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Stock prices rallied today with positive economic reports, strong third quarter earnings from Hewlett-Packard, and the announcement of K-Mart’s $11 billion buyout of Sears. The dollar reached new lows versus most of the major currencies with the euro above $1.30 and the December gold futures contract closing at the new high for the move at $445.10. Bond prices continue to defy the gravitational pull of lower prices that would bring a higher interest rate environment as anticipated due to the tightening cycle by the Federal Reserve. Stock prices continue higher, economic news is positive, the dollar tanks and inflation is higher than expected, but interest rates move lower. Bond prices should be moving lower, not interest rates, but the fact they are not should be telling the markets that all is not well. Something is out of line. I am beginning to hear more and more speculation the Fed is covertly buying bonds off the market to support prices and keep interest rates low. Ben Bernanke said they would use unconventional means if necessary, and on face value it looks like he meant it. On the economic front, the Bureau of Labor Statistics said the Consumer Price Index rose 0.6% in October, the biggest gain in six months. Expectations called for a gain of 0.4%, but after yesterday’s PPI numbers many traders were concerned the CPI would be even worse than what we saw today. The PPI was reported with a gain of 1.7% in October which was the strongest gain since January 1990. Year over year PPI is higher by 4.4% in October while September was higher by 3.3%. Now compare that to the gain in the CPI. Year over year the CPI was reported higher for September and October by 2.0%. Producer prices are increasing faster than consumer prices, which means corporations have to eat a portion of their cost increases putting a pinch on bottom line results. Increased competition for consumer goods and continuing low utilization of production capacity are making it difficult to raise prices at retail. The CPI understates the true rate of inflation, but can still be viewed “relative” to the PPI to see potential pressure on corporate profit margins moving forward. Two big negatives in the BLS report showed gasoline prices were higher by 8.6% and real average earnings WENT DOWN 0.4%. Prices are moving higher and incomes are moving lower…something to keep an eye on. Industrial production rose 0.7% in October after expectations called for an increase of 0.4%. Capacity utilization rose to 77.7%, but still historically low. A portion of the gains for industrial production were attributed to getting caught up on production after the disturbances caused by the recent hurricanes. In a separate report, housing starts increased 6.4% in October to the highest level this year, but a note of caution came for the housing sector with building permits falling 0.7%. The Mortgage Bankers Association said its application index moved higher by 4.3% with refinancing carrying the load. The refinancing index was higher by 10.6%, but the purchase index declined by 0.6%. Activity in the real estate market is still brisk, but the decline in building permits and MBA purchase index could be a head’s-up that listing times will probably get longer and price gains will be cooling-off. At the top of the WrapUp I said stock prices rallied today, but as I watch the last two hours of trading, the broad indices are giving up much of the early gains. In the last 17 trading sessions the S&P 500 has gone nearly straight up for 94 points from 1,094 to today’s intra-day high of 1,188, a gain of 8.6%. Stocks are clearly overbought at this point and even more telling of a near-term correction is the divergence in price and momentum. Take a look at the 60-minute chart of the S&P 500 and you can see the momentum high based on the Relative Strength Index for the current stock run occurred on 11/5 at 80.1 with the price at 1,170. On 11/12 the price moved higher to 1,184, but the RSI had a lower-high at 78.5, and today we had a marginal new high at 1,188, but the RSI could only make a high of 68.4.
The divergence of price and momentum in overbought territory implies the market should move lower in the days to come. The gains in the treasury market also suggest economic weakness ahead. It’s difficult to say we are beginning the next leg down for the bear market in stocks since they have been in rally mode since a week prior to the elections. The bulls might be able to paint the tape to close out the year in December, but in the very near-term a minimum of a “correction” is in order. I’ll be watching the 1,140 area for support and after that, around the 200-day moving average at 1,120 to see if they hold. If support holds, give it to the bulls to close the year; if support breaks…hello Mr. Grizzly Bear! By the end of today’s trading, the DJIA held on to gain 61 points to 10,549, the NASDAQ Composite added 21 points to 2,099, and the S&P 500 gained six points to close at 1,181. Part of the pressure on stock prices came from energy again as the Energy Department released inventory data today. Expectations for crude inventory called for an additional build of 2.0 million barrels, but the reported build was only 800,000. The big surprise came from “distillate inventories” which include diesel and heating oil. Expectations were for a gain of 650,000 barrels, but inventories actually declined by a million barrels. Heating oil shot higher by 6.2%, gasoline moved up 2.6% and crude oil reached a low of $45.40, but ended the day with a gain of $.69 to end the session at $46.80 a barrel. The Real Story: Dollar
Falls to Record Low as Snow Signals No Agreement to Stem Its
Slide "The history of efforts to impose non-market valuations on currencies is at best unrewarding and checkered," Snow said in response to a question on whether he would support an agreement with Europeans to manage the pace of the dollar's decline. He made the comments after a speech in London. (MY COMMENT: Why doesn’t Mr. Snow tell Japan and China about the "unrewarding and checkered" history of currency intervention, instead of telling Europe why we aren’t going to support the dollar in the currency markets?) Against the euro, the dollar extended its decline this year to 3.4 percent, falling to $1.3037 at 1:44 p.m. in New York from $1.2956 yesterday, according to electronic foreign-exchange dealing system EBS. It dropped as low as $1.3048, the weakest since the euro's 1999 debut. The U.S. currency fell to 103.81 yen, from 105.35, trading at its weakest since April 2. "It's become obvious the U.S. administration isn't going to stand in the way of dollar weakness," said Jeremy Fand, senior proprietary trader in New York at WestLB AG. "The U.S. administration is playing hardball with the Europeans. If the Europeans aren't going to stimulate their economy, they have to understand there's a consequence." A rising currency may damp economic growth by making European exports more expensive. Sales abroad account for a fifth of the euro region's economy, which grew at a quarterly rate of 0.3 percent in the third quarter, the slowest pace in more than a year. For the U.S., a weaker dollar may help narrow the record current-account deficit. 'Not Welcome' Fand predicted the dollar will fall to $1.35 per euro in the next few months. He said the European Central Bank wouldn't "hit the panic button" and consider selling the euro to weaken it until it reaches about $1.40. "We don't welcome" the euro's rise to a record, European Union Monetary Affairs Commissioner Joaquin Almunia said in Strasbourg, France. "We are all interested in avoiding disorderly movements of the currencies." At least six European Central Bank officials, including President Jean-Claude Trichet, in the past 10 days expressed concern over euro strength. Basically, Mr. Snow is trying to tell the European Union to get with the program and stimulate the economy via monetary and fiscal stimulus. We want them to inflate just like we are along with Japan. Monetarily we are telling them to lower interest rates and gun the money supply, while on the fiscal side we are probably telling them to increase government deficit spending to keep the money flowing until economic momentum can sustain itself. Remember that the euro was created to eventually work as a global reserve currency concurrent with the U.S. dollar. It looks like our guys are saying, OK Europe, you want a strong currency…you can have it along with its attendant problems. Now we have to see who will win this grand game of chicken. Will the U.S. begin to impose discipline on monetary and fiscal policies, or will the E.C.B. buckle under the pressure of a strong euro forcing them to overtly weaken the euro and support the dollar just as Japan and China have been doing? Something else from Mr. Snow appeared in another Bloomberg article that came across as almost comical. I ask you, who is this guy is trying to con? He was asked about the possibility that the Bush administration doesn’t mind the dollar’s drop because it makes U.S. exports more competitive. His answer, “Let me be clear: our policy is for a strong dollar. Our dollar policy remains unchanged because a strong dollar is in both the national and international interest.” If you have seen a dollar chart for the last three years, it’s obvious this is just the stated party line with nothing of substance. The dollar is getting crushed internationally! It appears quite clear that we are headed for some turbulent times in the currency markets with all the noise between the European and U.S. officials, the direct link between the dollar and the Chinese yuan (Renmibi), and overt intervention by Japan to weaken the yen. Who really knows what any of the major countries intend to do with their currencies. One thing for sure is that the countries around the globe will not decrease their money supplies to strengthen their currencies, but will only change the rate at which they increase the supply of money. Once again, that is why I believe the right thing to do is to invest in the only time-tested, proven currency of precious metals. Deflation is not an option if we are to keep any semblance of the global monetary system we use today. The Federal Reserve knows their job is very simply to inflate or die. We are now pressuring Europe to do the same. In some ways it looks like we are doing all we can to alienate our former allies. As time passes it is becoming more and more obvious why the Europeans have been snuggling up to Russia, China, and Iran for future business expansion and energy needs. I also heard a blurb on CNBC from one of their commentators that someone from the ECB made comments about having to punish the “dollar managers” for their irresponsible deficit spending with a new round of import tariffs. The commentator mentioned possible tariffs on textiles, sweet corn and machinery. I have been looking for supporting evidence on the internet, but have not been able to confirm the possible threat of import tariffs. If this is true, you can add trade wars to currency wars for next year. Gold and silver are still marching forward, but there are clearly some doubting gold and silver stock investors that remain on the sidelines waiting for a pull-back. Sure we could get one, but what if we don’t? It was sure nice to see some of the juniors finally breaking out today…one of my favorites was up by 9% today. At what point do you begin to chase this bull market? Many investors in gold and silver mining companies watch the metals prices closely, and even go a step deeper to see the positions of traders on the commodity exchanges. The open interest in gold and silver is reaching new heights and the short position of the commercials continues to grow along with the net long positions held by the specs. Many analysts and investors are expecting the commercials to get heavy handed with their selling to force the market lower, especially with the stakes being very high for the December contracts. My take on the situation is pretty simple. As long as the dollar is getting hammered in the currency markets, the commercials won’t be able to roll the specs over. If you are interested in reading more on the shenanigans of the ongoing saga between the specs and commercials, I’m leaving you with these two links to a couple authors that really do know the COT report and how to decipher the messages. The first came a week ago from Ted Butler called “Do or Die?” and the second comes from my friend Dan Norcini (AKA, Trader Dan) called, “Some Comments on the Latest COT Release of 11-15-2004.” (Try the trial membership to lemetrolpolecafe.com to view the article.) I have a great deal of respect for both of these gentlemen to give you the straight scoop. As a special point of interest, please note what Mr. Butler has to say about investors holding bullion versus paper silver and mining stocks. If you own any bullion you will know exactly what he means. If you don’t own any, I think it’s a great idea to go get ya’ some!! Once you have it in your possession you will most likely begin to feel a greater sense of financial security…I did and still do! Have a Great Evening! Mike Hartman
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