Summary
Last week's market outcome was one of strong stocks, strong bonds. My
hunch for the current week is that by the time it is over, it will have been a
period in which the stock market continued its general topping process, while
Treasuries gave back some of last week's gains.
The Stock Market
* My seven-measure tracking group rose an average 1.2% last week,
registering a similar median advance of 1.3%. All seven components were up, with
gains running in a range of 2.4% for the Russell 2000, to a far more modest 0.1%
for the DJIA.
* Three of the group's components -- the NYSE Composite, the Value Line
(geometric) and the Wilshire 5000 made 52-week highs last week (all on Friday),
but these remained of the marginal variety. The DJIA and the S&P 500
finished the week leaving intact the closing highs they established on 2/11, while
the Russell 2000 and the NASDAQ 100 ended Friday below their previous closing
highs, put in on 1/26.
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SELECTED STOCK-MARKET MEASURES
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Recent Highs 03/05
03/05 ------------ 02/11 01/26 From
Close Close Date Close Close 01/26
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NYSE Comp. 6780 6780 03/05 6751 6672 +1.6%
Value Line 385 385 03/05 384 384 +0.3%
Wil. 5000 11314 11314 03/05 11293 11282 +0.3%
S&P 500 1157 1158 02/11 1158 1155 +0.2%
Russ. 2000 600 602 01/26 597 602 -0.3%
DJIA 10596 10738 02/11 10738 10703 -1.0%
NASDAQ 100 1473 1554 01/26 1514 1554 -5.2%
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Average -0.6%
Median +0.2%
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* The "topping process" as I envision and define it in the current
situation does not preclude new highs in the market bellwethers. What it would
preclude are major new highs. While what constitutes "major" is somewhat
subjective, let's just say that to qualify, it would have to be a good deal more
robust than shown in the above table.
* The closes on 1/26 would fit my definition of meaningful new highs.
Note that although the DJIA and the S&P took out their 1/26 closes on 2/11, they
did so by a mere 0.3%. And although the NYSE Composite, Value Line and
Wilshire 5000 made new closing highs last Friday, they still did not finish the day
appreciably higher than where they ended trading on 1/26.
* If the pattern(s) I'm describing here sound like what many people would
associate with "distribution," you'll get no argument from me.
Interest Rates
* As last week progressed, I sensed that some on Wall Street purposely
were hyping expectations about Friday's employment report -- in other words, a
"setup." From last Thursday's research missive:
"... The 'whisper crowd' ... has created an undercurrent suggesting
tomorrow's payroll number will 'surprise' on the upside. Is this being done
purposely to create high expectations that won't be met but that someone will trade
against. Could be, since much of Wall Street remains nothing more than an
open sewer."
The 21,000 payroll jobs reported created during February, juxtaposed to
the 125,000 comprising the consensus forecast, represented a helluva miss. But
the "whisper crowd" had pumped into the rumor mill a number well above the
125,000; you can be the judge about potential motivation.
(NOTE: In one respect the payroll numbers were even worse than they
appeared. According to the Labor Department's "Employment Situation Summary,"
20,000 government-sector jobs were created in February, largely in education.
Although this certainly seems like a peculiar time in the year for such a
development, it alone had the effect of wiping most of the growth in the private
sector. From the Labor Department's release: "...Within government, state
government added 20,000 jobs in February, largely in state education.")
* The Labor Department's employment report (out at 8:30 AM ET) tanked
stock futures. This carried into a weak opening, but most of the losses were
recouped by Friday's close.
* The Treasury market, on the other hand, saw huge gains that held, more
than expunging losses from earlier in the week at the longer end of the curve.
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TREASURY YIELD CURVE AS OF 03/05/04
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90-Day 2-Yr. 5-Yr. 10-Yr. 30-Yr.
Date Bill* Note Note Note Bond
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03/05/04 0.95% 1.55% 2.80% 3.85% 4.76%
02/27/04 0.93% 1.64% 2.94% 3.97% 4.84%
12/31/03 0.92% 1.82% 3.25% 4.25% 5.07%
06/13/03 0.84% 1.07% 2.03% 3.11% 4.17%
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BASIS-POINT CHANGE TO 03/05/04 FROM:
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02/27/04 +2 -9 -14 -12 -8
12/31/03 +3 -27 -45 -40 -31
06/13/03 +11 +48 +77 +74 +59
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*Coupon-equivalent yield.
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* As the above numbers indicate, yields across the entire coupon-issue
curve finished Friday lower than where they stood at the end of 2003. However,
they remained well above where they stood last June, which marks the cycle low
to date.
I continue to expect that at the end of this year, Treasury yields,
across the curve, will exceed year-end 2003 levels. I also believe there's a
pretty decent chance that at the end of this week, yields will be higher where they
ended last week, at least at the longer end of the curve.
* Materially changed perceptions (and realities, too) about inflation
should make a sizable contribution to the process, particularly in the area of
energy costs. Although much of Wall Street clings to a forecast of West Texas
intermediate crude returning to the mid 20s, I strongly believe this should be
expressed as nothing more than a hope, not a realistic forecast.
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CHANGES IN SELECTED NEAR-MONTH
COMMODITY FUTURES PRICES OR PROXIES
(Ranked in Order from 03/2003)
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% Change
To 03/05/04
From
03/05 12/31 03/31 -----------
2003 2003 2003 12/31 03/31
Close Close Close 2003 2003
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CRB Fut. Index 274.57 255.29 232.15 7.6 18.3
================================================
Crude Oil 37.26 32.52 31.04 14.6 20.0
Unl. Gasoline 1.1246 0.9492 0.9444 18.5 19.1
Heating Oil 0.9243 0.9127 0.7924 1.3 16.7
Natural Gas 5.4430 6.1890 5.0600 -12.1 7.6
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Copper 1.3380 1.0430 0.7125 28.3 87.8
Lumber 378.40 312.60 230.60 21.0 64.1
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Silver 6.98 5.95 4.46 17.3 56.5
Platinum 887.00 811.30 648.40 9.3 36.8
Gold 401.60 415.70 335.90 -3.4 19.6
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* And speaking of inflation, where is the Producer Price Index for
January? The Labor Department (Bureau of Labor Statistics) now acknowledges that
the February PPI, due for release on Friday, will also be delayed. Far be it
from me to imply that the delay is becoming increasingly suspicious, so if you
would like, may read for yourself BLS's explanation of what is (or isn't) going
on here.
http://stats.bls.gov/ppi/delaynotice.htm
* Something else I suspect will continue to be nettlesome for US interest
rates, and for the dollar's exchange-rate value as well, are the higher rates
that continue to be available on government debt obligations abroad. This
situation is updated in the following table as of last Friday, which, of course,
was after the European Central Bank decided against a rate cut on Thursday.
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APPROXIMATE INTEREST RATES OF SELECTED
COUNTRIES' SOVEREIGN DEBT SECURITIES
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Maturity
Date ----------------------------
Country 2004 1-Year 2-Year 5-year 10-year
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Australia 03/05 5.34% 5.27% 5.52% 5.62%
United Kingdom " 4.10% 4.30% 4.59% 4.73%
Germany " 2.00% 2.18% 3.17% 3.98%
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UNITED STATES " 1.07% 1.55% 2.80% 3.85%
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Japan " 0.02% 0.06% 0.48% 1.27%
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Yield Spreads -- Treasuries Vs. Foreign
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Australia 03/05 -427 -372 -272 -177
United Kingdom " -303 -275 -179 -88
Germany " -93 -63 -37 -13
Japan " +105 +149 +232 +258
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