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Lackluster Market on Weak Housing Numbers

The markets caught a slew of economic news today with mixed messages depicting both a growing and a slowing economy. Stocks and bonds both got a “soft” bid pushing prices higher, but not with a great deal of conviction. The Dow Industrial Index meandered in a narrow 20 point range for most of the day until buyers came in after the lunch hour pushing the index higher for the last two hours of the session. The NASDAQ moved higher through most of the day with leadership coming from the internet leaders, Yahoo and Google. Treasury notes and bonds were modestly positive throughout the session, but the dollar struggled versus all major currencies.

If we use GM as the poster child for the Dow, it’s easy to see why the large-cap index struggles, while the high-flyers in the NASDAQ continue to shine…for now. Today Google blasted through the $400 mark, a gain of over 300% since they went public back in August last year. The recent advance has moved Google’s market capitalization to $110 billion, bigger than Cisco and ten times more than the failing General Motors! Leadership in the U.S. has clearly changed as our competitiveness in manufacturing is called into question. U.S. corporations selling proprietary intellectual property are performing better than the old brick and mortar manufacturing companies. The worst part of the GM debacle comes from Delphi Corp. with their announcement of Chapter 11 bankruptcy protection last month and now the layoff of a proposed 24,000 workers. One final tidbit on GM: GM’s stock price just hit an 18-year low, while the price of gold has moved to an 18-year high! I expect the trends to continue. On the economic front, the Federal Reserve said industrial production in the U.S. rose 0.9% following expectations for a gain of 1%. The rise in output followed a 1.5% drop in September due to the twin hurricanes. Wall Street is spinning this as a good report, but the bounce didn’t meet expectations and I would have expected a better rebound from the lack of production in September. In the big picture, manufacturing only makes up about 15% of our economy, and that includes manufacturing of electricity which we consume, rather than durable goods we are able to export.

First-time claims for unemployment benefits declined by 25,000 to 303,000, while economists expected claims of 324,000. The report came in better than expected, but I heard on CNBC that traders in the Chicago area are focused on headlines that workers' salaries in “manufacturing” states are not keeping up with the rate of inflation. In the Chicago area, wages are at an 18-year low relative to inflation.

The manufacturing and labor reports are getting a positive spin through the financial media, but they were clearly offset by the weakness in the housing numbers. The Commerce Department said housing starts fell 5.6% to 2.014 million homes annualized. This was the largest decline in starts over the last eight months. Building permits declined an even larger 6.7%, the biggest decline in over five years. The Housing Market Index fell to 60 from 68 in October. The index is considered a “confidence” index for builders as it measures sales and buyer traffic, and is now at its lowest level since May 2003. The economy is very definitely going to lose momentum without the stimulus from a hyper-active housing market.

Stocks, Bonds and Commodities

Stocks ended the day with the Dow Industrials adding 45 points to close at 10,720, the NASDAQ was stronger with a gain of 32 points to 2,220 and the broader S&P 500 added 11 points to close at 1,242, a gain of nearly 1% for the day. The best sector performers for the day were the Dow Transports (+2.02%), the AMEX Internet Index (+2.06%) and the AMEX High-Tech Index (+2.05%). My favorite index, the HUI Gold Index added another 2.38% to close at 246.47…a break above 260 will mark the end of the VERY long (nearly two years) of consolidation in the precious metals mining sector…finally!

Bond prices edged higher today, pushing interest rates lower. The bond market looked at the “strong” manufacturing report and favorable unemployment numbers, and simply yawned. If the reports were significant, bonds would have sold-off. I believe bond prices remain high because we have a BIG economic slowdown coming right after the first of the year. Enjoy the rising stock prices while you can, and seriously consider taking some money off the table as I do not expect the current rally to continue through the first quarter. Be smart and guard your liquidity as stocks begin to roll-over as we close out the year. The hedge funds and mutual fund managers will try to paint the tape to close the year, so use their window dressing as your opportunity to exit. I am currently working on an article I will post in two weeks recapping this year’s market movements and laying out my expectations and reasons for what I think we will see moving into the first half of next year.

Gold and silver added to their gains from yesterday with December gold closing at $486.80, up another $7.70 following yesterday’s gain of $10 per ounce! The volatility in gold is screaming about problems in the fiat financial systems around the globe! This is the tip of the iceberg, and I expect the volatility to increase over the coming two to three months. Silver has put on a stellar performance with a gain of 31 cents in the last two trading days. I see fireworks ahead!

The energy complex gave back some of the gains from yesterday when inventories came in lower than expected. Crude oil was tagged for a loss of $1.25 a barrel to close at $57.20, heating oil came down three cents to $1.698, unleaded gasoline dropped two cents to $1.461, and natural gas gave back 45 cents to close at $11.87/mbtu. Unleaded gasoline, heating oil and natural gas held up for most of the day, but at the close the sellers came in aggressively, driving the prices lower. Crude was the big surprise by falling $1.25 after showing much lower inventory than expected yesterday.

It looks to me like the near-term bottom is in for the energy complex; especially with regard to natural gas, but it could be another week or so until we see prices move higher. Similarly, I believe gold and silver will move higher over the next few months, but there is a good chance we could see some unusual volatility over the next two or three trading sessions. Looking ahead at the calendar, it is very important to notice the options expiry date for December gold and silver contracts. With the shortened trading week next week due to the Thanksgiving Holiday, December gold and silver options will expire on Tuesday November 22. Investors have been buying the December calls throughout the year, and there is a MOUNTAIN of call options out there. Between the strike prices of $440 and $490 there are 49,750 call options. Each option represents 100 ounces of gold, therefore after rounding, there is well in excess of FIVE MILLION ounces of gold on option for the December contract. The $450 strike price alone has 10,510 calls against it. At $470, $475, and $480 there are approximately 6,000 calls at each strike price. In the next few trading days, every five dollars up or down is a very big deal. If the call writers can cram the price down into options expiry next week, they can save themselves many millions of dollars!

I believe energies are ready to move higher as winter arrives, but just like gold and silver, the refined oil products have options expiry on Wednesday, November 23rd. After the precious metals and energy options expire, I don’t believe there will be as much pressure to hold the prices down. We shall see who has the upper hand (the longs or the shorts) going into expiration. In either case, be on guard for added volatility in gold, silver and energy products over the next three trading days before we break for the Thanksgiving Holiday. Then, buckle your seatbelts as the market makers work to close-out the year and prepare for financial storms to hit our shores in 2006!

Have a Great Evening!

Mike Hartman

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