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Today's WrapUp by Martin Goldberg 08.25.2005  Mon   Tue   Wed   Thu   Fri   Archive

Will the Low Interest Rates Allow the US Consumer to Spin One More Time?

Over the last year of the range bound stock market, the pattern has been fairly regular. When interest rates head up, it has hurt consumer and housing stocks. When rates head down, consumer and housing stocks rally. To a lesser extent, the broader stock market is affected similarly. Now, with technical damage done to the US consumer and housing stocks (related to an increase in interest rates), and the economic data looking weak again, the important question is whether a bond market rally will, once again, serve to juice the stock market. While this is a trend that deserves the benefit of the doubt, IF a bond market rally does not incite a consumer and housing stock market rally, then this could be an important change in pattern.

The strong action in the bond market the last three weeks suggests that whatever forces are conspiring to keep interest rates low, are acting once again. While the private bankers at the fed are in charge of the short term interest rates, long rates are determined by the buyers of our long term debt. It appears that Asian countries are trying to grow their nation’s production-based economies by lending lots of money to the US in order to keep interest rates low and demand for their products high. The debt-based US economy is taking on this excessive debt to support rich spending habits. Eventually the misguided folks taking on all this debt will not be able to continue borrowing, but by that time, the Asian production-based economies will be built out and able to support a different group of customers. Asians buying US debt is spawning and supporting a housing bubble here in the US, but it is not their concern because they are primarily focused on growing their own economies.

Below is a chart of the retailer holders’ exchange traded fund (RTH) versus the interest rate of the 10-year note. As you can see, there is an inverse relationship between the two – when rates head down, the retail stocks head up. On the hard right edge of the chart, you can see the 10-year note rate heading down through most of the month of August. It will be important to see whether this bond market rally (rates down) spawns another rally in retail and housing stocks as has occurred in the recent past.

Similarly, the housing stocks (as represented by the Philadelphia Housing Index), have been in an uptrend as long as interest rates were not heading decisively up. (See chart annotations, below.) The only exception where housing stocks corrected in spite of stable interest rates was the fall of 2004 when a major homebuilder announced that a few speculators failed to make settlement on new single family homes in Las Vegas. Again on the hard-right edge of the chart below, interest rates may be in a new downtrend. If this trend continues, the corresponding trend of the recent past has been for housing stocks to rally.

While it may be expected that a continuation of the bond market rally would keep these inter-market relationships intact, IF the relationship changes (e.g., a bond market rally does not support US housing and consumer spending), then the picture changes considerably. It would be at this time that US debt will be evaluated by Asians only on the basis of its investment value while not considering its stimulation effect on US consumers. With an ever increasing supply of debt, and a decrease in Asian demand, interest rates will have nowhere to go but up. This in turn, would likely have a devastating effect on the US consumer as well as the housing market and our historically over-valued and speculative stock market.

I suspect that the intentions of the purchasers of US debt are for this turn of events to take place after Christmas 2005. This will give them the benefit of one more robust episode of US purchasing of their products on credit at our malls. Yet if the data begins to support the tapped out US consumer slowing down their spending in spite of low interest rates and a rallying bond market, then we could see former buyers of our debt quickly turn into sellers.

Blinded by Science

The bubble that popped in 2000, although typically attributed as a Nasdaq bubble, was more accurately a technology bubble. This can be seen in the long term chart of the T Rowe Price Science and Technology Fund (PRSCX), below. Note that the PRSCX has not yet produced a retracement of normal proportions. The behavior exhibited in this fund is more directly attributed to something other that what can be described as normal market behavior. The fund may have topped at the exact level (~20) as the New Years 2004 and 2005 tops. A decisive close of the PRSCX above 20 would negate the triple top. We shall see if the science and technology fund again climbs the mountain formed by the late ‘90s technology bubble.

Similarly, below is a 5-year weekly chart of the Technology ETF with trendlines. The same triple top is shown to be a series of lower highs in the technology I-shares. If the recent triangle formation breaks higher, that would be bullish for technology stocks.

Edit Chart

The chart above looks pretty bullish, doesn’t it? Maybe. But a look at the one-year weekly chart provides some better perspective.

Within this timeframe, the technology I-shares appear to have peaked at 47, almost exactly at their winter highs, and now may be heading down within the established triangular trading range.

A six-month hourly chart suggests that the technology I-shares are at an important support/resistance juncture near 44.75.

Today’s Market (contributed by Chris Puplava)

The Dow Jones industrial average advanced 15.76, or 0.15 percent, to 10,450.63, while broader stock indicators also rose. The Standard & Poor's 500 index advanced 2.78, or 0.23 percent, to 1,212.37, and the NASDAQ composite index rose 5.46, or 0.26 percent, to 2,134.37. Bonds rose as the yield on the 10-year Treasury note fell to 4.16 percent from 4.18 percent.

Have a great evening!

Martin Goldberg

Copyright © 2005 All rights reserved.

Martin F. Goldberg, MS, P.E.
Market Analyst

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