Week #3 Report

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Bill's Portfolio: This part of my weekly report usually focuses on selected stocks and selected news items that came up during the week, but this week most equity traders are wondering if after three consecutive weeks the broad market will continue down. So, I'll discuss that situation.

The Dow has not had three straight losing weeks to start any year since 1983. In 1982-83, the North American equity market suffered a protracted bear, which was needed to clear away the inflationary excesses of the 1970s. Interest rates zoomed to 21 percent. Bonds were the 'Buy of the Generation', as I was fortunate to be quoted saying in a live Roundtable at the very bottom of the bear in May 1983 " photos and all, with me, Ontario's energy minister and Noranda's Exec VP Finance in discussion.

Yes, two and a half years into my securities industry career, I was able to join such an august group at the National Press Club in Toronto, in a session moderated by the former exec editor of the Financial Times of Canada. The truth be known, he was my friend or else I would not have made it to that stage.

But that was a moment to shine and I used it to call the bottom of the equity bear market as well, which happened a few weeks later for Canada and a couple months after that for the NYSE.

For year-to-date 2005, there are just five stocks that have gained in price, and of these only Altria is up a notable percentage. General Motors and Intel have been trashed.

Is there more to come? I'll discuss that in the report section on U.S. Equities.

Quick now " for the past 52 weeks, what is the best performing Dow 30 stock of them all? Do you think its Exxon Mobil because of the high crude oil prices? Well, you'd be close with that choice.

Actually the 52-week winner is a stock that your favorite Talking Heads seldom discuss. It's McDonalds (NYSE: MCD). It's not up much mind you, but that's another story.

From this list of Dow 30 stocks, you can see the performance over 1-week, 2-weeks, 4-weeks and so forth. It's a pretty dismal scene.

Actually, I'll break the suspense. It's going to get worse here for the bulls.

The TH's from your favorite Financial Entertainment Television, CNBC, sure did reflect the gloom this week. They even had to turn to interviewing mutual fund salespeople for support.

To hear them talk you'd think America is coming apart at the seams. But that's what happens to sales folk who get caught up in their own patter. Did you know that a salesperson is the easiest person to sell? I'm not fibbing.

And salespeople are the worst securities traders, for the same reason. They believe their own bull.

The problem they have is that the world is not always bull. It's occasionally bear.

Like today.

And if you look at the report section on International Equities, you'll clearly see that the bear is not prowling America. It's a worldly kinda thing.

And Bob Pisani actually thinks the centre of the universe is either Fort Lee New Jersey or the hallowed ground he stands on!

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ETF: For an interesting ETF, I thought I'd show you the IYT. This is the Dow Jones Transportation Index tracker that trades on the AMEX. Last week was a dismal one for IYT.

I thought I'd point that out because CNBC has been so busy touting the people from Fedex, Ryder and Yellow Roadway that I'm getting annoyed just hearing how wonderful business is.

That's the way it is with clowns. After they finish their act, the people leave the circus tent. There ain't no more.

Back to reality.

This list of IYT component issues is dated September 30, 2004. You might want to check the most recent weightings.

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Bonds: Based on higher prices, the bond market continues to reflect an economic slowdown. You can't argue with a yield spread that is now down to 243 basis points.

The 30-year U.S. T-Bond is now yielding just 4.643. It's starting to look like a limbo competition, as in how low does it go.

Not much further, I'm afraid.

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Commodities: Commodity prices are indexed by the Commodities Research Bureau. The CRB index looks like it's topped out. So I started to wonder why that might be?

One look at the crude oil chart below tells me that oil prices are headed south from here. If you mark the cycle lows and cycle highs on this chart from April 2003 (at $25.04), which just happens to be a couple weeks after the equity markets started their bull phase, you will see that crude oil prices ran up the pole until late October 2004 ($55.65).

Higher highs, followed by higher lows. That's called a bull phase, in case you didn't already know.

But, aha, look what happened in December. A lower low ($40.25).

Now that the crude oil price is back in its bull cycle, hitting a cycle high this week of $49.35 (closing Friday at $48.53), the BIG question is, can oil top the most recent cycle high of $55.65 this time around, or is the crude reality that oil has topped out, and will lead commodity prices south from here?

I wouldn't bet against it. It's snowing something terrible today in Toronto, but if you haven't already booked your holiday south, you're probably thinking spring, and warmer weather ahead. Oil speculators tend to do the same, i.e., they plan ahead a few months.

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Gold: The gold market had a good week. During Friday's down day in New York, I noted that the goldminers were doing pretty well, thank you.

Of course, unless inflation happens to be somewhat extreme, gold is going to trade like a currency, representing unallocated cash. It seems a lot of traders decided this week they didn't like the low yields being offered in the fixed income markets, so they hedged portfolios with some additional gold shares, and the GLD bullion ETF that trades on the NYSE.

But that may not continue next week unless the USD traders decide to buy more Euros and Yen. And going into the close on Friday, I noted that they decided they liked USD, which could be the general trend this coming week.

Who knows, maybe they are anticipating a rally in interest rates in the U.S., which will help remove a little downward pressure on the USD?

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Forex: Last week, the USD did gain on the week, as the second chart shows clearly. There is some chatter in Washington about budget spending cuts, but really how long can those pols keep blowing their smoke?

Even the best of them only have so much hot air. ;-)

This chart of the USD clearly shows a higher cycle low, followed by a higher cycle high. So, there is no question that the USD has been getting stronger.

It's been three weeks now, and is unlikely to continue at this rate. I kind of think, that forex traders will put the USD in a sideways trading pattern this upcoming week.

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Int'l Equities: As to the global stock markets, using my vantage point, I look to America's neighbors and see troubles on the equity scene. I look to the East, and I see more trouble. And I look to the Far East, and see the same thing.

Please tell me where else I can look?

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U.S. Equities: Last weekend I said "I'm not too impressed by the actions of traders that sent you home for the weekend thinking all's well. If you paid attention to what was happening, the 52-point DOW gain on the day, was actually 25 points gained in the last 32 minutes. But who's counting anyway? Is that a true market rally in the DOW or simply what people refer to as "putting lipstick on pigs". You make the call. It's your money."

I hope you made the right call.

I wouldn't want to see you commiserating with Kudlow, Cramer, Kernan, Pisani et al.

After all, there has to be more to life than that!

The monthly chart of the Dow 30 looks in terrible shape technically. So too does the weekly chart of Nasdaq. Now, I was going to show you the monthly chart, but then I thought that Nasdaq traders don't think in terms of months. Heck, most don't even think in terms of weeks, or even days.

For sure CNBC doesn't want them to have another look at the Nasdaq monthly chart. Heaven forbid. Hide the children.

Anyway, these charts are reflecting further weakness to come in the weeks ahead. It could get so bad for perma-bull traders, that maybe Cheney and Rumsfeld will have to take their act to Iran? I see they now have the appropriate Secretary of State.

And when Benjamin Netanyahu is seen being interviewed by CNBC's Tyler Mathisen, and reminding New Englanders that Iran's repressive mullah leaders have their pointy fingers on nuclear missiles that can reach Boston, as he was saying on Friday, I just don't know what to think.

The last time I watched Mathisen he actually told us that he really liked four letter names (like Bush) because he could pronounce them. Yes, he said that. So what's he doing interviewing one of the modern world's most complex political leaders? I mean Benjamin's got nine letters in his surname.

Actually this is serious stuff. I hope the U.S. administration is not intending yet another foray into the Middle East.

Kudlow could just be the last bull standing.

For the bad day (for the bulls) on Friday, I noted that metal miners, gold, and non-metal miners were the strongest three industry groups, and steel was in fifth place on the day. All had good gains.

What I always do on days where the Dow is up or down a half percent or more is to look at the winners and the losers from among the industry groups. I am looking for a pattern here, and if one exists I try to find what might be causing it.

On Friday there was strength in the gold bullion price, and yet the USD was not down, so this move might reflect a re-balancing of portfolios ahead of a perceived increase in the interest rates. Now, I don't know that for sure, but over the years the more I work through this simple type of exercise, the more accurate I find my forecasts get.

I'm done. Now I can go celebrate my daughter's completing her graduating requirements for the University of Toronto. She now can say with certainty that she has one-upped me.

Years ago, I came out of high school wanting to be a doctor, so I enrolled in science at U of T. I thought my math marks were pretty good on entrance. I had a 100 percent mark in my final Trigonometry course in secondary school. Unfortunately I ran into a Calculus prof from Bombay who I couldn't make heads or tails of. Then instead of studying at home when I missed the rest of his classes, I put my time into hockey, where I was captain of the New College hockey team.

My parents were not impressed with my Calculus grade. Now a short preamble might be helpful. Back when I attended U of T, the grades were reported only in decimals, like 10, 20, 30 etc to 100.

I'm still trying to figure out how I got a ten. I used to fib that it was really between 10 and 20, but that would make a grade of 100 somewhere between 100 and 110. Not likely.

My "10" probably ranks as the lowest mark ever given to a serious student (i.e., one who actually wrote the exam) in the history of this proud institution.

The good thing about that mark was that I woke up and switched to WLU in Waterloo where I excelled in the School of Business & Economics, and still played hockey.

And the good thing about celebrating this afternoon is that I have that 50-year old Canadian rye whiskey that I scooped up from Dad's bar. Just broke the seal, and now even my wife, who, like my Dad, doesn't drink whiskey, thinks this is a remarkably smooth drink. My daughter won't even take a sniff.

Anyway I'm proud of her. Finally, a University of Toronto graduate in the family.

BTW, this was a tough week all around, but I am making progress on this website and blog. It should be up to speed in about a week, and then I'll likely have more time for other things, including writing.

BCara@BillCara.com

p.s., I had to correct an obvious typo here, courtesy of Mr. Greenan.

Also, this morning I uploaded a top banner section linked to U.S. Equities.