The Document

Login Subscribe Now
July 1, 2005


The miniscule changes in the major stock indices today obscure a bigger picture of realignment that went on beneath the surface. Individual sectors and commodities saw huge moves. Oil was up over 4%, carrying oil service stocks solidly up in tandem. Gold and silver plummeted today, apparently in fear of a strengthening dollar which cracked the $1.20 barrier against the Euro. (In general, I don’t view pretty, round numbers as barriers, but the $1.20 level has shown considerable resistance over the passed two weeks.) Treasury bonds plummeted today, driving the 10-year yield to 4.13%, though housing stocks didn’t seem to notice, declining only mildly. And on a special note, a stock I highlighted earlier in the year, Pfizer, got clocked for 2%. Let’s look at all these movements in more detail.

The reason professed by the media for today’s oil move is bottlenecks at the refinery level. The rationale being that refinery bottlenecks are a sign of excess demand that will work its way back to oil. Based on my reading, refinery bottlenecks seem to have more to do with lack of capacity than surging demand, and such bottlenecks are more likely to temporarily slow oil demand than increase it. As you can see, it’s a double-edged argument, and the real reason for today’s surge is ultimately unknown. My guess is that over the coming years, we will see more spikes up in oil prices than spikes down. Without a discovery of a new, super oil field, oil prices will drive inexorably higher.

The Shiny Stuff
The sharp drop in metals prices today cannot be filed in either the "surprise" nor the "expected" category. It just happened. The action could be attributed to further interpretation of the Fedspeak of yesterday or it could be a simple start-of-quarter realignment by hedge funds. What was a surprise is that mining stock held up very well today in the face of the 2% drops in metal prices. If one were considering shifting exposure from equity to the commodities themselves, now would seem to be a good time to do it. Just a hunch. I could be totally off base.

I mentioned in a blog entry earlier this week that the surprise after the latest Fed meeting might be that long rates finally move up. Today is only one day, but long rates moved in a big way, with the long bond plummeting over a point. Once again the media managed to proffer a nonsensical explanation of the move, saying that the long bonds were pricing in expectations of further Fed Funds rate hikes. If this were the case, long bonds would have been falling months ago. One might ask why I anticipated the move, and the answer is I didn’t. I offered it as a possibility only because it was what seemed to be most unexpected.

Home builder stocks had a mild down day. It makes me wonder how they would have performed if Treasury bonds didn’t get pummeled. In any case their charts are looking slightly weak right now, but that opinion would change quickly if they managed to regain the highs set on their major reversal day two weeks ago.

Pfizer fell over 2% today on news that an HIV drug they had in the pipeline is ineffective. I find it fascinating to watch traders take away 2% of a company’s market capitalization based on termination of a not-yet-released product. Pfizer won’t lose any revenue, they are only losing potential revenue. These sorts of things are to be expected in this industry. Whenever a stock price over-reacts to news, the over-reaction can usually be attributed to pent up sentiment that manifests itself using the news as a catalyst. I highlighted PFE earlier in the year as a potential turnaround candidate. It performed quite well, gaining about 20% from the point of my first mention to it’s recent peak. Unfortunately, I was shaken out of the stock for a lesser profit, but I do watch PFE closely for a potential re-entry point. I do not think I would consider any price above $25.33, which is where it yields 3%, but your individual situation may call for a different entry point, if any.

Disclosure: None


blog comments powered by Disqus
Recent Blogs

Macroeconomic Blog | Cycle Trading Newsletter | TrendBands Fund | Library | About | Contact Us | Members