WORLD STOCK MARKETS ARE LOWER; BUT THE FIREWORKS ARE IN THE COMMODITY MARKETS:
Asia led by S. Korea and Hong Kong closed sharply lower by - 1.7% and -1.3% respectively, and European bourses are trading lower as well this morning – on average by -.8%. This weakness after yesterday’s late-day US surge has caught quite a few traders “off guard” this morning, and we are able to “sense” a material change developing in the psychology of traders. During the rally off the October-2005 low, Asian and European bourses would have followed the US indices higher and by greater percentage amounts – they would perform relatively better. Not so today; they have decoupled to a certain degree, and when we couple this morning’s weakness in the base and precious metals markets – we find traders are still in a liquidation mode. They are far more willing to sell rallies than they are to buy the dips.
Having said this, copper and the other base metals are lower by over -4.8%, with gold and silver down by 2.5%. We cannot remember a morning where the metals have been so weak without a visible catalyst; it would appear that long liquidation is occurring and that a test and likely break of the May metal lows is in order. Yesterday, we shorted Phelps Dodge (PD) intra-day based on commodity weakness; however,
it didn’t translate into stock specific weakness. Perhaps today the normal relationship between metal prices
and stock prices returns. Certainly in the intermediate-term this is the case, so it bears our patience.
TRADING THOUGHTS: Ye
sterday we moved to reallocate the PTP Portfolio by removing several long positions and adding one short position. We did so given we view the risk towards lower stock prices in the weeks ahead; the S&P 500 is churning below the 1280 level which is consistent with a consolidation to lower prices. Hence, we did take off our long energy a position given the enormous pressure crude oil was under at the time. In retrospect, we were probably premature, but we would rather err upon the side of being too cautious at this juncture rather than too aggressive. Obviously, we aren’t seeing the old baseball very clearly given the trading range, and thus we have only 6 trading positions, with our general average is upwards of 10. We want to see the seams on the baseball before becoming more aggressive; patience in our opinion is well warranted at this juncture.
FOMC “MAY 10TH” MINUTES WERE RATHER “HAWKISH”:
The minutes really didn’t contain any surprises; they noted the range of risks to both growth and to inflation. Clearly, the economy has been rather strong given the rise in commodity and energy prices, but then again housing is slowing and there are modest signs of economic weakening scattered about. This has led the FOMC to wonder aloud about the risk of moving too far given the attendant lag in policy decisions and when the economy responds. Really, the debate is and has been the same for many months now.
What we did find more interesting was the “tone” of the minutes; they were skewed towards inflationary concerns more so than they were at the March 27-28 meeting. In fact, they had a detailed debate about inflationary expectations, but the post-meeting communiqué noted that they were within the range of the past couple of years. We can infer they are now at the “upper end” of the comfortable range. Now, we aren’t central bankers here at TRR, but certainly if we were given the tone of the meeting we would have to believe that although the FOMC is data dependent at this juncture, then growth is going to have to materially slowdown between now and the June 28-29 meeting in order for them not to raise rates again given high and rising inflationary concerns. The risk of pausing doesn’t seem to outweigh moving ahead with another 25 basis points. We have said this before, and we will say this again – the FOMC has a tendency to end their rate hiking campaigns by raising rates by 50 basis points for emphasis and to change forward expectations. With FOMC talk of a 50 basis point hike in May – the capital markets may very well be provided with a 50 basis point hike in June with a post-meeting communiqué stating that the committee feels they have completed their long and consistent journey towards higher rates and moving forward will be a period of assessment. This would change the debate the FOMC so badly wants to change. If we were a central banker…we would certainly vote this way.
A COMPENDIUM OF DATA TODAY: The markets will be anticipating several employment reports in front of
tomorrow’s May non-farm employment report; the Challenger, Grey and Christmas report on monthly layoffs and the weekly unemployment claims. Also, housing gets a look with the OFHEO housing price index for 1Q and April’s Pending Home Sales Index – we anticipate the trend towards weakness will prevail. And finally, April Construction Spending figures and May ISM manufacturing data are expected to show 0.0%
growth and a reading of 55.6 respectively. We won’t argue with the consensus, but will note that the ISM report may bee too low given yesterday’s surprise Chicago-area manufacturing report showed great strength.
