This site works under the Honor System. Click here for payment instructions. Payment is much appreciated! |
No one can take the ultimate burden of decision-making off your shoulders, but the more you know, the lighter that burden will be.
[ Market Activity | Economic Reports | Anxiety (VIX) | After Hours | Fed Futures | Dollar | Oil | Gold | Geopolitical Situation | Terrorism | Iraq | Technology | Microsoft Antitrust | Books | Reform | Telecom | Miscellaneous | My Investments | Outlook for Today | Bottom Line | Economic Outlook | Tech Stock 'Safe' Signal | Resources | Disclaimer | Archive | Charts | Adages | Search | Payment | Contact Us ]
(Will be updated for Monday)
There seemed to be quite a sense of determination to push the market down on Friday morning, but that determination petered out as the day wore on. People may not be quite ready to bet the farm on this rally, but they aren’t ready to bet much against it either.
A combination of economic reports that were not very inspiring and a number of negative analyst comments sent the market lower at the open, but even that strong negative bias did not inspire much (if anything) in the way of ‘real’ selling.
Volume was moderately light (1.68 billion shares). Breadth was slightly negative, with 1.13 losers for each gainer.
According to Thomson Financial I-Watch, institutional investors were net sellers of Sun (SUNW), but net buyers of Intel (INTC), Dell (DELL), Cisco (CSCO), Lucent (LU), Applied Materials (AMAT), Nortel (NT), JDS Uniphase (JDSU), and EMC (EMC).
The Manufacturing and Trade Inventories and Sales (AKA Business Inventories) report for September register a moderate gain in inventories and a moderate decline in sales, but the inventory/sales ratio rose only slightly and is still down near its record low level. This was a mixed report, but not as bad as some suggested. First, this report covers September and we’re already out past October. Everybody already knew that the economy had petered out a bit in September. The result was predictable: a decline in sales and a rise in inventories, and that’s what this report shows. Even with the gain, inventory levels are quite low and indicative of the need to increase production in the months ahead.
The Producer Price Index (PPI) for October registered a sharp gain and rose moderately even ex food and energy. This was mixed report, but not as bad as some suggested. It should actually be a relief that the numbers came in strong since they suggest that economic activity is strong and dispels the notion that deflation is a problem. There was a moderately sharp gain in intermediate goods, rising for a fifth consecutive month, which suggests that inflation will probably pick up over the coming months.
The Industrial Production report for October registered a moderately sharp decline. This was a negative report, but shouldn’t have been much of a surprise given the economic weakness and uncertainty in September. There were a number of one-off factors that conspired to cut production in October, including weather slowing energy production in the Gulf of Mexico, lack of goods due to the West Coast port problems, and volatility in auto production. There was a lot of cynicism and weak sentiment in September and early October that probably caused manufacturing planners to throttle back. Note that this is a preliminary report and subject to revision as the full data comes in. Also, the data is seasonally adjusted, so actual production may have been significantly higher or lower than reported. The Fed doesn’t release the actual, unadjusted data. In any case, the manufacturing sector is still suffering some degree of weakness, but we already knew that.
The preliminary University of Michigan Consumer Sentiment Index for November rose moderately sharply, more than expected. This was a positive report. The “current conditions” component of the index did not improve very much, but the “expectations” component rose sharply. As always, these consumer confidence reports are at best coincident indicators and are not leading indicators of future consumer spending.
The New York Fed Empire State Manufacturing Survey for November registered a sharp improvement, from a negative (contracting) to a positive (expanding) reading. This was a positive report. Both new orders and shipments went from contracting to expanding. Employment is still contracting, but just barely. Two thirds of respondents remain optimistic about the six-month outlook, although fewer than last month. Expectations for new orders six months from now are still optimistic, but less so than in October.
The Economic Cycle Research Institute (ECRI) Weekly Leading Index (WLI) registered a moderate decline, but its six-month smoothed growth rate rose moderately sharply and has now risen for two consecutive weeks. This was a mixed report. The WLI growth rate is still fairly negative and recent WLI reports were actually revised downwards as well. A decline in mortgage applications was the primary culprit for the decline in the WLI.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, fell by 5.43% on Friday to 30.83, which is in the lower half of the high anxiety zone (30 to 35). That’s an impressive decline in anxiety on a day of little market gain. I would caution that VIX sometimes declines on Fridays and then rises on Monday as a result of people speculating on volatility during the week.
Some traders will view the too-sudden drop in VIX as excessive, an indicator of over-confident complacency, and an indication that the market is overbought on a very short-term basis, and hence the market is prone to a decline. VIX hasn’t been this low since the peak of the August rally – just before the market headed back down.
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 Friday evening session, closing down 0.73 points. There was no particularly noteworthy news.
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 12% (down from 14%) 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 slightly 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 rose modestly, 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, but is still well off the May high.
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. Although 12 Israelis were killed and 16 wounded by gunmen in Hebron, it’s not clear if the overall situation will deteriorate or stay the same.
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.
The advance team of the UN inspectors arrive in Baghdad on Monday. They’ll spend some time setting up their offices, so it is unclear when they will start ‘real’ work and when the first inspection (and possibly confrontation) will occur. Presumably they will not wait for the formal disclosure declaration which is due on December 8. They already know that they need to inspect every site they knew about back in 1998.
Now that the new UN resolution is effectively in force, the U.S. needs to decide how to handle the ongoing problem of Iraq shooting at U.S. and British planes in the no-fly zones. I don’t expect the U.S. to go to all-out war over the incidents, but there is certainly the potential for an expansion of the U.S. retaliation for the attacks. We had the first such incident on Friday, but the U.S. simply responded with the usual retaliation. The U.S. did say that Iraq is in “breach” of the UN resolution because of firing on our aircraft, but didn’t seem inclined to do anything more than the usual retaliation.
[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.
…
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 $18.
My forecast for Monday is that Nasdaq will close in the range -30 to +50. Nasdaq came in at -0.38 on Friday, well below the midpoint 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 11/16/02] The rally is now 27 days old and still holding up. I’ll give the market eight 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 has managed to close above 1350 for three days, but we need to stay up there for at least another week before we can start to have confidence in the rally again. Nasdaq even managed to stay above 1400 (and even 1410) for a second day, but needs to show an ability to stay there for more than a few 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 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 16, 2002 12:29:49 AM -0500
Copyright © 2002 John W. Krupansky d/b/a Base Technology