Investors will focus on Greenspan's testimony to Congress on Wed. for affirmation that an imminent rate hike is not forthcoming. A preliminary reading from the Univ. of Mich. on consumer confidence will be released Fri. These are the only 2 significant economic events for the week. The short-term technical indicators I follow turned positive on Fri. I expect the recent strength in retail, homebuilding and technology will continue this week. Consumer spending will only strengthen throughout the year with major tax cuts, low interest rates and decreasing unemployment continuing. Investors are anticipating this now.
BOTTOM LINE: On Fri. I positioned the portfolio 100% net long(%longs-%shorts). I covered some shorts and added a few new longs in the above mentioned sectors. I initiated a position in OHB, a small-cap homebuilder, on fri. It is down 40% from its high on interest rate fears. It has a great track record, low valuation and strong fundamentals. Technicals confirmed my buy decision and I expect it to outperform until interest rate fears resurface.
Sunday, February 08, 2004
Markets Week in Review
The S&P 500 Index rose for the 10th time in the last 11 weeks as strong economic reports and subsequent comments by a Fed Governor led investors to conclude that an imminent interest rate hike was not in the cards. Wednesday's technology weakness, led on the downside by CSCO, proved fleeting as investors focused on improving corporate profits with exceptionally low inflation. Profits for the S&P 500 are now projected to rise a healthy 14.2% in the 1st Q and 13.6% for all of 04. Thursday and Friday saw a rotation back into cyclicals, especially retail and technology.
BOTTOM LINE: Friday's strong positive reaction to underwhelming employment numbers shows the underlying strength in the US equity market. I would like to see follow-through on Mon. I expect we will. Seemingly overnight, investors decided that interest rates were not going to rise significantly anytime soon, thus rotating viciously back into cyclicals. I suspect a short-squeeze also contributed to the strength Fri.
BOTTOM LINE: Friday's strong positive reaction to underwhelming employment numbers shows the underlying strength in the US equity market. I would like to see follow-through on Mon. I expect we will. Seemingly overnight, investors decided that interest rates were not going to rise significantly anytime soon, thus rotating viciously back into cyclicals. I suspect a short-squeeze also contributed to the strength Fri.
Economic Week in Review
ECRI Weekly Leading Index 132.60 -.15%
The ISM Manufacturing index rose to 63.6 in January, a 21-year high, as factories boosted production to replace depleted inventories and meet improving demand. The pace of growth in the last 6 months of 2003 was the strongest in 2 decades, causing inventories to drop to record lows. Manufacturing may also be getting a boost from rising exports. Growth last quarter was augmented by a 19.1% jump in exports, the biggest increase in 7 years. A weaker US dollar has resulted in a dramatic increase in competitiveness for US companies overseas. The ISM Services Index rose to 65.7, its highest level since its inception in July 97. This is a very important number since services account for 85% of the US economy. Productivity came in at 2.7%, down from 9.4% last quarter. This bodes well for an increase in hiring. However, January's change in non-farm payrolls was only an increase of 112,000, below estimates of 172,000. This was the largest increase in jobs created in over 3 years, yet disappointed analysts. The headline unemployment rate dropped to 5.6%. Retail sales climbed a brisk 5.8% in January on increased sales of cold-weather clothing and increasing consumer confidence. Fed Governor Ben Bernanke said that he expects "some large employment gains fairly soon." He also stated that the Fed could be patient over the next few months because inflation will remain subdued through 05.
BOTTOM LINE: The very high readings for services, manufacturing and retail sales leads me to expect a very good 1Q GDP number. Currently, economists are projecting 4.4% GDP growth. I believe a number north of 5% is more likely. This, combined with record low inventories and decreasing productivity leads me to conclude that we are finally at the cusp of a significant pick-up in hiring. Within the next 2 months, we should finally see employment growth exceed expectations.
The ISM Manufacturing index rose to 63.6 in January, a 21-year high, as factories boosted production to replace depleted inventories and meet improving demand. The pace of growth in the last 6 months of 2003 was the strongest in 2 decades, causing inventories to drop to record lows. Manufacturing may also be getting a boost from rising exports. Growth last quarter was augmented by a 19.1% jump in exports, the biggest increase in 7 years. A weaker US dollar has resulted in a dramatic increase in competitiveness for US companies overseas. The ISM Services Index rose to 65.7, its highest level since its inception in July 97. This is a very important number since services account for 85% of the US economy. Productivity came in at 2.7%, down from 9.4% last quarter. This bodes well for an increase in hiring. However, January's change in non-farm payrolls was only an increase of 112,000, below estimates of 172,000. This was the largest increase in jobs created in over 3 years, yet disappointed analysts. The headline unemployment rate dropped to 5.6%. Retail sales climbed a brisk 5.8% in January on increased sales of cold-weather clothing and increasing consumer confidence. Fed Governor Ben Bernanke said that he expects "some large employment gains fairly soon." He also stated that the Fed could be patient over the next few months because inflation will remain subdued through 05.
BOTTOM LINE: The very high readings for services, manufacturing and retail sales leads me to expect a very good 1Q GDP number. Currently, economists are projecting 4.4% GDP growth. I believe a number north of 5% is more likely. This, combined with record low inventories and decreasing productivity leads me to conclude that we are finally at the cusp of a significant pick-up in hiring. Within the next 2 months, we should finally see employment growth exceed expectations.
Saturday, February 07, 2004
Weekly Scoreboard*
Indices
S&P 500 1,142.76+1.03%
Dow 10,593.03+1.00%
NASDAQ 2,064.01-.10%
Russell 2000 584.07+.57%
Wilshire 5000 11,129.42+.91%
Volatility(VIX) 16.0-3.79%
AAII Bullish % 50.91-10.5%
US Dollar 86.02-1.31%
CRB 260.5-.48%
Futures Spot Prices
Gold 404.2+.22%
Crude Oil 32.48-2.02%
Natural Gas 5.35-.76%
Lumber 363.6+8.89%
10-year US Treasury Yield 4.08%-1.21%
Average 30-year Mortgage Rate 5.72%+.7%
Sectors
Leading
Retail 128.20+4.06%
Homebuilders 239.57+3.02%
Drugs 351.41+3.21%
Lagging
Networking 295.23-2.78%
HMO's 870.28-2.47%
Computer Services 129.34-1.84%
*% Gain or loss for the week
S&P 500 1,142.76+1.03%
Dow 10,593.03+1.00%
NASDAQ 2,064.01-.10%
Russell 2000 584.07+.57%
Wilshire 5000 11,129.42+.91%
Volatility(VIX) 16.0-3.79%
AAII Bullish % 50.91-10.5%
US Dollar 86.02-1.31%
CRB 260.5-.48%
Futures Spot Prices
Gold 404.2+.22%
Crude Oil 32.48-2.02%
Natural Gas 5.35-.76%
Lumber 363.6+8.89%
10-year US Treasury Yield 4.08%-1.21%
Average 30-year Mortgage Rate 5.72%+.7%
Sectors
Leading
Retail 128.20+4.06%
Homebuilders 239.57+3.02%
Drugs 351.41+3.21%
Lagging
Networking 295.23-2.78%
HMO's 870.28-2.47%
Computer Services 129.34-1.84%
*% Gain or loss for the week
Friday, February 06, 2004
Mid-day Update
BOTTOM LINE: A technical glitch has resulted in another day without a mid-day report. Briefly, I have taken the portfolio to a net 100% long position by covering a few shorts and adding several longs. I will look for follow-through on Mon. to maintain this level of market exposure. The economy created 112,000 jobs in January, the most in 3 years, but below expectations. The headline unemployment rate dropped to 5.6%. This resulted in a decline in interest rates, a decline in the US dollar, a rise in gold and a rotation back into cyclicals. The positive response by the US equity markets to these numbers shows the underlying strength is still there.
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