Tuesday, December 22, 2009

Another New NASDAQ Top; S&P Follows; Dow Lags

Anyone who thinks that technology companies aren't leading the market should just take a look at a comparison 1-year chart of the three major indices. Not only did the NASDAQ suffer a smaller decline (by about 5%), it has outperformed the Dow by 20% and the S&P by almost the same amount. Thus, it was no surprise that the tech-heavy index broke out further to new 14-month highs for the second straight day. The S&P followed along to a new 2009 and 14-month high as well, while the Dow gained, but is still 36 points below the closing top of 10,501.05 on December 14, that being just more than a week ago, the Dow stocks can be excused for their lack of enthusiasm, though not for long.

Today was also another day in which the US dollar rose and so did stocks. It appears that the overt efforts of central bankers to break down the dollar carry trade has been successful. Just a few weeks ago, the Dollar Index had broken down to long-term lows below 74.50. Today, when the stock markets were finished with their funny business, the index stood close to 78.30, a nifty 4.8% move in just over three weeks, which is a powerful rally for a currency. A look at the "Dixie" chart reveals that the move was predictable. with a triple bottom at 18-month resistance in the 74.25-74.45 area. The lows of 2008 - in the 72 range - now appear to be well in the past, a very positive sign that a strong US recovery is well underway.

That stocks have begun to trend higher on days of dollar strength is another very positive development and is actually the normal way US equity and currency markets usually operate. The risk trade of the recent past - at least we believe it to be unwinding - may have been a useful tool in economic revival, whether planned or unplanned. The cheap currency allowed nearly risk-free investment in hammered down US stocks, spurring economic growth from the inside out. If there's any validity to supply side economics - the jury's still out on that one - money should begin flowing (trickling, as they say) to Main Street any day now, in the form of a less-strident consumer, job creation and capital flows to small business. We can hardly restrain our excitement!

The one item that supply siders always fail to mention is that for all their praise and devotion to the "Reaganomic doctrine" are the outsize federal deficits which accompany their economic boom. The Reagan years were marred by the same lower levels of government receipts as today's, though this time the borrowing by Treasury has been much higher, for a longer period and aided by the Federal Reserve through their policy of quantitative easing. Digging the federal government out of a $12 billion (and growing) hole is going to take some time and the resultant higher stealth tax rates (read: Medicare, Social Security and marginal increases to the wealthiest Americans) are likely to be a burden for years to come. Or, the government could just keep on spending and borrowing, which seems to be the preferred practice in congress, as it not only keeps the economy floating along on a mountain of debt, it works wonders for re-election campaigns.

Eventually, the debt will either have to be paid down or repudiated, a term which usually comes along just prior to another nasty utterance, war. Owing oodles of money to the Chinese, it seems almost inevitable that we'll come to blows with our Far East creditors, though likely in a proxy fight in some place like Africa, Afghanistan or some other remote area which neither party really wants. Of course, there is another way. The world currencies could be - in fact, they constantly are - recalibrated to reflect more realistic exchange rates. Besides the US, Europe also has berated the Chinese recently about devaluing the Yuan, mostly to deaf ears. The Chinese know they are now in control of global economic destiny and they're not about to take second best. The best we can hope for is continued prosperity and that our business and political leaders grin and bear it. After all, life in the USA is still pretty top-notch for the majority of folks.

By the way, in case you're confused about the difference between the Yuan and the Renminbi, there isn't one. It's called the Yuan on international circuits, but the term "Renminbi" means "the people's money," so, in China that's how it's known.

Dow 10,464.93, +50.79 (0.49%)
Nasdaq 2,252.67, +15.01 (0.67%)
S&P 500 1,118.02, +3.97 (0.36%)
NYSE Composite 7,184.18, +37.03 (0.52%)

On the day, advancing issues managed to clamber over decliners, 4009-2497. New highs remained ahead of new lows, 459-100, though there have been more new lows appearing by the day, a sign that stocks are beginning to top out rather severely. With the rally on a nine-month run, the past two have hardly been stellar, and making new tops seems to be almost more struggle than it's worth, unless, of course, you're smart enough to be in the right stocks. Volume was slow again, as it should be. There's only one more full session - tomorrow - before Christmas and a three-day break in the action.

NYSE Volume 4,196,486,000
Nasdaq Volume 1,751,327,250

Commodities were mixed as colder weather encouraged buying in the energy complex, with oil up 88 cents, to $74.60. Gold continued to fall, losing $9.30, to $1,086.70. Silver followed along diligently, dropping another 4 cents in value, to $17.00.

Prior to the open, the government released its third and final revision to 3rd quarter GDP, which came in at 2.2%, something of a disappointment, as the prior readings were 3.5% (advance estimate) and 2.8% (second). As it turns out, GDP grew, but by something on the order of 60% less than we were originally told. That the advance estimate was politically-sensitive is likely, but so is this revision, guiding expectations lower in order to deliver better-sounding results when 4th quarter results are announced on January 29, 2010. That appears to be how this administration wishes to play the game, so one should not be too amped up when 4th quarter GDP comes in around 3.0%.

The NAR announced that existing home sales for November stood at an annual rate of 6.54 million units, up 7% from October. Prices are still falling, albeit slower than they have been, down 4.3% from the same month a year earlier.

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