My tech stock "safe" signal is still stuck at 0.0 since none of the major tech companies is yet publicly claiming that they have evidence (other than "hope" or "hints") that their business has started to accelerate out of the tech downturn. My "safe" signal requires at least 20% or 1 out of 5 of the top 25 tech companies to signal acceleration. Expect at least two quarters to elapse from the time of the first indications of an upturn and the return of solid growth. The theory is that the stock market should begin a sustainable rally six months in advance of the return of strong growth. I continue to peg Q2 (May or June) of 2002 as the timeframe for the return of strong growth for the bulk of the tech sector. There may be lots of little rallies over the next few months, but just as many bouts of "profit taking".
Current short-term economic outlook: "Life in the trough". Don't count on much if any sign of a strong recovery in the next few months (through November). MAYBE a bit of slowing of the decline or even a little "stabilization". With at best a few "hints" of improvement. The economy is at an "inflection point" where its true trend won't be discernable for a few months. The gradually strengthening positive forces will only slowly overtake the gradually weakening negative "drags" (e.g., layoffs and cost cutting) that are still very strong.
Even after all the economic reports last week, I still think the preceding paragraphs are an accurate assessment of the economy.
The jump in the unemployment numbers on Friday obviously spooked a lot of people, but strangely enough didn't do very much damage to tech stocks. Maybe because the shorts had so much opportunity with Old Economy stocks that tech stocks lost their shorting appeal, at least for a day.
The Employment Situation report was obviously a very negative report. But it is important to keep in mind that in any downturn, employment continues to decline while the economy begins to recover. Also, understand that employment will continue to decline until the rate of GDP growth exceeds the rate of Productivity growth. The unemployment rate is somewhat confusing since the size of the total labor market (employed plus unemployed plus not seeking employment) decreased dramatically. The good news was that average weekly earnings continue to increase, and that's money in the pockets of consumers. Also, the service sector actually showed an increase in employment. The real bottom line is that we need to watch the weekly jobs numbers to see which way the trend is going. Last week's weekly number was actually an improvement. It will take a while for the market to sort through these conflicting reports.
The Economic Cycle Research Institute (ECRI) Future Inflation Gauge (FIG) declined in to a nine-year low in August. In other words, the Fed does not need to worry about inflation. And the bond market should stop worrying as well. This was a positive report.
The ECRI Weekly Leading Index (WLI) increased slightly from the previous week. This is a slight positive, but we need to see consistent improvement before treating a WLI gain as a solid positive. The six-month "smoothed" average of the WLI was still showing negative growth, but that is a trailing effect, weighed down by a lousy summer.
The Wholesale Trade report showed improvement in July. Sales were up and inventories were down. This resulted in a drop in the Inventory-to-Sales ratio, the first time so far this year. This is a reasonably positive report. Not enough to balance out the employment report, but enough to show that the economy is making progress towards a recovery.
All this latest "data" is a little too mixed and complicated for a rational person to sift through in just a few hours on Friday. I would expect that fund managers will have used the weekend to decide how they really want to be positioned and the next few days will see the "fruits" of their labor. That could be heavy selling that finally causes a re-test of the April Nasdaq low. Or, we could see more "wait and see". Or, there could actually be some buying of issues which actually do look like they will benefit from where the economy is headed rather than where it has been.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, surged up another 5.79% on Friday to 34.36 which is in the upper end of the high anxiety zone (30 to 35). It trended up (although erracticly) for the entire day, closing just short of the day high of 34.61. There was not really any sense of "capitulation" evident in VIX on Friday, despite the fact that Nasdaq did bounce back from it's 1:30 p.m. low for the day. In any case, anxiety is rather high and will probably continue to rise unless there is either a capitulation or some really good news that turns sentiment around. It's also possible we could see some tentative dip buying as well. Virtually anything is possible in this market.
The Nasdaq-100 After Hours Indicator had a weakly negative tone in the Friday evening session, closing down 0.49 points. Neither much pessimism nor optimism was visible. Mostly just people dazed and confused.
Nortel (NT) is talking about another 12 months of "drought" ahead, presumably referring to the telecom sector. There is also talk that Cisco (CSCO) could acquire them.
Metromedia Fiber Network (MFNX) is close to filing for bankruptcy. Yet another reminder that we still have a ways to go to consolidate and rationalize the telecom sector.
Just this morning, RF Micro Devices (RFMD) raised its quarterly outlook as it saw an increase in orders for it cell phone radio parts. It's not much, but it is worth noting ANY improvements in orders so we can discern a trend.
Fed Funds futures now suggest a certainty (up from 65% chance) of a quarter-point cut in interest rates at the October 2 FOMC meeting as well as a 10% chance of a half-point cut at the October meeting. Futures are also suggesting a 68% of a second quarter-point cut by the end of the year. Futures also suggest a 20% chance of a quarter-point cut BEFORE the October meeting. The likely scenario is a quarter-point cut at both the October and November FOMC meetings. Also expect increased public comments from various Fed officials to help "calm" the markets and focus more attention on where the economy will be next year rather that the short-term problems.
Federal Reserve Bank of San Francisco President Robert Parry said on Friday the U.S. economy still faces the risk of further weakness, but that "my best estimate at this point is that there will be a modest pickup in activity by the end of this year with more acceptable growth rates in 2002".
In a Reuters poll Friday, 24 of the 25 primary bond dealers believe there will be one more rate cut this year (up from 14 in an August 21st poll). 22 of 25 believe a quarter-point cut will come at the October 2 meeting. Two others believe the cut will be a half-point at or before the October meeting.
AMG Data Services reported on Thursday evening that for the (shortened) week ended Wednesday, September 5, $1.7 billion flowed OUT of equity funds and $1.8 billion flowed INTO taxable bond funds. Usually money is flowing into money market funds, but this past week $8.8 billion flowed OUT, possibly that was for back-to-school expenses.
Quarterly estimated tax payments will be due in a week, so at least a few people need to raise some hard cash by then (although people can write checks on money funds that don't get cashed for another week to ten days after the 17th.)
The latest issue of Barron's has a list of some tech companies that look somewhat appealing because they have a significant amount of cash compared to their stock price. Sometimes the cash even exceeds the stock price. Don't get too excited. Apple Computer has been on such lists for a very long time and it hasn't seemed to help them or their shareholders. There are two key issues: 1) is the company "burning" through that cash at a rapid rate and 2) is the company actually "using" that cash to the benefit of shareholders. A strong balance sheet is great for helping a company survive "lean" times (like now), but unless you are going to buy the company outright and liquidate it, the cash level is mostly just "an interesting statistic" and nothing to get excited about.
On the other hand, just this morning Critical Path (CPTH) announced that it had bought back a big pile of its debt for 25 cents on the dollar. As long as they have enough cash to survive the next six months, that is an excellent use of "excess" cash since it cancels a huge drag on the company's balance sheet and "book" value.
Are we in a recession yet or not? A common misperception that a recession begins with two consecutive quarters of declining GDP (or negative GDP growth). But as Fed Chairman Greenspan told Congress early this year, "it's a recession when the National Bureau of Economic Research says its a recession". NBER has a Business Cycle Dating Committee which meets whenever they feel conditions warrant. They look at a number of different monthly factors of which industrial production is only one and it's not the most important. The two most important are employment and national income. They will "call" a recession when the monthly data "roll over" in a significant way. Slight blips don't count, which is probably where the two-quarter "rule" probably came from. They also want to make sure that a temporary rise in the middle of a recession is not treated as a premature "end" to the recession. In any case, employment has been declining (as well as industrial production), but income is still rising. It's consumer spending that's keeping the economy out of recession, right now. So, we're not quite to a recession yet. The committee has been updating their web site each month and so far they are not "calling" a recession. Actually, they rarely call the beginning of a recession in real-time, sometimes not calling it until the recession is in fact over. This time they may make a closer call because so many people are now watching them so closely.
It's Monday again, so time for my latest weekly dolloar-cost averaging (DCA) purchase. Given the short-term gloomy outlook, it's very tempting to hold off to get an even cheaper price. But I won't. Holding off is called "timing the market" and that's not a long-term strategy. I'd rather make my purchase in a mechanical, "formula" manner and be done with it. I am spreading my purchases over an extended period of time to improve my total return, assuming the market eventually does come back. My return since the beginning of July is certainly rather abysmal, but I have "saved" a lot of anxiety.
The market could well continue to grind down for another few weeks or even a couple of months. Or, if the "technical analysts" finally sense a "capitulation" or the "values" of beaten down tech stocks are deemed "attractive" (using some forward-looking meanure or possibly even the old-fashioned "book value"), we could get a bounce at any time. Whether or when such a bounce occurs or how long it lasts is of course debatable. And whether it's merely a bounce before a further decline depends on whether the economy shows some stabilization or even improvement in the next few months. The pace and tone of quarterly warning announcements could also drive the market. But ultimately it is money flows into or out of mutual funds (and hedge funds as well) that will drive the market.
Even Alan Abelson of Barron's writes "We're still of a mind that we're on the verge of a big bounce, but what's new?" The reason the market has been declining since May is that retail investors have been redeeming shares of their mutual funds, despite the fact that Abelson suggests that "the public has been almost catatonic in its reaction to what has been a very aggressive and destructive bear market." He's ignoring the AMG Data Services numbers published weekly in his own paper that have catalogued the outflows from stock funds since April of 2000 and the increased inflows to bond funds. That's hardly what I'd call a "catatonic" reaction. In fact, maybe this is one of those rare times when it is "the public" who is being most rational, compared to the Wall Street "professionals".
Ultimately, the market is looking for the kind of little "hints" of economic improvement that come months in advance of actual, measurable economic performance. One of the most important I am waiting for is some sign that demand for advertising is stabilizing or picking up. No sign of that yet.
Jack Krupansky
Updated: September 10, 2001 08:16:43 AM -0400
Copyright © 2001 John W. Krupansky d/b/a Base Technology