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12/06/03 Investment House Daily
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MARKET ALERTS:
Target hit alerts issued Friday: None issued
Buy alerts issued: AIRN
Trailing stop alerts: ARTX
Stop alerts: A

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SUMMARY:
- Market sags again on Intel, jobs news, but no downside rout.
- Jobs report shows gains, but less than expected as Bush cross-policies hamstring recovery.
- Preparing to bounce, but day to day volatility last week is a problem.

Late Thursday rally fizzles in face of less than expected economic improvement.

Expectations to the market are like gravity to rock climbers: one slip and things can get ugly. With Intel raising guidance but not as much as desired (along with a $600M charge thrown in) and job creation one-third of official expectations (and well below the whisper of 240K), expectations overshot reality. A market primed for super news after an already impressive run did not get the news it wanted, and gravity was ready to take over. Just as the market has not applauded the much better than expected economic data, however, it did not plunge on the missed expectations. Yes it sold off, but volume was light, the indexes held at or very near support, and a lot of stocks did the same. It could have broken on the news, but all it did Friday was bend down to support.

Perhaps it was because that even though the reports missed expectations they still were not bad in the bigger economic recovery picture. Despite the repeated moaning about jobs being late, given the true indicator of recovery, the market bottoming, jobs are right on if not ahead of schedule. We were expecting creation in December at the earliest, but jobs started showing up in September. Not a great surge, but making the turn, and with the big economic growth, on the cusp of a big breakout. What about Intel? It raised its lower revenue range past the prior mid-point that was a raised level itself. It enjoyed huge third quarter growth, a quarter that is usually a weak quarter ahead of the stronger holiday months. The fourth quarter is shaping up better than expected, and we note that the Intel bosses were still saying the gains were without a notable increase in corporate replacement. Can you imagine what the results would have been/will be when the corporations step in as well? Pretty close to blowout time.

The market was not in the mood to imagine, just wallow in a bit more in the overall lethargy of the past week. It showed flashes of upside strength on Monday and Thursday, but it showed as many downside sessions on volume. It is trying to rally and make a pullback to support at the same time as opposed to just breaking out or making a nice, orderly test. You like to see one or the other as that means the buyers are still in control. This increased day to day volatility indicates buyers and sellers still slugging it out even as it tries to makes its move. That is not the best action to hold a move.

THE ECONOMY

Jobs grow but miss the mark.

Unemployment fell to 5.9% but non-farm payrolls gained just 57K, far below the 150K expected and the 240K whisper number. The California grocer's strike took away 26K to 31K jobs, but that still left it far below the mark. Hourly wages rose by 0.1%, a good sign because when workers earn more that goes hand in hand with job creation.

The immediate commentary was negative. After being notably mute the prior two months the 'I told you so' crowd was out discussing 'structural' impediments, 24 months of jobless recovery, and how 'this time it is different' (actual quote: "the old rules have been tossed out the window"). While there is no question that some jobs lost are not coming back, that is the same thing that happened in the early 1980's and again in the 1990's. Certain industries lost jobs that never came back, but that did not stop massive job creation as the economy recovered and new industries gave rise to new jobs. To us the 'this time it is different' line is sweet music. We heard that back in August and September 2002, and wouldn't you know it, the market bottomed in October. Typically market psychology runs through a set cycle, and the 'this time it is different' is pretty much the end of the down cycle.

Household survey shows jobs increase.

More than that, the unemployment rate fell to 5.9%, meaning that about 1 million jobs have been gained over the past three months given the action of the overall unemployment rate. This survey is of the actual workers: do you have a job now? The non-farm payroll number is the one everyone is watching, the survey the employers compile. How can the unemployment rate fall when economists say it takes 150K non-farm jobs per month just to hold steady? Many reasons, not the least of which is tied to the way the government keeps records.

Temporary or contract workers are not included in the non-farm number, but if you are one of those workers, you still have a job. The government pretends they are not there. Not really, that is why the feds keep track of the household survey as well. It is the economists, unfortunately, that have turned to tunnel vision, focusing on one incomplete aspect of the job picture. Sole proprietorships and other small business start-ups are also not included. After a serious economic slowdown and massive corporate layoffs as the big, slow behemoth companies shed workers to try and regain profitability lead many smart, industrious entrepreneurs to start their own businesses. That is what has happened in this last recession. For some reason we are acting as if those simply do not exist or as if they are worse than big company jobs. These are the businesses where the next innovations come from and where 75% of the future jobs will come from (that is the percentage of jobs that small businesses produce in the economy).

That is a structural change, but that is not a structural 'impediment' as some term it. We view it as a positive for the economy's future as new companies started by former employees with a better idea push technology further.

Fed has to like the jobs picture.

The Fed has been, as usual, skating on thin ice, hoping it does not crack. It has been using the 'foreseeable future' and 'considerable length of time' in describing how long it will keep rates low. It staked its easy money policies on lack of employment as far back as 2001. It does not want to raise rates and roil the market or risk economic investment just as it is starting to pick up. It could easily raise rates to 2% without leading rates; it would just be following them higher and that would not put any pressure on investing. It is the perception, however, that it is worried about.

The Friday jobs report gives it another month (and next week's Fed meeting) to not worry about saying 'considerable length of time' in its statement. If jobs jumped to 200K+ as we anticipated, the Fed would be have painted itself into a corner and thrown away the key (Archie Bunker). Now it can keep its inflationary monetary bias fully intact, skipping out to play football after school instead of doing the term paper that is due at the end of the week.

Bush economic policies at odds with each other, keeping a strong recovery from being a super recovery.

The Bush administration is its own best friend and worst enemy in the economic recovery. This recovery could be much better in both terms of growth and jobs but for the missteps Bush makes in order to curry favor and gain votes.

Bush's friend: supply side tax cuts, dividend and capital gains tax reductions, and overall reductions in marginal tax rates. These are tried and true, proven methods to start investment and get an economy roaring. Certain parts of the economy are roaring; others could be a lot better.

Bush's enemies: protectionism, overspending, currency mishandling. Farm subsidies, steel tariffs, Chinese laundry tariffs, Canadian lumber bans. After Clinton changed the democrats' stance on protectionism to free trade, Bush as taken the old democrat line and has turned protectionist in a fairly blatant play for votes. Some claim the lack of protectionism has lost us jobs. In reality, it is the protectionist policies that are supposed to help save jobs that are a part of the problem. Companies, fearing a trade war with the rest of the world the past few months, have had another reason to avoid re-hiring after a dramatic economic downturn. Uncertainty about what a trade war would bring keeps them from hiring. Moreover, tariffs only raise prices for everyone else here at home. If you want companies, all companies, to hire, don't take away a chunk of their recovering bottom lines as they come out of a recession by raising the cost of steel, wood, clothing, etc.

Spending is out of control as well, and that has negative implications on foreign investment and the dollar. There is nothing wrong with running a deficit trying to recover from a sharp economic drop and a history making bear market. That does not mean, however, that the spigot should be left on full blast. Even if you take out anti-terrorism expenses, spending is out of control. Congress likes to talk of discretionary and non-discretionary spending. It likes to toss up its hands and say it cannot do anything because so much of the budget is mandated. First, nothing is mandated. A program can be cut if it is not working. Second, show me a federal aid program without fraud and waste in its administration and I will donate directly to that program. Third, how the heck is $200K earmarked for the Rock and Roll Hall of Fame mandatory? Sure the tax cuts are generating more economic activity and already starting to eat into the deficits, but those increased tax revenues are no free pass to spend at will. Instead, if someone wanted something, the Bush administration has given it. The latest is the huge, huge, huge Medicare bill, tacking on several hundred billion (already rising in estimates to $1 trillion) to the deficit.

To put things in perspective, by this time in Ronal Reagan's presidency he had vetoed 23 spending bills. Bush has not vetoed one spending plan, and now he wants another moon mission. Let's face it, most all of these ideas sound great. Giving prescription drug benefits, free this, free that, free everything sounds great and gets votes. In a free enterprise system it does not work. There has to be the motivation, the incentive for people to work to make the economy work. In a free enterprise system you have to have incentives. You have to give incentives to those that take on the risks that make the jobs and the economy work. That means don't take so much of what they make; the reward has to be enough to make the risk worthwhile. Second, you have to give incentives to those that are not working but could work so that they become part of the productive class. In our system you can chose not to work and, by the governments standards, own a car, two TV's, VCR, and a computer and still be considered in poverty and thus get all kinds of federal assistance. If you are responsible self employed person and use a MSA (medical savings account) combined with the high deductible insurance policy the program mandates, you pay $50 for your immunizations in addition to your insurance premiums while someone that decides to go without insurance pays just $10. The incentives are backward. The tax cuts helped, but much more work in other areas is needed. Right now reverse incentives are part of that spending the feds so love, and they insure continued spending in the future. Yet we vote in another trillion dollar benefit without first mandating that all other programs be reviewed for efficacy and excised of fraud. The cart is leading the horses.

Finally, Bush is playing with the dollar and playing with fire. The Reagan administration started to fiddle with the dollar after the economy started to roar back, and that led to a soft spot in the recovery back in 1985. The same idea was at play, i.e., lowering the dollar to help out the big multinational companies sell more goods overseas. It backfired as the dollar kept on sliding and the economy slowed. Why? Because the majority of the economy, the US consumer and the majority of US businesses (remember, most are small businesses) were hurt by the falling dollar as their buying power shriveled. A few big businesses benefited while the majority that actually made the economy work suffered. The economy thus suffered as well. Same effect as tariffs. The Bush administration is starting to rework its tariffs. Now it needs to rework its policy on the dollar.

The wink and nod with respect to a 'strong dollar' policy has let the greenback sink against the new kid on the block, the euro. What happens if Russia decides to price its oil in euros versus dollars? The dollar sinks even lower. What Bush is doing is similar to what the Fed did with interest rates. IF everything goes according to plan, IF nothing unexpected happens, IF we are all extremely lucky, then it might possibly work. The question no one knows is at what point foreign investors decide the dollar is too low and dump their dollar based investments. And despite Bush's alleged peak into Putin's soul, what if Russia prices its oil in euros? George Soros, already fanatic about une-electing Bush, takes every opportunity he can to tell the work he is selling dollars (as he did to the pound a decade ago). He wants to profit from his short sales, and ruining the Bush economy only helps both his agendas. Those are just a few of the unexpected events that could implode the dollar and crush the recovery. That is another factor holding back the recovery because there is legitimate concern about investing into this scenario.

The recipe is simple, but Bush got off track in his lust for votes: tax cut stimulus, reduce federal spending, and reduce the size of government. As Meatloaf said, two out of three ain't bad, but Bush is going the wrong way with spending and government.. Simple rule of thumb: politics and sound economic policy do not mix at first. Doing what has to be done to fix a mess from unwarranted interest rate hikes, tax hikes, a neglected military and intelligence network, letting enemy number one go when he was offered to us is dirty work that no one wants to undertake. You have to make unpopular choices. In the end they pay off as we are seeing with the tax cuts and the war on terror. When you are trying to curry favors using tariffs, pork barrel gifts, and undermining the dollar before the hard work is done, you make the job all the more difficult. Do the hard work, the unpopular work, and then let everyone be very pleased when your policies result in a roaring economy. This economy could be much further along than it is but for these self-inflicted wounds.

THE MARKET

Flashes of strength faded by the end of the week. Techs, chips, smaller caps suffered overall on the week even though Monday and Thursday they tried to put together rallies. The cyclical stocks were strong all week as money moved out of the leading indexes into these large cap, non-growth companies. That puts the week in perspective. The leaders took a breather and the cyclical stocks rose as the money that left the leadership areas stayed in the market, just moving around. There were no major breakdowns though the indexes are testing support at the Friday close. Overall the uptrend remains along with money in the market. That in itself is a positive.

The action of the indexes is not that negative. Even though they closed lower Friday, they are for the most part holding up. Nasdaq is the important exception. It barely made a new high on this last bounce up off the 50 day MVA and the up trendline. This is quite different from the early bounces in the uptrend where solid new trend highs were made each time. Nasdaq was the only leading index that did not make that new high; the small and mid-cap indexes easily made new highs, tapping the top of their ranges and now coming back in their uptrends as if nothing was wrong at all. SP500 also surged to a new high and it is holding onto that breakout. The leader Nasdaq, however, is a problem that cannot be discounted, particularly if it breaks its uptrend on volume.

The back and forth action also made us uncomfortable. Strong surge Monday on solid trade, then a reversal Wednesday on strong, distributive volume. A late afternoon rally Thursday on volume after testing near support. Then right back down Friday. Not massive volatility, but the kind of action that shows that the buyers and sellers are still very much in a struggle even as Nasdaq and SP500 tried their breakout moves. That means no one is really in charge of the action. Thus far no breakdown, but the lower Nasdaq high and increased say to day volatility shows there is no clear winner at this juncture.

Still, the week closed with many stocks and indexes in good position to rally. The issue is whether they will be able to overcome the negatives and rebound for the next leg into Christmas. It looks as if it is going to be the same slugfest in the move higher as overhead supply pushes down from above even as the indexes try to maintain their uptrends. Thus far there has not been enough selling to overcome the strong uptrends, and thus the continued move higher even if it is 1.5 steps forward, 1 step back. But for Nasdaq, the overall action would be quite positive.

Market Sentiment

VIX: 17.09; +0.79
VXN: 27.05; +0.24
VXO: 17.34; +0.78

Put/Call Ratio (CBOE): 0.84; +0.12. Moving back up on some selling. A close at 0.94 or better has sent stocks higher during this uptrend.

NASDAQ

Slightly undercut the 18 day MVA and up trendline but on very low volume.

Stats: -30.98 points (-1.57%) to close at 1937.82
Volume: 1.676B (-20.74%). Volume fell off the table as Nasdaq slid lower all session. It broke the 18 day MVA and the up trendline, but marginally, and the low volume indicates it was not much of a horrid event.

Up Volume: 337M (-753M)
Down Volume: 1.315B (+327M)

A/D and Hi/Lo: Decliners led 1.91 to 1. Poor breadth, but not an out and out rout.
Previous Session: Decliners led 1.15 to 1

New Highs: 102 (-50)
New Lows: 10 (+3)

The Chart: http://www.investmenthouse.com/cd/^ixq.html

An early comeback attempt from the gap lower was over early as well. After that stretch higher the techs sold all session. A rally with 1.5 hours let ran out of steam and Nasdaq closed just off its low thanks to a last minute uptick. Absolutely no upside interest given the INTC news. On the other hand, there was no real selling either as volume was the lightest of the week. A lack of bids and just a few sellers sent it lower.

It closed below the 18 day MVA (1945) and the March/August up trendline (now at 1948). Those are key levels, and while closing below them they did so just barely and on very low trade. A low volume, lazy move just below those levels is not a major breakdown. It can still hold here, even hit the 50 day MVA (1913), and still make a higher low. It made a higher high, just barely, on the move higher, not the strong moves up off tests of the uptrend prior in the rally. It is long in the tooth, and about the only thing that keeps it going here is the year end, holiday move.

End part 1 of 2

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