InvestmentHouse Newsletter 14.10.00

[reg]

[Brigitte]

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10/14/00 Investment House Daily
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Investment House Daily Subscribers:
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San Francisco, California. Still in California this week doing field work
in the high tech community. Friday's response in the markets to the
strong earnings posted has this area feeling good; 'glad good earnings are
getting rewarded' was the oft repeated phrase. We still get a sense of
concern about how the market is treating stock prices; they want to see
the moves last a bit. Nothing unique in those views.
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TONIGHT:
- Massive point rally driven by strong earnings news turns the indexes up
from support.
- Stronger economic news does not stop the rally.
- The rally looks to last at least a few sessions, but we have seen this
before.
- Subscriber Questions
- Team Trades
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A much needed rally provides a great trading opportunity, and looks to
have started our relief bounce.
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The markets finally found some traction right at the year's lows (for the
Nasdaq and S&P 500), shrugging off a higher PPI report and focusing on
outstanding earnings numbers from some of the market leaders. It was a
classic day for a rally, starting softer, the leaders moving ahead,
pulling back, and then breaking over their morning highs on the way to
huge gains. We love these days as the price action gives us great entry
points for new positions; the huge gains on top of that entry point were
beyond our expectations, but when you keep looking for opportunities, you
get rewarded.
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What triggered this move? Earnings, consumer spending, volatility, and
money outflows.
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The market was oversold, the earnings were great, and it was now or never
(or at least lower) for the Nasdaq and the S&P 500 as they were at the
last thread of support. Moreover, the markets may even have taken heart
at the retail sales figures which were up more than expected. As
consumers drive two-thirds of the economy, if they are buying once again,
perhaps the economy is not headed for the gutter. Stocks surged in the
morning and continued all day, never once looking feeble.
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Many interesting currents today. One that the television faces credited
with the move was Abby Joseph-Cohen again coming out and stating that the
S&P had 15% to the upside from here before year end. That was a dubious
accolade as Ms. Cohen had surfaced again last week when a rally was trying
to move forward in the morning, saying it was time to start picking up
tech stocks. That day saw a massive reversal and the techs were
pulverized, continuing their march down. With the JNPR, VRTS, PMCS and
TLGD great earnings, what was there to lose with another attempt at saving
her previous year-end prediction? This time she guessed right and the
market continued its morning rally.
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There was a confluence of factors that triggered today's rally. The techs
have been crushed; they were ready to bounce. The problem was, bad news
kept piling on day after day. Not just market news with some laggards
reporting poor earnings, but world turmoil that just fanned investor
fears. With not 'new' bad news today, the markets were able to respond to
the really great news out there from the market leaders. Indeed, despite
the dire predictions regarding earnings, 63% reporting thus far have
exceeded expectations, 32% have met expectations, and just 6% have come in
below expectations.
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Further, as we saw Thursday, the VIX (volatility index for the S&P 100)
had spiked to 35, well over the 30 level that is considered high and
reaching toward its highest closing level of the year. Moreover, money
was leaving the markets; $9 billion was redeemed from mutual funds in the
last three days. Some of our brokers sounded like whipped dogs. Fear,
selling, and some good news finally came together and brought some
investors into the market. Importantly, even with the worldwide tensions,
sellers did not assert themselves at all during the session.
Interestingly, as the rally surged, the televisions faces kept wondering
aloud if the rally would last. With the faces finally conditioned to
selling on the rallies, that was pretty much the last contrarian indicator
we needed to go out for a nice lunch and let stocks run. Of course, the
Palm VII was kept close at hand just in case.
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THE ECONOMY
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Producer Prices 'surprise' with a higher energy component.
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The PPI logged a 0.9% gain for September, topping the 0.5% expected
increase. The culprit was higher energy prices that spiked 3.7% in
September versus a 0.2% drop in August. Remember how many of the
television economists were grousing after the August number, saying it was
too low? Well they were right, but investors knew this would be the case.
Taking out energy, producer prices rose 0.3% versus August's 0.1% gain.
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Oil prices are higher, no question. But they are not at a level that will
cause economic contortions just yet, and as we have been saying, the rise
is transient. No one who has really looked at the capacity and use
believes oil will stay at this level for a significant period of time.
The more likely price is back in the $26 range. But there is more. We
received many comments from industry, and we received yet another one from
the manager of one of the major wood products trading companies in the
U.S. They are experiencing the soft lumber market, the worst in a decade,
based on the housing slowdown generated by the Fed's interest rate hikes.
But there is much more to the picture.
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Many industries use letters of credit to finance the billions of dollars
of merchandise they buy and sell. That means increased costs in the form
of higher interest rates on many of the overseas transactions that quite
often do not close within 30 days. The markets are incredibly
competitive, and companies still cannot pass on higher costs, namely the
higher costs of using money, onto customers. And do not believe the
stories the Fed and their ring-kissing economists say about higher labor
costs being the problem. As one manager says: "Our biggest expense
increase this year is not from having to increase the wages we pay our
employees, as they like to tell us. These rate increases have been our
inflation. The cost of oil only affects us in the minimal surcharges we
pay the move trucks, and in ocean freight for imports. By far interest
rate increases have hit our bottom line the most."
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Remember when we said that the Fed was creating its own interest rate
problem with rate increases when there were no signs of inflation?
Remember when we said that there was no hint of inflation until the Fed
had raised rates five times? We are hearing it from the mouth of industry
itself. Wage demands, higher energy costs, and similar 'strains' on the
economy are not, in the eyes of those on the front line, causing any
increase in prices. It is the associated cost of the Fed's own interest
rate hikes that is pressuring industry to raise prices. As noted,
however, the world economies are still so efficient and competitive that
raising prices, even when the pressures are cause only by the cost of
borrowing, is not viable. The result: the decimation of the bottom line
for those companies dependent upon the cost of money to conduct business,
e.g., lumber companies, paper companies, and other 'old economy'
industries. They may be 'old economy,' but they are 'economy' nonetheless
and we need them. Thanks Fed for creating a problem that has bled
billions from the bottom line of businesses and the retirement accounts of
millions of U.S. citizens.
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THE MARKETS
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Overall market stats:
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Money flows: As noted, $9 billion ran away from mutual funds the last
three days of the week. Outflows from mutual funds may have helped light
a fire under institutions. Th