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Nasdaq managed to keep a mostly positive bias on Thursday, despite disappointing economic data.
Although the economic reports were disappointing, people seemed to figure that the weak data increased the odds of a Fed rate cut, and the market loves Fed rate cuts.
Volume was moderate (1.74 billion shares). Breadth was slightly positive, with 1.10 gainers for each loser.
It is fairly impressive that Nasdaq has retained virtually all of its recent gains, despite several attempts to sell them off.
According to Thomson Financial I-Watch, institutional investors were net sellers of Sun (SUNW), Cisco (CSCO), JDS Uniphase (JDSU), Intel (INTC), and Sanmina (SANM), but net buyers of Oracle (ORCL), EMC (EMC), AT&T Wireless (AWE), and ARM (ARMHY).
The Unemployment Insurance Weekly Claims report was weaker than expected, with moderate gains in both initial and continuing claims. The good news was that the 4-week moving averages of both initial and continuing claims declined modestly. This was a somewhat negative report since initial claims are back above 400,000 again. Even the unadjusted, actual claims numbers were disappointing. As disappointing as all these numbers were, they are still better than two weeks ago, so it’s not clear that there is any significant deterioration. Also, note that the 400,000 threshold has not been updated in recent years to account for population and workforce growth. Employment is probably still growing, albeit at a very modest pace.
The “advance” Gross Domestic Product (GDP) report for Q3 registered a moderate gain, but somewhat less than many people expected. This was a positive report, despite disappointment by many people. The biggest concern is that the growth occurred mostly in July and then petered out in August and September. But, that’s not necessarily a reliable indication of any future spending patterns. The other concern is that demand for cars and homes may be waning.
The Chicago Purchasing Managers' Index (PMI) for October declined moderately and is indicating a manufacturing contraction for the second consecutive month. This was a negative report. But, there is no way to extrapolate this report reliably out into the months ahead.
The Conference Board Help Wanted Index for September rose modestly, but is still below the level of July. This was a positive report. It’s too soon to call this a trend, but it is a definite improvement in the willingness of businesses to hire and to reach out to attract employees.
After the close: AMG Data Services reports that for the week ended Wednesday, October 23, $355 million flowed out of equity funds, but there were inflows to aggressive and small-cap growth and value funds, and $301 million of the outflows were from international funds. This was a slightly negative report and suggests that the recent rally was not based on inflows to mutual funds, so the durability of the rally is questionable (so far) and most likely the result of a rapid influx of ‘hot money’ (e.g., hedge funds and other institutional investors shifting away from bonds) that can turn and leave as fast as it came. $1.2 billion flowed into taxable bond funds. $376 million flowed into municipal bond funds. $17.2 billion flowed out of money market funds.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, fell by 0.47% on Thursday to 35.91, which is near the bottom of the very high anxiety zone (35 to 40). VIX is well off recent highs, so clearly people are less worried about the rally evaporating.
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 for the Thursday evening session, closing down 1.69 points. There was no significant news to account for the modest decline. People may believe that the slight Nasdaq gain during the day suggests some underlying weakness.
Fed funds futures suggest a 100% (up from 83%) chance of a quarter-point rate cut by the November FOMC meeting. In other words, futures indicate that the Fed will certainly cut rates at the November 6 FOMC meeting.
Fed funds futures suggest a 65% chance of a second quarter-point rate cut by the December FOMC meeting. In other words, futures indicate that the Fed is likely to cut rates at the December 10 FOMC meeting.
[UPDATED 11/1/02] I stick to my forecast that the Fed will hold interest rates steady through the Fall election (November 5), but now concede that there is a 60% chance that the Fed will cut rates at the November 6 FOMC meeting. The economy is not weak enough to need any more rate cuts, but the psychology of consumers, businesses, and the financial markets is week enough that the Fed may feel compelled to cut rates simply to improve psychology. The psychology argument would also suggest the possibility of an aggressive half-point cut. Additional rate cuts will not have any fundamental effect on the economy in the near-term (next few months) other than spurring additional buying of homes, but would help psychology. It would be better if the Fed did not cut rates at all, but the members of the FOMC may feel that they don’t want to be blamed for continuing sluggishness of the economy. They sometimes make an “insurance” cut that is not absolutely needed, but assures that they will not be blindsided by any further economic weakness. Unfortunately, the Fed will probably have to begin raising rates in the Spring, so another rate cut may cause them problems at that time. The Employment Situation report due out today may be the determining factor for the Fed.
The dollar rose modestly against the yen and rose 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 rose moderately, but is still well below 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 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.
Confusion over the breakdown of Israel’s “unity” coalition government leaves many people scratching their heads over what’s next. But the previous government was a mess anyway, so the new situation may not be too much worse.
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.
People expect that there will be a UN Security Council vote on the U.S.-British proposed Iraq resolution next week, after the U.S. elections. There may be some minor compromises on the U.S. resolution, but most Security Council members will go along with it.
[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.
Finally! The judge will be issuing her rulings (“opinions”) in the Microsoft antitrust cases today around 4:30 p.m.
My expectation remains that the judge will place a number of restrictions on Microsoft’s business behavior, but that the net negative impact on Microsoft’s operations will be relatively minimal. Yes, the restrictions will change the way the company does business, but not in any dramatically negative way. Although the rulings will be against the company, they will be relatively favorable.
The judge will most likely end up supervising the final judgment for at least a few years. This judge will not appoint a special master and will tend to tell the parties to work things out among themselves rather than get too involved in details.
Although the case has been a dark cloud hanging over the company for quite some time, that cloud is smaller than the larger twin clouds of the weak overall economy and weakness in the tech sector.
I believe that the market has already discounted relatively favorable rulings. In fact, there was no significant change in Nasdaq-100 futures when the news of the schedule for the rulings was announced.
[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.
I attended the VentureOne eXchange venture capital conference in Boston on Tuesday and Wednesday. There were about 150 attendees, a mix of entrepreneurs, venture capital partners, “service providers” (mostly lawyers, accountants), a few equity analysts, and only a few press. The bottom line is that there is a lot of venture capital floating around, but the VCs have much smaller “comfort zones”. You can get money if you have a great idea, a great business plan, a great team, and the VC feels comfortable with your target market. Some VCs are even having to worry about possibly returning uninvested capital to their limited partners since they haven’t found as many interesting (and comfortable) deals as they would like. The top-tier firms are doing well, but the second and third-tier firms are struggling. There has been a dramatic decline in the number of corporate VC firms. The surviving VC firms boast that “the tourists have gone home”. VCs now expect that it will take 3-5 years for a “liquidity event”, either an IPO or being acquired by a more established company. This is what was expected back before the dot-com/telecom boom. Overall, the tone of the conference was fairly upbeat, despite all the challenges ahead. Still, there was a distinct sense of uneasiness as well. Unfortunately, there are quite a number of entrepreneurs that are pursuing ideas and markets that are not very appealing to VCs.
I made my weekly dollar-cost-averaging purchase of January 2004 S&P 500 Tech Sector ‘Spider’ (XLK) LEAP call options with a strike price of $16 on Monday.
The employment situation report may move the market dramatically (either way) today, or maybe the market will just hover if the report is inconclusive. The market will move based on the headline numbers, but it is important to look at the household survey and unadjusted non-farm payroll number to get a better feel for what’s going on.
Traders still have their eye on the 1350 level. Surely they will make a run for it sometime over the next few days. But if they leap too far prematurely and ther is no substantial ‘real’ buying to support the advance, the bearish traders will jump on it and short it as hard as they can.
As today is the first day of the month, it is worth noting that the market sometimes falls due to profit-taking at the beginning of the month after an end-of-month rally.
Today is a Friday, so traders will tend to close out positions in advance of the weekend when anything can happen.
My forecast for today is that Nasdaq will close in the range -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 11/1/02] The rally is now 16 days old and near its peak. That’s quite impressive. I’ll give the market seven 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 1-2 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: November 01, 2002 01:01:47 AM -0500
Copyright © 2002 John W. Krupansky d/b/a Base Technology