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Nasdaq held up quite well on Thursday despite some serious attempts to force some profit-taking. That’s a good sign even though we didn’t make any new gains.
A revenue warning from Nortel (NT) did cause a moderate fall in the telecom equipment and chip sectors.
Volume was light (1.65 billion shares). Breadth was moderately positive, with 1.24 gainers for each loser.
The Unemployment Insurance Weekly Claims report registered a sharp decline in initial claims (although still above the critical 400,000 level), but continuing claims rose moderately. This was a slightly positive report, but we need to see a couple more weeks of improvement before we can call an improving trend. The 4-week moving average of initial claims was down slightly, but the 4-week moving average of continuing claims was up moderately. The raw, unadjusted, actual initial and continuing claims were both down moderately. There are only 334,620 more people making continuing claims than one year ago.
The advance Durable Goods Orders report for August registered a much smaller than expected decline. This was a positive report since orders did not fall off as sharply as expected, but computer and communications equipment orders were down moderately.
The New Home Sales report for August registered a healthy gain to a new record level. This was a positive report.
The Conference Board Help Wanted Index for August registered a moderate decline to the lowest level in decades. This was a negative report, but we already knew that employment growth was rather meager in August.
After the close: AMG Data Services reports that for the week ended Wednesday, September 25, $4.1 billion flowed out of equity funds with about half of that from domestic funds. This was a negative report. Outflows from equity funds suggest that recent market gains may not turn out to be very durable. Real estate funds report outflows for the first time in 8 weeks. $557 million flowed into taxable bond funds, mostly into mortgage-backed securities. $1.4 billion flowed out of junk bond funds. $611 million flowed into municipal bond funds. $25.2 billion flowed out of money market funds (probably to pay quarterly estimated tax payments).
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, fell by 5.40% on Thursday to 40.12, which is just above the bottom of the extremely high anxiety zone (40 to 45). People were relieved that virtually all of the Wednesday rally was left intact. It is still too soon to get too relieved, but at least things didn’t get worse.
The Nasdaq-100 After Hours Indicator had a negative tone for the Thursday evening session, closing down 2.61 points. The reason for the decline is not certain, but may have been the job cuts announced by SBC Communications (SBC).
SBC Communications (SBC) is cutting another 11,000 jobs and cutting capital spending by another $1 billion next year.
Solectron (SLR) met consensus earnings and was even a little ahead on revenue. Even better, they raised both earnings and revenue guidance, not by much, but that’s a whole lot better than reducing guidance.
Liberate Technology (LBRT) met consensus earnings, but was almost 10% light on revenue. The good news was that their revenue guidance for the next quarter is slightly above consensus.
Manugistics (MANU) beat consensus earnings by a penny, but was a little light on revenue.
Cognos (COGN) beat consensus earnings by a penny and was even a little ahead on revenue. Guidance for next quarter earnings may be slightly higher, but revenue might be slightly lower than consensus.
ATMI (ATMI) warned and says it expects quarterly revenue would be about 10% light. Earnings will be turning from a slight profit to a moderate loss.
Fed funds futures suggest a 63% (down from 70%) chance of a quarter-point rate cut in November. In other words, futures indicate that the Fed will cut rates at the November 6 FOMC meeting.
December is still too far away for futures to reliably predict the actual fed funds rate (according to studies that the Fed itself has done.)
[UPDATED 9/25/02] I forecast that the Fed will hold interest rates steady through the Fall election (November 5) and likely through the November 6 FOMC meeting as well, unless some dramatic, new, unforeseen crisis erupts.
The dollar fell modestly against the yen and euro.
[UPDATED 7/23/02] There are still no signs of any economic fundamentals that would make either Europe or Japan dramatically more attractive than the U.S. for long-term investment. Rather, the relative weakening of the dollar has been primarily driven by speculative currency trading and sentiment (such as the accounting scandals) and that sentiment will most likely reverse over the coming months as the forces depressing sentiment dissipate.
In any case, the dollar is still quite sound and no true investor should lose any sleep worrying about potential negative implications from a weaker dollar. And, a weaker dollar will boost U.S. exports.
The price of oil fell modestly, but is still slightly above the psychological $30 level. The decline was mostly due to tropical depression Isidore moving inland without causing any major damage to oil production or refining facilities.
In any case, the price of oil price continues to be well-behaved and no true investor should lose any sleep worrying about it.
The price of gold fell moderately.
In any case, there is nothing about the current price of gold that should give any true investor any reason to lose any sleep.
The relative calm continues.
Investors should always be prepared to buy any dip caused by panicky reactions by traders to any incidents.
The eerie calm continues.
There is now serious talk about possibly offering smallpox vaccinations to everybody in the U.S. All those doses of vaccine are not yet ready, and may not be available until next year or later. Israel is already preparing to offer smallpox vaccine to all Israelis, although they haven’t decided whether to offer it to all the Palestinians in the occupied territories.
Investors should always be prepared to buy any dip caused by panicky reactions by traders to any incidents.
Despite a fair amount of posturing, nothing happened to raise the anxiety level. The war of words continues. A number of Democrats may seek to defer the vote on the congressional resolution until after the November election.
The administration has already backed off on some of the language in the proposed congressional resolution since Democrats had complained that it gave the President too much authority and didn’t go far enough in backing UN efforts. The changes won’t have much real impact, but do lessen resistance in Congress. We may still be a week or two away from passage.
Negotiations over the UN Security Council resolution are inching forward, but may not be finalized before the chief UN weapons inspector meets with the Iraqis next week. He has said it could take four months for the inspectors to get up and running, but the Bush administration is expecting to see some results very soon after inspectors land (scheduled for October 15).
There will probably be a lot of confusion when the inspectors do land, and there could be a whole series of mini-crises as all parties learn how to dance again. Everybody presumes that Iraq has gone to extraordinary measures to hide and disguise their weapons and development programs. The U.S. will of course deliver some last minute intelligence to guide inspectors to suspicious sites, but that has the negative side effect of tipping the Iraqis off to the extent and quality of our intelligence gathering. It’s going to be quite a show. The first surprise visits to Iraqi presidential palaces will be rather interesting since Iraq previously had never allowed inspections of such sites. The real work will be interviewing Iraqis (who will be reluctant to spill any beans for fear of death and torture to them and their families) and gathering and analyzing documents. There will be some interesting challenges when the inspectors attempt to look into Iraqi missile development programs since Iraq naturally does not want its neighbors to learn about the details of those programs and not all of them are proscribed by the UN anyway.
President Bush was a little more clear yesterday, stating that Iraq is “seeking a nuclear bomb and, with fissile material, could build one within a year”, rather his previous statements that Iraq could have a nuke “soon”. Other estimates place the timeframe at one to five years. Some people might interpret the President’s statement as suggesting that there is no imminent Iraqi nuclear threat within the next few months.
Iraq is being relatively well-behaved, acting almost like a model citizen, being careful not to give the U.S. any new excuses to attack. They are still shooting at our planes over the no-fly zones and we are still responding by making selective strikes on Iraqi air defense facilities, but this is not much worse than it has been over the past decade. But we will increasingly use those attacks on our planes as excuses to more aggressively go after the Iraqi air defenses.
[UPDATED 9/16/02] The bottom line is that investor concern over the sluggish economic recovery and weakness in corporate revenue and earnings growth still weigh more heavily on the market than all the other non-economic factors. Traders merely use Iraq, et al as excuses for any market weakness.
Click here for our more extensive commentary on The Iraq Problem.
Click here for our more extensive commentary on Technology.
No activity.
[UPDATED 8/5/02] Check out our book list.
The SEC may be poised to force Wall Street firms to separate stock ‘research’ from investment banking. At least superficially this sounds great, but there may be less than meets the eye. The biggest complaint I have is that the SEC frequently only pursues reforms that they can convince Wall Street to accept. That’s not real regulation. In truth, all the SEC really needs to do is to tell Wall Street to stop labeling the so-called research as research and properly label it for what it really is: marketing and promotional literature. Hmmm… maybe this is really an FTC consumer issue, but the SEC has jurisdiction. Oh well. One problem is that the so-called research actually really does have a fair amount of legitimate research embedded in it, but the problem is that there is so much other non-research junk thrown in there too. Price targets and buy/sell recommendations are clearly not objective research. Which brings up another point: legitimate research (uncovering and deducing facts) should not be confused with recommendations. Another problem with Wall Street research is that it is frequently selective, intending to spin a subset of the facts to support the desired buy/sell recommendation. Finally, note that hold or underweight or sell recommendations are clearly intended to support the generation of stock sale commissions. In fact, lowering a stock from “strong buy” to “buy” is also intended to generate stock sale commissions since true momentum investors only want to hold the hottest stocks.
Absolutely nothing more is needed at this point other than to simply let the current market-driven corrective processes play themselves out.
Click here for our more extensive commentary on financial reform.
As highlighted by the latest SBC Communications job cuts, the telecom sector will continue to deteriorate even as the economy picks up steam. Part of it is an excess of capacity, but a lot of it is simply way too much deadwood tied up in the old phone system as people move more towards wireless and the internet.
Click here for our more extensive commentary on The Telecom Problem.
Microsoft (MSFT) announced its quarterly report date (October 17), so some people presume that this means that the company will not be making a preannouncement (warning).
Personally, I would have expected significantly more warnings by now if companies really had done poorly this quarter. There is still plenty of time for warnings over the next two weeks, but many companies typically warn before the quarter is even over.
As an example of the risk of selecting stocks based on their dividend yield, Xcel Energy (XEL) just cut its dividend in half. They also reaffirmed earnings guidance for the year, which also illustrates how arbitrary dividends really are and how they have very little correlation with business economic fundamentals (e.g., earnings).
No activity.
It’s a Friday, so traders will tend to close out positions ahead of the weekend when anything can happen.
The final revision for Q2 GDP is due out today, but that’s such ancient history that the market will pay little attention to it.
There are only two trading days left in the quarter, so there might be a bit of window dressing (buying or selling) so that money managers can have “the right” stocks in their portfolios. Some of the recent buying could already have been window dressing.
My forecast for today is that Nasdaq will close in the range -30 to +80. Nasdaq came in at -1 on Thursday, well below the midpoint of my range of -40 to +80. The market continues to be so crazy that it could go either way, but I still believe there is a longer-term upwards bias even if the near-term bias is all over the map.
[UPDATED 9/27/02] The market performance over the past three days suggests that maybe we aren’t back in a bear market (yet) and we could still be in a trading-range market. Nasdaq did quite well holding its head above the 1200 level. But if we can’t make much progress over the next several days, then we could easily fall back into bear market mode.
[UPDATED 9/25/02] Technically, we are back in a bear market (as of Monday) since we have broken below the July 24 low. But whether we continue downwards depends on whether the recent declines were driven by ‘real’ selling or simply due to short-selling. Short-sellers do eventually have to buy their borrowed shares back. The lofty level of the market Volatility Index (VIX) suggests that professional investors are bracing for the worst. That sounds bad, but frequently, those precautions are a harbinger of a turn in the market. The only question is whether the turn occurs within the next few days, a few weeks or a few months.
[UPDATED 8/22/02] The incredible level of disbelief in the current rally strongly suggests that a contrarian bullish view may be appropriate. It’s the exact flip-side of where we were in April and May of 2000 when people refused to belief that the bull market was over and that a bear market had begun.
[UPDATED 6/24/02] Regardless of how crazy the market behaves, the economic recovery is well underway. Market participants may not yet be ready to acknowledge the recovery, but it is inevitable, even if the timing is uncertain. There are more than enough differences in the current market cycle than any in recent memory, but inevitably the market will rise as people anticipate earnings growth down the road. Investing for the long term is still an excellent strategy even if it feels painful in the near term.
[UPDATED 6/24/02] The market will rally when the selling peters out. The market religiously obeys the law of supply and demand, but many buyers have a habit of waiting until the sellers exhaust themselves.
[UPDATED 9/14/02] I’ve decreased my estimate of the probability of a double-dip recession to 20% (from 25%) due to higher retail sales in August. I still think a double-dip is unlikely, but I do want to quantify my beliefs as well as risks.
[UPDATED 6/24/02] There is absolutely no question that the economic recovery in the U.S. is going at a somewhat slower pace than had been expected by this point in time, but the recovery is well along nonetheless. We are still winding our way through an extended turning point, but virtually every day brings news that we are making incremental progress, even as there are still plenty of negative data points as well. Impatient observers fail to recognize that turning points are bumpy affairs and that negative data points do not necessarily mean that something has gone wrong.
[UPDATED 6/24/02] Spending on technology has picked up only modestly, at best. And the telecom sector continues to decline. That said, the recovery is in fact well along, with the manufacturing sector leading the way. Manufacturers have plenty of excess capacity so that they can increase production without spending too much and without needing to hire many workers, yet.
[UPDATED 6/24/02] Even as unemployment continues to rise modestly, actual employment has already begun to rise, although at a very modest pace. The average paycheck has also been rising, and at a rate faster than inflation. That combination of more people working with larger paychecks means that overall national income is rising, which is a very good thing and will continue to fuel consumer spending.
[UPDATED 6/24/02] Companies are reluctant to dramatically increase their spending on technology until they become more comfortable that ‘final demand’ is increasing at a dependable pace. Demand is increasing, but at a slow enough pace that companies are proceeding with great caution. But as each day goes by, an additional increment of that caution evaporates. It may be as painful as watching grass grow or watching paint dry, but investors can be sure that their patience will be rewarded. Sure, it will take some time to get back to ‘normal’, but that result is inevitable even if the timing is uncertain.
[UPDATED 9/10/02] I still don’t have a forecast for Q3 GDP. The accounting is so inscrutable as to defy any rational forecast. At this point it does feel like Q3 is moderately worse than Q2, but the crazy accounting could take it either way. A Reuters poll of economists places Q3 GDP growth around 3%.
[UPDATED 6/24/02] Although the end of the recession has not been officially ‘called’ yet (by the National Bureau of Economic Research), March is the most likely candidate for the ending month of the recession since that was the last month that showed declining employment. Industrial production’s last decline was in December.
[UPDATED 8/14/02] We are still in the turning point where the view in front of your nose is mixed and confusing. Recent economic reports have been weak or mixed, so we probably need another month of data to be able to see where we are going. For me personally, it’s a no-brainer that we very close to the final edge of the turning point, but so many people have lost confidence that they need a truly monumental level of evidence to believe again. But that’s always the way it is with turning points: it’s darkest before the dawn.
[UPDATED 8/24/02] I’ve reset the Tech Stock ‘Safe’ Signal back to 0.00 since it has the last change is over six weeks old. There needs to be a sense of ‘freshness’ to the outlook for tech business that simply isn’t there right now.
[UPDATED 8/24/02] Our ‘safe’ signal requires at least 20% (1 out of 5, or 10 out of 50) of the top 50 tech companies to signal acceleration. Expect one or 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 four to six months in advance of the return of strong growth. Many companies are still trimming Q3 forecasts, and virtually nobody is beating the drum for a great Q4. A lot of people are saying that even Q1 of 2003 will be sluggish. That said, if you want to get the early stock market gains, you'll have to jump the gun and get in before our signal triggers. But if you do, you have to be prepared for some significant volatility and possibly some big losses. You have to decide for yourself whether you want safety in the short run or higher potential returns in the long run.
[UPDATED 9/14/02] For our complete list of resources, click here.
[NEW 5/25/02] DISCLAIMER: I cannot and do not offer any recommendations of stocks to buy or sell. I may on occasion discuss companies that I am considering or myself have bought or sold, but the reader must do their own research before making their own purchase or sale decision. It is never a good idea to buy a stock just because someone else tells you to or even merely mentions a company in a favorable light.
Jack Krupansky -- The Unrepentant Optimist (Click here for Jack's Bio)
Updated: September 27, 2002 12:20:22 AM -0400
Copyright © 2002 John W. Krupansky d/b/a Base Technology