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DOW INDUSTRIALS CRAWL BACK TO 10,000

Stocks prices opened higher with good news coming from Intel on lower chip inventories and Yahoo raising their forecast for 2004 operating income from $995 million to $1.01 billion. Stocks also got an early bounce with crude oil falling to $52.15 in early trading, but the gains for the Dow Industrials didn’t last long as the index fell below yesterday's close just one hour into today’s session. Floor traders commented to a CNBC reporter that Intel shares were oversold and today’s gain had more to do with short covering, and also added that the chip sector was “not out of the woods yet.” Similarly, Treasury prices began the day lower with renewed confidence oil prices will come down reducing the drag on the economy of high energy prices. With crude falling below $52 per barrel, bond prices began to turn positive as stock prices fell into negative territory. While the tug-o-war continued with stocks and bonds, the dollar strengthened and commodity prices generally moved lower, especially copper falling more than 10% today.

In the news, oil came down after a report from the International Energy Agency said they expected demand to slow next year as higher energy prices slow down the rate of global growth. Economists polled by Bloomberg news have reduced GDP growth forecasts for the fourth quarter to 3.8% following an expected increase of 4.0% for the third quarter. The Mortgage Bankers Association said today its application index fell 9.2% with the purchase component falling 4.9% and the refinancing index taking a big dive by dropping 14.2%, the biggest decline since May. The 30-year fixed rate fell from 5.78% to 5.69%, but it wasn’t enough to jump start refinancing activity. The back-to-school shopping season was soft for retailers and with the lack of stimulus from cash-out re-fi’s, it could be tough to sell big-ticket items during the Holiday Season.

Primary Trends

Based on the heavy volume of emails I received last week, it’s clear that investors are getting caught up in a great deal of the “market noise” out there. At this point in the game it’s nearly impossible to separate financial markets from politics. With the election just three weeks away the noise will probably get even louder. For those of you that haven’t received an email reply from last week, please bear with me as I’m fighting a flu bug. I will be cutting this WrapUp short, but there are a few things I really want to get out there.

The most important thing for us as investors is to maintain a good perspective on the big picture. We went through a bull market in stocks and bonds for roughly 20 years and the bull market ended back in 2000 when the NASDAQ began to crumble. The first leg down in the bear market for stocks went from 2000 to the end of 2002 and was followed by a counter-trend rally through 2003 that topped out at the beginning of this year. So far 2004 has been a long, drawn-out topping pattern before stocks begin wave three down in this primary bear market. On the S&P 500 chart you can see the bear market channel I have proposed and the symmetrical triangle that contains the current counter-trend rally and topping pattern.

Now have a look at the 30-year bond chart that shows an ascending wedge pattern which is a bearish reversal pattern. The thing that stands out the most for me on the bond chart is the fact that bonds didn’t break down during 2003 when the S&P 500 rallied nearly 50% from around 790 to the high just over 1160 at the beginning of this year. Stocks rallied with the prospects of an economic recovery, but bond prices should have come down to confirm the recovery would stick. Now as we begin the next leg down for stocks, bond prices will probably remain elevated keeping interest rates low…especially with renewed concerns of economic momentum slowing down.

The last chart I have for today is the U.S. Dollar Index. In a nutshell, I expect the index to test the low near 85 from February this year, then move lower to test the low back in 1995. Looking at the chart you can see why the Clinton / Rubin team implemented the strong dollar policy…in ’95 the index almost broke down but held support instead of making new lows during the Nineties. Now we come around full circle to see the dollar where I believe it will slide lower to test the lows that were hit three times in the first half of the Nineties. If the dollar had broken support back in ’95, we probably wouldn’t have had such a big blow-off for stocks because it would have been more difficult to attract foreign stock investors to U.S. shares with a falling dollar.

Hook ‘em Horns – Aggies get McTeer

Dallas Federal Reserve Bank President Robert McTeer had some interesting comments on Monday about the current account deficit, capital flows and the U.S. dollar. Here is a portion of what he had to say on Monday and the following snippet from today.

McTeer Says U.S. Trade Imbalance May Cause the U.S. Dollar to Fall Rapidly 

Oct. 7 (Bloomberg) -- The record U.S. current account deficit will lead to an inevitable decline in the value of the dollar, a drop that might be rapid and provoke a financial crisis, Dallas Federal Reserve Bank President Robert McTeer said.

In a New York speech, McTeer said a precipitous drop in the U.S. currency would lead to a big jump in interest rates. He offered no easy policy solution, saying he `` feels foolish warning about it'' because ``nothing bad has happened so far.''

The current account deficit, which reached $166.2 billion in the second quarter, ``is going to cause problems, but we just don't know when,'' McTeer said at a New York event hosted by Market News International.

At some point, foreigners will slow their investments in the U.S., meaning capital ``flows will turn against us, and there will be crisis that will result in rapidly rising interest rates and a rapidly depreciating dollar that will be very disruptive,'' he said. ``But I don't know what to do about it.''

Just two days later we get the following report about a career change for Mr. McTeer:

WASHINGTON (CBS.MW) -- Robert McTeer, the president of the Fed Bank of Dallas, has been named as the sole finalist for the chancellorship of the Texas A&M University system. Under Texas law, the Texas A&M System Board of Regents cannot vote on the nomination until Nov. 4 to allow for public comment. McTeer has headed the Dallas Fed since February 1991. He became known as the "Lonesome Dove" for being the only FOMC member to vote against Fed rate hikes in June and August 1999.

Here is my last snippet on currencies with thanks to Ed Steer for finding this information out of Italy. This article follows one about a week ago where Robert Mundell introduced a huge gold coin called “Big Phil” and spoke to the merits of gold as a long standing asset for the preservation of wealth. Now we get this one on the prospects of a gold-backed global currency. Who knows if or when it will happen, but it looks like the N.W.O. gang are using Mr. Mundell as a mouthpiece to plant some seeds for future consideration. Mr. Mundell is no slouch when it comes to currencies since he is the one who laid out the framework to launch the euro. At the time of the euro launch he also indicated that the euro was a stepping stone to the bigger global currency…we shall see.

(AGI) - Florence, Italy, Oct.11 - Nobel Prize winner Robert Mundell reckons that the "long-term goal is world currency", and proposed to call it "Intoro". That's what he said at the international congress of financial directors in Florence. Intoro stands for "oro internazionale, international gold", because the new currency "should be based on the only international metal system, which is gold. The mechanism is similar to the one of the Breton Woods agreement, and is to involve the IMF, perhaps with an initial agreement between the 3 main currencies, euro, US dollar and yen. The following step would be a temporary currency named 'dey' (dollar, euro, yen), and it could then include the pound sterling and the yuan. Such a monetary reform would then lead to the brand new international currency, Intoro."

Many people were saying the euro would never work, but look where we are today. No doubt most investors will pooh-pooh talk of a global currency, but look at the strains on the dollar and all other fiat currencies around the globe. I just wonder if they will realign currencies before we end up shipping more of our jobs and debt offshore. Next year with the elections and Holidays out of the way it will be fascinating to see the direction of global currencies. Just this week China said they are in no hurry to revalue the yuan…the pressure builds.

Presidential Debate Tonight

So far the analysts are saying Kerry wins on most domestic issues and Bush shows his strength with the war on terror and lower taxes. On Friday I got an email from one of my investing buddies just after the labor report came out much weaker than expected. His comments were short and to the point. He said, “Looks like they had to choose between Bush and the bond market…they decided to flush Bush and support bonds with weak economic data.” The weak labor numbers came the day of the last debate and today I’m a bit surprised to see the Dow Industrials breaking below the psychological 10,000 level. Richard Russell points out that an incumbent has never been re-elected when the Dow has dropped more than 0.5% in the October preceding the presidential elections.

Wow, I just noticed there has been a rather dramatic turn lower for the dollar in afternoon trading. It was stronger throughout the morning reaching a high of 88.72 with the 50-day moving average at 88.79. By the close the Dollar Index fell back to 88.02. Spot gold is up more than two dollars in after hours trading at $415 an ounce, so I’ll be watching to see how the dollar acts tomorrow after the candidates sling more mud at each other again tonight. With all the market noise out there, I’m sticking with the fundamentals…dollar lower, stocks lower and bonds drift sideways a while longer. By the close of today’s session, the DJIA barely made it back above the 10,000 level to close at 10,002, a loss of 74 points, the NASDAQ dropped four points to 1,920, and the S&P 500 fell eight points to close at 1,113. Oil turned around to close with a gain of $1.17 to $53.68 and copper was crushed for a loss of nearly 11% from $1.44 to $1.29, so for now volatility reigns supreme! Let’s see what Mr. Bush and Mr. Kerry have to say tonight in the final presidential debate and more importantly, how the markets will react tomorrow!

Have a Great Evening!

Mike Hartman

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