected, and worked to unwind the optimism from the two prior days. Expectations called for an increase of 1.5%, but the gain was half that at 0.7% for June, the first increase in the last three months. Upon further inspection, transportation orders increased by 4.2% and orders for defense related items grew by a whopping 30.4%. The war keeps government spending at a brisk pace. If we exclude transportation and defense, durable goods orders actually declined by 0.6%. Remember also that new job creation in June was half the prior months, retail and auto sales were reported lower and industrial production declined. There is clear evidence the economy is slowing. The negative economic news and record high oil prices on the NYMEX took their toll on stocks today.

I’m actually backtracking now to fill in the closing numbers for the broad stock indices, so I’ll have to change a few words from my original text. The stock market was once again rescued from disaster in the last two hours of trading. It appeared certain stocks would close lower across the board with a few exceptions. Earlier in the day the only indices trading higher were the Gold/Silver Index and the Oil Index. In the end, the Dow Jones Industrial Average added 31 points, to close at 10,117, the NASDAQ Composite was nailed for a loss of 10 points (should have been a 30 point loss) to close at 1,858 and the S&P 500 added fractionally to close at 1,095. (Will wonders in the market ever cease to amaze?) The Semiconductor Index tends to lead the way for technology shares and it took a loss of three points to close at 399. On July 1^st the SOX Index opened at 485, so the loss this month alone represents a decline of 18%. Going back to mid-January, the SOX had a closing high of 560 and with today’s close it’s down over 28% in roughly seven months. The NASDAQ Composite has declined nearly 14% over the same period, but will most likely follow the Semiconductor group to bigger percentage losses. I simply cannot understand why investors want to be invested in the overvalued technology sectors when the place to be is in commodities and commodity related companies.

Commodity Prices Moving Higher

While the US economy shows signs of slowing, the increasing demand for commodities is a global event. With demand for energy soaring, especially in China, the Russian government has ordered Yukos (Russia’s largest independent oil producer) to stop oil sales. In a Reuter’s article, “Yukos has said it faces imminent bankruptcy as courts seek to enforce a $3.4 billion tax debt for 2000…A halt to sales would hasten the collapse of the company.” ConocoPhillips has expressed an interest to bid on the company, but it looks more like the Russian government would prefer to nationalize Yukos to keep it for themselves. They played a similar game with Pan Am Silver by burning them on a $38 million investment in a mining property due to “licensing problems.” There are certainly safer countries to invest your money overseas if you want to participate in the global commodity boom. The potential supply disruption pushed crude to a record intra-day high of $43.05 per barrel and finally settled at $42.90, a gain of $1.06 or 2.5% for the day. Unleaded gasoline had a bigger gain of 4.1% by adding a nickel to $1.296 per gallon on inventory concerns. Analysts expected gasoline inventories to increase by 375,000 barrels, but the U.S. Energy Department said they declined by 700,000 barrels while the API reported gasoline inventories declined by 3.3 million barrels. Natural gas and heating oil were also higher by approximately 2%.

The world is hungry for energy! Mr. Greenspan indicated high energy prices are a “transitory” event, but China doesn’t seem to agree. According to China Daily, “Cosco (China Ocean Shipping Group) President Wei Jiafu said that the firm, the nation’s largest shipping company, plans to build 15 very large crude carriers by 2010, to become China’s largest crude shipping fleet.” Cosco is expected to double its crude oil fleet by 2007 and increase the value of its fleet to $1.2 billion. That is an enormous investment to satisfy increasing demand over the coming years, so how can high oil prices be transitory?

Copper took off by over 4% today by adding a nickel to $1.27 a pound also on concerns of declining inventories and ever increasing demand from auto manufacturing, home building and development of infrastructure in China. Bloomberg reported two weeks ago that copper inventories are down 85% in the last year. I also think of the enormous amount of energy required for mining operations due to the use of heavy equipment and rising transportation costs. These higher energy costs will continue to have highly inflationary effects to input prices of raw materials across the board.

The August gold contract closed $2.00 higher at $389.00 per ounce and silver added $0.12 to settle the July contract at $6.36 per ounce for the day. Don’t blink in the next couple weeks or you’ll miss silver blowing back through $7.00 again! The HUI Gold Index closed nearly 2% higher at 180.72 and silver stocks closed 3-5% higher. The HUI had the biggest gain of all sectors today. In an article from yesterday on fxstreet.com, Peter Grandich, editor of the Grandich Letter, believes the metals are building “constructive technical pictures” and “a significant base is being formed despite the marked increased bearish sentiment.” He also said, “The mining share market is at its most attractive buying level since 2002.”

Bond Prices and Interest Rates

Bonds and the dollar were very quiet today as stability is always required during Treasury auctions. Yesterday the Treasury sold $11 billion in 20-year TIPS and today they sold $24 billion in two-year notes. I’ll be looking to see the level of participation from foreign central banks, especially the Bank of Japan. According to Japan’s Ministry of Finance, Japan has not sold any yen in the last three months to buy dollars. I’m waiting for the day when the only buyers of our new Treasury debt will be the primary bond dealers with the Federal Reserve creating new Federal Reserve Notes (dollars) to buy up the balance. I would not be surprised one bit if the Fed is already making covert buys to monetize the debt, especially on the long end of the curve. It’s easier for them to control long-term interest rates since the Treasury quit selling 30-year debt back in October 2001. If we assume constant demand with declining supply, 30-year Treasury prices will remain higher than they would if they had continued to sell the long bond thereby keeping long-term interest rates artificially low.

Also in the interest rate arena, the Mortgage Bankers Association announced its Application Index rose 0.6% with the Purchase Index gaining 1% and the Refinance Index falling 0.1%. The Re-fi Index has gone down four out of the last five weeks and is down 75% from a year ago. The 30-year mortgage rate stayed just a tick below 6% for a fourth consecutive week. According to the president of the Federal Reserve Bank of Kansas City, Thomas Hoenig in a speech on Monday to businessmen in Denver, interest rates are still “highly accommodative” and far below a neutral rate. Most economists estimate a neutral rate for Fed Funds is somewhere between 3% and 4.5%, so rates could easily climb by 2% from the current 1.25%. In that scenario, mortgage rates would push higher toward the 8% level which means borrowing costs for home purchases would increase by 33% from where they are today. If you haven’t moved from a variable rate mortgage to a fixed rate by now, it might be a good idea if you plan on staying in your home rather than selling in the next few years.

Looking Ahead

I’m speculating to say the reason for the late-day rally in stocks was due to the release of the Federal Reserve’s Beige Book painting a rosy picture of the U.S. economy just like Alan Greenspan did in his recent testimony to Congress. If you’re short the stock market, be warned about the release of the GDP numbers coming on Friday. Something tells me our GDP growth will be “better than expected,” launching stocks higher and bond prices lower. I’m still holding my short bond positions in anticipation of lower bond prices next week leading into the Treasury’s quarterly refunding that begins on August 9^th. Unless something changes, I plan on taking profits on the short bond position on Friday, August 6^th. We’ll see how it all plays out.

Tomorrow we get Initial Jobless Claims along with the Employment Cost Index and the Money Supply figures. Friday will also be busy with the release of second quarter GDP, Consumer Sentiment and the report from the National Association of Purchasing Managers in Chicago. Hold on for the ride, because all these reports could easily increase market volatility tomorrow and Friday.

Hope you have a Great Evening…I’m off to celebrate 19 years of wedlock with my little bride!!!

Mike Hartman

Home  l  Broadcast  l  Market Monitor  l  Storm Watch  l  Sitemap  l  About Us  l  Contact Us