Friday, September 29, 2006
Dow Jones Industrial Average Has Best Third Quarter in 11 Years
The Dow Jones Industrial Average finished the third quarter with a gain of 5.4%, including dividends. This was the best third quarter performance for the Dow since 1995. As well, the benchmark S&P 500 had its best third quarter in 9 years, finishing with a gain of 5.7%, including dividends. The Dow is now only 71 points away from its January 14, 2000 all-time record high of 11,750. Sector standouts during the third quarter were software (+14.6%), telecom (+12.2%) and REITs (+10.2%). Sector losers included coal (-17.6%), oil service (-10.6%) and steel (-11.1%). I still expect the S&P 500 to gain at least 15% for the year. It is currently up 8.5% year-to-date.
Weekly Scoreboard*
Indices
S&P 500 1,335.85 +1.60%
DJIA 11,679.07 +1.49%
NASDAQ 2,258.43 +1.78%
Russell 2000 725.59 +.97%
Wilshire 5000 13,322.49 +1.56%
S&P Barra Growth 619.96 +1.53%
S&P Barra Value 713.81 +1.67%
Morgan Stanley Consumer 653.50 +.85%
Morgan Stanley Cyclical 819.63 +2.21%
Morgan Stanley Technology 531.22 +2.29%
Transports 4,453.46 +2.91%
Utilities 428.40 +1.34%
MSCI Emerging Markets 96.77 +2.12%
S&P 500 Cum A/D Line 7,592.0 +6.0%
Bloomberg Crude Oil % Bulls 40.0 +43.32%
CFTC Oil Large Speculative Longs 166,460 +3.0%
Put/Call .83 -7.78%
NYSE Arms .86 -18.87%
Volatility(VIX) 11.98 -4.84%
ISE Sentiment 80.0 -38.46%
AAII % Bulls 51.32 +7.48%
AAII % Bears 32.89 -3.91%
US Dollar 86.03 +1.02%
CRB 305.58 +1.57%
ECRI Weekly Leading Index 135.10 -.30%
Futures Spot Prices
Crude Oil 62.91 +4.31%
Unleaded Gasoline 155.39 +2.92%
Natural Gas 5.62 -4.42%
Heating Oil 175.35 +3.94%
Gold 603.60 +1.36%
Base Metals 233.35 +.53%
Copper 346.00 +.43%
10-year US Treasury Yield 4.63% +.87%
Average 30-year Mortgage Rate 6.31% -1.41%
Leading Sectors
Oil Service +5.31%
Energy +4.32%
Computer Services +2.63%
Biotech +2.48%
Computer Hardware +2.15%
Lagging Sectors
Hospitals -.43%
Broadcasting -.50%
Telecom -.72%
Tobacco -1.33%
Airlines -1.83%
One-Week High-Volume Gainers
One-Week High-Volume Losers
*5-Day % Change
S&P 500 1,335.85 +1.60%
DJIA 11,679.07 +1.49%
NASDAQ 2,258.43 +1.78%
Russell 2000 725.59 +.97%
Wilshire 5000 13,322.49 +1.56%
S&P Barra Growth 619.96 +1.53%
S&P Barra Value 713.81 +1.67%
Morgan Stanley Consumer 653.50 +.85%
Morgan Stanley Cyclical 819.63 +2.21%
Morgan Stanley Technology 531.22 +2.29%
Transports 4,453.46 +2.91%
Utilities 428.40 +1.34%
MSCI Emerging Markets 96.77 +2.12%
S&P 500 Cum A/D Line 7,592.0 +6.0%
Bloomberg Crude Oil % Bulls 40.0 +43.32%
CFTC Oil Large Speculative Longs 166,460 +3.0%
Put/Call .83 -7.78%
NYSE Arms .86 -18.87%
Volatility(VIX) 11.98 -4.84%
ISE Sentiment 80.0 -38.46%
AAII % Bulls 51.32 +7.48%
AAII % Bears 32.89 -3.91%
US Dollar 86.03 +1.02%
CRB 305.58 +1.57%
ECRI Weekly Leading Index 135.10 -.30%
Futures Spot Prices
Crude Oil 62.91 +4.31%
Unleaded Gasoline 155.39 +2.92%
Natural Gas 5.62 -4.42%
Heating Oil 175.35 +3.94%
Gold 603.60 +1.36%
Base Metals 233.35 +.53%
Copper 346.00 +.43%
10-year US Treasury Yield 4.63% +.87%
Average 30-year Mortgage Rate 6.31% -1.41%
Leading Sectors
Oil Service +5.31%
Energy +4.32%
Computer Services +2.63%
Biotech +2.48%
Computer Hardware +2.15%
Lagging Sectors
Hospitals -.43%
Broadcasting -.50%
Telecom -.72%
Tobacco -1.33%
Airlines -1.83%
One-Week High-Volume Gainers
One-Week High-Volume Losers
*5-Day % Change
Stocks Lower into Final Hour on Quarter-end Profit-taking
BOTTOM LINE: The Portfolio is slightly lower into the final hour on losses in my Medical longs and Semi longs. I have not traded today, thus leaving the Portfolio 100% net long. The tone of the market is slightly negative as the advance/decline line is modestly lower, sector performance is mixed and volume is below average. Most professional and individual investors have not embraced the recent rally despite the fact that the S&P 500 is poised to post its best third quarter in 11 years. In fact, short interest on the NYSE and Nasdaq is at all-time highs. Most bearish sentiment readings are still very high considering the DJIA is less than 50 points from an all-time high. The ISE Sentiment Index has bounced around depressed levels for months. The OEX Put/Call ratio has been elevated during this time, as well. Domestic stock mutual funds are still seeing outflows. Commodity and emerging market funds, which have received huge capital infusions this year, will likely see significant outflows at year-end. How many times earlier in the year did we hear investment managers talk about the mid-term election cycle decline they expected and that they were already positioned for it? Historically, the average bottom for mid-term election cycle lows is tomorrow. There is still massive bull firepower available to push the major averages even higher through year-end. I sense we are still in the early stages of a stunning rally. I expect US stocks to trade mixed-to-higher into the close from current levels on short-covering and bargain-hunting.
Today's Headlines
Bloomberg:
- OPEC, seeking to stem a two-month plunge in oil prices, said Venezuela and Nigeria will cut crude production by a combined 170,000 barrels a day.
- Pirate Capital founder Thomas Hudson, seeking to calm investors after half of his staff left, told clients of the hedge-fund company that he plans to deliver returns of more than 20%.
- A more rapid slowdown in economic growth and further signs of waning inflation would be needed to prompt the Fed to cut interest rates, St. Louis Fed Bank President William Poole said. Poole also said the “worst inflation news may be behind us.”
- The Fed will probably lower its benchmark interest rate in the first quarter of 2007 as inflation pressures diminish, according to economists at Citigroup(C).
Wall Street Journal:
- President Bush plans to focus on easing bottlenecks slowing the distribution of ethanol during his remaining time in office.
- The SEC relaxed a rule that controls the number of agreements mutual funds must enter and the time they have to file shareholder information.
- The FASB is starting a series of changes in policies that could have a big impact on companies, investors and workers with defined-benefit pension plans.
NY Times:
- New York’s overall crime rate has fallen 5% so far this year compared with the same period in 2005.
Washington Post:
- Muslim leaders in the US said they will try to get more of the country’s 2.2 million voting-age Muslims to vote this year.
- Iran may be moving more slowing to enrich uranium than previously believed because of technical difficulties with the process.
Boston Globe:
- Harvard University and four other colleges have agreed to donate $10 million in cash and services to 10 of Boston’s poorly performing public shools.
CNBC:
- Amaranth Group’s talks with Citigroup to gain working capital ended last night, which may force the hedge fund to begin liquidating all its positions.
Variety:
- Apple Computer(AAPL) and Wal-Mart(WMT) are in talks to form an alliance that would allow the retailer to profit from iTunes downloads and give Apple(AAPL) access to more film titles from the major Hollywood studios.
Oriental Morning Post:
- Wal-Mart Stores(WMT) may pay $200 million to buy 27 stores from Trust-Mart, a Taiwan-based mainland China supermarket chain operator.
El Universal:
- A Florida lawmaker is calling for sanctions against Citgo Petroleum, the US subsidiary of Venezuela’s state oil company, after Venezuelan President Hugo Chavez called President Bush “the devil” at the United Nations meeting last week in New York. State Representative Hasner asked Florida’s Transportation Dept. to force Citgo-affiliated gasoline stations from the Florida Turnpike because of Chavez’s remarks. Chavez should be given a clear message that “Florida won’t support institutions that seek the destabilization of the US,” Hasner said. 7-Eleven, the largest US operator of convenience stores, said it will start selling gasoline under its own brand after a 20-year relationship with Citgo Petroleum.
- OPEC, seeking to stem a two-month plunge in oil prices, said Venezuela and Nigeria will cut crude production by a combined 170,000 barrels a day.
- Pirate Capital founder Thomas Hudson, seeking to calm investors after half of his staff left, told clients of the hedge-fund company that he plans to deliver returns of more than 20%.
- A more rapid slowdown in economic growth and further signs of waning inflation would be needed to prompt the Fed to cut interest rates, St. Louis Fed Bank President William Poole said. Poole also said the “worst inflation news may be behind us.”
- The Fed will probably lower its benchmark interest rate in the first quarter of 2007 as inflation pressures diminish, according to economists at Citigroup(C).
Wall Street Journal:
- President Bush plans to focus on easing bottlenecks slowing the distribution of ethanol during his remaining time in office.
- The SEC relaxed a rule that controls the number of agreements mutual funds must enter and the time they have to file shareholder information.
- The FASB is starting a series of changes in policies that could have a big impact on companies, investors and workers with defined-benefit pension plans.
NY Times:
- New York’s overall crime rate has fallen 5% so far this year compared with the same period in 2005.
Washington Post:
- Muslim leaders in the US said they will try to get more of the country’s 2.2 million voting-age Muslims to vote this year.
- Iran may be moving more slowing to enrich uranium than previously believed because of technical difficulties with the process.
Boston Globe:
- Harvard University and four other colleges have agreed to donate $10 million in cash and services to 10 of Boston’s poorly performing public shools.
CNBC:
- Amaranth Group’s talks with Citigroup to gain working capital ended last night, which may force the hedge fund to begin liquidating all its positions.
Variety:
- Apple Computer(AAPL) and Wal-Mart(WMT) are in talks to form an alliance that would allow the retailer to profit from iTunes downloads and give Apple(AAPL) access to more film titles from the major Hollywood studios.
Oriental Morning Post:
- Wal-Mart Stores(WMT) may pay $200 million to buy 27 stores from Trust-Mart, a Taiwan-based mainland China supermarket chain operator.
El Universal:
- A Florida lawmaker is calling for sanctions against Citgo Petroleum, the US subsidiary of Venezuela’s state oil company, after Venezuelan President Hugo Chavez called President Bush “the devil” at the United Nations meeting last week in New York. State Representative Hasner asked Florida’s Transportation Dept. to force Citgo-affiliated gasoline stations from the Florida Turnpike because of Chavez’s remarks. Chavez should be given a clear message that “Florida won’t support institutions that seek the destabilization of the US,” Hasner said. 7-Eleven, the largest US operator of convenience stores, said it will start selling gasoline under its own brand after a 20-year relationship with Citgo Petroleum.
Personal Incomes Rise, Spending Decelerates, Confidence Increases and Chicago Manufacturing Surges
- Personal Income for August rose .3% versus estimates of a .3% gain and a .5% increase in July.
- Personal Spending for August rose .1% versus estimates of a .2% increase and a .8% gain in July.
- The PCE Core for August rose .2% versus estimates of a .2% increase and a .1% gain in July.
- Final Univ. of Mich. Consumer Confidence for Sept. rose to 85.4 versus estimates of 85.0 and a reading of 84.4 in August.
- The Chicago Purchasing Manager Index for Sept. rose to 62.1 versus estimates of 55.7 and a reading of 57.1 in August.
- Personal Spending for August rose .1% versus estimates of a .2% increase and a .8% gain in July.
- The PCE Core for August rose .2% versus estimates of a .2% increase and a .1% gain in July.
- Final Univ. of Mich. Consumer Confidence for Sept. rose to 85.4 versus estimates of 85.0 and a reading of 84.4 in August.
- The Chicago Purchasing Manager Index for Sept. rose to 62.1 versus estimates of 55.7 and a reading of 57.1 in August.
BOTTOM LINE: Consumer spending in the US rose .1% last month, Bloomberg reported. This comes on the heels of a .8% surge in July. Disposable income rose .4% and is now 8.8% higher from year-ago levels, almost three times the rate of inflation. The core pce, the Fed’s favorite inflation gauge, rose .2%. I expect consumer spending to accelerate over the next few months as stocks rise more, interest rates remain low, sentiment improves, energy prices fall further and the job market remains healthy. I expect the core pce to decelerate over the intermediate-term.
Falling gasoline prices pushed confidence among American consumers to the highest level in five months in September, Bloomberg reported. The expectations component of the index, which economists link to future consumer spending, surged to 78.2 from 68 the prior month. Consumers expect inflation to moderate to 3.1% over the next 12 months versus expectations of a 3.8% gain in the prior survey. The average price of a gallon of regular gasoline fell to $2.34 on Sept. 27 from $2.79 at the end of August, according to the American Auto Assoc. 33% of Americans said they are spending more on other goods after the fall in gas prices, a recent Bloomberg survey showed. A 7.7% gain in Americans’ wages during the second quarter is also boosting sentiment. I still expect consumer sentiment to reach new cycle highs over the intermediate-term as stocks rise, inflation decelerates, energy prices continue to decline, interest rates remain low, housing stabilizes at relatively high levels, the job market remains healthy and irrational pessimism lifts further.
Manufacturing in the Chicago area unexpectedly accelerated this month to the highest since July 2005 as new orders picked up, Bloomberg said. Strong profits, rising confidence, falling energy prices and inventory rebuilding are spurring companies to boost production. The new orders component of the index jumped to an 11-month high of 67.3 from 59.6 the prior month. The prices paid component of the index fell to 69.8, the lowest in 13 months from 75.2 the prior month. The Chicago Fed said its district makes 40% of US motor vehicles. I am surprised by the strength in Chicago manufacturing considering auto production cutbacks. Plunging energy prices are so far offsetting this. I will closely monitor the ISM Manufacturing report next week.
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