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The market continues to struggle to find its feet. The economy continues to limp along, companies are limping along a little slower than they expected, and the Iraq situation is drifting as well. Things aren’t really as bad as they seem, but so many people are setting up false strawmen and then being disappointed when results turn out to be simply so-so.
Wednesday’s decline was exacerbated by a very large sell order that was entered by mistake 20 minutes before the close.
Volume was moderate (1.75 billion shares). Breadth was lousy, with 1.78 losers for each gainer.
According to Thomson I-Watch, institutions were net buyers of Cisco (CSCO), Sun (SUNW), Intel (INTC), EMC (EMC), AT&T Wireless (AWE), Lucent (LU), Nortel (NT), Oracle (ORCL), and ARM Holdings (ARMHY). Institutions have a tendency to go after stocks that are beaten down by traders more than is warranted. In some cases, they may merely be buying to cover short orders at a lower price.
The weekly Mortgage Bankers Association (MBA) Mortgage Applications Survey registered another record, with strong growth in refinancing, but a very slight decline in applications to purchase. This was a positive report, although home purchases may be starting to moderate.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, rose by 8.05% on Wednesday to 43.36, which is in the upper half of the extremely high anxiety zone (40 to 45). People were rather disappointed that the market declined with so much profit-taking.
The Nasdaq-100 After Hours Indicator had a negative tone for the Wednesday evening session, closing down 1.37 points. AMD (AMD) warned of a significant revenue shortfall, but that didn’t seem to drag after-hours trading down by very much at all. Unfortunately, it’s not possible to tell if AMD’s shortfall is due more to overall PC and server market weakness or due to Intel stealing market share. We do know that just a few weeks ago Intel told us they were doing fairly well this quarter. In any case, the rule for traders is that you shoot first and ask questions later (if at all).
Fed funds futures suggest a 98% (down from 100%) chance of a quarter-point rate cut in November. Futures also suggest a 0% (down from 8%) chance of a half-point cut. 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 rose modestly against the yen and was unchanged against the 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 rose modestly, and is still slightly above the psychological $30 level. Hurricane Lili is adding a premium to prices, but that will be temporary. It’s difficult to tell what the “war premium” for Iraq is at this point.
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 modestly.
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.
Congress is starting to sink its teeth into the Iraq resolution. The White House and House Democrats came up with a compromise, and there are two other proposals floating in the Senate. I went to part of a “markup” hearing of the House International Relations Committee Wednesday evening (it started at around 5:00 p.m.) All they were planning to do in that first hearing was opening statements (5 minutes each) for each member. Today they’ll be offering (and shooting down) amendments. It looks like the compromise resolution has a solid chance of getting passed as is. In fact, Senator Biden essentially admitted this. He had a hearing on his own counter-proposal scheduled for Wednesday morning, but cancelled it barely an hour before it was scheduled to begin. It does look like both the House and Senate have a good shot of passing a resolution before the end of next week. Hopefully they can agree to pass the same identical resolution, otherwise they have to spend at least a few additional days in a “conference” committee to resolve differences.
The compromise congressional resolution does permit the President to act without UN approval, but strongly encourages him to attempt to work through the UN first.
It has seemed that the administration wanted to get a better handle on the congressional resolution before pushing too hard on the UN resolution. The only constraint right now is to get some sort of new or updated UN Security Council resolution passed before the arms inspectors are due to go to Iraq in two weeks. Although the U.S. is far apart from France, Russia, and China, the essence of a compromise resolution is to decide what criteria should be used to determine when or if Iraq is failing to adhere to the new disarmament resolution.
I attended a hearing of the House Armed Services Committee on the topic of U.S. policy toward Iraq. They had only two think-tank witnesses (one chosen by the Republicans and one chosen by the Democrats) who agreed more than they disagreed. The Democrats’ witness at least superficially claimed that the policy of containment could be made to work, but then went on about how regime change probably is a better policy. The ultimate problem is that even if you can successfully disarm Iraq, it would be very difficult to prevent them from eventually re-arming. Regime change solves that problem.
[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.
In some rare good news on the telecom front, bankrupt fiber-optic network operator 360networks (ex-TSIX) obtained final court approval for their bankruptcy reorganization plan. They blew away all the shareholders and much of their $2.9 billion of debt holders, and converted creditors to new shareholders. They emerge with $100 million in cash and $215 million in debt. The private equity company W.L. Ross & Co. will use them as a vehicle for consolidating excess fiber capacity. Eventually they will IPO again. It’s too early to even guess how they will do, but they are following one of the models for how the telecom sector will dig its way out of its seemingly bottomless pit. This approach is a wipeout for shareholders, but Wall Street pros whose expertise is buying up distressed debt for pennies on the dollar will see plenty of opportunities over the next couple of year. Unfortunately, a number of the telecom equipment providers, including Lucent (LU) and Nortel (NT), will probably also have to reorganize in this manner since nobody wants their debt at list price.
Click here for our more extensive commentary on The Telecom Problem.
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No activity.
The market will continue to bounce around until there are some clear indications of the direction the economy is headed. Right now, all signs point to: mixed.
The weekly unemployment claims report may shed a little light on the labor market. But everybody is focused on the employment report that comes out on Friday.
My forecast for today is that Nasdaq will close in the range -30 to +80. Nasdaq came in at -26 on Wednesday, 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 03, 2002 12:02:21 AM -0400
Copyright © 2002 John W. Krupansky d/b/a Base Technology