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There were a bunch of small negatives that all added up for a bleak picture on Monday, with a very weak Chicago PMI report being the straw that broke the camel’s back.
Nasdaq made a new intra-day low, but the lack of any strong selling pressure (selling exhaustion) caused a modest recovery bounce.
Volume was light (1.66 billion shares). Breadth was poor, with 1.22 losers for each gainer.
The Personal Income and Outlays report for August registered moderate gains in both income and spending. This was a positive report, although spending rose less than expected and is rather tepid. Market commentary generally panned this report, but it was actually a fairly decent report and not indicative of recession, a double-dip, deflation, or anything else bad other than growth being sluggish.
The Chicago PMI report for September fell sharply and indicates that the manufacturing sector was contracting in the Midwest. This was a negative report, but is only for one region of the country. Much of the decline was due to declines in new orders and the unfilled order backlog. But, there was growth in production. Although employment continues to contract, the pace of contraction is less than August.
The Chicago Fed National Activity Index for August declined moderately. This was a negative report. The index is below zero for the second consecutive month. A negative index does not necessarily indicate economic contraction, but merely that growth is below “potential”. The index indicates that the economy was growing modestly in August.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, rose by 3.31% on Monday to 44.57, which is near the top of the extremely high anxiety zone (40 to 45). VIX spiked up to 47.50 (midpoint of the near panic zone) as the market bottomed in the morning. It then trended down to 43.19 at 3:20 p.m., but rose a bit as the market recovery faltered. Anxiety is quite high, which is a contrarian bullish signal, but any recovery will be limited until there is a sense that either the bad news is over or that some good news is at hand.
The Nasdaq-100 After Hours Indicator had a positive tone for the Monday evening session, closing up 2.58 points. Clearly the sell-off was overdone.
Fed funds futures suggest a 100% (up from 70%) chance of a quarter-point rate cut in November. Futures also suggest a 13% chance of a half-point cut. In other words, futures indicate that the Fed will cut rates at the November 6 FOMC meeting.
The economic data that caused traders to freak out may just be a blip, so it’s too soon for me to go along with this frantic view of the economy.
Another reason that traders were so willing to raise the odds of a cut was that New York Fed President Bill McDonough said that the Fed has plenty of room to cut rates further. That statement was not a suggestion that the Fed would cut rates, but helped dispel a myth that cynics have promoted that says that the Fed has “no ammunition left”.
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 sharply 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.
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 rose sharply, but is still below the May high.
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.
Investors should always be prepared to buy any dip caused by panicky reactions by traders to any incidents.
The war of words continues unabated.
It was heartening that the chief UN weapons inspector met with an Iraqi team and said the discussion went fairly well. It appears that the inspectors view that they must work within the restrictions of the existing agreements with Iraq, so they are not in a position to demand access to Iraq’s presidential palaces. The U.S. can’t accept that, so we’ll see some intense discussions at the UN Security Council over that issue (among others) in the weeks ahead.
It’s very interesting to hear how many of Iraq’s neighbors (including Iran) are beginning to insist that Iraq needs to do something to lessen tension with the U.S. Even Iran said it wants the Persian Gulf to be free of weapons of mass destruction. The countries in the region enjoy the status quo and do not want to see the U.S. gain a larger foothold.
[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.
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.
I happened to notice that Verizon (VZ) was actually laying down some new fiber optic cable (from Corning (GLW)) here in downtown Washington, D.C. I’ve also noticed the same in New York City in recent weeks. This is consistent with the theme that the Baby Bells can afford to do at least some investment in new, high-tech capacity even if they do have to stay within a limited budget. Metro-Area Networks (MAN) are still considered a potentially profitable business opportunity. But none of this conflicts with the general thesis that the telecom industry’s ability to invest in new infrastructure continues to shrink.
Click here for our more extensive commentary on The Telecom Problem.
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No activity.
The market looked very technically oversold on Monday. There was a bounce, but there was too much negative news for people to be strongly tempted into buying. We could see a better bounce today, or maybe we’ll just see a continuation of the sell-off. It depends on whether we see a significant up-tick in ‘real’ selling or a critical mass of new bad news to give traders an incentive to short more. Traders like to see ‘tests’ of lows, so lacking any significant ‘real’ buying, traders were able to use short-selling to force a test on Monday.
My forecast for today is that Nasdaq will close in the range -30 to +80. Nasdaq came in at -27 on Monday, well above the lower end 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 10/1/02] The market performance in recent days suggests that maybe we aren’t back in a bear market (yet) and we could still be in a trading-range market. 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: October 01, 2002 01:06:11 AM -0400
Copyright © 2002 John W. Krupansky d/b/a Base Technology