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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.
Investors who were willing to buy probably bought on Monday. And shorts who got blown away on Monday came back to feast on Tuesday while the buyers were resting. And momentum players who "bought the dip" on Monday simply threw in the towel on Tuesday as positive momentum just never happened. There was a little uptrending "tail" at the close which usually suggests day-trading short sellers closing out their positions. My suspicion is that there was not any substantial "real" selling other than the short-term momentum players.
One gigantic cause for anxiety is that there is really not much that can be said about the military action other than "it continues". We nominally have "air superiority", but I don't think anyone was worried about that anyway. According to a Pentagon official yesterday: "It’s a come-as-you-are operation... You make it up as you go along." Good grief... U.S. officials are "considering a variety of options". Incredible. Simply beyond belief. To read between the lines: the "planners" at the Pentagon can't do a whole lot until the policy makers at the White House resolve some of their conflicts and give the Pentagon some clear objectives. I believe that is an accurate assessment.
The market will languish a bit until investors get used to the idea that we won't know that "it's over till it's over". Just something to get used to. So, the hope is that the market, consumers, and businesses will accept the uncertainty and get on with their business. And that includes the uncertainty as to whether any additional major terrorist attacks will occur here in "The Homeland".
The Kansas City Fed Manufacturing Survey for September showed a Production Index of zero, which at least was not a contraction. There were some negative components to the index, but I suspect much of that was due to the way August had showed a huge improvement over July. I'd consider this report a mild positive since it could have been worse.
The Richmond Fed Manufacturing Survey for September was actually positive. The New Orders index was positive for the first time since February. And the New Shipments index was positive for the second month in a row. This was a positive report. The downside was that future expectations pulled back, but that's to be expected given recent events.
The market was clearly in a foul mood over quarterly reports and the lackluster military campaign, otherwise these two manufacturing reports would have inspired at least a little "exuberance".
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, ROSE slightly by 0.42% on Tuesday to 36.06, which is firmly in the very high anxiety zone. VIX jumped at the open but recovered a little by 10:45 a.m. and then bounced around without a clear bias for the rest of the day in a range from 35.5 to 36.5. In other words, there was no significant change in the confusion level of the market. That's okay actually, for now. The rest of the week will give the market a chance to sort itself out as far as "expectations".
The Nasdaq-100 After Hours Indicator had a solidly positive bias for the entire Tuesday evening session, closing up 1.34 points. A little bit of optimism or relief based on the lack of any really bad tech warnings. Well, the warnings are BAD, but there is some relief that they weren't even worse and the market has already discounted an intense level of gloomy results.
Level 3 Communications (LVLT) bought back $2.86 BILLION of its debt for between 15 and 48 cents on the dollar. Although those bondholders are not happy to have to take this extreme a "haircut", a lot of them are probably relieved to get rid of this headache. Good advice: take your losses and move on.
The intense financial pressures of the next couple of months will be quite a gauntlet, discarding the weak and fortifying the strong.
Fed Funds Futures suggest a 100% chance of a quarter-point cut in interest rates at the November 6 FOMC meeting, a 15% chance of a half-point cut at the meeting, and a 56% chance of a total of a half-point cut by the end of the year. The likely scenario is a quarter-point cut at the November meeting and another quarter-point at the December meeting.
The Hotel Employees and Restaurant Employees International Union says that layoffs seem to have bottomed out since last week. About ONE-THIRD of the 260,000 hotel and restaurant workers represented by the union have lost their jobs, so far. I would expect layoffs to continue for a while, but at a much slower pace. As the hotel and restaurant business begins to gradually pick back up (as it already is), a good portion of these unemployed workers will be re-hired.
The Supreme Court's refusal to hear Microsoft's (MSFT) request to have the entire antitrust case thrown out is no big deal. Everybody knew it was a "Hail Mary" pass. The net result is that the case continues as before. Right now, the company and the government are SUPPOSED to be in settlement talks, but the latest rumors are that the talks are not making any progress. If this continues, the District Court Judge will appoint a mediator next week and then the parties have until November 5 to settle or else the case continues on to the remedy phase with "discovery" and depositions leading up to witnesses in court in March. Nobody really expects a settlement, at least not yet. It's in the interests of all parties to "hang tough" until they get to a stage where they think they have more to lose by not settling. It's a game of "chicken": the first party to put forth an acceptable offer loses, but if nobody puts forth an acceptable offer, both parties lose. In any case, the news from yesterday was no big deal. The stock declined on simple profit taking and short selling on a lousy market day.
As soon as the market stabilizes a little after this latest selling, long-term buyers could once again be tempted into the market. The only thing to keep them out would be a new wave of mutual fund redemption selling. Last week we saw INFLOWS to mutual funds, so I'm not sure why this week should be the opposite. Even when there are inflows, the resulting stock purchases are not consistent from day to day and there can be "relapses" between spurts of buying. And, money managers like to "hide" their purchases by buying on days where there is selling or at least negative sentiment.
I am still of the view that we should just wait until after the middle of the month (next week) before passing judgment on the true state of the market and the economy. I do expect that this week and next will mark the end of the massive wave of layoffs. November will probably be a month of stabilization in employment. That does not mean we will see gains in employment, just that the rate of new unemployment claims will shrink week by week.
Jack Krupansky
Updated: October 10, 2001 12:15:54 AM -0400
Copyright © 2001 John W. Krupansky d/b/a Base Technology