CAPITAL MARKET COMMENTARY
WORLD STOCK MARKETS ARE LOWER THIS MORNING:
The only exception to this is the Japanese NIKKEI, which rallied to close just above unchanged for the day. This is opposite the other Asian shares, what had been strength in both absolute and relative terms over the past several sessions, has turned into sharp weakness. Hong Kong’s HANG SENG and the S. Korean KOSPI declined a rather sharp -0.7% and -1.9% respectively. Also, Europe is weaker coming into NY trade, but off their earning morning lows after strong economic data out of Germany. On average the losses are -0.5%. This has the US futures on the defensive.
TODAY’S ECONOMIC CALENDAR IS IMPORTANT:
First up at 8:30am EST, we see the July Durable Goods report; it is widely expected to have shown weakness in what is a ‘payback’ for recent strong figures. The consensus is -1.5% for the headline figure, and we won’t proffer an estimate there for it depends on airplane orders and other such stuff that renders estimation futile. As for the ex-trans number…consensus sits at -0.8%...we look for something substantially less such as -2.5%; with the non-defense capital goods figure – our proxy for capex – falling by -2.5%. If we are right here…this will send the bond market sharply higher and yields sharply lower. Our long TLT position would benefit
proportionately. At 10am EST, we have July New Home Sales; they are expected
to have declined from June’s record level of 1.374 million units to 1.328 million. Given recent mixed housing data that suggests activity has peaked…we look for something less than this such as 1.32 million. Again, this would be supportive to higher bond prices and lower yields.
MORE HOUSING DATA…INVENTORIES ARE “LOW, BUT RISING”:
As we have discussed in previous letters, we are clearly of the opinion the housing
market is more important to the economy than anything else…including rising energy prices. But the combination of a slowing housing market and rising energy prices is simply the ‘double whammy’ the economy cannot withstand and are what September
and October equity markets weakness can and/or should be about.
Yesterday’s release of the existing homes data was interesting simply because of the inventory data. Supply rose +71k to 2.751 million units…a record to be sure. Many are beating the table about record inventories; but sales too are very near a record.
Hence, we must look to the “month’s supply” figure to really balance it out. In 2004…it stood at 4.3 months; in 1Q-2005 it stood at 4.0 months, in 2Q- 2005 it stood at 4.3 and at present it stands at 4.6 months. This clearly shows that supply is increasing; and, given demand is decreasing…prices will moderate and impact the economy in our mind far more than many believe.
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ETF : CHART COMMENTS
OUTLOOK: We remain long-term fundamentally and technically bearish as our S&P 500 target of 1230-1265 was met. Both our ST and Alternative Models are on “sell signals” and we must now look to sell rallies as they develop.
GENERAL TRADING COMMENTS:
We remain short given our alternative model gave a ‘sell signal’ last Tuesday; however, we lightened up our position yesterday given IWM was back into major support. And, we understand that pressing a short position into support has been akin to hary cary in the stock market for the past several years; hence we exited prudently. Now, we must watch and wait to add to our short position...perhaps even covering our other SPY leg if a bottom is indeed forming. We are using an SPY trade above $123.50 as our line in the sand; this may be close...but the risk-reward does favor a potential rally developing in the days ahead.
Today, we are also moving to sell gold shares; this is predicated upon the fact a major trendline was violated yesterday and with the US dollar weakening today we expect further technical damage to materialize in the weeks ahead. We will use NEM as our surrogate for the trade.
"PAID-TO--PLAY” PORTFOLIO CHART T COMMENTS
GENERAL PORTFOLIO COMMENTS:
At this point, our equity has traded to new highs for the year and we are ‘sitting pretty’ so to speak. Moving forward, we want to see our short industrial metals position bear further fruit much in the same manner as our long oil patch position
did. In Europe this morning...we see all the miners and producers of things that if dropped on your foot would really hurt are declining and doing so rather sharply. This bodes well for our PD, X and STLD short positions...and we would move
our stop losses down in a commensurate manner Also, a review of our industry models shows a great deal of industries indeed ‘rolling over’ on both absolute as well as relative strength terms. Those that are showing the most bearish patterns have to do with consumer spending for Apparel and Luxury Items, Construction Materials, Chemicals and Home Furnishings. This is to name just a very few that we will be exploring in upcoming letters.
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