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The real reason for the Nasdaq decline on Monday was “none of the above”. It wasn’t “war jitters” over Iraq, an HP (HPQ) executive departure, analyst comments, or any of the stuff listed by the financial media. It was probably a combination of more momentum traders bailing out, the decline triggering stop-loss orders causing more selling, short-sellers smelling blood in the water, and at least a modest amount of asset reallocation out of dollar-denominated financial assets due to the dramatic Fed rate cut. The low volume due to the bond market holiday certainly increased volatility, which tends to make stocks move more sharply up or down.
Volume was quite light (1.26 billion shares), probably due to the bond market holiday. Breadth was very negative, with 2.72 losers for each gainer.
According to Thomson Financial I-Watch, institutional investors were net buyers of Cisco (CSCO), Sun (SUNW), Oracle (ORCL), Intel (INTC), Lucent (LU), Nextel (NXTL), Brocade (BRCD), Dell (DELL), and JDS Uniphase (JDSU).
The Wal-Mart (WMT) Weekly Sales Summary reported that sales came in “on plan” and the company is “on track” to meet its November sales growth target. This was a positive report.
The J.C. Penney (JCP) Weekly Sales Summary reported that same-store sales for the past two weeks came in “on plan”. This was a positive report.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, rose by 7.60% on Monday to 36.11, which is in the lower half of the very high anxiety zone (35 to 40). The market decline was disconcerting, but VIX rose in a fairly orderly manner. No big surprise or big concern.
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 positive tone for the day evening session, but gradually petered out, closing down 0.17 points. People believe that the sell-off was overdone, but given the fierceness of recent negativity, people are reluctant to stick their necks out too far, yet. People are starting to get antsy as to whether the October rally is on the verge of totally fizzling out.
Oracle (ORCL) reaffirmed guidance for their quarter that ends at the end of November. They were also rather upbeat for prospects in 2003.
Motorola (MOT) reaffirmed Q4 guidance.
[The bond market was closed due to the Veterans Day holiday.]
Fed funds futures suggest a 9% (unchanged) chance of a quarter-point rate cut by the December FOMC meeting. In other words, futures indicate that the Fed will not cut rates at the December 10 FOMC meeting.
Fed funds futures suggest a 20% (unchanged) chance of a quarter-point rate cut by the January FOMC meeting. In other words, futures indicate that the Fed will not cut rates at the January 28/29 FOMC meeting.
The dollar fell modestly against the yen and rose moderately against the euro, but trading was thin since the U.S. bond market was closed due to the Veterans Day holiday. Traders are still adjusting for the Fed rate cut.
[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, but is still well below the psychological $30 level. So much for “war jitters”.
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. So much for “war jitters”.
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. 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.
There was quite a bit of anxiety over Iraq due to tough talk on both sides, but everything is on a path for Iraq to agree by Friday to abide by the UN Security Council resolutions and for the advance team of UN weapons inspectors to arrive in Baghdad next week. The anxiety expressed on Monday was quite misplaced.
[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.
Intel’s (INTC) new Pentium 4 chip with “hyper-threading” is quite an advance. This feature adds about 3-4% additional hardware on the chip that allows the chip to run two simultaneous processes, acting as if it were two discrete processor chips.
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.
Contrary to some critics and the market reaction, the resignation of Michael Capellas from HP (HPQ) is actually a positive and is certainly not a negative. It had long been expected that he would eventually quit since he was ‘redundant’ after the merger. A leaner and meaner HP is a good thing. We’ll have to wait until next week when HP gives its quarterly report to find out how the merger has been going. Critics ‘worry’ that additional former Compaq staff will leave, but I say that is great, the more of them that leave, the better.
OfficeMax (OMX) reported a nice profit, revenue growth, and said they had more customers and the average customer spent more. This is a further hint that the economy really is beginning to recover.
The new Republican Congress should pass quite a few pro-business, pro-growth, pro-investor changes. Sure, there will be a healthy dose of gridlock as well, but so many Democrats are up for re-election in 2004 and they simply won’t win on a platform of obstructionism. Basically, the Republicans will get most of what they wanted, but with a smattering of minor compromise to get enough of the Democrats onboard. I’m not sure why the market hasn’t fathomed that prospect yet, but maybe it’s simply an example of how inefficient the market can be. In any case, this bodes well for the economy and the market in the year ahead.
I took another look at the September (and earlier) consumer price index reports and could find not even the slightest hint of any looming deflation. Ex-food and energy, prices rose 2.2% over the past year and 2.3% on an annualized basis over Q3. Similarly, the producer price index does not show any hints of deflation. In particular, the intermediate goods component rose in both August and September. There is no clear trend that would suggest even a remote possibility of deflation. In truth, the gist of the argument for deflation is based on a simple tautology: if the economy dramatically sinks into a very deep recession (i.e., a depression), then we’ll get deflation. Worst case, you could make an argument for a moderate, double-dip recession, but not a depression-class contraction. The other way of phrasing the deflation thesis is that if all major sectors of the economy collapse (especially housing and consumer spending), we’ll have a depression and deflation. That’s a logically true statement, but the premise is absolutely false, so the conclusion is also false. Another argument suggests that the high levels of debt make the U.S. economy prone to deflation. This is an equally bogus claim that fails to properly rate the ability of U.S. entities to service debt, and fails to recognize the greater ease with which U.S. entities can reorganize to restructure debt obligations. And finally, critics simply refuse to recognize the underlying structural strength of the U.S. economic system and its ability to adapt and thrive. Debt in the U.S. is neither a problem today, nor will it be a problem in coming years.
The decline in the value of the dollar relative to the yen and euro is a net plus for U.S. exporters, especially manufacturers, since U.S. exports are now somewhat cheaper relative to the competition.
No activity.
Maybe today we’ll finally see the awaited bounce since the market is now looking oversold on a very short-term basis.
Greenspan will be testifying before the congressional Joint Economic Committee, so people are thinking that maybe he’ll do a better job explaining last week’s rate cut. Personally, I don’t think any additional explaining is needed. Mostly it has been a matter of lots of people second-guessing the Fed. Plain and simply, it was an insurance cut, designed to shore up weakened consumer and business psychology and to try to move the economy to a somewhat faster pace of recovery. Why people claim not to understand is simply a great example of how messed up the Wall Street rocket scientists really are. Recent economic data are nowhere near as weak as Wall Street ‘experts’ have suggested. The issue for the rate cut was not that the economy was a disaster, but that it was simply not performing up to par. The economy deserved a “C” grade when a solid “B” is needed, but the economy certainly does not deserve the “D” or “F” grade as critics seem to suggest. Some of them made a big deal about the “soft spot” phrase or the balanced risk statement, but these are simply nits compared to the overall Fed message that the economy is not in bad shape, but simply needs a little help to be in better shape. The only valid criticism of the Fed on the cut is that Fed comments in recent weeks did not set the stage for the fed futures market to properly price in the full extent of the cut. But, in hindsight it’s difficult to see how they could, other than explicitly stating that the economy needed one last good, hard shove to send it on its way. This is just an example of how no system is perfect. Finally, it is important not to confuse the morose reaction of the Wall Street denizens with the ultimate reaction of the intended targets of the rate cut: American consumers and businesses. Three months from now, the Fed move will be widely seen as a success, and six months from now the critics will claim that the dramatic cut wasn’t needed at all.
There are two Fed regional manufacturing reports due out today that will offer more clues about the state of the manufacturing sector.
[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 -40 on Monday, well below the lower 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 11/12/02] The rally is now 23 days old, but starting to look a little ragged. 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). The fact that the 1350 level did not hold up is a bad sign, but not fatal. Nasdaq needs to move back above 1400 within a couple of days. Nasdaq also needs to break above 1420/1425 within two weeks and stay there for a week. Gaining – and keeping – the points to get us above the peak of the August rally will be both quite a struggle and quite a milestone. The real stumbling block is 1423.19, which was the closing level on September 21, 2001 and marked the “bottom” that year. Trying to break above the bottom from below is technically very difficult. This has nothing to do with economic fundamentals, but in a market where people are quite anxious, the behavior of traders guided by technical analysis is a driving force until some more ‘real’ buyers step in.
[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 11/9/02] The ECRI Weekly Leading Index (WLI) tells us that the economy is starting to pick up a little. Not enough to make people happy, but enough to offer encouragement that neither a double-dip recession nor deflation are in our cards.
[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 11/7/02] I’ve decreased my estimate of the probability of a double-dip recession to 10% (from 20%) due to hefty half-point Fed rate cut. 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 11/11/02] I don’t yet have a forecast for Q4 GDP. The accounting is so inscrutable as to defy any rational forecast. People expect economic activity to slow dramatically from the pace of Q3, so real GDP growth in the range of -0.5% to 2.5% (midpoint is 1.0%) is possible. Actually, a survey of economists by The Economist shows an expectation for real GDP growth in 2002 of 2.4% (low of 2.3 to 2.6), which implies Q4 GDP growth of 0.2% (low of -0.2 to 1.0). The same survey forecast real GDP growth of 2.7% in 2003 (low of 2.1 to 3.3). There was no hint or suggestion of deflation in these survey results.
[UPDATED 11/8/02] The Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) is still uncertain whether the recession truly ended of whether the end was merely temporary with a second dip to follow. In their words (as of November 5), “The behavior of the economy in the first eight months of 2002 indicates that the decline in activity that began last year may have come to an end. But recent data indicate that additional time is needed to be confident about the interpretation of the movements of the economy last year and this year.”
[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 11, 2002 11:00:20 PM -0500
Copyright © 2002 John W. Krupansky d/b/a Base Technology