Market Wrap Up May 26/05

by Martin Goldberg

Tonight, I will discuss a technical analysis of the Dow Jones Industrial Average. I think that the Dow can rise an additional 10 points this week, to 10,510 driven by its greatly oversold condition. With modest leverage (by today’s standards) of 100:1 this can be a profitable trade. I’m predicting tomorrow’s weekly jobless claims to drop to 90 jobs lost, down from 91 jobs last week. I would like to also discuss the recent consumer price index release by the Fed; the core rate was a benign 1% rise ex food and energy. (The total was 22% including food and energy. But no matter as has been the case in the last few years, the market responded to the core rate and ignored the food and energy statistics.). As usual the market cheered the core rate. Yes folks, all is well in the economy and there is no inflation! Today I bought a cup of coffee in Starbucks and it only cost me $15.50 for a Grande. I suppose that there was a lot of food and energy in my hot cup of Java. But there is no inflation according to the Fed.

I must live on the most unlucky neighborhood in the US. The US released the unemployment number a couple of weeks ago which indicated that our national unemployment rate is a benign 0.2%, but nobody on my street has a job, except for the 10 people who are real estate brokers, agents, or mortgage loan originators. Oh that’s right; there are also 2 cooks and 5 waitresses. I believe that Europeans should try to look to the US business model and structure their economy in a similar manner, because as our economic statistics clearly show, we’re in the 7th year of controlled growth and no inflation. Europe fiddles but here in the US we are in a Goldilocks economy. If you want proof of our robust economy, just check out our economic statistics. President Jeb Bush is trying to lobby congress to pass a law to limit corporate income taxes to a rate of negative 2% of pro-forma earnings. Larry Kudlow has openly campaigned for this bill in his CNBC TV show. His rationale is that this law will boost the stock market because the more a company earns, the government’s negative tax becomes greater, so that there will be even more incentive for corporations to make more money, especially the pro forma kind. And of course the middle class and poor should welcome the chance to subsidize corporate America with the negative tax because (or course) what’s good for corporate America is good for America. The negative corporate tax rate will be made up for via more government debt from Asia as it seems as if there is still no end in site to the amount of money they will lend the US. Even though China has learned how to produce things of value over the last 10 years or so, as hard as they try, they just can’t crack America’s valuable talent in the area of consumption. For that, China and the rest of the world continues to be grateful. And let’s not forget that negative corporate taxes are good for the bottom line and the stock market where we all have our 401K’s that most Americans are so dependent upon.

Kudlow’s open campaigning for the new negative 2% corporate tax rate (currently 0% since 2007) on his TV program was lost on most viewers who were shocked to have seen Jim Cramer seemingly drop dead of a massive heart attack during “the lightning round” of Mad Money when he was recommending General Electric stock. As it turned out, Cramer only suffered from severe gas, and it is expected that he will be back to Mad Money in about a week. I thought it a bit low class of CNBC to have rerun the apparent heart attack episode of Mad Money at 9 pm 11 pm on the east coast. General Electric stock dropped at the open apparently because it would be difficult for Mad Money to maintain its top rating on both cable and network television, but the stock quickly recovered on the “Cramer Has Gas” news, released at 10 am. Alan Greenspan will be the substitute host of Mad Money as Cramer recovers over the next week.

Here’s a tip on a hot IPO. US-Asbestos (Symbol: MESO). It could become the next Google ($5,280 per share). Following the government’s pull back of the ban in asbestos, the stringy stuff is once again a hot commodity with new housing needing to better insulate and fire proof given the high price of oil ($150 a gallon). It’s hard to believe all the tree huggers were against this stuff a few short years ago. And of course, their growth engine is overseas in (you guessed it), China. So what’s a little tickle in your throat?

You want another idea for hot IPO? How about Acme Yellow Ribbon Sticker Company (AYRS). It’s a pure play on American civilians’ desire for personal sacrifice to support the war effort. In the 1940’s women worked in factories (a building where things are produced) and families bought war bonds to support the war effort. In this decade, most non-poor Americans support the war effort on the national off balance sheet credit card, along with retail purchases, and putting a $0.99 yellow ribbon sticker on their SUVs. It promises to be another growing year for Acme, and the stock is a “buy”. (The ribbons are produced in Indonesia.)

Fed Chairman Greenspan has been re-appointed for another term in office, and it is generally believed that there is no reason why he cannot serve for the remainder of the century. I have to admit, I got egg on my face a couple of years back when I stated Mr. Greenspan’s name in the same sentence of John Law. I missed on the assessment in thinking that there was a housing bubble that was not sustainable. Mia copa! Today the housing stocks advanced, as NVR surged to $3500/share, on rumors that the company would declare a 100:1 split. Nobody in my neighborhood has a job, but the standard of living seems to remain sustainable as most people are through their 5th refinance in as many years. The average home in Wayne PA sells for $15 million. It’s a sure-fire bet that we can get $11 million for our house next year. That’s why I’m not too worried about my younger daughter entering college this year. With tuition at $120,000 per year, I’m going to have to refinance to put her through college. Actually the tuition is only $35,000 but the meal and energy surcharge plan comes to $85,000. I’m not worried, as long as I can refinance my mortgage. What the heck, I’m also taking out extra cash for a new “General Motors H-Vee” too. The new 10-cylinder 6-wheel drive model will enable our family to enjoy it’s off road capabilities, given the amount of pot holes on most State Highways (state and local budget cut backs). The re-finance money will also cover a good portion of our families’ gas money with gas at $7.49 a gallon. (Editors note for readers in 2005: An “H-Vee” is similar to the Chrysler “K Car” of the 1980s - the vehicle that led a US car company back to solvency following a Government bail out. In the case of the “H-Vee” it’s a 10-cylinder 6-wheel drive Hummer which Americans will love.)

The chart below is a sure-fire winner, in the buy high sell higher world of loved small caps. In spite of the stable Dow, selected small cap stocks have surged over the last year. This company, formerly Countrywide Credit Company, is in a linear uptrend and promises to have another great year in anticipation of the Fed dropping the Federal Funds rate back down to 2%. There is no reason why it shouldn’t continue its uptrend in this environment. Again I’m sorry to have been skeptical of companies such as this to sustain their earnings growth rate here in the US.

This quote from Mr. Greenspan’s last speech in front of the Citizens to Promote Gun Ownership among the Rich, covered by Bloomberg and CNBC (reference the chart of the Dow, above):

“I believe that the intrinsic value of the Dow Jones Industrial Average is 10,500.2.”

It is such a refreshing change of pace to hear Mr. Greenspan speak more directly to the serious issues in the economy such as stock market valuations. If I remember correctly, Mr. Greenspan began his first foray into equity pricing in way back 1996 during a speech where he suggested that our stock market was subject to “irrational exuberance”. Because this took the market down significantly (for one day only), he kept out of any sort of direct discussions about the stock market until early May of 2005 (about 4 years ago). At that time the Fed issued a statement on the Federal funds rate. After having issued a statement whereby the rate was raised a quarter of a point, the Fed waited about 2 hours observing the stock market drop before issuing a corrected statement that included a sentence about inflation being well-contained. This incited an important stock market rally (as I recall the market was threatening some key support levels at that time). This put a bid under stocks which has lasted for the last five years. Since that day in 2005, Mr. Greenspan has been less reluctant to issue statements espousing his view of stock market valuations.

Also from the same Greenspan speech:

“Cisco is a 'Buy' with a target price of $50 per share.”

So it was no secret that Cisco closed up $0.03 to close at 50.01/share. That The Greenspan Put still works spectacularly even after all these years.It is widely expected that with the initiation of social security private accounts this year, Mr. Greenspan will upgrade technology stocks to boost consumer confidence and this should boost retail stocks and homebuilders once again. Wall Street will be waiting with bated breath for Greenspan-technology stock upgrades as he speaks before the “Students to Repeal the State Balanced Budgets Laws”, meeting at Yale next month.

Google surpassed General Electric today as the largest company by market capitalization in the nation. OK, I’m off to hug a rich person, wax their car, and beg that they stay in the USA. It’s great to be an American.

Today’s Market

Today with the government’s release of rosy economic GDP data there was a reason for the stock market to rally, and for the bond market to swoon from its “conundrum” low long rates. We only got one-half of that picture today as the stock market rallied on tepid volume, while the bond market finished little changed. Luxury homebuilder Toll Brothers announced quarterly results that beat expectations and upped their 2005 guidance; the news was cheered by all homebuilders across the board with a 4% gain. What can be better than that? This from the Wall Street Journal, May 24th, page C-1, “Betting against the House”:

“In the end, whether the housing boom is a bubble may matter less than the fact that the U.S. economy has become highly geared toward the real-estate market. Northern Trust economist Asha Bangalore points out that employment in housing and housing-related industries has accounted for 43% of the rise in private-sector payrolls since late 2001. If housing cools, what will take up the slack?”

I saw a similar statistic cited in the Special Real Estate edition of Money Magazine as it applied to the economy in the San Diego, California. (Reading material at the oil change garage.) That our economy is so geared to the real estate market is practically the definition of a bubble. So as I said last week, with regard to housing, we are perhaps in October of 1999 in technology. At that time it was clear to any logically thinking person that we were in a technology bubble, yet anyone who invested his/her convictions was routed badly. Then, as now, there were a lot of discussions of a bubble in the mainstream media and publications, and yet the fundamentally correct were reduced to apparent buffoons until they were finally proven to be correct all along. And although it is difficult for me to admit, it seems that CNBC is presenting equal time to both sides of the story, from what I have seen. Until the homebuilder index makes a new high, there will be some validity to the argument that the housing bubble as it applies to the homebuilder stocks has already topped. Yet you can’t ignore that we can’t go significantly higher before we crash. Bubble tops are, as we recall from the 2000 Nasdaq, wild affairs and there is no reason to believe that we will not get a similarly wild top in the housing sector.

The chart above shows how the homebuilder index made a lower low before taking off with a decisive rally to where it sits now – off a long white candlestick challenging a fresh new high. This is wild action that is more typical of a top than a bottom and yet, we have seen many instances of such wild action ever since the indices topped out in January of 2004 and March of 2005.

Today’s economic data was yet another example of a long bond market that wants to go up in the absence of news. (Interest rates want to go down.) One would have thought that today’s economic growth news would have dropped the long bond and raised rates significantly, yet there was little effect. As you can see from the 10-year treasury yield below, even though interest rates were up today on the good news, they were little changed and no trendlines were broken. As with the homebuilders index, many eyes will be looking at the psychologically important 4% level. If the blue trendline is decisively penetrated without violating the 4% support, then interest rates could head substantially higher.

Still the downward sloping long interest rate line seems to say that the bond market is disagreeing with the stock market. Yet may be this is not a disagreement at all. Below is a chart of the Nasdaq to S&P 500 ratio.

It almost seems that those companies that are not tethered to classic valuation measures are the ones that have benefited from the most recent rally. This is similar to the 2000 Nasdaq top where all of the other major indices topped early in anticipation of an inverted yield curve, while the Nasdaq surged. Google closed the trading day a 72-billion-dollar company today.

Below is the chart of the Central Fund of Canada – a closed end fund consisting of approximately equal weighting of gold and silver.

As with the 10-year bond and the homebuilder’s index, there is a key technical level that deserves attention. My educated guess is that the support will hold at the blue line. Yet those fundamental investors holding dead money in precious metals should remind themselves of a stock market trader in 1929 which I’ll paraphrase as I recall from John Kenneth Galbraeth’s book documenting the Great Crash.

”When the world has gone mad, to be successful, you must emulate them to some degree.”

You want to make short-term money? Buy Google!

Below is the S&P 500 6-month daily chart.

Lower lows, higher highs. We filled a gap—albeit a small one. We have a divergence between price action--which is bullish--and volume action--which is not confirming the bullish price action. We are at the psychologically important 1200 mark and if it breaks that, especially on high volume, there is not reason to believe it will not go to 1220. If it fails…I don’t know. As you can see from above, these financial markets are totally sustainable!

Have a great evening!

Martin Goldberg

Martin F. Goldberg, MS, P.E.
Market Analyst
email mdelmgoldberg@comcast.net