At Arm's Length: 04.08.04 (8:00am EST)
A market that drifts should be a signal to investors that this is not a good place to jump in and take a position. Even as the futures suggest that this will be a good open, the only thing that will pared on Monday after this holiday shortened week will be any gains that were made.

Expect trading to be light today in advance of the markets close on Friday in advance of the Easter holiday. Those who choose to participate will be speculating that news for Iraq will improve, mortgage rates which hit an eight month high is just a short term anomaly, the slowdown in consumer debt is possibility a result of a bump in tax refunds, and new specter of inflation is still some way down the road.

Escalating tensions in Iraq have investors nervous. In spite of the instance that the country will be handed over to the Iraqi people at the end of June, the idea that this country can govern itself without the U.S. as the occupying force is as Jon Stewart, host of Comedy Central's Daily Show suggested, like catching the baby who is already in the air. Trouble is, who will catch it.

Mortgage rates have risen significantly enough to bring the mortgage refinance market to a stop. The markets have relied heavily on the continued participation of this revenue source. Now add the fact that those diminished spending dollars will be impacted by a rise in inflation - even with food and energy removed, and the markets are becoming downright jittery.

The numbers for yesterdays mixed markets were all down. The Dow ended the session at 10,480.15 giving up 90.66. The S&P 500 dropped 7.63 points to close at 1,140.53. The NASDAQ closed on an almost even advance/decline day at 2,050.24, down 0.47%.

Enjoy your holiday.

At Arm's Length: 04.07.04 (7:00am EST)

Earnings, as I have said numerous times, are going to be terrific. Expect companies like Alcoa, member of the basic materials, to post earnings increases well in excess of 70% over last year. This greatly anticipated earnings season took its first winner and shredded it because of the belief that the second half of this year will not be as good.

That, my friend, is newsworthy.

What is at play here is a juxtaposition. That's a big twenty five cent word that simply means, side by side. Analysts and commentators are going to spend much of this pumped up anticipation aligning companies with the future. Call it unfair. Call it alarmist. But it is going to be done in excess in the coming weeks.

The speculation is going to be sold as news and this is in direct reference to the old adage, "buy on the rumor, sell on the news". Companies have got to prove that the business they built over the past quarter wasn't because of one of the most accommodative environments in history. All efforts aligned to get the markets back on their feet even if they were still a little wobbly.

Negligible inflation with historically low interest rates - not to forget to mention that there is still a lot of money in the pipeline which should take awhile to dissipate - make the nay-sayers of this season's successes as the stand this quarter with the second half of the year.

This brings out the prospectors, who have only barely noticed that gold, the anti-stock has been moving n tandem with the markets since last year. This side by side comparison should make you wonder.

Gold did what the markets should have done after Friday's jobs report: corrected. Those numbers were not as hot as some would have you believe, and gold has set itself up for another run. The equities market, I'm afraid won't follow. In fact, the two should move away from each other as one by one, all of the supports to this growth and enormous profits are taken away.

The Dow closed the day after a rough ride slightly positive ending at 10,570.81. The S&P500 caught the down draft of Alcoa's miss and shed 2.41 points to end at 1148.16. The NASDAQ took a breather also dropping 19.22 to end the day at 2059.

I have one more missive to add to the fray. Has anyone noticed how much this markets is hinged on those jobs numbers. Over the last three months, the missing element of the recovery has kept the investor on the edge of their seats. Why should one lone Friday of the month carry such weight?

At Arm's Length: 04.06.04 (7:22am EST)

While earnings season begins today, it will be the outlooks for the coming quarters that will be key in any movements in the markets. Generally, profits are expected to be stronger than the same quarter last year. A very favorable monetary policy, increased productivity, and a weak dollar made profits easy pickings for many companies.

One question will hang heavy on these earnings: can they continue? If the credit markets change significantly in the second half of the year, estimates could be revised downward. Changes in the credit market will have a ripple effect in the consumer side of the equation as well. many companies have relied on the ability of their customers to take advantage of the low mortgage rates to keep spending. When rates begin to rise - now a short term reality - the incentive to refinance will disappear.

If companies are forced into increasing their labor force, the cost of those new employees will impact the bottom line of many of these companies. This could be offset by increased flexibility in pricing as inflation rises in tandem with interest rates.

The Dow showed continued strength Monday on a holiday shortened week. Finishing at 10,558.37, up 87.78 points, the winning streak is likely to end today on light trading. The S&P 500 closed at 1,150.57, while the NASDAQ added another percent to its totals finishing up 21.95 points to close the day at 2,079.12.

At Arm's Length: 04.05.04 (Before the Bell)

Who among us believes that all of that economic data released last week, from the Michigan Sentiment numbers to the jobs report released on Friday, will effect the markets one iota this week?

If you are a bond trader or investor as they used to be called, you have a world of things to worry about. The jobs report and the stronger than anticipated ISM number all point to one thing in the future: higher short term rates. With an almost sure bet that some move will be made by the Fed before the election, Treasuries began selling. The folks who took the hardest hit were the overseas investor who has placed their collective trust in the good faith and credit of our government.

Folks are worried that this trust may now be perceived as ill-placed. If our recovery shows signs that it is falsely propped up with monetary policy that has outrun its welcome - and the slightest indication that it might be yanked at only a hint of stability - these lenders may just flee in droves.

The ten year Treasury yield shot up to 4.17% on Friday from a pre-jobs report yield of 3.99% before settling at 4.145%. With prices running in the opposite direction, investors saw huge losses in the markets on a report that while on the surface seems amazing but underneath, looks like many that have been reported previously. Many economists have failed to come close to the actual number with estimates and this time was no different.

The most troublesome fact was the continued lack of acknowledgment of the not only the disparaged worker, the one who is no longer looking for a career but will settle for anything. Add to that the lack of jobs being created for young workers entering into the markets. With an average of 150,000 new job hunters looking for work each month that were not there the previous month, we are falling woefully short of job creation.

And the chances that the Fed will raise those rates have increased with the most popular time table estimating September. A pre-election increase might signal to the markets and the voter that Mr. Bush's economic stimulus policies had little to do with any economic recovery. Mr. Greenspan may unwittingly understand that if he and his learned bankers are to be given credit for their stewardship, this would be the right time to stop the economy on a dime.

But bond investors like to create scenarios while equity investors like to, well, live for the moment. Or at least it seems that way. I liken it to Robert Pirsig's, author of "Zen and the Art of Motorcycle Maintenance", observation about why cars and motorcycles are different. Bond traders like to watch the scenery go past from the safety of the vehicle while equity traders like to be in the picture. But for the life of me, I can't understand why.

This week ahead will see the markets digest those numbers and prepare for earnings season. Everybody had a great year. Profits will be up. GDP will be up. Employment will reflect 300,000 full time jobs, not part-time work held by workers who want full time work.

But the stock market won't be paying much attention. You will hear increasing talk about these estimates, and in many cases exceeding profit forecasts as having already been built into the markets. Equity traders would due themselves no harm in understanding everything that the bond market has.

While companies are doing well now, bond traders understand that in a rising interest rate environment, the first thing that happens is not rapid acceleration of profits. In fact, it is quite the reverse. Newly created full time jobs come with costs. Retooling and revamping factories that have been understaffed and running to capacity will impact profits. In the absence of this business friendly monetary policy, the higher cost of servicing loans will also impact stocks. Add in the dollar's strength and the increase in inflation, and suddenly things look less bright.

I think the bond traders have this one right. There is trouble on the horizon and it should be the horizon we keep our eyes on. China and Japan took huge losses in their fixed income holdings after those numbers were released. Once the silver lining that many have been pointing to in this recovery is exposed as not so silver, there will be a lot of money headed for the exits.

The Dow Jones Industrial Average had a good week with a 2.5% gain. Getting back that 257 points was important to traders who still rely on the index for market trends. The price weighted average index - the rest of the popular indices are weighted on company worth or capitalization - will be changing once again to reflect what the Dow Jones Co. believes is a better example of the best companies. Fallen from grace are AT&T, Eastman Kodak, and International Paper. Replacing them will be AIG, Pfizer, and Verizon.

The NASDAQ continued to confound and amaze with another strong week up 5% to 2057 and the S&P 500 ended up 3% at 1141.

Archive of previous weeks. Beta test began on 03.08304.

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