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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. Despite recent events, I continue to peg Q2 (May or June) of 2002 as the timeframe for the return of relatively strong growth for the bulk of the tech sector.
Current short-term economic outlook: Recent events will cause a sharp drop in economic activity, but those effects may be short-lived as pent-up demand needs to be satisfied. The economy will be completely up in the air until mid-October. November and December may show the beginnings of recovery, but only to the extent that the "response" to terrorism does not continue to drag down the economy. To get the "pulse" of the economy, focus on employment, income, and advertising spending. The government issues unemployment numbers every Thursday. But, don't waste time with these numbers until after mid-October when the new wave of layoffs peaks.
We ended the week and the quarter with a nice little rally. Factors included "window dressing", short-covering, better than expected economic reports, and a little "euphoria" over reports that the military is in fact actually doing something ("commando" operations) in Afghanistan. Most significantly, the market spent the entire day in positive territory. Now we are back to the eternal issue: Will we finally see some follow-through?
The "final" estimate of Q2 GDP showed an annualized real growth rate of 0.3%, which was an UPWARDS revision of 0.14% from the "preliminary" estimate of 0.2%. This is all such ancient history now, but the report could have been worse, so I'll rate it a slight positive. The bad news is that until real GDP growth exceeds the rate of productivity growth, job losses will continue to accumulate and put the economy at greater risk.
The Chicago Purchasing Managers index increased to 46.6 in September from 43.5 in August. The index indicates that the manufacturing sector is still contracting (less that 50.0), but gradually stabilizing and working its way to that magic 50.0, so I consider it a somewhat positive report. This is a a survey which was partly completed before September 11, so should be considered somewhat "ancient history".
The University of Michigan’s Consumer Sentiment Index fell to 81.8 (initial reading of 83.6) in September from 91.5 in August. Although superficially a negative report, I would rate it as a slight positive since it was better than expected. Consumers are hanging in there, despite recent events. This survey includes September 11, so it's not ancient history.
The Economic Cycle Research Institute (ECRI) Weekly Leading Index (WLI) reached a new low for the year of 116.7 for the week ended September 21 compared to 117.7 the previous week. That's not a good sign, but given recent events, it's not that big a drop from the 118.8 for the week ended September 7. The index will likely decline until the pace of initial jobless claims begins to level out, possibly in a few weeks as the new wave of layoffs peaks. For now, this is a negative report.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, FELL a nice 5.93% on Friday to 35.19, which is at the very bottom of the very high anxiety zone. This is good, for now, considering where we were the week before. VIX fell sharply at the open and trended down all day with very little relapse although it did falter in mid-afternoon as Nasdaq started to give back some of its gains.
The Nasdaq-100 After Hours Indicator had a decidedly negative bias in the Friday evening session, closing down 1.83 points. Basically people are not willing to believe that the Friday rally was "real" and may have just been short-covering by traders worried that anything (including something good) could happen over the weekend.
ExciteAtHome (ATHM) finally filed Chapter 11. Unfortunately, that provides the company with temporary "protection" and delays the ultimate disposition of the company. They plan on selling their broadband unit to AT&T (T). What will happen to the Excite.com web site is anybody's guess. I would vote for either Microsoft (MSFT), AOL (AOL), or Yahoo (YHOO) to pick it up for pennies on the dollar and then gradually absorb it into their own operations.
Fed Funds futures "easing expectations" fell back due to better than expected economic data and now suggest a certainty of a quarter-point cut in interest rates at the October 2 FOMC meeting and a 66% chance (down from 88%) of a half-point cut at the meeting. Futures now suggest a certainty of just a half-point (total) cut by the end of the year as well as a 72% chance of a total of three-quarters of a point of cuts. The likely scenario is a half-point cut at the October FOMC meeting and then an additional quarter-point by the end of the year.
AMG Data Services reported Thursday evening that for the week ended Wednesday, September 26, $4.9 billion flowed OUT of equity funds. But $334 million did flow IN to international equity funds. $661 million flowed OUT of junk bond funds, but $552 million flowed IN to investment-grade bond funds. $1.375 billion flowed into mortgage-backed security funds. $15.8 billion flowed OUT of money market funds. At least a few people probably paid their quarterly estimated taxes by writing checks on their money market funds.
Microsoft (MSFT) had its first day in court before the new judge. Basically, everything is now on hold pending settlement talks ordered by the judge. She was adamant that "now is the time" and that "there will be NO extensions." The parties have until October 12th to settle on their own before the judge assigns a mediator to try to move talks along. If there is no settlement by November 2, "discovery", depositions, etc. will then proceed with a hearing on March 11, 2002. Nobody really expects a settlement though.
On my Saturday afternoon walk over to the Pentagon City shopping mall in Virginia, there seemed to be a healthy amount of shopping going on. Maybe it was just something pleasant to do after walking to the gas station across the highway where you had a birds-eye view of the damaged wall of the Pentagon. The parking lot at Costco was packed. At Circuit City I even ran into a recently layed-off airline employee looking to buy a notebook computer. Consumers really are hanging in there. As an interesting aside, Circuit City had an HP (HWP) notebook computer with Windows XP (Home edition) pre-installed. That's the first time I've seen it in a store. Also, a number of their demo unit positions were empty as they had sold even the demo units. I don't know (or care, actually) what the demand for desktop systems is, but demand for notebook computers is still there.
I've also noticed that business in restaurants here in DC has been picking up noticeably in recent days. I'm still inclined to believe that American consumers will recover quicker than the media and analysts give them credit for.
The question of whether the market will show some follow-through is linked to whether mutual fund investors continue to redeem shares. That, of course, is up in the air. ANYTHING could happen in the next few weeks. There may be some HUGE warnings as we approach the quarterly reporting season, but the market has already priced in some rather negative expectations. If there is no large amount of mutual fund redemption selling, the market could well yawn or even rally in relief at the warnings.
Since it's Monday, I'll be once again making my weekly dollar-cost averaging purchase of LEAP options on the S&P Tech Sector "Spider" (SPDR).
There is a strong possibility that some kind of military activity will occur at any time. The market could respond negatively, but it's also possible for the market to rally in relief that something is actually getting done. Also the "quiet" (but anxious) periods between spurts of military activity can tend to suppress market activity.
Jack Krupansky
Updated: September 30, 2001 11:57:27 PM -0400
Copyright © 2001 John W. Krupansky d/b/a Base Technology