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What a crazy day on Wednesday with Greenspan and Iraq competing for the market’s attention. But, mostly the market is simply struggling with the fact that nobody has any real conviction whether the market should be headed either firmly up or firmly down. Sounds like a recipe for a trading range, or possibly even the beginning of a new bull market.
The significant thing is that there really wasn’t a lot of apparent ‘real’ selling on Wednesday. Maybe there were a number of short-sellers who believe that the market should go down due to (the perception of) the current business environment, but other people are speculating where the economy will be in six to nine months.
Volume was moderately heavy (1.9 billion shares). Breadth was barely positive, with 1.01 gainers for each loser.
According to Thomson Financial I-Watch, institutional investors were net sellers of Cisco (CSCO) and Sun (SUNW), but net buyers of Applied Materials (AMAT), Intel (INTC), JDS Uniphase (JDSU), Nortel (NT), and HP (HPQ).
The weekly Mortgage Bankers Association (MBA) Mortgage Applications Survey registered a moderate decline, with a sharp decline in applications to purchase and a modest decline in refinancing. This was a negative report. The index is off recent highs, but still showing real strength in demand for mortgages. It is disappointing that the Fed rate cut and a decline in mortgage interest rates did not boost demand, but there is a lot of weekly volatility, so we need another couple of weeks to see where demand is headed. The decline may have been weather-related. In any case, demand for housing is still strong.
The Business Roundtable (BRT) survey of 150 top CEO’s gave a gloomy outlook for 2003. This was a negative report, but had some bright spots. The BRT said that “Our nation’s economic recovery has not been strong or sustained, and the BRT’s survey shows that CEOs do not expect the situation will improve significantly in 2003.” 60% expect their employment to drop in 2003, 28% expect it to remain unchanged, and 11% expect employment growth. It is worth noting that although the 150 companies have revenue of 36% of GDP, they employ only 7% of the total U.S. work force, so it may be misleading to extrapolate their outlook to the other 93% of the work force. 57% expect their capital spending to remain unchanged, 24% expect a decline, and 19% expect higher spending. 64% are planning for less than 2% GDP growth in 2003 and 36% planning for more than 2%. On the bright side, 71% expect higher sales in 2003, 19% expect sales to be unchanged, and only 9% expect sales to be lower. Note that the BRT is a group whose purpose is to promote the interests of its members and right now that interest is to lobby Congress to pass additional measures to help boost consumer sentiment and business spending. As such, they play up the negatives in an attempt to persuade Congress to act (soon).
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, rose by 2.51% on Wednesday to 36.28, which is in the lower half of the very high anxiety zone (35 to 40). Once again, we see this fluke where anxiety rises even as the market rises. People are getting very confused about the market. While they can’t complain when the market rises, they aren’t ready to truly believe that the market will continue to rise. But, this is par for the course in a new bull market: a bull market climbs a wall of worry.
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 day evening session, closing down 4.63 points. Applied Materials (AMAT) was somewhat light on revenues, forecasts a revenue decline in the current quarter (and next year), and says it doesn’t expect the environment to improve any time soon.
Fed funds futures suggest a 12% (up from 9%) 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 an 18% (down from 24%) 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 rose moderately against the yen and euro. Some of the move was due to Iraq, a little to Greenspan, but much of it was simply a technical adjustment as the dollar was oversold on a short-term technical basis.
[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 sharply (due to Iraq), and is 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 fell sharply, due to a combination of Iraq and being overbought on a short-term technical basis.
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.
A CNN.com QuickVote poll reports that 59% of 81,685 respondents said that the new message from bin Laden did not increase their fears about possible al Qaeda attacks. That’s a good sign that the American people are finally beginning to put all these media-induced terrorist fears in a proper perspective.
Investors should always be prepared to buy any dip caused by panicky reactions by traders to any incidents.
It was welcome, but not terribly surprising, news that Iraq has agreed to allow UN weapons inspectors to resume their work in Iraq. This is only the next step of a long journey. The next step will be the return of inspectors to Baghdad next week. Then they start to do their work. The big test comes on December 8 when Iraq is supposed to fully disclose the extent of their WMD program. The problem is that Iraq continues to insist they have no WMDs or WMD development program. The U.S. has its intelligence reports which suggest otherwise, and Iraq certainly knows that evidence of various weapons’ programs is well known. We’ll have to see how much Iraq discloses and then how the U.S. responds to omissions. The trick is that the U.S. would rather not disclose sensitive intelligence since it may compromise sources and leads down a path on which the U.S. is gradually bled of all it’s most valuable Iraqi intelligence.
An uncertain hurdle is that at some point Iraq must drop its pretext that it has no weapons of mass destruction. Who knows, maybe they have destroyed everything that they had (or moved it outside Iraq to some “friendly” country or countries), but at least they need to come clean about what they did have at various points in the past and then detail what happened to the stuff.
There will be a lot of excitement and anticipation when the inspectors first try to inspect some of the presidential palaces.
The other big uncertainty is whether the U.S. will choose to escalate its response to Iraq shooting at our planes enforcing the no-fly zones.
[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.
The market will decide whether the mediocre results and outlook for Applied Materials are already priced into the market or not.
Dell reports after the close, so there should be significant anticipation of their quarterly results and outlook. Most people expect them to do fairly well, so that sentiment could boost the market and counteract the drag from Applied Materials.
The weekly unemployment insurance claims report will offer a few more clues about the labor market. It could be slightly better or slightly worse, and we will continue to see volatility for some time to come.
The monthly retail sales report will garner some interest as well. Auto sales will likely drag the headline number down, but ex-autos shouldn’t be too bad.
My forecast for today is that Nasdaq will close in the range -40 to +50. Nasdaq came in at +12 on Wednesday, slightly below the midpoint 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 11/14/02] The rally is now 25 days old, and still managing to limp along although it is looking a little ragged. I’ll give the market six 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). It’s a good sign that Nasdaq did manage to break above 1350 and stay there most of the day and even close moderately above 1350, but we need to stay up there for at least another week before we can start to have confidence in the rally again. 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 14, 2002 12:36:48 AM -0500
Copyright © 2002 John W. Krupansky d/b/a Base Technology