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(Updated since Saturday – changes marked with [ *])
That was quite a feat to get two back-to-back strong rally days on Nasdaq. Sure, maybe much of Friday’s rally was still short-covering, but there was probably at least a little ‘real’ buying to keep the rally going and hold off profit-taking.
People may have been heartened that Congress successfully voted to authorize President Bush to go after Iraq if the UN is unable to succeed at disarming Iraq. The market wants to see progress on Iraq and will react positively when there is progress.
It’s possible that much of the rally is an anticipatory rally in advance of the first big wave of quarterly reports this coming week. Traders are very fond of the strategy of “buy the rumor, sell the news”. Unfortunately, that’s not the kind of ‘real’ buying that a long-term, sustainable bull market is based on.
Volume was almost heavy (1.92 billion shares), and certainly much heavier than most of the sessions in the past two months. Breadth was quite decent, with 2.21 gainers for each loser. A big gain of heavy volume is a very positive sign.
The Retail Sales report for September registered a sharp decline, but that was expected and primarily due to weak auto sales. This was a negative report, but everybody saw this one coming, so it wasn’t a big deal. The weekly chain store sales reports had been weak all month, but did start to pick up in the most recent week. Consumer spending is quite important, but retail sales tend to fluctuate a lot even in a stable economy, let alone a changing economy such as we have now.
The University of Michigan Consumer Sentiment Index for September registered a sharp decline. This was a negative report, but it’s a lagging indicator (e.g., telling us why retail sales were down in September). None of the consumer confidence reports have any predictive value for the economy (e.g., consumer spending) going forward. The expectations component of the index fell sharply to the lowest level since 1993, but it is well known that consumer views on the future of the economy are shaped by impressions from the media, which has been chock full of intense negativity. The current conditions component of the index fell only moderately, but to the lowest level since 1992.
The Producer Price Index (PPI) for September registered a modest gain. This was a positive report. Inflation is under control, and there is no sign of deflation either.
The Economic Cycle Research Institute (ECRI) Weekly Leading Index (WLI) registered a modest gain, but its six-month smoothed growth rate registered a moderate decline and is now further in negative territory for a third consecutive week. This was a mixed report. It is heartening that there was a modest improvement, but it will take a lot of modest improvements to reverse the declines over the past 4 months. The WLI is at roughly the same level as it was at the end of November 2001. As it stands now, the WLI suggests that we could see some weakness over the next few months, but that’s relative to where the economy was in Q3, and Q3 was a lot better than most people give it credit for.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, fell by 6.16% on Friday to 43.44, which is in the upper half of the extremely high anxiety zone (40 to 45). Friday’s rally was a big relief, but people still have a tremendous amount of anxiety. What that really means is that the market could rally a lot further before traders begin to feel that people are being too exuberant.
The Nasdaq-100 After Hours Indicator had a negative tone for the Friday evening session, but managed to recover, closing up 0.09 points, basically flat. This is the usual Friday pattern where people don’t want to change their positions after the close. What’s unusual is that we didn’t see more profit-taking. There was some in the first half of the evening session, but maybe people are actually getting a little optimistic about the market.
Fed funds futures suggest a 45% (down from 63%) chance of a quarter-point rate cut in November. In other words, futures indicate that the Fed will not cut rates at the November 6 FOMC meeting. This is a dramatic change in sentiment from just over a week ago when futures indicated a 100% chance of a cut. People are beginning to focus more on December, but it’s way too early to be able to judge where the economy will be in December.
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 moderately, but is still below the psychological $30 level.
Gulf oil output is still down moderately due to the effects of former hurricane Lili.
[ * ] Iran’s oil minister says that he believes that the price of oil will “collapse” if the U.S. attacks Iraq. The idea is that the current price of oil has a hefty “war premium” and freeing Iraq from economic sanctions would open up more oil development and production and flood world markets with oil, causing prices to fall. Meanwhile, the oil minister of the United Arab Emirates (UAE) said that oil prices would rise as the situation with Iraq deteriorates. He believes the current “war premium” is about $5, but the Algerian oil minister believes the war premium is $2-$3. Most OPEC member believe that there is no need to increase output, that there is plenty of oil to meet demand, and that the high price is merely the premium due to “political tensions”. A successful war with Iraq will relieve much of the political tensions.
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 declined slightly.
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.
Would-be Palestinian suicide bombers are attempting attacks almost every day, but they are mostly being apprehended due to the extreme security measures.
Investors should always be prepared to buy any dip caused by panicky reactions by traders to any incidents.
The eerie calm continues.
[ * ] It does appear that the explosion at a shopping mall near Helsinki was the result of a bomb, but there is no clue as to whether it was the result of locals or might have been directed by al Qaeda. There was mention that the perpetrator was a local university student who had mental problems, but that does not tell us one way or another whether he was part of the global terror network.
[ * ] The Bali nightclub bombings are believed to be the work of terrorists, but no firm connection to the global terror network has yet been established. The purpose of the attack is not quite clear since there were so few Americans there. There were a lot of Australians in the clubs and Australia has been a strong U.S. ally in the global “war” on terror, including soldiers stationed in Afghanistan. It may have been intended as a warning to the Indonesian government to refrain from cooperating with the U.S. in the global war on terror. A CNN.com article said that “U.S. and Asian intelligence authorities said they had linked the attacks to the al Qaeda terrorist network in Southeast Asia because they bear the hallmarks of the terrorist group”, but their rationale does look a little suspect, stretched, and self-serving. It is also possible that the attack was by local rebel groups who are fighting for independence in various provinces of Indonesia and may have either chosen to mimic well-publicized al Qaeda methods or maybe there is a Kuwaiti-like link to al Qaeda (i.e., training and advice, but no political connection). Ironically, the magnitude of this attack may finally force the Indonesian government to start cracking down on terrorists and their sympathizers that operate freely within Indonesia. In any case, everybody will be exploiting this attack to pursue their own agendas.
Investigators are leaning more strongly towards believing that the explosion on the French tanker off Yemen was indeed a Cole-like terrorist attack. But responsibility for the alleged attack is still uncertain. It may be more of a local thing rather than a coordinated part of a global terrorist campaign. In any case, it’s beginning to become stale news.
[ * ] There is a distinct possibility that al Qaeda is now a headless snake, unable to plan, control, and coordinate from the top, but nonetheless the distributed cells are capable of causing some limited local panic. In other words, we could continue to see numerous smaller-scale attacks, possible against U.S. “interests” abroad, but are unlikely to see much in the way of domestic attacks or anything even approaching a 9-11-scale event.
Investors should always be prepared to buy any dip caused by panicky reactions by traders to any incidents.
Well, Congress has now given President Bush his official license to attack Iraq at his leisure. Of course, the administration continues to assert that no attack is imminent and that the President has not yet even decided to attack. The next step is to get some sort or UN Security Council resolution (that needs to be acceptable to France, Russia, and China), and then to get the inspectors started again.
[UPDATED 10/11/02] My assessment remains that there is virtually no chance of an all-out military conflict with Iraq this year and only a 20% chance next year.
[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.
Lucent (LU) continues to grind down. They are shedding another 10,000 jobs, but they probably need to restructure the entire company more radically, splitting or spinning off the profitable (or at least potentially profitable) operations and shutting down anything else that does not have clear viability. There are still too many telecom equipment companies, so some mergers are in order, but that may not be possible until there are more bankruptcies due to current debt burdens. I’m not sure what Lucent should do with Bell Labs, but they certainly can’t afford to fund it the way it should be funded.
Click here for our more extensive commentary on The Telecom Problem.
I attended a luncheon presentation at the American Enterprise Institute by the Mayor of Jerusalem. He discussed the full range of issues that confront his portion of Israel. He’s certainly not optimistic for peace in the short-term, but sees possibilities further out. He also understands that not much will happen on the peace front until the U.S. is done dealing with Iraq. He was quite an energetic, passionate speaker. I’m undecided what to think about someone who is so very pessimistic about the near-term and yet so optimistic for the long-term.
It’s time for me to make my weekly dollar-cost averaging investment, but I absolutely hate to buy into a rising market. I am sorely tempted to wait until the next dip, but I’ll probably go ahead and purchase now anyway just to keep my plan as simple and anxiety-free as possible.
Once again, there’s plenty of room for profit-taking, but people may just want to push this rally as far as they can until it runs out of steam. It could be that traders will continue to rally into at least the first big wave of Q3 reports and then sell off at the first hint of major disappointment.
[ * ] It’s certainly possible that the market could succumb to profit-taking after two big days of rallying and on account of anxiety over recent bombings, but I suspect that anticipation (or anxiety) over Q3 company reports will carry the day. When in doubt, traders will usually “buy on rumor and sell on the news”. There have been quite a number of warnings, but companies are betting better at getting bad news out earlier, so maybe this reporting season could treat the market better than in recent memory. Another way of looking at it is that the market has already anticipated a tremendous amount of negative news, so even mediocre results could be well received.
[ * ] The important thing to look for is not earnings, but revenue growth (and keeping profit margins up). Any damn fool can slash costs to meet an earnings goal, but growing revenue in a sluggish economy is an important accomplishment. Also, the outlook for Q4 revenue and earnings will be more important than Q3 results. The hard part is that companies are gradually being trained to under-promise to a far greater extent than in recent years, so it’s possible that we could see some Q4 guidance that at least appears disappointing even though Q4 could turn out better than previously expected.
[ * ] There are no big-techs reporting Monday, but people will trade in anticipation of reports that will be issued on Tuesday and later in the week. The simplified schedule is: Intel (INTC), Motorola (MOT), and Novellus (NVLS) on Tuesday, IBM (IBM) and Siebel Systems (SEBL) on Wednesday, and Broadcom (BRCM), Lam Research (LRCX), Microsoft (MSFT), and Sun (SUNW) on Thursday.
[ * ] Reports due on Tuesday: Applied Micro Circuits (AMCC), Intel (INTC), Internet Security (ISSX), Linear Technology (LLTC), Motorola (MOT), Novellus (NVLS), RF Micro Device (RFMD), and Teradyne (TER).
[ * ] Reports due on Wednesday: ATMI (ATMI), Ultratech Stepper (UTEK), Harris (HRS), Advance Micro Devices (AMD), Akamai (AKAM), Apple (AAPL), CDW Computer (CDWC), Celestica (CLS), Electronics for Imaging (EFII), Extreme Networks (EXTR), IBM (IBM), Interwoven (IWOV), Macromedia (MACR), Polycom (PLCM), QLogic (QLGC), RSA Security (RSAS), SanDisk (SNDK), Siebel Systems (SEBL), Symantec (SYMC), Vignette (VIGN).
[ * ] Reports due on Thursday: Cypress Semiconductor (CY), EMC (EMC), Nokia (NOK), SprintPCS (PCS), StorageNetworks (STOR), Advance Fibre Communications (AFCI), Atmel (ATML), Avid Technology (AVID), Broadcom (BRCM), Checkpoint Software (CHKP), CNET (CNET), Compuware (CPWR), Cree (CREE), DigitalThink (DTHK), E.piphany (EPNY), eBay (EBAY), Fairchild Semiconductor (FCS), Gateway (GTW), Handspring (HAND), i2 Technologies (ITWO), Integrated Device (IDTI), Iomega (IOM), Ixia (XXIA), Kana Software (KANA), Lam Research (LRCX), McDATA (MCDT), Mercury Interactive (MERQ), Microsoft (MSFT), National Instruments (NATI), Nortel (NT), PeopleSoft (PSFT), PMC-Sierra (PMCS), Rational Software (RATL), Scientific-Atlanta (SFA), Secure Computing (SCUR), Sprint (FON), Sun (SUNW), Sybase (SY), Western Digital (WDC), Xilinx (XLNX).
[ * ] Reports due on Friday: Tellabs (TLAB).
My forecast for Monday is that Nasdaq will close in the range -30 to +60. Nasdaq came in at +47 on Friday, towards the upper end of my range of -30 to +60. 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 10/12/02] Thanks to a second day of strong rallying, I’ll give the market yet another two days before concluding whether we’re truly back to a bear market or just at the lower edge of a trading range.
[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 13, 2002 11:42:35 PM -0400
Copyright © 2002 John W. Krupansky d/b/a Base Technology