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NASDAQ APPROACHES CRITICAL SUPPORT

Stocks opened lower this morning after the government reported a drop in consumer spending and the price of crude oil reached another all-time high by climbing above $44 per barrel. Economists were forecasting a slight drop in consumer spending of 0.1%, but the Commerce Department reported a sharp decline of 0.7% from the level in May. This was the first decline in consumer spending since September of last year and the largest drop in nearly three years. Economists estimated a rise of 0.3% for incomes in June, but they actually grew by only 0.2%, the lowest gain since last September.

Alan Greenspan told Congress last month that the economy just hit a “soft patch” in June, but expected economic activity to increase soon. Consumer spending accounts for roughly two-thirds of our economy, so getting the consumer back to spending again will be a key to Mr. Greenspan’s prediction. He also said high energy prices would be transitory, but they sure are putting a pinch on consumers. Since the numbers were compiled for June, energy prices have done nothing but move higher the entire month of July. In my opening statement I said the price of oil hit another all-time high, but I must qualify the statement by saying it has reached a high in absolute dollars, but using inflation adjusted dollars, we still have a long way to go.

In 1980 the price of crude broke through the $30 level, but adjusted for inflation using year 2000 dollars as a constant; the price of oil actually touched $60 per barrel. We have a problem with our measuring stick (the dollar) because it keeps changing in length. A dollar in 1980 was worth a whole lot more than it is today. You might ask, “How much higher could oil really go?” The simple answer, MUCH HIGHER! In a Bloomberg article today, “OPEC President Purnomo Yusgiantoro said the group may not be able to increase production fast enough to lower prices, which have surged 38% in the past year.” In the same article Kevin Norrish, an energy analyst at Barclays Capital in London said, “We are in the upswing of demand toward the winter peak. The question people are beginning to ask is how that demand can be met.” It actually runs much deeper than just production capacity for OPEC. Analysts are now asking for greater transparency in the way oil reserves are calculated and reported, as total available supply is now being brought into question. 

Inflation Watch

Today’s report from the Commerce Department also included the personal consumption expenditures price index, Mr. Greenspan’s favored gauge of current inflation. The index is higher by 2.5% from June last year, and the same rate as reported for May. The core rate excluding food and energy rose 0.1% from May to June this year and was higher by 1.5% on a year over year basis. According to Bloomberg News, this is “a sign that inflation has tamed.” Oh really? Someone better get out there and tell the consumer to open their wallets again, because the higher prices are just figments of their imagination!

Now let’s take a look at inflation from a different perspective. The current inflation rate for the last five months goes as follows: Feb 1.69%, Mar 1.74%, Apr 2.29%, May 3.05%, Jun 3.27%...are we beginning to see any trend in the numbers? The monthly inflation rates were calculated using the Current Consumer Price Index (CPI-U) published by the Bureau of Labor Statistics. If anything, I would tend to believe the data actually understates our true level of inflation based on the methods of hedonic deflators used to calculate the CPI. I pulled the information from a website I just discovered today at www.InflationData.com where they post some excellent charts, data tables and articles.

Back to the Markets

I just went back to see where the markets are trading and it’s nice to see silver and gold march higher throughout the day and close near the highs for the session. August gold settled at $394.00, a gain of $2.30 per ounce and September silver settled at $6.68, up six cents for the day. The performance of the metals during New York trading was actually better than the closing prices indicate, since they were pounded lower during overseas trading in London. Gold opened at $390.00 and silver opened at $6.50, so silver once again added more in percentage terms. As I recall, some of the major bullion banks closed up their operations in New York a couple years ago and moved their offices to London. Maybe it’s easier to carry on their shenanigans without oversight from the U.S. authorities…reminds me of the lyrics to an old song… “Dirty deeds done dirt cheap!”  I’m not complaining…market forces will eventually prevail!!

I’m filling-in for Ike Iossif today who presents a very keen technical analysis of the broad stock indices, gold and the dollar with “big picture” weekly charts showing key points of resistance and support. Not much has really changed since last week in terms of break-outs from key levels, so for today I’ll just give a brief update. If you want to see Ike’s complete overview, just go to the main page and click on his archive to get a look at the specific support and resistance levels along with two probable scenarios for the dollar, gold and the HUI Gold Index.

For now, the NASDAQ Composite and the U.S. Dollar Index are the only two that are near Ike’s critical levels. The U.S. Dollar Index has been stubbornly attempting to break through the 90 level. Today the index closed at 89.60 with slow stochastics in overbought territory looking ready to roll over and move south. If the dollar is going to break through 90, it will need further consolidation that will most likely test the 50-day moving average that will also coincide with the recent break of the neckline that negated the original the head and shoulders pattern. From a bearish dollar viewpoint, I also see a head and shoulders pattern forming with a double-shoulder on both sides. Frankly, the long-term fundamentals for the dollar are lousy based on excessive government debt and our enormous trade deficit, but anything can happen on a short-term basis.

The NASDAQ Composite is approaching a critical support level Ike identified in last Tuesday’s Wrap-Up. He said, “If the 1850-1840 support zone doesn’t hold it, the next downside target is the 1790-1780 zone.” Today the NASDAQ Composite closed at 1,859, down 32 points for the day and just 10-20 points above critical support. The Dow Industrials dropped 58 points to 10,120 and the broader S&P 500 fell six points to close just a fraction below the 1,100 level.

My short bond position hasn’t worked out as well as I have been expecting due to the weak economic reports we’ve been getting. It started with the weaker than expected GDP report on Friday and poor consumer spending numbers today. I’m going to give it one more day since tomorrow brings the closely watched ISM data on the service sector of the economy along with factory orders. Last month the ISM Service Index came in at 59.9 and economists are forecasting an increase to 61.5 for the July reading. If the number comes in stronger than expected, bond prices should move lower, the dollar will gain support and the stock market could be rescued again. A weaker number than expected should move bonds higher and look out below for falling stock prices! We’ll just have to see what tomorrow brings!

Have a Great Evening!

Mike Hartman

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