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Thursday, October 28, 2004

US Stocks Squeak Out A Gain

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Economic Statistics

New Jobless Claims figures were released as usual, and showed an increase of 20,000 to 350,000; the consensus guess was for an increase of 5,000.

The bigger news was the decision by the Chinese central bank to raise official interest rates in the "other" economic superpower - both benchmark rates were increased by 27 basis points as follows:

  • benchmark rate on 1-year yuan deposits: from 1.98% to 2.25%;
  • benchmark rate on one-year yuan loans: from 5.31% to 5.58%.

Consider the ramifications for the US dollar: anybody who wishes to bet that China's economic future is one of larger current account surpluses, growing industrial capacity, and the accumulation of net external claims, can buy Chinese deposits with a 50 basis point spread to US official rates - and no risk of currency appreciation (because the consensus view is that China will not revalue the yuan for the foreseeable future).

So if you were a hedge fund, you might SELL US-denominated bonds and BUY Chinese bonds; this would lock in the spread - and the 50bps would be magnified by the artificial leverage (because your net outlay is reduced by the "hedge" of selling US Treasuries). If you were a large hedge fund, might do it lots and lots and lots (and in the process, force the US government to drive up US interest rates to eliminate the currency-risk-free spread).

So to my way of thinking, nobody has thought through the medium-term ramifications of China's move: this is not a large enough rate hike to "cool the Chinese economy" as many numb-nuts journalists have written - but it is certainly enough to generate interest-arbitrage trading in large volumes. It is a move calculated to add to China's net capital inflows in a way that does not result in transfers of ownership of Chinese businesses.

Federal Reserve Open Market Operations

The Fed's Open Market Operations desk performed two repurchases; both of them were 100% Treasury-backed collateral -

  • a $9.25billion overnight repurchase; and
  • a $7 billion, 13-day repurchase.

The "buy at midnight" hypothesis worked yet again; the session low was set at 12:33, 2.75 points below the midnight level. From there the market rose 11 points in the following four hours.

(Note - once we move to Daylight Savings, midnight no longer coincides with the 10 a.m. repurchase moonshot; be aware of that for next week).

Major US Indices

The DJIA rose a meagre 2.51 points (0.03%), squeaking up in the last five minutes to prevent the ignominy of a 4-digit close. The blue-chip index closed the day at 10004.54 points; the broader S&P500 posted a rise of 2.04 points (0.18%), closing at 1127.44.

Over at Times Square, the Nasdaq Composite added 5.75 points (0.29%), to close at 1975.74, while larger-cap technology issues fared better with the Nasdaq100 adding 7.09 points (0.48%), to end at 1487.12 points.

NYSE Volume was chunky, with 1.63 billion shares crossing the tape, whileNasdaq Volume was solidly above average, with 1.82 billion shares traded.

Nasdaq Composite1975.745.750.29%
NYSE Volume1.63bn--
Nasdaq Volume1.82bn--
US 30-yr yld4.823%-0.023%-0.1%

Market Breadth & Internals

On the NYSE advancing Issues exceeded decliners by 1723 to 1561 for a single-day A/D reading of 162; and Nasdaq losers exceeded gainers by 1527 to 1500

Voume was split pretty evenly - as was to be expected on a flat-ish day. NYSE advancing volume exceeded volume in decliners by 854.54 to 756.46 million shares; Nasdaq advancing volume was greater than volume in decliners by 589.4 to 415.98 million shares.

167 NYSE-listed stocks rose to new 52-week highs, and 14 posted fresh 52-week lows, while on the Nasdaq there were 123 stocks that hit new 52-week highs, and 38 which fell to fresh 52-week lows

Advancing Volume (m)854.54589.4
Declining Volume (m)756.46415.98
New Highs167123
New Lows1438

Market Sentiment

It appears that da Boyz are content to try and keep the market about where it is, between now and the election. Put option volume is drying up, but call option volume is drying up at a faster rate, pushing the equity-only put-call ratio upwards and keeping it in no-man's land.

Volatility is still at mind-bendingly complacent levels; effectively the options market tells us that investors expect lower-than-bond volatility, but investor surveys tell us that they expect higher-than-historical returns on investment in stocks. In other words, a risk-free lunch.

Sorry - can't happen, particularly while dividend yields (the source of the overwhelming majority of all long-term equity returns) are so low. Dream on, suckers.

Equity Call Volume2.73m-0.85m-23.79%
Equity Put Volume1.76m-0.32m-15.35%
CBOE Volatility Index15.39-0.33-2.1%
CBOE Nasdaq Volatility Index21.25-0.27-1.25%
Equity Put-Call Ratio0.650.0611.07%
SPX-VIX Ratio73.261.66762.33%


Bonds rose at the long end, with the yield on the benchmark 30-year Treasury bond shedding 2.3 basis points to 4.839%.

UST 2Y (yld)2.5730.010.27%
UST 5Y (yld)3.311-0.033-0.99%
UST 10Y (yld)4.06-0.02-0.51%
UST 30Y (yld)4.823-0.023-0.47%

The Banks Index rose 0.53 points (0.54%), at 99.09; within the index,

  • the Derivative King - JPMorganChase added $0.46 (1.21%) to end the session at $38.48; and
  • Citigroup added $0.71 (1.63%) ending the day at $44.26

The Broker-dealer Index advanced 0.57 points (0.42%), to 136.51; the ticket clippers lined up as follows -

  • Merrill Lynch posted a rise of $0.06 (0.11%) at $54.36
  • Morgan Stanley Dean Witter added $0.61 (1.19%) at $51.83
  • Goldman Sachs advanced $1.33 (1.38%) closing at $97.43
  • Lehman Brothers advanced $0.65 (0.8%) to $82.35

The Philadelphia SOX (Semiconductor) index added 1.46 points (0.36%), ending the day at 412.36

  • Triquint slid $0.03 (0.82%) at $3.62
  • Micron Technology advanced $0.11 (0.91%) at $12.25
  • Intel added $0.27 (1.23%) ending the day at $22.27
  • Altera posted a rise of $0.02 (0.08%) to $22.73
  • JDS Uniphase dipped $0.37 (10.54%) at $3.14

Gold & Silver

Gold finished the session almost unchanged, rising by just $0.10 (0.02%) to $425.20 per ounce. it had traded as high as the mid-$428s, and down as far as the high $421s. In other words, it simply couldn't make up its mind.

Given that it held up reasonably well, it appears that some smart money is taking indirect bets against the US dollar- a sensible thing to do when the "Next Big Thing" has just set up a no-risk bet against your currency.

Interestingly - for those anti-journalists like me - the supposed Chinese-inspired weakening in the prices of stocks that sell stuff to China was not reflected in things like the price of copper (probably the most widely-used industrial metal): copper rose for the session - although the CRB index did fall.

The Gold Bugs Index lost 3.47 points (1.49%), at 228.69 points.

Silver fell by $0.07 (0.97%) to close at $7.15 per ounce. The Gold and Silver Index (XAU) lost 1.59 points (1.54%), ending the day at 101.61 points.

PHLX Gold and Silver Index101.61-1.59-1.54%
AMEX Gold BUGS Index228.69-3.47-1.49%


Texas Tea was smacked again, to the tune of a couple of percent. The Chinese central bank decision was seen as a negative for commodities more generally; as I mentioned above that is a stupid stupid stupid view to hold, given that a 25-ish basis point hike means absolutely nothing in terms of slowing the Chinese economy.

After all, nobody expects US demand for oil to slow when the Fed raises rates, now do they?

Oil dropped $1.33 per barrel (2.55%), closing at $50.80 per barrel. The Oil and Gas Index (XOI) declined 12.73 points (1.82%), to end the session at 686.78 points.

The Oil service stocks (OSX) Index declined 2.77 points (2.32%), to end the session at 116.64 points.

Reuters CRB284.75-1.25-0.44%
Crude Oil Light Sweet50.8-1.33-2.55%
AMEX Oil Index686.78-12.73-1.82%
Oil Service Index116.64-2.77-2.32%


The US Dollar Index has been tracing out higher lows and higher highs (on an hourly basis) for a few sessions now; too many journalists are being spoon-fed "weak US dollar" stories. This is generating a good crop of dumb money newcomer-USD-shorts into the USDX market (and the various major crosses in the ForEx market) - which paradoxically enables those touting short USD positions to pick up their desired long USD positions on the cheap.

I am still a long-term US dollar bear; it sounds extreme, but I think that the US dollar will eventually go the way of the Reichsmark and the original Cruziero. Shorter term I epxect another little downdraft, then a bounce back up towards 90 on the US dollar index - a bounce that will fail and set up a 3rd wave down which will scare the living daylights out of the global curency market.

US Dollar Index85.35-0.21-0.25%
Australian Dollar0.74570.00320.43%
Swiss Franc1.2006-0.0072-0.6%

European Markets

France's benchmark CAC-40 Index posted a rise of 43.43 points (1.18%), to 3721.82; the German DAX-30 Index advanced 30.56 points (0.78%), at 3959.59; and in the UK, the FTSE-100 Index advanced 12.7 points (0.27%), closing at 4642.8 points.