Divining the future is no less possible than traveling the past. Einsteinian theory notwithstanding, one forecast I make with relative certainty is that neither will ever be achieved.
Sometimes, though, you can get a glimpse of what’s going to happen simply by tracking a phenomenon called “cultural diffusion†— the spreading of an idea or behavior pattern from one society to another.
A new type of slang emerges in
Cultural diffusion is everywhere.
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Will Selling Spread from Bonds to Stocks?
But I know of no cultural diffusion more transparent than the kind we deal with every day in the financial markets. And among them, I know of no two markets more important than bonds and stocks.
Reason: Behaviors that first appear among bond traders often spread to stock investors.
Take the situation we’re in right now, for example.
In late June, bond investors finally began to recognize that the Fed’s rate hikes were no bluff; and the potential consequences, no picnic. So they unleashed a wave of selling that has continued till this day.
Result: 30-year Treasuries, which had reached a peak of 119 and a fraction, have fallen steadily to less than 115 , driving Treasury yields sharply higher.
Meanwhile, throughout July, stock investors were mostly oblivious to the bond market’s decline. They jumped on the positive earnings news from high-profile companies. And they bid up stock prices.
Never mind that surging energy costs were beginning to sting and rising borrowing costs were beginning to bite! Wall Street didn’t want to worry about that, at least not yet. They wanted to get the market up, and they did.
The Dow climbed approximately 400 points, from the 10,300 area to the 10,700 level; and despite yesterday’s 87-point decline, we’re still near that peak.
The big question: Will the bond market selling behavior now spread to stocks?
Wall Street bulls say “no.†They say it’s all about a stronger economy — good for stocks, bad for bonds.
But they underestimate the linkage between the two markets. When inflation and interest rates rise, it’s not just bad for bonds. It’s bad for both. It just takes a while longer for the impact to reach company earnings and for stock investors to figure it out. Bottom line: Bond selling begets stock selling.
Notable Exceptions
and Notable Profits
Are there exceptions to this basic rule? Absolutely. And among them, the most notable are stocks powered by commodities and natural resources — especially oil and gold.
Reason: While bonds are hurt by rising inflation, these are the sectors that have the most to GAIN from rising inflation. So they can continue to rise sharply even while most other sectors are falling.
Take yesterday, for example.
While the Dow fell 87 points and the Nasdaq dropped 25, the Oil Service Holders Trust (OIH) I’ve been tracking for you surged to a new intraday high of 118.31, closing up by another .6%. And that’s on top of a 10% gain just in the last couple of weeks.
Plus, that’s the kind of trend which has generated — and should continue to generate — up to triple-digit gains in oil stock options.
Prime example: A couple of weeks ago, in his Energy Options Alert, Larry Edelson recommended options on Talisman Energy, an independent oil and gas exploration and production company. Meanwhile, his trading assistant, Scot Galvin, picked the Talisman call options expiring in January, with a strike price of 45.
Sure enough, the very next day, the stock blasted off — in tandem with the blast-off I showed you a couple of weeks ago in OIH. And one week later, adding to the momentum in Talisman shares, the company announced that second quarter earnings surged by 76% — to 93 cents a share, compared with just 50 cents a share for the same period a year ago.
So this week, Larry and Scot sent out a quick issue to sell the options and grab a profit. They don’t think the surge in these stocks is over — not by a long shot. But with options, you can’t dilly-dally. When you have a great profit, you’ve got to act on it quickly, and they did. The gain, assuming subscribers got in and out within a reasonable time frame: 161%.
(For more information, see Larry’s report on oil takeover candidates.)
The fate of many other sectors, however, doesn’t look so good, as Tony explains below …
Why Retailers are Reporting Weak July Sales
Yesterday was not exactly a good day for retail stocks, especially for the ones reporting disappointing results — Kohl’s, Federated Department Stores, Nordstrom’s, Gap, Abercrombie & Fitch, Ann Taylor, Pier 1, Aeropostale, Hot Topic, J.C. Penney, and Target.
Overall, 60% of the retailers reported worse-than-expected July results, while only 39% beat estimates. That translated into an overall 3.7% same-store gain, below the 4.2% gain Wall Street was hoping for.
This confirms what the retail research company America Research Group has been warning: The back-to-school shopping season is going to be very disappointing for retailers. “Parents,†they report, “have much lower spending plans this year, with the average at $296.20 compared with $411.24 a year ago.â€
And in their survey, 53.3% of the respondents said they were trying to get their children to wear what they wore last year, compared with 36.8% last year.
Of course, a lot can happen between now and Labor Day, but I bet this survey’s dismal forecast is just another manifestation of sky-high oil prices and rising borrowing costs.
No matter what you think about the stock market, there’s no questioning the fact that sky-high energy costs are sucking up a bigger chunk of Americans’ disposal income. That extra $20 or $40 a week that people are spending at the gas pumps is $20 or $40 a week less that they can spend at stores, restaurants, and the mall.
The knuckleheads on Wall Street just don’t get it, but you do.
Sara Lee Joins the
“Commodity Pity Partyâ€
Earlier this week, I alerted you to the complaints we’re hearing about commodity inflation — from companies like Proctor & Gamble, Docummun, and American Woodmark. Plus, we also got similar complaints this week from Tyco, Masco, and Cooper Tire.
Now, add Sara Lee to that ever-growing list of companies crying about rising commodity prices eroding their profit margins.
Sara Lee reported a worse-than-expected 19-cent Q2 loss and warned about the rest of the year. Next quarter, for example, the company expects to make 22 to 27 cents, which is well below the 44 cents it made last year and the 43 cents Wall Street was expecting. And for the year, Sara Lee now expects to make $1.24 to $1.34 per share, below the $1.44 forecast.
What’s the problem? “Higher commodity costs also contributed to lower foodservice profits,†they said.
So I really don’t know how Alan Greenspan can keep a straight face when he continues to tell the world “inflation is not a problem.†I don’t think he’s a liar. But could it be he’s as blind as Mr. Magoo?
Maybe we’ll find out next week when the Federal Open Market Committee meets again to decide on the next hike in interest rates. So stay tuned.
Layoff Announcements
Surge by 48%
According to Challenger, Gray & Christmas, the number of layoff announcements in July jumped to 102,971, a 48% increase over 69,572 layoffs in July 2004.
An isolated event? Not quite.
July was the fifth month this year that layoff announcements exceeded those of the year-earlier month, and the second month in a row with layoff announcements of 100,000-plus.
For the year, a total of 641,245 job cuts have been announced — an 18% increase from last year. Of course layoff announcements don’t show up in the government’s unemployment report until the employees are actually terminated. So don’t expect an immediate correspondence with the jobs report.
Six Fundamental Forces
Driving Oil Prices Higher
Oil’s bull market remains much stronger than most have expected. Corrections will come and go. But after every one, oil marches to new record highs. The primary reason: Six forces that are largely unstoppable …
Force #1: Oil demand continues to explode. OPEC is nearly maxed out. The world now needs nearly 83 million barrels per day. And as I pointed out last week, just five years from now we would be facing a deficit of as much as 17 million barrels per day, enough to send oil prices to well over $100 a barrel — and gas to over $3.50 a gallon.
Force #2: Russian oil production is slowing. The world’s second largest oil exporter is running at less than half of last year’s growth rate. And due to all the problems with the Russian producer Yukos, it’s not likely that production in Russia will increase dramatically anytime soon.
Force #3: Norway, the world’s seventh largest oil producer, is also in bad shape. Bad weather. Old equipment. Strikes. And more. End result: Oil production is nearly 9% lower than a year ago.
Force #4: Gulf of Mexico production is STILL in disarray from last year’s Hurricane Ivan. And now, the U.S. Weather Bureau has just updated its already-dire forecast for the current hurricane season: It will be EVEN worse than previously expected.
Force #5: No change in Iraq. Iraq’s pipelines are still being blown up left and right. Oil production in the country is now 40% below capacity and 50% below pre-war production.
Force #6: New war fears. New world tensions are smoldering — between the U.S. and North Korea, between North Korea and Japan, between Japan and China, between China and the U.S. — not to mention between Iran and most of the Western world. Even if none of these explode in the near term, the mere fear of a blow-up is keeping upward pressure on the price of oil.
Just ONE of these six forces would be enough to propel oil prices sharply higher! The combination of more than one will be explosive.
Stay tuned. The next move could be even more explosive.
Best wishes,
Martin Weiss,
Tony Sagami and
Larry Edelson
About MONEY AND MARKETS
MONEY AND MARKETS is written by the editors and financial analysts at Weiss Research. To avoid any conflict of interest, our editors and research staff do not hold positions in companies recommended in MAM. Nor does MAM and its staff accept any compensation whatsoever for such recommendations. Unless otherwise stated, the graphs, forecasts, and indices published in MAM are originally developed and researched by the staff of MAM based upon data whose accuracy is deemed reliable but not guaranteed. Any and all performance returns cited must be considered hypothetical. Contributors: Marie Albin, John Burke, Michael Burnick, Beth Cain, Amber Dakar, Larry Edelson, Scot Galvin, Michael Larson, Monica Lewman-Garcia, Anthony Sagami, Julie Trudeau, Martin Weiss.
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