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Corporate
Carnage Continues
I
am not inclined to dwell on the subject since I have already covered the
economic situation in previous REPORTS. However, in advance of
potential FED inaction the January 24th Wall Street Journal “What’s
News” column reads like a corporate earnings obituary.
“Boeing
earnings sank almost 80%… Merrill Lynch reported a $1.26 billion
quarterly loss… Corning posted a loss of $655 million…
Bethlehem Steel recorded a wider quarterly loss… Caterpillar posted a
37% drop in earnings… Dynegy’s net slid 27%…”
There
were some positives for General Dynamic, Halliburton, Pfizer, and DuPont
that can be attributed to the “new environment.” The question
is whether the selective survival of some bottom lines will be enough to
offset the general economic decline. After being castigated for a
perceived downbeat State of the Economy speech, FED Chairman Greenspan
is trying to talk up prospects for a recovery. Read between his
lines and take notice of his body language. Greenspan is not
particularly encouraged about pulling out of a nosedive.
As
I have consistently warned, the stock market is far from a recovery.
Each time the DOW Industrials pops above 10,000, it experiences a
setback. Economists are beginning to agree that equities are in a
“trading range” between 9700 and 10,300, for the moment. This
being the consensus, investors have returned to U.S. debt as a holding
pattern. This explains the reluctance for longer-term issues to
plunge in response to discouraging FED rumblings and the latest jobless
data that showed a decrease in filed claims.
March
T-Bonds dipped to the 20-day average this morning, but failed to
definitively penetrate the 20 and 40-day lines. The downward
channel could gain sufficient momentum to touch 10116 support, however,
if today’s close edges above 10220, there is an increasing possibility
the current formation will develop into a continuation “flag.”
This
view is somewhat contrarian since opinion has leaned toward an interest
rate bottom. I believe further equity weakness or even a stall
will prompt a move into bonds and notes. Regardless of any upbeat
projections, investors are scared and fed up. They have watched
retirement accounts shrink by 50% and more and see their
brokers/financial advisors in a panic. Further, situations like
Enron hardly add to the public’s confidence.
If
we want to glean public sentiment, look at the political polls.
With Bush receiving exceptional ratings, and Enron receiving total
disdain, there is likely to be a subtle psychological swing towards
government trust. In other words, “I’d rather hold U.S. paper
than corporate junk. Adding to this potential undercurrent is
Kmart’s bankruptcy. The all too familiar line, “Attention
Kmart shoppers,” may become a relic and it’s not going over well in
the thousands of locations serviced by Kmart stores.
Understand
that people rely upon Kmart, Target, and WalMart. They used to
rely upon Caldor, too. Americans have been systematically shifted
from Main Street to malls and from specialty stores to supermarkets.
Obviously, two generations have grown up hardly knowing a butcher shop
or produce store. We have changed where and how we purchase.
Some may recall the huge resistance to the malls. Towns were
convinced the large “super stores” would destroy local shops and
related jobs. However, malls progressed and are the American way
of life… for now.
Thus,
when an entity as significant as Kmart declares bankruptcy, it sends
shivers down the communal spine. The first reaction of residents
is, “Where will I go for my merchandise?” The concern is real
and every bit as important as the fears of those directly impacted by
the loss of jobs, leases, and the like. Kmart also represents a
huge distribution channel for major and minor brands. The ripple
effect of a Kmart shutdown would be substantial.
I
engage in reading retailer reports covering everything from foods to
durables. These provide insight into the movement of wholesale
products and raw materials. The United States has been labeled a
“consumer-driven economy.” Growth in Gross Domestic Product
(GDP) has been attributed to consistently increasing transaction volume.
I am sure a study of changing distribution channels, i.e. malls versus
Main Street, would show that “convenience shopping” has contributed
to growing transaction volume and, hence, our expanding economy.
If retailing channels begin to shrink, I am sure consumers will respond
in kind.
When
a mall is two miles away with plenty of store diversification, a trip is
both entertaining as well as useful. “Go to buy milk…
and pick up a video while you’re at it.” Place the stores 20
miles away and the pattern shifts to, “Pick up plenty of milk.
Skip the video ‘cause we won’t get it back in time.”
Of
course, economies abhor a vacuum. Unquestionably, many towns
retain a local pharmacy and video store on Main Street. The
question is whether we’ll see a return of the local hardware store as
well. As a population, we are flexible and dynamic. We adapt
to change. I simply point out that the economy takes more time to
reshape. If change is abrupt, there can be a period of confusion
and apprehension. Historically, people pull in, consolidate, and
wait to see what happens. I feel this mood favors fixed income
over stocks.
The
cash Nasdaq experienced a FED-based rally. As Greenspan walked up
to the podium, the index began to rise just as the Bonds began to sink.
Yet, 1575 support has been challenged. The previous January high
was lower than the December rally. High tech faces more challenges
and Microsoft is about to face another onslaught of antitrust
litigation. The chart is very tenuous.
Today’s
action propped prices above 1575 support, but the 20-day average
breached the 40-day average.
For
a spot check, I went on eBay to get a feel for the used electronics and
communications gear market. As I expected, liquidators are having
a field day as dot.coms go out of business. Servers, modems,
routers, and specialty communications cards are in original boxes
selling for 10¢ on the dollar. This raises the question,
“Who’s buying new?” I am inclined to expect a retracement of
the recovery from the September bottom. A 50% decline would place
the Nasdaq at about 1410.
Grains
Favorable
weather forecasts for Argentina and Brazil nailed U.S. soybeans and
thwarted my attempt to participate in a recovery. In the typical
frustrating way, we picked up the top of the last rally and watched
prices drop through our stop in consecutive downside sessions. The
good news was that we stayed short March corn which slightly offset the
decline in beans. However, today’s action suggests corn may firm
more aggressively.
Seasonal
uncertainty makes grain trading particularly difficult. The South
American and Australian crops are in and progressing. The critical
period comes into play in approximately six weeks. With Southern
Hemisphere crops expected to be records and revised U.S. numbers on the
high side, the encouragement offered by March’s bean rally above the
20-day and 40-day averages was quickly snuffed.
I
was reminded by fellow chartists that last week’s consolidation
displayed an upward slope that was not indicative of a continuation.
Further, I bought right at 4.55 resistance. Thus, I should have
known better.
Alas,
I should have stuck to my previous strategy of trying to buy a dip to
4.27. Given the current patterns, the short strangle may be best
if we can find sufficient premium. I hesitate to go out to the May
expiration since too much can happen. The 440 call and 430 put
provide approximately 12¾¢ premium making the strangle safe from 4.17¼
to 4.52¾. Obviously, this is well within the most recent range.
Most of the danger appears to be on the breakout above 4.52, having
recently achieved 4.55. March options expire on February 22nd.
Fundamentally, I do not see any appreciable influence on U.S. or
Southern Hemisphere markets between now and option expiration.
Recent reports hint that the downside, although further away, carries
equal (if not more) exposure. Examine the December decline to 4.18¼.
Nothing is beyond the realm of possibility.
In
the meantime, our bull wheat spread took a rapid turn for the worse
going from a 16¢ profit to just 6¢. July exhibited considerably
more strength based upon the prospect for non-U.S. supplies.
Frankly, the action is confusing. While a renewed bear market can
proportionally narrow the spread, the charts present an unusual picture
that implies tightness in new crop July. Well, if new crop is
tight, shouldn’t users look to old crop?
Unseasonably
mild temperatures and a lack of snow cover could stymie a good portion
of winter wheat. Mild winters still have a tendency to produce
hard freezes. This can be extremely damaging to root systems.
We have a very favorable entry at 8¢ July over March. If we
return to such levels, I would add to the spread because I see very
little downside.
Metals
Several
developments have applied pressure to precious metals. Two weeks
ago, Ford announced a $1 billion write down on platinum and palladium
inventories. The announcement stunned traders into inaction
because the amount, even at palladium’s lofty $1,000/oz. – plus
prices represents 1/6th of annual world production. How much metal
could Ford have accumulated?
Last
week, the news hit home. What can Ford do with all that metal?
With the write down behind the company, Ford can liquidate for a profit.
Further, such an inventory implies that Russia is less able to squeeze
platinum group metals.
Platinum
plunged below 47000 support while palladium lost $40 from $420 to $380.
With auto sales off, Ford and other manufacturers can afford to ease up
on inventories. A significant question is, “Who else is holding
such inventories?” If other manufacturers replicate Ford’s
strategy, there is far more metal out there than the market reflects.
On the other hand, Johnson Matthey statistics show back-to-back deficits
for palladium with the recession just beginning to reverse the trend.
Across
the pit in gold and silver, my prediction materialized. Silver
continued its retreat, albeit not as fast and the U.K. gold auction was
not a rush. Gold busted the 20-day and 40-day averages and there
simply is not enough investment liquidity to justify a move into this
metal
Email:
Phil@commodex.com
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