Economic Data Imperils Rally

Monday, August 04, 2003 | 11:15 AM

The market has been stuck in a holding pattern following an impressive 3 month move off of the March lows. Whether the end of this story turns out to be merely a consolidation or a stall (and possible reversal) has yet to be written. Here are the factors, which we believe could resolve the issue as we enter Q3:

Employment: Good news/bad news from the July jobs data. The good news was that the unemployment rate dropped to 6.2% (from 6.4%). The bad news was that the decline was not due to a spate of new hiring; Rather, it was caused by, as Barron's noted, disheartened job seekers giving up looking for work altogether. Though the pace of layoffs has slowed, major announcements from the likes of Boeing, AT&T, Maytag, Siebel, Verizon, Delta, Fairchild, continue to hurt.

This nagging problem needs to be resolved if the recovery is to have any sort of strength or staying power.

This issue is what made Wall Street’s loud cheers over Microsoft’s new hiring plans so perplexing. It’s not as if this is happening throughout the economy; If this is a new trend, unfortunately, its limited only to those companies who have an extra $49 Billion in cash lying around.

GDP: The pundits were cheered by the unusually strong rise in US GDP. The consensus was for 1.4% and the results came in at 2.4%. Drilling deeper down into the numbers, we see the bulk of these gains were due to the largest increase in defense spending since the Korean War. The Financial Times noted "(assuming) there is not going to be another war in the third quarter," we won’t see the same GDP growth in Q3 2003. If you back out about 1.5 percentage points, the “economy would be virtually stagnant, growing an anemic 0.67% in Q2 2003.” Argus Research economist Rich Yamarone observed “Without the voracious winds of government spending, the USS Economy might have been a rudderless dinghy."

Liquidity: has been the primary driving force for much of the recent market move. Interest rates, money supply, currency rates, and tax changes are what’s been helping both earnings and fund flows. Seasonality factors will cause most of this to taper off in August. That might be followed by the usual September/October jitters.

If this recovery is for real, those jitters will provide the ideal early Fall entry for the next leg up. If this turns out to be yet another phantom second half recovery, your tight (12%) stops will limit the damage. Still appealing are small and mid caps over large caps; Valuations are more attractive in cyclicals and financials, rather than pricey technology, internets and telecoms.
Chart of the Week:

The Dow Industrial Average has consolidated into a symmetrical triangle. The recent breakout (7/31) above the top of the triangle failed to close there. We the next measured move of about 400 points (reflecting the width of the left side of the triangle) will be either to 9650 or 8650. The trigger will be a close over 9300 or below 9050.


Chart of the Week
The Dow Industrial Average has consolidated into a symmetrical triangle. The recent breakout (7/31) above the top of the triangle failed to close there. We the next measured move of about 400 points (reflecting the width of the left side of the triangle) will be either to 9650 or 8650. The trigger will be a close over 9300 or below 9050.

Break out or Fake out?
DJIA Triangle.jpg After a few head fakes, the Dow has closed outside its triangle consolidation. The “measured move” objective is 400 point.

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THE SYRIAN BET

Quote of the Day: The Empire, as I have always said, is a bread and butter question. If you want to avoid civil war, you must become imperialists."
-Cecil Rhodes, British imperialist

Monday, August 04, 2003 | 11:15 AM | Permalink | Comments (0)
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