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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.
Short-term economic outlook: As November progresses we will gradually start to see the first signs that the economy is beginning to recover. Not a large increase, but at least the trend will not be downward. December will be a little better. But, October was probably bad enough that Q4 will "print" as a decline in GDP. Employment will continue to fall until GDP finally breaks above the rate of productivity growth, sometime in Q1 of 2002.
Despite the Nasdaq gain, trading was very choppy and not at all what I'd call a nice clean rally. But, that said, a rally is a rally and clearly somebody was doing a little buying. There was probably a little short covering too, especially by those who bet that the GDP report was going to be much worse.
Of course, the real reason for the lackluster rally was the mediocre performance of the Yankees on Monday night. A win is a win, but Wall Street likes things to be decisive, by a big margin. Same thing happened AGAIN last night with the Yankees winning by a single run, AND it took an extra inning. We'll have to see how the market reacts to this one.
The "advance" report on Q3 GDP was somewhat better than economists were expecting, but it was still negative (-0.4%). Certainly this was a negative report, but the market had been ready for worse. It will be another two months before we have the final numbers on Q3, so the revisions coulod go either way. In any case, the Q3 GDP number is not terribly meaningful to the market at this point since it is ancient history.
The Agricultural Prices Index for October showed a very sharp 9.5% decline. This is a slightly negative report since farmers get plenty of aid from the government. But it does mean less pressure to increase food prices, which will help tgo keep inflation under control. Much of the decline is due to lower global demand due to the global recession.
The Chicago Purchasing Managers index (PMI) for the manufacturing sector declined slightly to 46.2 in October from 46.6 in September. This is a negative report, but the good news is that economists had expected a larger decline. This is the thirteenth consecutive month that the index has been below 50, which is the cutoff for growth. Manufacturing has a ways to go yet. Another piece of good news was that for the second consecutive month, the production component of the index was able to stay a little above 50, indicating slight growth.
The Mortgage Bankers Association (MBA) Mortgage Applications Index declined for the week ended October 26. This was a slightly negative report, but the decline was much less than the previous week's decline. Applications for mortgages to purchase homes actually increased slightly. Demand for housing is still expected to moderate somewhat, but remain fairly strong for the longer term. The problem for the economy is that housing demand is not growing. But that's better than a typical recession where housing demand falls like a rock.
Sun Microsystems (SUNW) helped the market by saying that orders were greater than at this same point last quarter. That's not saying a lot, but at least it's something positive for the fundamentals of the tech sector.
Micron Technology (MU) said that it has seen increased orders for memory chips. This is being attributed to the additional memory being recommended for Windows XP which comes pre-installed on all new personal computers. Once again, it may not be much, but it is good news for tech land.
Amazon (AMZN) announced a deal with Target (TGT). This is good news. It's a continuation of the strategy of convincing bricks and mortar businesses that it's silly for them to waste their limited resources on a "roll your own" approach to retailing on the internet. Better to just hand off the internet part of the operation to Amazon. I've been holding off putting any more money into Amazon's stock due to their debt burden and accounting shenanigans.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, ROSE a slight 0.11% on Wednesday to 35.19, which is now just barely up in the very high anxiety zone (35 to 40). Despite the Nasdaq gain, the choppy nature of trading and the way the market fell off sharply after 3:00 p.m. spooked people a little. VIX spiked up above 35 by 10:00 a.m., but then fall sharply down to 34 by 10:30 a.m. Then it gradually rose up to 35 by 1:00 p.m. as the market hit a low point, and stayed up there until 2:00 p.m.when it fell fairly shaprly down to the low of the day of 33.67. But then, as the market swooned at 3:00 p.m., VIX reversed again and shot back up to the high of the day of 35.55 shortly before the close. No clear trend at all. People could not figure out whether the market is
getting set to rally or fall. That confusion is why VIX and anxiety are so high.
The Nasdaq-100 After Hours Indicator took on a grumpy, negative tone for almost the entire Wednesday evening session, but right at the end turned up and closed up 0.58, probably just to spite the cynics. The indicator had traderd as much as 2.5 points lower, but that's not so bad even after a rally. Despite the Nasdaq rally during the day, people are not quite ready to accept the inevitability of the eventual economic recovery and would prefer to focus (obsess) on the short-term mess a little bit longer. With the economy effectively in recession, people want to see some real signs of recovery before they give up even a modest amount of their cynicism.
Fed Funds Futures continue to suggest a 100% chance of a quarter-point cut in interest rates at the November 6 FOMC meeting as well as close to a 100% chance of a quarter-point cut at the December meeting. There is now just barely a 50% chance of a half-point cut at the November meeting, but I'd say that's not likely, at this point, given the "good" Q3 GDP report. But, anything can happen between now and November 6.
Are you sufficiently impressed by the forecasting abilities of professional economists? According to David Orr, chief economist for Wachovia Corporation, "Forecasting is basically a combination of modeling and intuition. The models seem useless right now... The only certainty is uncertainty and ambiguity." It's refreshing when an economist can be so clear. With regard to the proposals for fiscal stimulus floating around Washington, Orr says that "We know almost nothing about how to stimulate an economy short-term". But we do know two things. First, it's far better for the government to keep its economic intervention to a minimum. Second, the best role of government is to shore up confidence to convince consumers and businesses that it's okay to spend money. The last thing in the world we need is to encourage anyone to spend just for the sake of spending or just to get a tax break. The problem with the economy right now is simple an excess of caution, not a lack on money.
Friday is the deadline for the settlement talks in the Microsoft (MSFT) antitrust case. There have been several rumors of a settlement, possibly to be announced today. The DOJ is said to be anxious to settle, but the states are adamant that they want very harsh terms. There is a status hearing scheduled for 9:00 a.m. on Friday. I suspect that's when the results of the talks will be announced. I'll be there. Settlement will give Microsoft a psychological boost, but won't really compensate for the doldrums of the tech sector and the PC sector in particular. Even if a settlement is announced, that's not the end. A settlement proposal has to go through a procedure called a Tunney Act proceeding to ensure that the agreement is in the public interest. The states could raise objections at that time and further muddy the waters. And then there's still the prospect of private antitrust lawsuits based on the findings of this case.
The U.S. Treasury confused the market a bit by announcing the end of the 30-year "long bond". The bond market acted very surprised, even though this move was inevitable. It was just a question of when. I've been hanging on to some 2019 zero-coupon bonds just waiting for this kind of thing. Part of the reason for the surprise of the bond market was that traders focus so heavily on the short-term aspects of the market that they completely miss the long-term changes like this that lurk just over the horizon. They may have been shorting bonds in the expectation that the massive fiscal and monetary stimulus will eventually result in significant inflation, and now they have to cover a lot of those shorts. A similar thing happened in early 1999 when the bond traders suddenly woke up and realized that the U.S. Treasury was going to start buying back older bonds. Even though the discussions had been going on for many months and the traders own industry association had delivered testimony on it at a hearing the previous summer, which I had attended. Now I have to agonize over whether to hang on to these zeros or take my profits. They do fluctuate a lot, but the yield is so much higher than the money market rate (and with no risk to the principle) and they do have potential to appreciate more as interest rates continue to be cut and investors need a "safe haven" in an uncertain world. The long bond used to be a key part of the bond market, but now it is more of a sideshow with most attention given to the 10-year note. Still, this was quite a surprise move. A real shock to the market.
Everyone wants to see today's National Association of Purchasing Management (NAPM) report on the manufacturing sector. Index values less than 50 mean the manufacturing sector is contracting or in recession. Since the index was at 47 in September and has been below 50 for some time, we already know the setcor has been contracting. Values of 43 or less historically have indicated that the overall economy, not just manufacturing, is likely in recession. That's what to look for today.
Clearly, many cynics are just not yet ready to throw in the towel and admit that the economy will eventually recover. Some will hang in there until we have absolutely clear, convincing, hard evidence of a recovery. But who knows how far the market will have climbed by then. If you want to get a nice return, you have to take some risk. The best time to buy will always be a time when there are plenty of reasons not to buy. You don't have to bet the farm, just put in barely enough that you don't feel like you totally missed out on the rally. What I'd be very cautious of is "market timing", thinking that somehow you'll receive a revelation that "now is the time". The pros on Wall Street WILL eventually tell you that you should have every available dollar in the market, but only after their in-house trading desks and institutional clients have already made most of the money to be made.
Good hunting!
Jack Krupansky
Updated: November 01, 2001 12:52:07 AM -0500
Copyright © 2001 John W. Krupansky d/b/a Base Technology