(Bloomberg) "Federal Reserve Bank of Atlanta President Dennis Lockhart said the US economic slowdown may moderate inflation that has been spurred by rising prices of energy and commodities." I thought inflation was spurred by war spending and excessive fiat money printing. But, wait, maybe I didn't earn four finance professional and business school designations and academic degrees? Maybe Mr. Lockhart is onto a new theory?
I josh of course. What Mr. Lockhart knows and what he's prepared to say in order to keep his chip in the game are two polar opposites. I used to wish this were not so, but, you know, I have given up "wishing".
Wishing is for those callers to 1-800-HELP and recipients of so-called tax rebates. Oh, throw in those who buy lottery tickets as a part of their estate planning, as well.
The next word out of the Atlanta Fed is that speculators are the problem and have to be rooted out of their holes.
Traders do not wish; they deal in facts. That is, they used to. Now the US government sees fit to tell the world that inflation in America rose a mere +0.2% this past month, and just +0.1% if you ex-out energy and food costs.
Just for fun, let's try to determine the cost for a family of four to travel to the Indianapolis 500 race this coming holiday weekend. Maybe we could look at the added cost this year to fuel up those military jets that buzz the stadium just about the time everybody breaks out in a rousing "God Bless America" or the costs to power those racing machines or equip them with tires because they don't go onto the track ex-rubber. Insurance, now that's another story, all included in the higher ticket price.
I think the added costs of running the Indy 500 race this year just by itself is enough to power inflation in the St. Louis Fed region by probably +1%. Maybe more if you factor in the milk for the winner.
The point is, when does a Fed Head stop being a Talking Head for the sell-side?
Second question: Is an economic slowdown a Fed policy initiative? Maybe I'll leave the answer to that to Professor Burton Malkiel, given that he's likely to say that it is a random occurence. You see, if I'm going to ask a question, being a good trader I want to know the answer in advance.
Global Economics Review
Here are the key US economic reports and the Econoday analysis from last week.
US Economic Calendar.
US Treasury Budget for April. Tax receipts led to a surplus for April of +159.3, just shy of the expected gain of +160.0 billion. Fiscal year-to-date receipts have slowed to a +3.0% gain while outlays were up +7.4%. Individual income tax receipts are up +6.0% while corporate income taxes are down -14.7%.
US Import and Export Prices for April. Import prices surged + 1.8% in April due to energy and food costs, for a Y/Y gain of +15.4%. Export prices also increased, up +0.3% for a +7.7% Y/Y rise.
US Retail Sales for April. Retail sales, ex-auto and gasoline sales, surprised on the upside. Ex-autos, retail sales jumped +0.5% in March after a gain of +0.4% in Feb. Analysts had forecast a +0.3% gain. Ex-autos and gasoline, retail sales lifted a surprising +0.6% in April, after gaining +0.2% in March.
US Business Inventories for March. Lower inventories caused by less production and a greater than anticipated drawdown by retailers resulted in a positive report.
US Consumer Price Index for March. This was a shocking report, stretching all credibility. The authorities in govt are stating that consumer inflation in March grew by just + 0.2% and just + 0.1% if food and energy costs are factored out. The mind boggles. Surely these reports ought to be produced by the private sector.
New York Fed survey for May of manufacturing in NY. Prior to this report, I stated: "Can we really trust the New York Fed? Did manufacturing really stabilize in April?" Now the report suggests that general business conditions in New York state are atrocious.
Philadelphia Fed survey for May of manufacturing in the region. Conditions are bad.
US Production Index (mines, factories, utilities) for April. Industrial production is now worse than previously figured.
US Housing Starts for April. April's 1.032 million units (annualized) were down -30.6% Y/Y, but were above the consensus expectation for a 0.940 million units.
The Reuter's/University of Michigan's Consumer sentiment index for May. The index dropped from an already very low 62.6 in April to a yet lower 59.5. A reading this low last occurred in 1980. I forewarned with my statement a week ago, "This is the new American dance, "The Paulson-Bernanke Limbo". How low can they go?"
So much for last week, it was another bad one although retail sales started to pick up.
The economic issues that Americans are struggling with are global in scope. If the global economy suffers further contraction, there is little more the monetary authorities can do. High inflation rates will likely mean very few central bank rate cuts in the next couple years.
US Equity Markets Review
This was a rally week in a Bear market: 22 Dow components up and 8 down.
The DJIA, S&P 500 and NASDAQ Composite gained +1.9%, +2.7%, and +3.4% respectively, led by the commodity price sensitive Basic Materials and Energy and by Tech.
Tech, including Semi-conductors, shows continued strength.
Here is the list of the ten highest-weighted non-financial stocks in the Nasdaq Composite. Put them in a watchlist (see Google Finance Portfolio) and watch them like a hawk. If you want, add a couple like SNDK and ADBE:
AAPL MSFT GOOG QCOM RIMM CSCO INTC ORCL GILD EBAY
The US equity market Sector ETF Summary
This week, there were 10 sectors up and 0 down.
(From the WIR of a week ago) Anyway, let's agree that it's a Bear market. We could even agree that it will be that until (i) Industrial Production and Real Estate Construction turn around, and (ii) Humungous Bank & Broker (HB&B) starts writing off assets and accordingly restocks their capital base, if they can.
Here's the SPY Monthly, Weekly and Daily data charts:
SPY Monthly data:
SPY Weekly data:
SPY Daily data:
10 (energy: XLE)
15 (basic materials: XLB)
20 (industrial: XLI)
25 (consumer discretionary: XLY)
30 (consumer staples: XLP)
35 (healthcare: IYH)
40 (financial: XLF)
45 (technology, semiconductor: SMH)
50 (telecom: IYZ)
55 (utilities: XLU)
Energy (XLE +4.9% W/W) has enjoyed a solid two weeks, although much of this week's gain was earned on Friday (+3.7%).
Crude Oil ($WTIC +0.06% W/W) retained its strength on the basis of Friday's move of +1.77%, closing at 126.04.
The Canadian oil and gas sector was strong again (ECA +9.5% and SU +8.0%), following the week earlier gain of +11.9% for each of these surging stocks. Imperial Oil (IMO) though had a small loss on the week.
PetroBrazil (PTR) gained +9.4% and Statoil (STO) was up +9.2% as share prices are reflecting the underlying asset prices based on 100+ oil.
Basic Materials (XLB +5.23%) was the winning sector this week, switching positions with Energy. The gain on Friday was a healthy +1.17%, not as much as XLE, but reflective of the very weak $USD on Friday.
The Industrials (XLI +2.69% W/W) were strong, except for GE (-0.43% W/W), and except for Friday's small loss (-0.25%).
Construction operator Fluor (+16.7% to 191.37) has been on fire, up +25.2% in two weeks because Q1 profits lifted +63% to $138 million, exceeding analysts' predictions. The stock was $150 at the beginning of the month.
Competitor ABB (ABB) was also hot this week, up +5.0%. Like Fluor, these companies receive long-term contracts that are mostly resistant to the effects of inflation or short-term economic weakness. But traders need to catch them early on the upswing, which sometimes can be seen in the additional trading volumes.Consumer Cyclicals (XLY +3.85% W/W) did not sink this week despite more high prices at the fuel pump. This seems to be the effect of the cash payout program of the US government.
Consumer Staples (XLP +2.48% W/W). Starbucks (SBUX +7.5%) had a good week for a change. Actually it had a good day – on Friday SBUX was up +6.1%. A couple hedge funds --Nelson Peltz's Trian and Lee Ainslie's Maverick Capital— announced they took large positions. I wonder if they were reading me from a recent blog? (LOL)
Whole Foods Market (WFMI) took a hit of -11.4% W/W after the Q1 earnings dropped -13%, missing analyst's estimates. Besides, in a price-conscious inflationary economy, the always high prices at Whole Foods are given a second thought by many of their customers.
After the Financials (XLF) lost -6.1% a week ago, this week they gained +1.04% W/W, but that was only the 9th best performance out of 10, and there was also a loss of -0.91% on Friday, which was a strong market day.
However, there was improvement: Citi (C -2.2% W/W) had been down -10.5% the week earlier.
India's ICICI Bank (IBN +4.7%) was the leader on my watchlist.
Tech (XLK +3.55%) including Semi-conductors (SMH +4.85%) were clearly pulling the market higher this week.
QCOM (+7.3%) and INFY (+7.2%) were leaders and AAPL (+2.3%) at the bottom of my list was still strong as it was a week earlier.
In last week's WIR I gave you a heads-up with SanDisk. I wrote: "SanDisk (SNDK) was ok—didn't pull back after the prior week's big gains in spite of broad market weakness." This week SNDK jumped +11.2%. So traders have to watch a stock's price performance relative to its peer group as well as the market as a whole. Try to spot anomalies, and then try to analyze possible reasons.
Telecom (IYZ +4.26% W/W) gained after a soft week and that one happened after a very strong one (up +4.8%) where the IYZ was #1 for two weeks in a row.
VZ +2.3% and T +3.8% were both strong.
Utilities (XLU +2.15% W/W) had a good week, but was still performer 8 out of 10.
Bonds & Yields Review
Table 10: US Treasury Yields
US Treasury Bonds
|Maturity||Yield||Yesterday||Last Week||Last Month|
|Maturity||Yield||Yesterday||Last Week||Last Month|
|Maturity||Yield||Yesterday||Last Week||Last Month|
The yield tables were incorrect this weekend, showing the past Saturday's results, so I'll skip over it. Suffice to say that yields were up and bond prices down.
Interactive Chart of Interest rates and bond yields.
The TLT lost -0.71% W/W, almost as much as it gained a week earlier.
The TIPS were basically flat.
SHY Monthly data series chart:
IEF Monthly data series chart:
TLT Monthly data series chart:
AGG Monthly data series chart:
LQD Monthly data series chart:
TIP Monthly data series chart:
The big three of the mortgage suppliers, CFC, FNM and FRE, were strong this week, up +4.94%, +7.48%, and +7.24% respectively.
Congress is going to permit smaller down-payments, which seems to be the problem the housing market had in the past couple years. The week ended soft for these companies however.
The $CRB lost -0.25% W/W to close at 426.43, but it would have been worse without Friday's gain of +1.14%.
Two weeks ago, I wrote: "Every time CRB looks ready to plunge down through the 50d MA, Crude Oil picks up. The stories come mostly from pipeline issues, rebel action, warship maneuvers, etc. This should be a Hollywood script." This week it was a US missile sent into the Middle East. Maybe I should have said "scripted".
As I pointed out a week ago, "The game by smart insiders may be to crank the commodity group first and then sell it off slowly to switch into the other stocks in trying to kick-start the market."
$WTIC (US Light Sweet Crude called West Texas Intermediate) consolidated its previous week's gain of +$9.64/bbl with a minimal (+0.06%) gain from 125.96 to 126.04. There was a high of 127.42 on Friday.
"How many remember $51/bbl in January 2007?"
The 50d MA for $WTIC is now at 112.48 (amazing!), and the 200d MA is 93.87.
Gold & Precious Metals Review
$GOLD gained +$14.10/oz this week after a move of +$27.80/oz the prior week to close at $899.90.
The 50-day MA for $GOLD is now 919.52, and the 200d MA is 834.01. So the current price is below the 50-day MA, and well above the 200d MA.
This week, $SILVER gained +$0.05 (+0.30%) to close at 16.96.
"Let me remind you that $SILVER was $21.44 just a few weeks ago." The question no is whether the precious metals can surpass their previous highs or pull-back as I think to retest the cycle lows before continuing their Bull market.
For $SILVER, the 50d MA is now 17.81, and the 200d MA is 15.33. The current price is below the 50-day MA, and above the 200d MA.
This week $PLAT gained +28.30/oz following the previous week's gain of +188.10/oz (+9.84%) to close this week at 2128.10.
The 50-day MA is 2011.74 and the 200-day MA is 1646.87. Note that the current price is now above the 50-day MA.
$PALLADIUM gained +9.95/0z, following the +$23.40/oz (+5.52%) gain of the prior week, to close at 457.20.
The 50-day MA is now 459.03 and the 200-day MA is 403.25. Note that the current price (457.20) is now well above the 200-day MA, and just under the 50-day MA. Note also that these 50-day MA's are pulling back now and unless they revert to a bullish trend, this is a dangerous time to be chasing these prices.
This week, $COPPER gained +11.00 (+2.96%) to close at 382.65.
The 50-day MA for $COPPER is now 383.24 (the current price is lower) and the 200-day MA is 347.81.
I still think the 50d MA is a battleground for traders.
The $XAU Goldminers index lifted +8.24 W/W after being up +6.26% the prior week, closing at 187.87.
The better performers included NEM +6.9%, GG +4.6%, and AEM +4.5%, but most of these gains happened on Friday when the $USD dropped sharply based on dubious stuff going on in the Middle East.
The 50d MA for $XAU is 182.67, and the 200d MA is 173.88.
International Equity Markets Review
International equities were strong this week.
UK FTSE from 6204.7 to 6304.30
German DAX from 7003.17 to 7156.55
Aussie All-Ords from 5844.4 to 6006.1
Shanghai Composite from 3613.5 to 3624.23
HK Heng Seng from 25063.2 to 25618.86
India's BSE 30 to 17434.94
Japan's Nikkei 225 to 14219.48.
I added 16 country index charts from StockCharts.com (with their formal approval btw as long as I don't publish too many) because I think it is important to be watching these markets move through a trend juncture together, and in relation to currency and commodity strength or weakness.
I also made some additions to the country-based ETF tables as I intend to focus more on ETF's in 2008. In time, I will also set up tables and track the domestic market prices.
The world is now a very small one in capital markets and international business. No longer are corporations just American, British, French, German, Italian, Canadian or Japanese. Most do business internationally. We need to observe their businesses and capital market prices on a global basis.
Value Line Report(s) this past Friday
This week, Value Line reported on two Dow 30 companies: Disney (GICS 25, Dow 30, Cara 100) and 3M Company (GICS 20, Dow 30, Cara US 100 June 25-06)
One look at (i) Value Line's projected Annualized Total Investment Returns for DIS (estimated 21% hi and 13% low) and MMM (11% hi and 6% low) shows why the former is a Global Cara 100 and the other was dropped in 2006. Besides the 3M operating and financial performance is not what it used to be. Margins and Returns on Capital and on Equity are falling, while for Disney just the opposite is happening. Yet, I still like 3M to keep it in the US Cara 100.
The Value Line analyst believes that 3M's products are largely recession-proof, but the 2001 recession proved otherwise. Revenue, cash flow and earnings per share dropped at that point.
Disney under the latest CEO Robert Iger is an impressive story. The business needs good management because they deal with discretionary purchasing consumers who have lots of options. TV (ABC and ESPN) is 42% of revenues; Theme Parks, Resorts and Cruises are 30%; Films are 21% and Stores at 7%. The brand is strong.
The price hit a low of $26.30 on Jan-22 and is now at $34.91 (with an intra-day 2008 high of 35.02 on Friday), close to its 52-week high of 36.79 on May-23-07. The RSI-7 is showing weakness ahead on the Daily-Weekly combination, but the Monthly has some upside. This would be a good stock to write covered calls and on strong days, maybe if the stock is called away, to buy some long-dated puts at a 35 strike. But at the market cycle bottom and with this stock, at that point likely in the Accumulation Zone, I would be back with long positions in the stock, long-dated calls and put writes.
This was a quick review as I'm now headed to the Family Island of Eleuthera, flying into Governor's Harbour Airport in a small plane, returning tomorrow late in the day.
Each of the islands of The Bahamas has a distinct history and culture. In Eleuthera, in particular, you cannot even tell from the north to the south part of the island if you are in the same hemisphere, the places are so different.
And there are so many different islands. It takes time to see them all.
What follows next week in the market is anybody's guess. The truth is that central bankers have things pretty much under control right now. Not being in the room, we can only wait to see what they plan to do. That's not a good thing for the so-called "free" capital market. The problem is that equity prices today are contrived by bankers to a significant degree, much the same as they did for the asset-backed securities they held on their books for several years, at dubious prices.
The collective interest of using market prices to discover value, which is the purpose of capital markets, is now replaced by the interest of central bankers to help commercial and investment bankers survive the process of regeneration.
Meanwhile the public will be told that the system still works, but we know it doesn't for us, only for them.
Have a great weekend. Next weekend is Memorial Day in the US and I'm looking forward to see the Indy race where the CART and Indy League teams are back together again.