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Yield
Curve Remains Stubborn
After
another impressive ½-point cut in FED Funds, long term rates remain
persistently high. The
prime lending rate is not sufficiently enticing to stimulate borrowing
in a downbeat environment. Why
borrow if there is no reason to expand? Certainly, we will see a wave of refinancing from mortgages
to equipment loans. Eventually,
there will be some relief. Yet,
the majority of equipment is financed through leases that do not permit
easy refinancing. Unquestionably,
certain leasing companies and bank divisions are going to enjoy
exceptional margins in the months ahead.
So
far, the market is telling us there is still a high risk perception.
Institutional and individual investors are caught in a
“never-never land” where short term rates are too low and long term
instruments are too risky. Oddly,
there is considerable cash on the sidelines.
However, decisions to commit to equities or bonds are on hold and
money market inflows reflect this indecision.
Recall
how we were stopped out of our bond positions and almost edged out of
notes when the market corrected for no apparent reason other than an
unwilling yield in the yield curve.
However, investors are gradually becoming convinced that the
“fix” is not going to take place within a quarter, half, or even a
year. The U.S. is gearing
up for a protracted military buildup of unprecedented proportions.
Looking
for stocks to buy? Check
out military issues that stand to gain from the upcoming paradigm shift
from peacetime economy to cold war…
well, perhaps a warm war. I
would also be inclined to buy major airline stocks.
It should be obvious to any rational investor that the airlines
are now the safest mode of long distance travel.
That terrorist door has been slammed shut.
With
the exception of ground-to-air missile attacks such as the downing of
the Russian airliner in route from Israel to Siberia, the chance of
another in-flight skyjacking has diminished below the chance of a random
lightening strike. Crowded
train and bus terminals pose more of an enticement at this stage.
With
a $15-billion plus support package in place and the ability to realign
entire workforces and pay structures, airlines will emerge from this
tragedy lean and mean and ready to make huge profits.
Consider that several union contracts were effectively nullified
by force majeure clauses that permitted carriers to layoff tens of
thousands of workers without contractual consequences.
Once the unemployment claims are settled, massive savings move to
bottom lines. Undoubtedly,
there will be squawking down the road.
However, airlines have been given carte blanche to save their
necks. Couple labor
realignment with a precipitous drop in fuel and operations costs.
This is a formula for success.
In
addition, airlines will be able to finance equipment and operations at
the lowest interest rates since the Kennedy Administration.
Rumblings about investment tax credits simply add fuel to the
potential fire. So, my
advise is to stop with the doom & gloom and get on with the search
for value and potential!
I
am hoping the circled 2-day price action from 10620 to 10800 represents
the beginning of a consolidation flag.
If so, I would not be surprised to see December bonds test above
10926. This suggests
December notes could climb to 11016.
From these levels, I believe principle values will stall into
November unless the FED surprises us with further cuts.
Considerable attention will focus upon pre Christmas sales.
Will consumerism return?
With
half the retail volume occurring between Black Friday (the Friday after
Thanksgiving) and Christmas Eve, there is little question that this
season will be critical in determining whether we see an accelerating
recession or a potential economic bottom.
By some estimates, the pre season has already suffered more than
a ½ trillion dollar loss. Major retail chains have gone into panic mode with super
sales of entire fall and winter clothing lines.
The spring season is on hold and my sources in the factoring
business tell me financing for first quarter 2002 has dropped by more
than 30%. It looks ugly.
However,
recall the post Gulf War jubilance that rocketed equities and consumer
spending in late January, 1990 through June of that year.
The American public is resilient.
If President Bush shows progress in his new war and instills
public confidence, we could get such a pop.
This is particularly true with interest rates at multi-decade
lows.
Euro
Currency Stalls
I’ve
been reviewing two contrasting scenarios for the new Euro Currency as it
approaches a physical reality in January, 2002.
My first assumption is that conversion from old paper into Euros
will drive its value higher. Of course, this assumption was put forward before our new
war. The second
potentiality is that Europeans will reject the Euro and bicker over the
replacement of their old and familiar currencies.
Germans
are not pleased with losing their venerable Deutschmark to the new Euro. After more than fifty post-war years of rebuilding their
currency, Germans are loath to gamble with a new monetary standard.
Yet, gamble they must. The
French share the German disdain for sharing a common currency.
Alas, we see Europe’s old identities emerge as the populations
near a time of consolidation.
Another
unexpected influence is the tightening of borders just when Europe was
abandoning borders. A
central theme in the Common Market evolution is the melting of borders
and the promotion of free trade. With
new security issues arising from terrorism, some form of check pointing
is bound to be proposed and required.
To the extent any restrictions interfere with Europe’s
consolidation, we could see the U.S. Dollar assume a more dominant
position.
Before
the attack, I was poised to watch Europe lead the world out of recession
with a huge resurgence in spending.
Terrorism has dulled this perspective.
Now, the question is whether Europeans can continue safely
hoarding old bills. If we
have a few more weeks of calm, I see a resumption of the conversion into
the new Euro Currency.
The
chart illustrates how easily formations can be misinterpreted.
Notice how a “continuation flag” seemed to form in August.
The lack of FED intervention coupled with a consensus that long
term rates would remain high in anticipation of a bottom in rate
reductions pulled 30-year and 10-year issues down.
The flag failed to materialize.
Now,
we see a similar formation. Both
take off from 8800 support. However,
the August formation generated a gap that some technicians claimed
needed to be filled after prices busted below 9050 support.
The December Euro Currency is probing the 20-day moving average
and sell stops are rumored to be clustered around 9045…
just below the 40-day average.
Once again, the flag could fail.
Yet, if it holds, the current flag projects beyond 10000.
Many
traders remain skeptical about par with the U.S. Dollar.
If U.S. equities show signs of recovering, Euro Currency will
pour into the U.S. stock market and bolster the Greenback…
so they say. I would
welcome a breakout above 9165. This
would edge prices over the upward channel line and sway opinion more
towards a bullish stance.
Equities
It
seems the FED, Washington, and brokerage forms across the nation are
saying, “Come on, already!” With deliciously low interest rates and
an unbelievable liquidity pump humming, what’s wrong with stocks?
Even more importantly, analysts are turning bearish.
If you believe in contrary opinion, it’s time for a rally.
The
problem is shell shock. Demographics
suggest that more than 33% of individual stock market participants have
never experienced a recession. This
seems odd when considering the post 1987 crash and subsequent slowdown
that helped push the elder Bush out of office.
Yet, the chart is proof that new cash entering the market after
1987 has not experienced a significant downdraft.
The
woes of the 1970s saw Baby Boomers emerging from college.
Viet Nam was the distraction and Nixon was trying to sort out the
Johnson Administration’s Great Society.
Generation X came on the heels of the 1980s’ boom.
Having never seen $800 gold or a massive real estate plunge,
there simply is no frame of reference except for textbooks.
The
analogy is in poor taste, but buzz on the Internet alludes to our
excesses. The United States
was simply on an over consumption binge.
Did it take this terrorist attack to bring us to our senses?
Do we really need to take up the pace of consumerism exhibited
before September 11th? This
attitude strikes fear in the hearts and minds of our leaders.
We cannot afford to become accustomed to less.
Worse, what if the public realizes less is more?
Less movies… more
family time. Less travel…
more home improvement. Less
buying… more fixing or making do with what we have.
Less clothes… more dieting. It’s a fantasy, right?
Meats
Just
as I was about to boast on our progress on the short side of live and
feeder cattle, prices soared on today’s rumor that large supplies of
beef and pork would be required to sustain our troops in the weeks and
months ahead. Within a few
hours of the open, live cattle responded to short covering that took out
buy stops placed well below the 20-day and 40-day averages.
Technically,
live and feeder cattle were “oversold” and due for a corrective
rally. Thin conditions
amplified the reaction. I
contacted some processors to determine if there was any validity to the
rumors about military purchases. I
learned that there were some “unexpected purchases” presumed to be
for overseas operations. However, the total number of military currently committed to
new operations is not significant in comparison to domestic consumption.
After tracking the rumor down, I read the initiating memo that
cited the amount of beef stored and consumed on a single air craft
carrier. If all our ships
were to restock tomorrow, there could be a dip in immediate supplies.
However, the memo was more of a conjectural conjuration that a
reality because our carriers are already well stocked.
They consume no more meat during tactical operations than at any
other time. They are
resupplied on a regular schedule.
There
is some truth to the assertion that ground troops and called-up reserves
will require additional food. Is
the potential demand sufficient to reverse the downtrend in live and
feeder cattle? What would
these people eat under normal circumstances?
The
pork complex has operated as I expected with lean hogs settling into a
trading range reflected by the narrow path of the 20-day and 40-day
averages. This was exactly
the condition I was hoping for when placing the hog/belly spread.
The
February lean hog channel (bottom) is widening and displays an internal
flag that could rally prices above 5700.
February pork bellies busted below the channel and are poised
just above 7237 support. A
bust below 7220 suggests a 6750 test.
Thereafter, prices could easily crash another dime.
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