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Economy
Is Touch And Go
That’s
right! The economy has become a touchy subject as evidenced by
today’s surprises. Unemployment roles sank on a seasonally
adjusted basis to suggest we are finally seeing a rebound.
However, durables dropped to an amazing low led by failing auto sales.
The inflation rate is well under control despite the FED’s enormous
interest rate implosion. Economists predict we should see some
results by March, but Uncle Sam is visibly shaken. Regardless of
swift progress in the War Against Terror, the mood is, once again
turning somber.
Under
their breath, several analysts have voiced concern that unemployment is
severely distorted by seasonal adjustment. While the statistics
might lie, the result never does. The Department of Labor can say
jobless claims are retreating, however, companies after company continue
announcing significant staff reductions and consumer spending is
declining in step with employment roles. If you have any doubt,
look back to see when short-term interest rates were lower.
I’ve
brought up Census 2000 in previous REPORTS because I believe it is an
underlying motivation for current FED policy. Why are we seeing
such a huge campaign to avoid a prolonged recession? What does our
elderly FED Chairman know that the rest of us cannot discern?
Does the phrase, “The bigger they are, the harder they fall” have
any meaning to you? Essentially, the boom that preceded the Great
Depression and the boom that abruptly ended in March, 2000 share common
ground. Both booms were the result of converting from war machine
to peacetime economy. Both were technology driven. Both
developed bubbles. Both burst. In addition, there were
troubling shifts in demographics. World War I hollowed out an
entire generation. The Spanish Flu pandemic contributed to
the demise of the 20th Century’s first generation. Simply put,
the smaller young population could not support the older generation.
The
only solution was artificial stimulation through another war effort.
If you adhere to the 25-year rule, there are four generations for every
century. From 1923 to 1943, there was a sufficient recovery in
fighting-age males to comfortably wage a new war in Europe. The
back-to-back wars created a population hump known as Baby Boomers.
Over the past twenty years, this dominating generation has guided the
world toward greater prosperity. With the leading edge nudging
retirement age and the trailing edge pushing their children through
college, anticipated spending patterns do not bode well for an economic
recovery.
The
size of investment savings has plunged by $4.5 trillion.
Presumably, the bulge in population has taken the biggest proportional
hit. Timing for the current recession could not be worse. It
comes when withdrawals from the investment pool are inevitable and near
at hand.
Recall
my discussion this time last year when the Bush/Gore election
controversy was finally coming to a close. I pointed out that
Bush’s Social Security agenda was a smoke screen for market rescue
efforts. A move to “privatize” a portion of Social Security
was the only way to assure sufficient cash flow into stocks and bonds to
prop up the economy in general. After all, stock investing is not
a perpetual process. At some stage, shares must be liquidated and
profits realized. The purpose of investing is to be able to spend
wealth if, and when it is accumulated.
The
only way to make up for the deficit between Baby Boomers and
Generation-X is to force feed capital markets. In the meantime,
consider how the FED has done, so far.
The
campaign to stimulate through monetary policy was enough to push the DOW
Industrials average to a 10,200 test before meeting resistance defined
by the July – September consolidation. This is precisely the
forecast I made in previous REPORTS. The failure after testing
resistance has been sufficient to turn down the 20-day moving average.
The trendline has been slightly violated by the recent drawback, but an
argument that a slope adjustment was inevitable is enough to keep bulls
charged up… for now.
T-Notes
have displayed a highly erratic pattern that has stressed both longs and
shorts. Anticipation over the latest ¼-point rate cut managed to
drive prices from a 10500 test to today’s 10700 high, but traders
became spooked by gloomy data and the emphasis appeared to by on the
drop in unemployment claims rather than flat inflation.
No
matter what the FED does, it can’t seem to flatten the yield curve.
With Eurodollars presenting less than 2½%, several financial
institutions are pleased to borrow in the overnight market and buy bonds
or notes. This doesn’t put money into circulation. Is
there any wonder why the 30-year bond is being retired? Of course,
this very transaction can increase demand for long-term issues and bid
up their price while dropping the yield. The pressing question is,
“When?” Regardless of logic, we sold March T-Bonds at 10117
using a 10302 resistance stop. Two previous upward channels
resulted in powerful corrections and it appeared the most recent
two-week pattern was no exception. Further, the FED’s cut was so
discounted in the media and minds of traders that it seemed unlikely the
“non-surprise” would generate any follow-through.
Although
today’s action is encouraging, it is obvious we need a bust below 9915
to confirm a fourth downside objective as low as 9600. At that
stage, the FED will look for another way to prop up bond and note values
relative to short term rates.
Is
there really so much uncertainty to justify the significantly higher
long-term government yields? This is a foolish question since the
market speaks for itself. I know most investors pray for an end to
the bear equity market. However, the FED’s liquefying exercise
has not trickled down to Main Street… let alone Wall Street.
Until loose money makes its way into circulation, the economy will
stagnate and producers will seeks profit margins through savings rather
than sales volume.
The
vicious circle has been experienced time after time. Sluggish
sales leads to layoffs leads to more sluggish sales until a bottom is
forced into place. Investors are uncomfortable, but no one has
expressed the excruciating pain required to identify a true bottom.
In a sense, we still have too much anticipatory optimism. Stock
market analysts and brokers continue foisting “buy” recommendations
upon an unsuspecting Joe Investor and he continues buying. There
is disgust, but we haven’t reached disdain and indignation.
An
interesting technical dichotomy exists when examining the Euro Currency
in conjunction with falling U.S. short-term rates. We bought the
March Euro based upon the anticipated FED cut and a potential flag.
Although the 40-day average had not been taken out, the possible
violence of any breakout or bust warranted an early entry. Even
with the decisive move above the “flag,” today’s retracement sends
a powerful warning that we are not out of the woods.
We
are in the absolute home stretch for the Euro. I feel it must be
bid higher to encourage the 2002 transition. Still, any widespread
rejection by the Germans or French could torpedo the Euro like a World
War II merchant ship in the scope of a U-boat. Admittedly, I have
serious reservations about pitting my skills against such market
uncertainty. Each time the Euro Currency appears ready to launch a
new offensive against the Greenback, we see the move evaporate.
Environmentally, world leaders never anticipated launching the new
European currency into a global recession and new world war effort.
Usually, central banks like to ease their constituents into any new
situation without such dramatic distractions. What is the saying?
Timing is everything!
Speaking
about shipwrecks, the Japanese currency has plunged into the abyss after
producing a strong inverted “W” formation and violating went into a
nosedive 8080 support. Yen bulls who were counting on 8080 to hold
have been crushed. Even yesterday’s blip higher should be
carefully weighed against the potential for a test below 7500.
I
recall the Japanese Finance Minister saying that the Yen could not be
allowed to climb above 4510 (basis futures) for fear the Japanese
economy would shut down. That was in 1984! How low can the
Yen go. Take a look at the March ’84 chart.
The
Yen traded between 4130 in September 1984 and 4510 in March 1985.
By
the next year, it was below 3800! Keep in mind that the slowdown
effecting domestic business also impacts Japanese imports. Simply
put, consumers aren’t buying American (despite the slogans) and
they’re not buying Japanese either. If you intend to go bottom
fishing in the Yen, ware a life preserver.
Grains
The
Chinese buying spree is over and the Southern Hemisphere glut is in its
place. What’s the new expression? “I’m bummed!”
Having picked the exact course of January soybeans, a few ticks
prevented us from taking our longside objective after the 450 gap was
filled and effectively going short. Then, the Chinese purchase
derailed the turn-around. Fortunately, I had the intestinal
fortitude to reenter. Now, beans and corn are responding to a
potential bumper South American Crop, not to mention good Australian
conditions.
The
only encouraging grain is also in a tailspin. Wheat is being
dragged down with her sister grains. But, the Southern Hemisphere
winter wheat crop is already made. We are approaching January with
very little moisture or snow cover in a wide winter wheat area.
Thus, I remain happy with the March – July bull spread at 10¢ July
over. We shall see!
PLEASE
NOTE THE COMMODITY FUTURES FORECAST SECURITY CODE WILL BE CHANGING.
LOOK FOR THE NEW CODE WITH YOUR BULLETIN.
Email:
Phil@commodex.com
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