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The overall market reaction to the disappointing news from Texas Instruments (TXN) was not as bad as it could have been. In fact, the total market decline could just as easily have been ascribed to “modest profit-taking”. It’s a very good sign that the market held up so well after such a strong rally over the past two weeks.
The Nasdaq intraday low was reached less than 10 minutes after the open. Nasdaq then bounced up over 25 points in less than an hour, but half of that evaporated by noon. Nasdaq stabilized for a while, but fell again between 1:15 p.m. and 2:15 p.m. That second low point was a couple of points above the morning low, which was a good sign. Nasdaq then proceeded to rally about 10 points into the close, which was another good sign.
In addition to the modest nature of the decline, there was no sign of any significant ‘real’ selling, with the market closing reasonably well above its lows.
It was a minor disappointment that Nasdaq was not able to hold its head above the 1300 level, but the Texas Instruments news was just too big a shock.
Volume was moderate (1.70 billion shares). Breadth was moderately negative, with 1.45 losers for each gainer.
According to Thomson Financial I-Watch, institutional investors were net buyers of Sun (SUNW), Cisco (CSCO), Nortel (NT), Lucent (LU), Intel (INTC), Ericsson (ERICY), AT&T (T), EMC (EMC), and Texas Instruments (TXN).
The weekly Reuters Instinet Redbook National Retail Sales Index registered a sharp gain in the first two weeks of October compared to the same weeks in September. This was a positive report. The report said that “Cooler weather and perhaps some catching up by consumers who had delayed fall shopping earlier in the season strengthened the sales growth.”
The BTM/UBSW Weekly Chain Store Sales Snapshot registered a moderate gain over the prior week. This was a positive report. According to the report, sales were “generally on-to-above plan.” The gain is despite some weakness in the DC-area related to recent sniper attacks. The BTM and Redbook reports frequently conflict, but it’s a good sign when they both point in the same direction (and that direction happens to be up).
After the close: The weekly ABC News/Money Magazine Consumer Comfort Index registered a moderately sharp decline to -23 from -19 (out of a range from -100 to +100), its lowest level since January 1994. This was a negative report. There was a 3% drop in how people view the overall economy (after a 2% gain last week), a 2% drop in how consumers view their own finances, and a 2% drop in how consumers view the buying climate. As usual, these reports are not leading indicators.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, rose by 1.11% on Tuesday to 39.34, which is near the top of the very high anxiety zone (35 to 40). There was no dramatic change in anxiety due to the modest nature of the market decline.
The high level of VIX remains a contrarian bullish indicator, but the market could decline further before rallying again.
The Nasdaq-100 After Hours Indicator had a negative tone (although it had started with a positive tone) for the Tuesday evening session, closing down 3.97 points. Quarterly results were mediocre, with a number of companies issuing below-consensus guidance. The bottom line is epitomized by STMicroelectronics (STM): “We share the view that the traditional fourth quarter seasonal upturn in demand will be quite modest this year.” KLA-Tencor (KLAC) came in roughly as expected, but warned of a significant revenue shortfall in Q4. But, most people knew that the chip equipment sector was going to be light this quarter for some time, so it’s unclear how much of the new guidance for these companies was not already in current prices.
Overall Q3 results seem reasonably close to expectations, but we are seeing quite a number of reductions in Q4 guidance. The good news is that many of the guidance reductions are fairly modest in nature and quite a number of companies are in fact reaffirming guidance.
[This is yesterday’s report since my data source was not updated, sigh.]
Fed funds futures suggest a 20% (down from 25%) chance of a quarter-point rate cut by the November FOMC meeting. In other words, futures indicate that the Fed will not cut rates at the November 6 FOMC meeting.
Fed funds futures suggest a 56% chance of a quarter-point rate cut by the December FOMC meeting. In other words, futures indicate that the Fed is just barely likely to cut rates at the December 10 FOMC meeting.
[UPDATED 10/22/02] 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. Most likely, the Fed will not cut rates this year at all, unless there is a significant further deterioration of the economy.
The dollar rose modestly against the yen and fell moderately 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 fell moderately, and is now well below the psychological $30 level. The market accepts that war with Iraq is not imminent (next two months) and there is plenty of oil sloshing around in world oil markets.
Lower oil prices mean that inflation will be lower. Also, high oil prices were an implicit tax, so corporate profits will benefits from lower oil prices.
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 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. Israel has so far chosen not to retaliate for the suicide attack on Monday.
North and South Korea have agreed to pursue the nuclear weapons issue (among others) “through dialogue.” The U.S. wants North Korea to immediately forego its nuclear weapons program, but the U.S. is not willing to pursue military action to force such a resolution. Dialogue is the right approach, but substantial pressure from the U.S. is needed to prod North Korea into making the necessary concessions.
Investors should always be prepared to buy any dip caused by panicky reactions by traders to any incidents.
The eerie calm continues. There may continue to be attacks or alleged attacks abroad, but the U.S. “homeland” may be relatively immune, at least for now.
Investors should always be prepared to buy any dip caused by panicky reactions by traders to any incidents.
Negotiations over the new UN Security Council resolution continue. The latest word is that it may take another week. The White House talks about time running out, but that’s just a negotiating tactic. According to a White House spokesman, “We're still talking. We'll continue to talk. The situation is fluid. We are engaged in intricate diplomacy.” That’s “intricate diplomacy” as opposed to “cowboy diplomacy”. The new resolution will happen, if not this week or next week, then the week after. Or, maybe just to spite the “arrogant Americans, especially the Republicans, (and their petulant British lapdogs)”, France, Russia, and China will delay agreement until our November election is over.
According to a media report, the resolution would specify that Iraq would have a month to accept the resolution and declare all their weapons, then the inspectors would have a month and a half to get started, and then the inspectors would have two months to report back to the Security Council. I believe that the inspectors would also have to report back immediately if Iraq causes any problems. The U.S. would of course wish that problems would be brought up well before February since January/February is the optimal timeframe for the U.S. to engage in all-out military activities. Iraq and other parties will want to delay the inspections process so that the U.S. will have to choose between accepting a go-slow(er) inspection process (deferring the prospect of war until Winter a year from now) or risk engaging in military operations in the horrendous Iraqi summer. The U.S. also has the issue of not wanting to have troops and equipment deployed for extended periods of time. My feeling is that the White House (or at least the political advisors) would rather have the war closer to the 2004 presidential election so that they don’t have the same problem that former President Bush had after the Gulf War of winning the war and then losing momentum going into the presidential election. Still, the administration does in fact have to be prepared to go to war as soon as the inspectors might run into difficulties since it is only the threat of imminent war that keeps Iraq motivated to acquiesce.
[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.
Click here for our more extensive commentary on The Telecom Problem.
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No activity.
Once again, we have some mediocre quarterly reports (or guidance) to digest. It will be quite fascinating to see how the market does with the latest batch. The results didn’t seem as horrendous as the Texas Instruments (TXN) news from Monday.
[UPDATED 10/21/02] The rally has had a good run, so any profit-taking is to be expected. But the rally will continue to run as long as there are people willing to believe that maybe this time the rally will last.
[UPDATED 10/21/02] Market participants will continue to position themselves based on their expectations for Q3 results and Q4 guidance. Market reaction is frequently very unexpected. Sometimes stocks will fall on good news, and other times they will rise on bad news. It’s all a question of where the quarterly results and guidance come in relative to the expectations of each individual trader and investor. And many traders will simply trade in the direction they think the market seems to be trending shortly after news comes out. Meanwhile, institutional investors, hedge funds, pension fund managers, and mutual fund managers will be deciding whether they think the real earnings up-cycle is finally less than two quarters away. Sitting in cash may preserve capital, but people don’t pay most money managers to earn little better than money market rates (minus hefty fees).
My forecast for today is that Nasdaq will close in the range -40 to +60. Nasdaq came in at -17 on Tuesday, well above the lower end of my range of -40 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 10/23/02] The rally is now 9 days old, although now modestly off its peak. That’s fairly impressive. I’ll give the market five more days before concluding whether we’re truly back to a bear market or just in a trading range (or, heaven forbid, starting on a new bull market). Nasdaq would have to break above 1350 and stay there for at least a week (within the next 2-3 weeks) before people will be willing to suggest that this rally has staying power, and that would just be the next step.
[UPDATED 9/25/02] Technically, we are back in a bear market (as of Monday, 9/23) 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 10/21/02] The economy is looking even more mixed than before. Although there are plenty of signs of weakness, there are increasingly tantalizing tidbits of improvement. Here in New York, street traffic and business in restaurants has dramatically picked up. In fact, quite a number of new restaurants have opened, with more on the way. And this is despite the weakness on Wall Street. In Q3 tech profits and Q4 guidance, there is certainly a fair amount of weakness, but there have also been quite a number of bright spots, even if they are small bright spots. I suspect that a number of companies did their best to get as much bad news out as possible so that Q4 would be as strong as possible. I also went back and looked at the September Employment report and noticed that the loss of 43,000 non-farm payroll jobs was actually a 478,000 gain once you remove the seasonal adjustment. It turns out that the change from August to September varies widely over the years, so the seasonal adjustment is rather harsh. And finally, the 400,000 “threshold” for initial unemployment claims is not as hard a boundary as it seems, and 401,000 to 425,000 over the past seven weeks probably does not indicate a true employment contraction since the population and workforce have been growing over the years since the 400,000 rule of thumb was concocted. The bottom line is that the economy is hanging in there and even growing a little, even if it is not up to its full potential.
[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 22, 2002 11:53:18 PM -0400
Copyright © 2002 John W. Krupansky d/b/a Base Technology