Agora Outlook

December expiration
November 28th 1997

The big question these days is what the Asian fianancial crisis may do to the U.S. economy. So far, the U.S economy is showing strength with no signs of imbalances. However, Asia could place some minor hurdles in the way. Average growth in the U.S should be in the 2.5% range over the next five or six quarters. The financial turmoil in Southeast Asia, is likely to slow U.S. exports and make a small dent in growth. There shouldn’t be a major slowdown in demand for U.S. products for two main reasons:

1. The crisis in Asia is not likely to be greatly prolonged, and 2. 85% of our gross domestic product is still sold domestically. If this "Asian Contagion" were to have greater repercussions in Japan, Latin America, Central Europe, Russia ... then it would have a larger impact on the U.S. economy. Technological improvements have provided much more advanced tools for companies to control inventories, an important variable if demand were to shrink suddenly. Our expansion has been fairly broad based across sectors of the economy, so there aren't any imbalances building. We could see a small disinflationary effect, though, on the U.S. It may help to cut a couple of tenths of a percentage point off of inflation in the coming year which is good news. Labor markets in the U.S. remain tight but productivity has been offsetting the negative impact. Such a situation could have caused inflation. Gold prices seem to be revealing a deflationary cycle anyhow. It ended below $300 an ounce Wednesday for the first time in 12 -1/2 years. Some extra Australian producer hedging and Japanese dealer selling contributed to the break of the psychologically significant $300 mark today in gold. World demand for gold rose to a record high of 705.3 tonnes in the third quarter 1997. According to the World Gold Council, the market appears to be focused on the likelihood of slowing demand for gold in the short term. This is due tothe financial crisis in Asia according to analysts. In the short term, however, Asian disinvestment from the gold market is contributing to gold's woes. It will take some time before we will really see if the Asian crisis and the current gold devaluation are indicating a move into a deflationary cycle for us. If we continue to have strong productivity it is unlikley we will have to worry. Deflation is one of the worst situations a country can find itself in.

Economic Effects

On Tuesday Btm Schroeder weekly chain store sales came in unchanged for the week. Johnson Redbook sales were unavailable. Consumer confidence rose to 128.3 from a revised 123.4 in October. Consumers continue to express confidence about the health of the U.S. economy and expect these favorable conditions to continue well into 1998. Consumers expressed growing satisfaction with current economic conditions, pushing the group's present situation index up to 158.9 in November, its highest reading since 1969, from 147.5 in October. A 2.1% increase in October for existing home sales was surprising to some economists who had expected a slight decline, but they agreed the housing industry's growth continues to be fueled by low unemployment and borrowing costs. Existing home sales rose 2.1% to a seasonally adjusted annual rate of 4.40 million units from a revised 4.31 million units in September. Strong consumer confidence seemed to fuel the security. On Wednesday The number of people lining up to file for unemployment for the first time fell by -31,000 last week to the lowest level in nearly a month. Initial claims fell to 303,000 in the week ended Nov. 22. That was down from a revised 334,000 the week before. The four week moving average of new jobless claims, seen as a more accurate gauge, rose to 316,500 from a revised 315,500 the week before. It was a surprise to the markets. Durable goods orders weakened surprisingly in October, with virtually every category except transportation posting declines. Durable goods are items like cars, home appliances and production machinery that are intended to last three years or more. Orders are an indicator of the manufacturing sector's health, which in turn weighs heavily on the overall economy. Total new orders fell -0.3% last month to a seasonally adjusted $185.92 billion. The first drop in five months and sharply contrary to Wall Street economists' forecasts for a +0.5% pickup. Orders for industrial machinery, which includes computers, were down -1.9% to $34.66 billion last month after rising +1.8% in September. Gross domestic product, the broadest measure of national economic activity, expanded at a still healthy 3.3% annual rate in the three months from July to September, but that was down from 3.5% estimated a month ago. Weaker international trade and smaller additions to inventories slowed the U.S. economy's growth to a slightly less vigorous pace than previously expected during the third quarter. The revised figures showed consumers were spending even more freely than anticipated. Personal consumption spending, the fuel for two thirds of economic growth, was at its fastest rate in 5-1/2 years, rising at a 5.8% rate or $67.7 billion a year. Being a pre - holiday trading day, bonds didn’t react much to the indicators but were down due to the strength in the reports. On Friday personal income grew at a healthy +0.5% in October with spending keeping up with a +0.5% increase. Personal incomes have risen for 12 straight months with October’s increase. There was a smaller +0.3% gain in September and a +0.6% gain in August. This brought personal income growth to a seasonally adjusted annual rate of $6.97 trillion. Economists say income gains reflect steady wage increases stemming from low unemployment. Economists forecast that October spending would be up only +0.3%, but the income gain was in line with expectations for a +0.5% rise. A steadily expanding economy has created one of the strongest U.S. job markets in decades, keeping incomes rising at a healthy pace. Indicators were on the strong side this week but as everyone was looking forward to Thanksgiving, there was little reaction to any reports.

Next week’s Economic data

This week is packed full of important indicators that could move the market significantly. Monday starts out with strong numbers. Construction spending is out along with the national association of purchasing managers numbers. Construction spending has always been a passive indicator so the market will focus on the NAPM number. If this number is strong, look out below! Stocks and bonds have reacted negatively before when the number is much stronger than expected. If the number is weaker, we could see a nice up move in both bonds and stocks. On Tuesday we get weekly chain store sales reports and leading economic indicators. The market never really pays much attention to the LEI number as its accuracy has been questioned of late. Wednesday has new home sales and the beige book out. New home sales have jolted the market in the past but of late the numbers have been quite strong so it will be a surprise if they continue in such strength. Thursday has weekly jobless claims, productivity & costs plus overall chain store sales. The productivity & costs number will be the focus as it will reveal the state of the economy and if we are entering an inflationary or deflationary cycle. Friday has the most significant indicators of the week. The unemployment report will be the first out. It will help to confirm the P & C number that was out on Thursday. Factory orders, leading inflation index and consumer credit is also out today. If all of these numbers are strong we could see a negative response in the market. Even though it is too early to tell we think the market will begin to discount strong numbers that come as there is the looming possibility of the Asian problems slowing our economy down.

Technically

With the market remaining flat all week it gave it a chance to work off its overbought situation. Most indicators are either neutral or oversold except stochastics. They are still in overbought territory but heading downwards. An important indicator we follow is the volatility index. A few weeks ago during the correction lows, the VIX was hovering around 38 on a weekly basis. It is now back to the high 20’s which even though is still a strong number, it shows that the correction phase should be ending. It would still be nice to see the 10 day arms index give us a true oversold condition to confirm that the market is finished correcting.

Mclellan Oscillator: 53 -100 oversold +100 overbought

Summation Index: 1227

Five day arms: 1.09 .80 and below, overbought 1.00 and above, oversold

Ten day arms: .91 .80 and below, overbought 1.00 and above, oversold

Bulls: n/a previous week 45.1 50% plus overbought/bearish

Bears: n/a previous week 37.7 50% plus oversold /bullish

Correction: n/a previous week 17.2

Five day Qvix: 28.08 10-15 bullish, low volatility 15-40 bearish, high volatility

Davidson’s View

I can’t say enough about how excited I am about this market. The more we search historically, technically, and fundamentally, we don’t see any reason to believe that the market is not going to go back to having a regular gain per year of 8-10%. Next year we expect to see the market on a gentle ride upwards with each expiration driving the option traders crazy because their options will run out of premium. It will become very boring but we’ll be excited each expiration with the great profits we’ll have!

If the overall market were to be up strongly again next year it will have broken all the records in the past. This year is already surpassing records as normally it would be a down year being the third of a presidential cycle. Technically, the market had broken out of its upward formation in 1995 and has been long-term overbought now for quite sometime. This situation has lasted much too long in many technician’s eyes. It was great to see James Kramer from "The Street.com" challenge technicians on trading interviewed on CNBC this week. He claims that good trading doesn’t come from studying charts but comes from experience in the market. I have to agree wholeheartedly. You all know how I’m not big into technical trading. Fundamentally, the market is still overvalued if you look at all the basics. Price earnings ratios, dividend yields, etc. I’m also not much of a fundamentalist but it has its place when buying individual stocks. All three of these aspects are important but nothing is as important as the overall mood of the market. Even the public has been drawing back from the market of late. Stockmarket liquidity last week was negative for the third week in a row. Equity fund inflows were a surprisingly light $1.3 billion for the week. Because of the 30 year bond yield we don’t think we’ll see any big corrections (for now) but we anticipate the market to slow its upward pace to its normal annual gains. Thus, we should have a great year next year!

MARKET CLOSES

Please note that on Monday the S & P 100 split 2 for 1. We calculated out the difference as if it was at it’s normal level for this week.

Current Trades

When the market sold off Monday it was perfect timing to fill our long trades on the 910/905 Puts and on the 905/900 short trade. It is rare that we have a short trade lower than a long trade but the actual placement of the trade was the week before so we decided to keep it as a short trade. After expiration on Friday, the program gave higher numbers for a long trade so we will still use those numbers for the long trade. After the market sold off on Monday it turned into a flat market for the rest of the week. Because of this most of us couldn’t get our trades in on the 1005/1010 calls. One person did get into the call trade though!! We have to congratulate him because he always calls his trades in immediately after receiving the "ALERTS"which puts him first in line to get in. The market truly is a first come first serve operation. We should see the rest of the fills next week with everyone back from the holiday and all the important indicators no doubt bringing more volatility to the market.

Program Trades

Copyright c 1996. All rights reserved. The information contained in the AGORA OUTLOOK NEWSLETTER is based upon data that is believed to be accurate, but is not guaranteed, and subject to change without notice. All projections, forecasts, opinions, and track records cannot be guaranteed to equal our past performance. Persons reading this newsletter are responsible for their actions. Officers and employees of this publication may at times have a position in the securities mentioned, or related services.

Agora Outlook

December Expiration
December 5th 1997

The U.S. unemployment rate fell to a 24 year low of 4.6% percent in November. This was a drop from 4.7% in October as the economy created jobs across a broad spectrum of industries. Non-farm jobs jumped by 404,000, nearly twice as many as economists had expected and the most since February, 1996. Payrolls grew by 287,000 in October. November's 4.6% jobless rate was the lowest since October 1973. (The last time the jobless rate was lower was in March 1970, when it was 4.4%.) Average hourly earnings rose $0.07 to $12.47 last month and were 4.1% above their year ago level. The average workweek grew by 0.3 hours to 34.8 hours. Today’s report came as a surprise to economists. In line with their belief that this year’s brisk pace of economic growth is slowing, they were looking for about half as many jobs to be made and for the jobless rate to rise to 4.8%. It looks as though we’re heading into the fourth quarter within a very strong economy. It’s an extraordinarily strong report. You can argue that the seasonal factors have affected unemployment but it’s very strong, showing very tight labor markets. The fact that earnings rose 0.6% really is showing that wages are on a sharp uptrend. Construction employment rose 29,000 in spite of unseasonably cold weather. Manufacturers added 44,000 jobs, with the increase concentrated on makers of electronic components, industrial machinery and aircraft. Employment jumped 53,000 at temporary help firms; 15,000 in engineering and management services; 13,000 in computer and data processing services, and 21,000 in health care. All areas seemed to see an increase. Economists have been concerned that labor shortages would accelerate wage gains and spur inflation. (Earlier in the spring it looked like the Fed was going to raise rates but they didn’t. It may have been because the Asian financial turmoil helped to slow down economic growth and inflation pressures.) The market sold off on the release of the report but then turned around to rally strongly upward. At its high, the Dow was up +114 points, S & P 500 was up +13.00 points. They closed at 8149.13 and 983.76 respectively. So why did the market rally? It appears that it’s because of how well our economy is doing. We’re producing jobs; there is no inflation so far; we’re living in a perfect world! However, many analysts believe that when the Fed meets on Dec. 16th we’ll see a rate rise for sure. For now though it seemed like a great idea to surprise everyone and rally the market. Something the market loves to do.......defy all understanding!       

Economic Effects

On Monday The National Association of Purchasing Management number fell to 54.4 in November from 56.0 in October, though the overall economy grew in November for the 79th consecutive month. An index above 50 indicates that the manufacturing economy is generally expanding while a rate below 50 indicates it is contracting. November marked the 18th consecutive month of manufacturing growth, according to the the NAPM. Purchasing managers from more than 300 industrial companies, reported that prices paid showed a slower rate of increase in comparison to the October rate. The market rallied with the Dow adding +189.98 points. Separately, spending on new construction projects barely edged up 0.1% to a seasonally adjusted annual rate of $605.5 billion in October. The government report showed healthy spending on residential projects but weaker investment in new commercial projects as the third quarter ended. The report pointed to a leveling off in construction spending, though certainly no major downturn. October's small rise followed a steeply revised 0.4% increase in September instead of the 1.1% drop reported before. Tuesday had Btm Schroeder weekly chain store sales come in up +0.5% and Johnson Redbook sales fall 1.5% in the fourth and final week of November. Retail sales rose 6.5% compared to the same month a year ago. The Leading economic indicator index rose 0.2% in October after a 0.2% gain in September. Economists in a Reuters survey had predicted the index would rise 0.2%. Changes in the leading indicators index are used to predict shifts in the business cycle. The report also said the index of coincident indicators, a gauge of present economic conditions, rose 0.3% after an identical rise in September. On Wednesday, New home sales fell 1.7% in October to a seasonally adjusted annual rate of 797,000, down from September's revised rate of 811,000. The department originally estimated the September sales pace at 800,000. Everyone had expected a new home sales pace of 808,000 in October, but markets took the data's release in stride. Bond traders seemed to shrug off the unexpected fall in housing sales because they were looking forward to the more important release on Friday of employment data for November. On Thursday weekly jobless claims came in down -3,000 for the week bringing the number to 303,000. The four week average was 314,000. The number came in as expected. Chain store sales reports during November suggest overall consumer spending was on a solid, but unspectacular pace entering the key holiday shopping season, with overall sales rising about 4.0% over last year. If sales remain on a 4.0% pace through December, it would set up retailers for the best Christmas since 1992. But given strong economic fundamentals, such as high consumer confidence, strong income growth and low employment, that’s not a stunning performance. On Friday the U.S. unemployment rate fell to a 24 year low of 4.6% in November from 4.7% in October as the economy created jobs across a broad spectrum of industries. Non-farm jobs jumped by 404,000, nearly twice as many as economists had expected and the most since February 1996. Payrolls grew by 287,000 in October. November's 4.6% jobless rate was the lowest since October 1973. Gains were widespread in the private sector, with especially large increases occurring in services, retail trade and manufacturing. Average hourly earnings rose $0.07 to $12.47 last month and were 4.1% above their year ago level. Also out were factory orders. New orders received by U.S. factories increased for a fifth straight month in October but weaker shipments and rising inventories suggested a moderating pace of activity. Orders rose 0.3% to a seasonally adjusted $337.2 billion. Economists had forecast a decline of 0.1%, following a 0.4% rise in September. All the October gain came from a 0.8% increase in orders for quickly used nondurable goods, especially food and paper products, after a matching 0.8% jump in September. Orders for more costly goods such as machinery and home appliances fell a revised 0.1% after being flat in September. At the first glance, stock and bond futures hated the unemployment report as they sank on the release but then they decided it was a good thing and stocks and bonds diverged taking stocks into a strong rally mode. The factory orders were completely ignored. Once again, for the week, indicators were strong but didn’t seem to have much of an effect on the market as it appeared to be in the January effect which means rally mode.

Next week’s Economic data

The week will start off slow but pick up on Friday with some key reports out. On Tuesday we get weekly chain store sales reports. Many will be watching these numbers to see how Christmas shopping is going. Wednesday will give us wholesale trade numbers and the current account deficit. Will we hold the biggest deficit again with China this month? Thursday has weekly jobless claims, retail sales and import & export prices. We received a good indication of how retail sales were going last week and on Tuesday, so this number will probably be ignored for the import/export prices. On Friday we get business inventories, consumer sentiment, producer price index and the Atlanta fed survey. All four of these numbers are market movers so it could be an active day.

Technically

We have now reached an overbought level on a short term basis as the market is retesting its old highs. Some indicators like stochastics are showing an extremely overbought situation. The good news is that relative strength in the market is at a comfortable level and the arms indexes are still neutral looking at it from a medium term length. This could indicate that we may go down to consolidate gains but we’ll still continue to move higher. On a longer and broader view there is a bigger problem brewing. If we do hit new highs without the advance/decline confirming it, it will not be a healthy situation. Just today (2:00 est) with the Dow and S & P 500 up over +90 and +10 points, advancers were only 15 to 12 decliners. For such a rally, this is not healthy. Also, new highs have been almost even with new lows the past few days and even lower than new lows intraday.

Mclellan Oscillator: n/a -100 oversold +100 overbought

Summation Index: n/a

Five day arms: .99 .80 and below, overbought 1.00 and above, oversold

Ten day arms: 1.04 .80 and below, overbought 1.00 and above, oversold

Bulls: 47.1 previous week 44.7 50% plus overbought/bearish

Bears: 34.7 previous week 36.6 50% plus oversold /bullish

Correction: 18.2 previous week 18.7

Five day Qvix: 23.09 10-15 bullish, low volatility 15-40 bearish, high volatility

Davidson’s View

The S & P 500 tested and beat its old highs today. It barely went above it, (about a half a point) so it is still testing the waters. It was a good rally but not impressive enough to suggest that it will be a long lasting rally, in my opinion. I was asked this week what the odds are of the S & P 500 breaking through the 1000 level. It made me think of a past commentary on the Dow going through 1000. In 1966 the Dow touched the 1000 level for the first time but then retreated. After that it touched 1051 briefly in 1973. It then fell back and rose again reaching 1014 in 1976. In 1981 it hit 1024 but then corrected to 776. The last time the Dow saw 1000 was in 1982.

It rallied clean through 1000 and went all the way to 1287 before a correction set in. It took 15 years for the Dow to get through 1000 on a final basis. The very first 1000 mark was a hard thing for the Dow and I don’t expect this to be much easier for the S & P. I am sure though that it will make it through in much less time! Will we see 1000 on a closing basis for the S & P this month? I don’t think so but I’m not alone in this market!

There was an announcement this week saying that we will soon have options on mutual funds! That should be interesting! The idea, they say, is to protect the fund owners from a down market. Gee I wonder who’ll sell those options. Maybe the people who manage them. Won’t that create some fascinating market manipulation!

The rules for trading curbs are also changing. They decided to make modest changes to rules that halt trading in the stock markets when prices plunge, but skipped a plan to make it harder to trigger the so called circuit breakers. The amendment being proposed by the NYSE would keep the point triggers the same, but would trigger shorter trading halts after 2 p.m. and close trading entirely when there is a dramatic drop after 3 p.m. Currently, trading is suspended for a half hour when the Dow drops -350 points and for one hour when the index loses -550 points. The NYSE said it will propose additional changes to the rule in 1998, leaving open the possibility of raising the threshold for triggering trading halts. That could mean there would need to be a 10% drop in the Dow for the first halt and 20% for the second. At current market levels, that would be equivalent to about 800 and 1,600 points. The tripwires were installed after the October 1987 stock market crash. They were designed to slow the decline in case of another sell off. The percentage idea seems to make much more sense considering that on a point basis were currently so much higher.

MARKET CLOSES

Current Trades

Well everyone got into the long call trades. With the market rallying this week our put trades look great as their premium died. The call trades are also looking good even with the big surge on Friday. We thought we would run the numbers through the program to see what the numbers were and this is what they said. On the long put trades the program gives a strong 95% probability of success by expiration. The long calls have slipped a bit but are still strong. They have a 89% probability of a success this expiration.

Program Trades

Copyright c 1996. All rights reserved. The information contained in the AGORA OUTLOOK NEWSLETTER is based upon data that is believed to be accurate, but is not guaranteed, and subject to change without notice. All projections, forecasts, opinions, and track records cannot be guaranteed to equal our past performance. Persons reading this newsletter are responsible for their actions. Officers and employees of this publication may at times have a position in the securities mentioned, or related services.

Agora Outlook

December Expiration
December 12th 1997

The top story of the week was South Korea’s desperate yet futile effort to regain foreign confidence and buying interest in it’s stock market as the Korean won continued its plunge. Currency trading again came to a halt after the won plunged to its 10% daily lower limit of 1,719.8 to the dollar. The stock market slumped 5.6% on Wednesday and 6% on Thursday. An executive at a local brokerage firm added: "It’s a massacre. Even the country’s president is helpless." South Korea’s desperate quest for dollars led it to open 50% of the equity market to foreign investment on Thursday, four days earlier than expected. But foreign buyers were almost non-existent with blue chips battered by heavy selling instead. South Korean credit ratings were also hit. Overnight, Moody’s Investors Service lowered South Korea’s foreign debt currency ceiling, while downgrading the ratings of 31 Korean issuers. Standard and Poor’s Corp. lowered its long term foreign currency rating of South Korea and related entities to ‘BBB minus’ from ‘A minus’, and its long-term local currency rating to ‘A minus’ from ‘A plus’. S&P also lowered ratings on export-import Bank of Korea, Korea Development Bank, and Korea Industrial Leasing Co. Ltd., and lowered its ratings on Seoul Metropolitan City Government’s foreign currency credit. Traders said South Korea was caught in a vicious circle with the currency crisis driving away foreign investors despite the allure of a cheap and now open stock market.

Hong Kong stocks were battered for the third straight session on Thursday, crushed by a rise in local interbank rates and a weakening Hong Kong dollar as the South Korean won continued its slide. A disappointing government land auction added to the market’s woes and the Hang Seng Index ended the day down 602.19 points, or 5.46%, at 10,420.22 points. "Currencies are falling about our ears," said Miles Remington, sales trader at SocGen Crosby Securities. "We will find a floor over the next couple of days but I don’t think there is considerable upside." On Friday Hong Kong closed up 110 points. Wall Street also worried about a proposed $77 billion in special government backed bonds being approved by Japan’s ruling Liberal Democratic Party. A formal package of party recommendations aimed at boosting the economy and stabilizing the financial system is to be released next Tuesday. On the foreign exchange market, the dollar weakened as players took profits on the dollar’s recent rise and on expectations the financial package could help bolster the yen.

Standard & Poor's 500 companies are reported to earn a 9.4% earnings increase in the fourth quarter ending Dec. 31. This is the smallest annual percentage gain posted by U.S. companies all year. Some analysts think profit growth of most U.S companies is going to begin contracting even for firms that don't do much business overseas. If Asia's woes cause significant slowdowns in major sectors of the U.S. economy, then these domestic stocks would ultimately provide only limited shelter from this storm. As much as people would love to see the bull go on forever, the plain fact is that we are nearing the end of the stock market's three best years since World War II. Even after last week's slide, the S&P 500 remains ahead 108% since December 30, 1994, according to Ned Davis Research. The only three-year span that comes close is the period from 1954 and 1956, when the S&P 500 rose 88%.

Economic Effects

On Monday Machine tool orders rose 6.6% to an estimated $699 million from a revised $656 million in September. For the first ten months of this year, machine tool demand was $6.87 billion, up 17.6% from the same period in 1996. October orders signal continued strength in the industry, although they are not evenly distributed across all market segments. Machine tools are used to shape metal in making everything from bicycles to aircraft. Demand for these tools can provide a leading indicator of the pace of manufacturing. Tuesday Btm Schroeder weekly chain store sales came in down -0.5% and Johnson Redbook sales were up +0.3% balancing each other out for the week. The market seemed to disregard the numbers. On Wednesday weakening overseas sales drove the U.S. current account deficit, the broadest measure of the nation's trade performance, to its highest level in a year during the third quarter. The Asian currency crisis was just beginning in the third quarter and is expected to sharply increase pressure on the U.S. trade deficit in coming months as Asian trade partners try to boost sales to the U.S. while buying fewer American made products. In the three months from July through September, the deficit widened 11.4% to $42.16 billion from $37.85 billion in the second quarter, its highest level since $42.83 billion a year earlier in the third quarter of 1996. The one thing we don’t want to see is the deficit grow too strong as in time it will begin to affect the market. Traders are still expecting a balanced budget in 2002. On Thursday overall retail sales at the start of the holiday shopping season rose a lackluster 0.2% despite healthy gains at clothing shops and furniture stores. The disappointing advance in November, to a seasonally adjusted $213.8 billion, followed drops of 0.2% in October. Economists were predicting a rise of about 0.5%. Analysts cautioned that sluggish spending in November doesn’t mean a disastrous December for retailers, when many businesses register as much as half their annual sales. The number of unemployed people claiming jobless benefits fell by 13,000 last week. Initial claims fell to 311,000 in the week ended Dec. 6 from a revised 324,000 in the prior week. The closely watched four week moving average, which smoothes out weekly volatility, fell to 318,250 last week from 318,750 in the prior week. The markets disregarded both the numbers today as the Asian flu came back to take control of the market. Friday saw the cost of computers, gasoline and coffee become cheaper in November as prices paid to producers declined for the eighth time this year. Prices paid by wholesalers and others for finished goods fell a seasonally adjusted -0.2%, while the closely watched core rate which excludes volatile food and energy prices fell 0.1%. That followed three monthly increases in the Producer Price Index, but 8 out of the 11 months of reporting this year have seen decreases. Prices have fallen at an annual rate of 1.2%, compared with a 2.8% increase for all of 1996. While good news for buyers, such deflation also raises economic worries. The inability of producers to increase prices especially when they’re being forced to pay higher wages because of the lowest unemployment rate in 24 years, raises the prospect of a profit squeeze ahead. In any case, today’s report almost ensures the Fed policy makers meeting next week will find no need to put out inflation with higher interest rates. Inventories held by U.S. businesses piled up in October as sales stalled at factories, wholesalers and at retail outlets.

Stocks of unsold goods rose 0.4% to a seasonally adjusted $1.041 trillion, double the 0.2% increase forecast by economists following a 0.7% jump in September. The report adds to signs of a relatively lackluster run up to the Thanksgiving to Christmas holiday shopping season. The PPI number was the only real viable number this week and it showed that no inflation in sight which is probably the reason that the 30 year bond closed this week out at 5.93%.

Next week’s Economic data

Monday has Industrial production coming out. This number can cause volatility in the market. At this time analysts are going to want to see a high capacity utilization number in this report. As wages continue to rise, productivity needs to be high so that inflation doesn’t rear it’s head. On Tuesday we get weekly chain store sales reports. Housing starts and the Consumer Price Index are also coming out. These numbers have moved the markets in the past. With both coming out together we could have an interesting day on our hands. These numbers will be the focus of the day. The CPI number will help to confirm the great PPI number we had out last week. Analysts expect the number to be low so if there is a surprise look out below! Thursday has weekly jobless claims. This number has really flattened out of late so it will probably be disregarded. Friday has the beige book coming out from the past FOMC meeting but the news is so old it rarely has any effect on the market so this time should be no different. Back then the Fed also had to be cautious with their words because of the Asia crisis, so don’t expect anything big. It is a triple witch expiration so that should make the day quite exciting!!

Technically

Short term the market is quite oversold. Our 5 day arms number is very oversold which means we should get some kind of bounce or flattening market this coming week. Stochastics are almost at a oversold area. They will probably reach that area on Monday or Tuesday. Relative strength is right in the middle of the range but heading lower once again. Longer term indicators are still overbought. Because of this, the market may remain flat for a while longer. Many technical analysts seem to be quiet right now due to the indecision in the market. Its much easier to time a rising or falling market than a flat market. When you just look at a longer term chart of the S & P 500 it looks like the index is rolling over but it’s hard to evaluate if it will or not. We may also be forming a base for another run higher. A couple more weeks should reveal the real direction in the market.

Mclellan Oscillator: -70 -100 oversold +100 overbought

Summation Index: 1734

Five day arms: 1.32 .80 and below, overbought 1.00 and above, oversold

Ten day arms: 1.16 .80 and below, overbought 1.00 and above, oversold

Bulls: n/a previous week 47.3 50% plus overbought/bearish

Bears: n/a previous week 27.7 50% plus oversold /bullish

Correction: n/a previous week 26.0

Five day Qvix: 25.38 10-15 bullish, low volatility 15-40 bearish, high volatility

Davidson’s View

Well, the poll we sent out last week came back 50/50 for the best way to read the letter. Many of you have access to much better charts than ours so we think we’re going to send both for you to read. Our chart of the S & P 500 gives a good visual picture of where the current expiration ends so it does give an idea of where closure is. Everyone will have to choose. We still recommend that you get the free "wordviewer" from microsoft to be able to read any "word" file. The address is: http://www.microsoft.com/msword/internet/viewer/

I have had a few questions this week so I thought that I would use this time to answer some since the market right now is quite boring. The closer we get to Christmas the more boring it will probably get.

1. The first question I was asked is what is an ALERT? An "ALERT" is only sent out to subscribers. It is to inform them that there is a possible trade for them to place or it is to adjust a trade that is on at the time. It is very important that every ALERT sent out is confirmed that it was received by us! The reason is that if the person doesn’t receive the opportunity to place a trade they will be very upset. This way we know that they received the message and can make their decision. Another part of this is that if they have placed the trade and were filled, we like to know what prices they were filled at. This way we can figure out the average spread and if someone didn’t get filled we can adjust the trade for them.

2. How much should I trade? Traders should use 1/3 of their trading capital if they do one trade or 2/3 if they do both the put and call trades in the same month. Let's say you have $9000 to trade in total. We would take $3000 and use that for your margin amount for one trade. In the average margin account you can buy and sell 6 call contracts. This would be the use of 1/3rd. If we then placed the put side you would take another $3000 which means you’re using 2/3rds of your capital. You would then have another 6 contracts in play for the same month’s expiration cycle. $3000 would be sitting in cash. This could be used for an early long trade placement. The number one rule we follow in this business is the preservation of capital. If you don't have the cash its hard to play the game and it gets really hard to sit and watch!!

3. What are my loss potentials? The great thing about spread trading is that you know when you place your trades what your profits will be and what your potential profits may be. This is as long as you’re doing spreads on the S & P 500 cash market. Other indexes have different expiration rules. Let’s say you were using $3000 for margin and say the credit profit was $1.00 on 6 December call contracts. That would be a $600 profit. Your maximum loss with a credit spread on the S & P 500 is determined by the point spread, minus the profit credit, equaling possible loss. In this case if you had a loss it would be $2400, no more. Since you hopefully have the other December trade on, for $1.00 put credit you would make another $600 on 6 put contracts thus cutting your loss to $1800. You can never have a loss of 2/3rds because the index can't expire in 2 places, as long as you have a long call and a long put trade on in the same expiration month. We never do long trades in different months anyhow. Your maximum loss can only be 1/3rd - profits of one side. $3000- $600 - $600= $1800 max loss from above example.

4. What is the difference between a "Long Trade" and a "Short Trade"? A long trade is placed at the start of the new expiration period and normally held up until expiration. A short trade can go a few days or a week or right up to expiration. It is mostly done on momentum of the market. Similar to outright buying strategies but giving you a little freedom if the market goes the wrong way. We go for huge credit premiums like $2.00 or 40% with most short trades on one side . Long trades go anywhere from 10-20% on each side twice each month. They’re smaller but they build up. We have only registered one trade a month since 1989 in our profits section so we expect to see higher numbers next year. Since September, because of subscriber pressure, we began to list both, when two trades have been made. We hope that this answers a few questions for you.

MARKET CLOSES

Current Trades

With the way the market finished this week our call and put spreads are in great formation to expire worthless next Friday!! We ran the numbers through our program and the calls came out with a strong 95% probability of expiring worthless. The puts came out with a lower number but since we were down all week we expect a few up days next week. The number showed a 91% probability of our puts expiring worthless. They should all expire giving us a 63% profit all combined for our short and long trades this month. Now that you have let your breath out you can do that Christmas shopping you've been waiting for!!

Program Trades

Copyright c 1996. All rights reserved. The information contained in the AGORA OUTLOOK NEWSLETTER is based upon data that is believed to be accurate, but is not guaranteed, and subject to change without notice. All projections, forecasts, opinions, and track records cannot be guaranteed to equal our past performance. Persons reading this newsletter are responsible for their actions. Officers and employees of this publication may at times have a position in the securities mentioned, or related services.

Agora Outlook

December Expiration
December 19th 1997

Asian stocks took a beating Friday, with key indexes in Tokyo and Seoul losing more than 5% and Hong Kong ending 3.24% lower. Japan fell on Friday as the failure of foodstuffs trader Toshoku Ltd., rekindled fears over the health of corporate Japan, brokers said. The Nikkei 25 average ended at 15,314.89, its second lowest close for calendar 1997. It tumbled 846.75 points, or 5.24%, to mark its third biggest point loss this year. The Toshoku news sparked panic selling of lower priced issues as Toshoku’s failure was brought on by bank reluctance to extend loans," said Noboru Yorita, general manager at Tachibana Securities. The market is busy speculating over who will be next after Toshoku. Recently, foreign investors have mostly been recently but now domestic investors are in, accelerating the losses. South Korea’s financial markets also faltered Friday, one day after presidential elections, as concerns about the country’s economy resurfaced. The won briefly lost about 11% of its value against the dollar in early Friday trading but ended at 1,550, compared with Wednesday’s close of 1,481.0. The local currency pushed benchmark yields on three year corporate bonds with bank guarantees to close at a record high of 26.14%. Seoul stocks plunged 5.13% percent on renewed concerns about hardships accompanying the International Monetary Fund (IMF)-led rescue package, brokers said. Things seemed to be set to fall from the beginning regardless of who won the vote. Kim Dae-jung, leader of main opposition National Congress for New Politics, was elected South Korea’s next president on Thursday. Hong Kong stocks closed sharply lower Friday after tumbling at the open on negative Wall Street and Tokyo sentiment, but brokers said a minor pre-holiday rally was possible next week. The Hang Seng Index closed 348.30 points, or 3.24%, lower at 10,405.81, but off the day’s low of 10,352.68 it came back a bit. Next week may be quiet, but we could also see some window dressing mixed with a lot of volatility as markets will no doubt be thinly traded. Disappointing earnings released late Thursday by Nike and 3Com plus big declines Friday in Asia’s major markets were more than enough to take our markets sharply lower today. Trading was heavy early on, with selling activity related to triple witching expiration. In the early afternoon, the Dow was off about -270 points, the S&P 500 was off more than -28 points. Despite the fearlessness of some players, there didn’t appear to be much reason for optimism in the early going. Weakness in Asia’s major markets Friday only added to the already negative influences of the earning disappointments and the expirations. Once again, the worries about international markets and profitability of U.S. corporations was working to the benefit of the bond market. More demand for the perceived "safety" of 30 year bonds helped send the yield below 5.90% Friday morning. At some time the market is going to react to the lower yields. is The question is when. We may need to see a few low earnings quarters to get a decent rally.     

Economic Effects

Monday had Industrial Production output increase last month by a stronger than anticipated 0.8%, partly due to a rebound in automaking, after a 0.5% October rise. Capacity utilization was 83.2% of maximum capacity in November, up from 82.9% in October for the strongest operating rate since 83.6% in September 1995. Despite the signs of tight capacity and the lowest unemployment levels in 24 years, the Fed is expected to keep rates steady because of the Asian instability. The jump in November output occurred in the manufacturing sector, while utility companies and mining industries reduced production. Tuesday Btm Schroeder weekly chain store sales came in up +.02% and Johnson Redbook sales were up 1.7% in the second week of December versus November. According to retailers, the sluggish sales and low volume seen in the first week of December carried through most of the second week, but the period ended on a brighter note with business picking up over the weekend. Construction starts on new homes and apartments rose surprisingly in November as building hit its strongest pace in nine months. Starts increased 0.8% to a seasonally adjusted annual rate of 1.53 million in November after a revised 0.8%gain in October. Wall Street economists had forecast November starts would decline to an annual rate of 1.49 million. Housing officials foresee a good market at least into the early months of 1998, primarily because of low interest rates. The National Association of Home Builders said its index of market activity climbed in December to 59 from 56. The cost of gasoline, oranges and airline fares fell in November, holding the increase in all consumer prices to 0.1%. The increase in the Consumer Price Index was the smallest in five months. Prices rose 0.2% a month from July through October. The November rise in the CPI was less than economists expected. The rise kept the annualized inflation rate for the first 11 months of the year to 1.8%, the lowest since oil prices crashed in 1986. Core prices, which exclude volatile food and energy prices rose 0.1% in November. For the year so far, they’re advancing at a 2.1% annual rate, the best since 1965! These are positive readings in terms of consumer prices not showing influence from wages. On Thursday, the trade deficit with the rest of the world narrowed sharply for October to $9.7 billion as a record level of exports helped to offset a relentless climb in imports. But in a potentially ominous sign, the U.S. deficit with Japan soared to the highest level in 2 1/2 years. Analysts are forecasting bigger deficits with all Asian countries next year as the U.S. economy feels the effects of the financial turmoil that has engulfed the region. Also, economists are predicting an even bigger deterioration in the deficit next year as Asian imports flood into the country, made suddenly cheaper because of the sharp currency devaluation’s that have occurred in the region. Applications for unemployment benefits rose by 5,000 last week to a seasonally adjusted 319,000. The small increase was in line with expectations and left jobless claims at a level showing that the job market still remains tight. The 1.6% rise comes in spite of a labor market at its tightest since the 1970’s and underscored by last month's unemployment rate sinking to a 24-year low of 4.6%. The four week average is314,750, down from 318,500 in the prior four-week period and well below 343,250 in the previous year. The Philadelphia fed survey came in lower for the fifth month this year coming in down -1.3 from +10.1 in November. Once again the numbers this week didn’t have much on the market since it is more concerned with the Asian turmoil.

Next week’s Economic data

On Tuesday we get weekly chain store sales reports. Also out is gross domestic product and durable goods orders. The GDP number will likely be ignored as it is such a lagging indicator but the Durable goods number should be taken seriously. The indicator is important when it comes to inflation as it reveals the true spending patterns of the public. Wednesday has personal income and spending, consumer sentiment and an early weekly jobless claims. The personal income number will be the number of the week since everyone is on the alert for wage inflation. Being the day before Christmas, trading will be thin and if the number is way out from consensus we could see some strong volatility. Thursday and Friday have no indicators out. The week overall will probably be shunned for indicators as it is a holiday week and many people start vacation right now.

Technically

Short term we’re still oversold in the market. As we have said before, when the market has been overbought it can advance for some time before you see a change in direction. This rule also applies to being oversold. The 5 & 10 day arms number is showing a strong oversold reading. Stochastics are approaching oversold levels and relative strength is barely holding neutral. Longer term, however, the market is still giving an overbought reading as shown by our bull and bear indicator. This indicator has been quite accurate in the past for longer durations. Ralph Acampora has decided to give the Dow more time to reach 10,000. His previous prediction was that the Dow would reach 10,000 by the summer of 1998. Now he is moving it to 1999! Yale Hirsh also went bearish today as he said that the Dow may hit a new high in the new year but then it will fall back to around the 6500 level. Isn’t it interesting how these guys always say this whenever the markets starts to fall! Timing is everything, isn’t it!

Mclellan Oscillator: -90 -100 oversold +100 overbought

Summation Index: 1586

Five day arms: 1.08 .80 and below, overbought 1.00 and above, oversold

Ten day arms: 1.20 .80 and below, overbought 1.00 and above, oversold

Bulls: 52.5 previous week 51.2 50% plus overbought/bearish

Bears: 30.8 previous week 32.5 50% plus oversold /bullish

Correction: 16.7 previous week 16.3

Five day Qvix: 27.57 10-15 bullish, low volatility 15-40 bearish, high volatility

Davidson’s View

Surprisingly, last week the markets refused to cheer from a marked decline in interest rates. The yield on the 30 year bond falling to 5.90% at week's end, its lowest level since October 1993. Usually, stocks go lock step with bonds and having bonds below 6.00% is great news. One reason the good news on rates didn't move the stock market is that investors lately have grown more fearful of weakening corporate profits than of rising rates or inflation.
There has been ample reason to worry given the shortfalls, some of them related to Asia, some not. Thursday night Nike and 3 com reported poor earnings but the biggest shocker came from Oracle, the database software company. It is one of the strongest of the Nasdaq along with Microsoft, Intel and Cisco Systems. All of the news today made for an interesting end to the December expiration. With the Dow off -270 points it made it very interesting. Nonetheless the fall wasn’t enough to affect our put trades since they expired this morning much lower than even the S & P 500 low of -28.00 points to 927.00, 910/905. We had a down month for the December expiration cycle which is very rare. The market seems to be sporadic and directionless. It does’nt seem to know which way to go and in my view that is what is affecting the spreads so much. There is a difference between volatility and sporadidity. (New word) When the market has volatility it is usually hard down and then hard up or vice versa and then it reverses itself but with sporadidity the market goes up, down and all around making things confusing. It may take some time to find its direction and it may get worse as we move into the Christmas holidays.
With all of this worry, you would think it would help to lift gold. It was up slightly after dropping 5% on average in the prior week and plunging 42% so far this year There's normally a strong seasonal rise in gold stocks in the first two months of the year, according to Ned Davis Research. Since 1965, the gold-mining group has risen by 25% on average from its November-December low to its January-February high. In 1997, the gain was 13%, and there was a 37% rise in early 1996.

MARKET CLOSES

S & P 500 Expiration 943.65

S & P 100 Expiration 450.51

Current Trades

Well, we enjoyed another month of profitable trades. All of our options expired worthless Friday morning. Our short trade, 905/900 December puts, which turned out to be lower than this month’s long trade, came in with a $1.00 or 20% profit for the month.. Our long trades were also profitable. The 910/905 December puts expired Friday morning giving us a $1.00 or 20% profit. Finally, our 1005/1010 calls expired giving us a profit of 23%! This gave us a total profit of 63% for the month. What a great way to finish the year!! For all of 1997 we had a 188% profit. Short trades were 108%. We expect next year to be even higher as we will be reporting both the call and put profits each month. We started reporting both sides in September. January program numbers will be out Sunday night for another exciting month of spread trading!!

Program Trades

Copyright c 1996. All rights reserved. The information contained in the AGORA OUTLOOK NEWSLETTER is based upon data that is believed to be accurate, but is not guaranteed, and subject to change without notice. All projections, forecasts, opinions, and track records cannot be guaranteed to equal our past performance. Persons reading this newsletter are responsible for their actions. Officers and employees of this publication may at times have a position in the securities mentioned, or related services.