At Arm's Length: 03.26.04 (8:45 am EST)

What a wonderful day yesterday turned out to be. The markets surged on absolutely no news worthy of driving stocks. The Dow posted a huge 170.59 points return to 10218.82 which is almost a 2% increase. The Standard & Poor's 500 stock index followed in step with the largest thirty companies also increasing 1.6% to 1109.19. The Nasdaq Composite Index enthusiastically moved forward 3%, to 1967.17.

You can look at the slight decline in oil prices, but you would have to base your numbers on "facts" released by the administration. Before you get too carried away, gasoline prices on average across the country have reached four year highs with less refineries on line keeping supplies at the pump far beneath demand.

You can credit short term traders who believe that the market drop made equities better priced.

Or you can take a look at the programs. A full 46.6% of the market was bought yesterday by automated brokerage account programs that are set to buy at certain prices. With 2.5 billion shares being traded, this is an enormous market mover giving the average investor the appearance of sunny skies and green lights ahead. The way the program works, the brokerages buy a basket of 15 stocks usually valued at $1 million for either accounts or for their own brokerage accounts. The later has been an enormous boon for brokerages and their bottom line. This stockpiling allows them to be able to sell stocks to their clients at current market prices that were bought at program lows.

As the day begins, futures are not really an indication of how the day will proceed. The current jagged edge that is appearing on more and more charts does not signal. in my opinion, a correction. Instead it might be revealing a growing unease with the continued sluggishness - in spite of numbers suggesting otherwise.

Senator John Kerry will release his economic plan, which at first glance seems to address the lack of corporate tax revenue as a portion of the GDP. Forty years ago, a full 20% of GDP came from this tax base. That figure is now around 7%. Overseas tax revenue is tax exempt under current law, which I believe was written in the first decade of the last century.

Economic numbers released today include personal income, which came in slightly higher at a 0.4% increase with personal spending coming in just under estimates at 0.2%. Making more and spending less is not how the average economist believes will grow the economy. Later today, the Michigan Sentiment numbers will be posted and could be a major distraction on any full blown move into positive territory.

At Arm's Length: 03.25.04 (9:10 am EST)

It won't be long before the politicos start pointing fingers at business types. With a wagging digit they will exclaim that business doesn't know what is good for it. Business believes in job growth but see no chance of that happening on the horizon. Companies want business to get better but discount the European factor too much. And when the politicians in Washington offer to increase profits by reducing payrolls, they are incredulous at the corporate reluctance to cut the income of millions of white collar Americans by making them mid-level managers.

But what do business people know. Plenty it seems. According to the National Association of Business Economists, business sees the deficit as bad, the Europeans and outsourcing as a non-threat, interest rates as unpredictable to nail down over the next six months to a year, and money policy more or less right on.

The NABE survey of 1,500 businesses' recently released report noted that jobs and deficits were at the top of the list as most worrisome. It should be noted that the recent terrorism in Spain happened after this report was released.

The survey group, who has had Alan Greenpsan as a former president took a look at the long term problems facing the economy. The growing population of elderly and the rising costs of health care. A full quarter of those responded that the deficit is not as good for the economy as many would like them to believe.

Longer-Term Challenges to the U.S. Economy
(percent of survey panelists responding)

	Survey Date March 2004
Growth of elderly population/dependency ratio	27
Federal deficit	24
Health Care	19
Education system	12

So you can image the issues on the table as the corporate tax bill, supposedly designed to help businesses with a series of tax breaks on overseas profits and a move to eliminate overtime by crating a new group of salaried middle managers stalled in the Senate falling short of the requisite 60 votes needed. Overtime, the bill cites has been the catalyst that allows productivity to increase while jobs stagnate. One senator believed that the bill was now so far removed from passing that it would need to be rewritten.

The numbers from yesterday are much the same as the last trading session. The Dow Jones Industrial Average in now down almost 5% for the year with a flat showing of 10,048.23 dropping 15.41. Futures looked hopeful, as they do today. The S&P 500 also dropped a little further yesterday to 1,091.33 which was a 0.24% loss. Only the NASDAQ showed any strength up 7.68 points to close at 1,909.48.

Newly released numbers show the GDP at 4.1% (unrevised Q4 numbers) with new claims for unemployment largely unchanged. Roughly 46,000 folks have dropped out of the unemployment line during that period. 3.74% yield in the Ten year Treasury was up 0.03% from the previous days close with oil futures opening under $37 a barrel based on revised inventories.

At Arm's Length: 03.24.04 (8:40 am EST)

Some days are just like that and yesterday was no exception. Volume was okay. The news was relative to recent news. Not that oil, terror, budgets and the fear that Microsoft will turn into an utility should weigh on investor sentiment, but that seems to be as good of a reason as any. Some investors are looking for the numbers that job reports, housing and durable goods bring.

What started out the day with enthusiasm ended with a flight to defensive stocks indicative of a long term lull in buying growth. That forced all of the air out of the markets with the Dow Jones Industrial Average finishing flat at 10,063.64 within 1.11 points of opening. The S&P 500 ended the day at 1,093.95 down 1.45, and the Microsoft ruling may have had some effect on the NASDAQ's drop of 8.10 to 1,901.80.

A good deal of folks are trying to talk this market up without being very specific about how. With so much political uncertainty in the news with partisan fights beginning over the budget and the 9.11 commission, it must be difficult to make a clear financial decision.

In the short term, much of the news looks to be volatile for the markets. In the long term, the belief that most of the economic stimulus is already in the market making permanent tax cuts more burdensome than helpful. Very little is said about the cost of this deficit but service fees are expected to cost the government $740 billion. This is not included in the published versions of the budget

Bond prices moved up yesterday but the durable goods orders could bring those prices down. Released at 8:30 am, the durable goods orders posted a 2.5% gain. Take transportation out of that number and the number falls considerably to -0.3%. Expect this number to be revised. Futures experts are looking at the Dow giving up another hundred or so points headed into the job numbers next week.

Overnight the dollar was much stronger as the European Banks are looking to protect their exports in the near future.

At Arm's Length: 03.23.04 (8:10 am EST)

The futures look good. But the rally that is being called for from all corners of the Street may not be soon in arriving. If I'm wrong and a rally begins again, there just is not enough fundamentals in place to make a sustained run through the end of the year.

The selling began with the bell as the Dow dropped 121.85 to finish the day at 10,064.75. The S&P 500 ended down as well closing at 1,095.40. The NASDAQ is now at a three month low settling the day at 1,909.91 losing 30.56.

With geopolitical themes continuing to fluster investors and this includes the growing cost of oil as well as terrorism, it is hard to believe that the estimated $40 billion in additional costs that oil will syphon from the economy will not take a greater toll than analysts are assuming. Had the economy generated jobs, this would not be a factor. With companies already as lean labor-wise as they are, the only adjustment they can make to keep their increasing estimates of profits is to cut spending.

This spending, which was being trumpeted as the saving sector for growth in technology now has investors with little to choose from aside from cyclical stocks immune to an economic downturn. these include consumer products, utilities and drugs. But the high cost of oil will not leave these industries unscathed.

At Arm's Length: 03.22.04 (8:00 am EST)

Friday was a fitting close to a dismal week. It was a week that traders tried to digest news from halfway around the globe, which may or may not be true, the price of oil, which may not have reached it's highest point, and the possibility that corporate profits in the future may not be buoyed by the same reasons.

Looking at the numbers, the Dow Jones Industrial Average ended the session closing down at 10186.60. This triple digit loss (109.18 points or 1.1%) was the second consecutive losing week for the blue-chip index. The tech heavy Nasdaq Composite Index moved farther away from the psychological high of 2000 by shedding another 22 points to close the week at 1940.47. Year-to-date, the index is down 4.72% as some of it's biggest members faced pressure from Europe, revenues, and/or profits. The Standard & Poor's 500-stock index fell an additional 12.54 to end the week at 1109.78. The Russell 2000, which remains in positive territory for the year (2.48%) took it on the chin as well with a weak showing on Friday.

Looking at the reasons for the drop is not always as easy. News from a remote corner of Pakistan left traders jittery at best. The possibility that Osama's number two guy might be captured or killed unsettled traders somewhat as they harbored visions of new retaliatory strikes from terror cells hidden around the world. Instability is never a good way to do business. This is one reason that what was once seen as a normal correction is now being viewed as a possible slump.

Friday was also the quarterly expiration of futures and options, this time multiplied by four. Normally a volatile time, it was made worse by quadruple witching. Using this as the primary reason to rethink their portfolios, this once a quarter phenomenon allowed investors to gravitate towards more defensive positions.

Oil is now a real problem that may take the often giddy investment types down the notch or two they need to fall. Many talking heads have mouthed their positive spin but they are looking dated - and I'm talking only several years ago when everyone was foolishly giddy. There is a high degree of enthusiasm in the air these days and over the past year as well which suggests that there is something amiss with the atmosphere on Wall Street. Too many of us outside of those institutions of higher wealth understand more about the numbers than they do - even those without any numbers savvy.

For instance, as oil approaches $40 a barrel, no matter what the Consumer Price Index reports, or for that matter, Producer's Price Index, we have inflation. The two aforementioned indexes tend to exclude the increasing costs of fuel and food by pointing towards the core of those reports. There are a number of reasons why, many of them actuarial that will save the government from making higher payments to individuals whose incomes are tied to the calculation. Even Greenspan spoke of using the core index to save money on Social Security payments. Turning your back on rising prices does not make the disappear.

The average consumer who is pulling up to the pumps is experiencing sticker shock and if it hasn't trickled to the prices on the grocery shelf, give it a minute to catch up. The higher cost of transportation has begun to show up in the markets with the losing streak the Dow Transportation Index has been experiencing. This overlooked index reflects the increased cost of getting those manufactured goods to market. The DTI is down 7.32% for the year and that gap is expected to widen giving the bears more ammunition in their argument that this has been nothing but a bear market rally.

For those more knowledgeable about the nuances of the market will recognize this correlation between the the Dow Industrials and the Transportation index as the ground work for the Dow theory. The Dow theory, invented by Charles Dow, ties the Transports with the Industrials as a means of validation. If the Transportation index is up in tandem with the Industrials, the trend can be called bullish. If the Transports do not follow, then the market should be called bearish. And they haven't followed since late last year. moving steadily away from each other.

For those of you who are more knowledgeable your income, the debt you carry, and the savings that may not exist, you will recognize gasoline and food prices for what it really is.

There is a good deal more wrong with the CPI accounting than the idiotic removal of the two most volatile members of the index. Start with how the price of housing effects the number. Mortgage refinancings coupled with the increased in overall debt by these homeowners should signify an increase in the price of housing. Not so. If you were to consult the CPI numbers, the cost of a house has only risen about 2%. Evidently, the air in Washington might also be suspect.

And lastly, as the week opens with these worries undercutting any optimism, the pressure of oil prices will put pressure on interest rates. Interest rates will put pressure on inflation. And to keep this prediction in simple terms, these factors will start showing up in corporate profits by year end - if not sooner. It is probably safe to conclude that buying now is not the same as buying the bottom - and this morning's futures will support that claim.

Archive of previous weeks. Beta test began on 03.08304.

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