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Thursday was a very strange day for Nasdaq. The economic data was at least fairly benign if uninspiring. Oracle had a decent quarterly report. Iraq was the big, ‘bad’ news, but there wasn’t really much surprise there despite the theatrics. We actually had a fairly nice bounce in the morning that did peter out fairly quickly, but did not turn into a complete rout. Nasdaq ended down only modestly, but the day felt more negative than the numbers showed.
Volume was fairly light (1.62 billion shares). Breadth was moderately negative, with 1.2 losers for each gainer.
According to Thomson Financial I-Watch, institutional investors were net sellers of JDS Uniphase (JDSU), but net buyers of Oracle (ORCL), Sun (SUNW), Cisco (CSCO), Precise Software (PRSF), Intel (INTC), EMC (EMC), Micron (MU), and Qwest (Q). Institutional buyers still have not given up hope on this market.
The Unemployment Insurance Weekly Claims report registered a smaller than expected moderate decline in initial claims (but above 400,000 for a second week), a sharp increase in continuing claims (but still well under the level of a year ago), a moderate increase in the 4-week moving average of initial claims (now slightly over 400,000), and a modest decline in the 4-week moving average of continuing claims. This was a mixed, but slightly positive report. The good news is that there was a moderately sharp decline in the actual, unadjusted initial claims and a moderate decline in the actual, unadjusted continuing claims. The bad news is that unadjusted initial claims are well above 400,000 and well above the level of a year ago. Unadjusted continuing claims are below the level of a year ago, but not by enough to make a substantial difference. The labor market is still limping along, and will continue to do so until top-line economic growth picks up to a healthier pace.
The Chicago Fed National Activity Index for November registered a modest improvement from October, but is still modestly negative, indicating “below-trend economic growth” and “suggests that national economic activity continued to expand in November, but at a pace well below its historical trend.” This was a slightly positive report since there was some improvement. Labor market weakness was the main culprit. The NAI came in at -0.51 compared to -1.34 a year ago, so presumably we’re doing better than a year ago.
The Conference Board U.S. Leading Index for November registered a moderately sharp gain, the largest gain since last December and has erased all of its losses since May. This was a positive report. The leading index anticipates economic conditions 3-6 months from November. The board also reported that their Coincident Index (a measure of current economic activity, in November) increased modestly for November, but has remained essentially flat since July.
The Philadelphia Fed Business Outlook Survey for December registered a modest gain in the diffusion index of current activity, showing that the region’s manufacturing sector remains sluggish and had improved only modestly. This was a modestly positive report. New orders improved moderately. Shipments declined moderately. Unfilled orders declined modestly. Inventories rose moderately. Employment contracted moderately. Expectations for growth over the next six months remain quite optimistic. Firms expect to be hiring and spending more over the next six months, but not as much as they were expecting a month ago.
After the close: AMG Data Services reports that for the week ended Wednesday, December 18, $3.6 billion flowed out of equity funds. Three-quarters of those outflows were from domestic funds. $418 million flowed out of technology funds, the largest outflow since August 14. One possibility is year-end tax-loss selling. This was a negative report. $789 million flowed into taxable bond funds. $306 million flowed out of municipal bond funds. $34.0 billion flowed out of money market funds. There were inflows to international and emerging market debt funds, presumably for either higher yields or to gain exposure to other currencies that may possibly appreciate against the dollar.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, rose by 8.82% on Thursday to 34.55, which is near the top end of the high anxiety zone (30 to 35). VIX actually spent 2 hours above the 35 level (very high anxiety zone) in the middle of the afternoon. VIX peaked at 35.55 around 3:30 p.m., but fell off moderately as the market recovered modestly into the close. Anxiety rose by more than the modest market decline would suggest. The economic data was fairly benign, so that suggests that quite a number of people got spooked by the boldness of the U.S. tough talk on Iraq and decided that they needed a lot more protection from a market decline. VIX did not exhibit any sharp spikes (which usually occur due to steep price declines), but clearly anxiety rose dramatically.
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 Thursday evening session, closing up 0.1 points, basically flat. Quarterly reports were okay, with no big surprises and no disasters. People are simply unsure what to think about which way the market will go next.
[UPDATED 12/12/02] The Fed funds futures market suggests that there will be no Fed rate changes through the May FOMC meeting.
Fed funds futures suggest a 38% (unchanged) chance of a quarter-point rate cut by the March FOMC meeting. In other words, futures indicate that the Fed will not cut rates through the March 18 FOMC meeting.
Fed funds futures suggest a 10% (up from 5%) chance of a quarter-point rate cut by the May FOMC meeting. In other words, futures indicate that the Fed will not cut rates through the May 6 FOMC meeting.
The dollar fell moderately against the yen and rose modestly 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.
[UPDATED 7/23/02] 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 only modestly above the psychological $30 level. The rise is not due to any excess demand or lack of supply, but simply due to speculators. OPEC and the U.S. government are watching the oil situation like hawks and each will release more oil if any supply shortage does develop. OPEC’s policy is to not increase production unless prices (as OPEC measures them) stay above their $22-28 range for more than 20 days and prices have only been above that range since Monday.
[UPDATED 7/23/02] 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 very sharply, as speculators continued to rediscover the asset and as baffled professional short-sellers keep covering themselves in a rally that makes little sense to them.
[UPDATED 7/23/02] In any case, there is nothing about the current price of gold that should give any true investor any reason to lose any sleep.
[UPDATED 7/6/02] The relative calm continues.
[UPDATED 7/23/02] Investors should always be prepared to buy any dip caused by panicky reactions by traders to any incidents.
[UPDATED 10/14/02] 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.
[UPDATED 7/23/02] Investors should always be prepared to buy any dip caused by panicky reactions by traders to any incidents.
The U.S. has now clearly stated its position to the UN Security Council on the Iraqi weapons declaration, as have the inspectors, but there was no real news other than the theatrics. The U.S. used the “material breach” codeword, but the inspectors simply talked about how much was missing. The U.S. and the inspectors agree that the Iraqis needs to be more forthcoming, so clearly Iraq is now informally on notice that the inspectors will be expecting a lot more in the coming weeks. The U.S. will seek to force the inspections to be more intrusive. The open question is whether or when the U.S. will begin providing the inspectors with hardcore intelligence reports that will help the inspectors pinpoint people, places, things, and documents that will lead to discovery of weapons or weapons programs.
Iraq’s response to the charge that there was nothing new in the report was that there wasn’t anything new in the part of the report that was written in English and that all the new stuff was in the shorter part of the report that was written in Arabic and may not yet have been completely translated by the inspectors. That’s what the Iraqis say. We’ll have to wait to hear whether that is true. At a minimum, it’s an interesting twist.
It has been reported that the administration is hinting that a decision about whether to attack Iraq will be made in the late-January to mid-February timeframe, after the weapons inspectors give their first detailed (but still preliminary) report to the UN Security Council. This leaked decision timeframe is completely consistent with cranking up the pressure on Iraq to disarm voluntarily (or else) and to do it sooner rather than later.
I disagree with the assessment that the U.S. response to the Iraq weapons declaration “moves military action nearer”. There was no net change. It was clear before the U.S. “response” that there were gaps to be filled. The timing of a possible war was always fairly clear (preferably February). If Iraq makes substantial, real progress on disarmament by the January inspectors report, then war can be averted (and probably will be). If they don’t make sufficient progress, then the U.S. would have to resort to military force. This process has been clear for quite some time. It is quite disturbing when the media feels the need (or right?) to layer dubious interpretations on top of clear facts.
Meanwhile, the inspectors were quite busy visiting quite a number of facilities, including missile production, remotely-piloted vehicle (RPV) production, deep-underground facilities nominally associated with electricity generation and irrigation, another university biology department, and a yeast factory, among others. A total of nine separate teams carried out these inspections.
Irregardless of the U.S. theatrics on Thursday, the process is moving along quite well. We aren’t close to success, but the process is making definite progress, as much as could have been expected by this stage.
[UPDATED 12/12/02] 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. If there is to be an all-out war with Iraq, it would happen in the winter of 2004, not this winter.
[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.
[UPDATED 7/23/02] 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.
People will respond to the various quarterly reports from last night. As will the analysts, and then the traders will respond to the analysts.
The market is oversold on a short-term technical basis, so we are due for a bounce, sometime soon if not today.
It is difficult to say whether the market will “worry” much more about Iraq. Not much has really changed (relative to expectations) in recent days or weeks, but there is this vague anxiety that people have. It’s not like Iraq is a new issue that just popped up. I would have thought that by now the market would have fully priced in the range of possible scenarios, but some number of people continue to act as if the market hadn’t even begun to discount Iraq. Maybe the market really has fully adjusted for Iraq and it is merely commentators who feel the need to blame even modest fluctuations on Iraq.
Regardless of what commentators might say, the market will focus on the outlook for the economy, sectors, and individual companies. The financial outlook for the typical company is very unlikely to be influenced dramatically by whatever transpires with Iraq.
Today is a Friday, so traders will tend to close positions in advance of the weekend when anything can happen.
My forecast for today is that Nasdaq will close in the range -30 to +60. Nasdaq came in at -7 on Thursday, 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 12/20/02] The October recovery is 50 days old, but the correction off the peak is now 15 days old. Nasdaq is looking quite ragged but still retains all of the October gains even though most of the November gains are gone. It may or may not completely unravel. I’ll give the market four more days (I add a day if Nasdaq rises at least 1% and subtract a day if it declines at least 1%) 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). We are still waiting for another initial bounce to see if we can finish “the December correction.”
[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 12/18/02] There seems to be some amount of consensus that the economy will continue to grow at a sluggish pace in the first half of 2003, but then accelerate in the second half of the year. Of course, that’s what people said about 2001 and 2002. Part of this new consensus is an expectation of war with Iraq in Q1, possibly spilling into Q2, but then the economy would pick up after Iraq is out of the way. I don’t concur with the consensus on Iraq, but I am fully prepared to assume growth in Q1 and Q2 may be no more than modest. On top of this economic expectation, we layer an expectation that the stock market is typically expected to react six months in advance of economic changes.
[UPDATED 11/30/02] I rate the probability of serious deflation in the U.S. over the coming year at 1 in 1,000 (0.1%). It’s easy to make a hypothetical case for deflation – in any economy – by simplify hypothesizing that a whole bunch of factors all turn south and policymakers do all the wrong things. Fortunately, that’s not likely to happen in the U.S. Sure, there are plenty of sectors where prices have come down either to excess capacity or suppressed demand, but capacity has a way of adjusting and suppressed (or pent-up) demand eventually has a way of reasserting itself. Policymakers are well aware of previous episodes of deflation, so there is little reason to believe that they will make “all the wrong moves” needed to force the economy into a deflationary depression. In truth, we are actually looking at a higher risk of inflation next year since prices of intermediate goods have risen at ever higher rates for each of the five past months. In short, don’t make the mistake of assuming that hypothetical, theoretical, potential disasters are the likely scenario.
[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 12/16/02] The economy is looking even more mixed than before. Although there are plenty of signs of weakness, there are increasingly tantalizing tidbits of improvement. 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 12/9/02] 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 -1.5% to 3.5% (midpoint of 1.0%) is possible. 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 -0.7% (low of -1.1 to 0.1). The same survey forecast real GDP growth of 2.6% in 2003 (low of 2.0 to 3.3). There was no hint or suggestion of deflation in these survey results. In fact, The Economist poll for consumer prices forecast a gain of 2.1% in 2003.
[UPDATED 12/4/02] Even Stephen Roach, the gloom-and-doom economist from Morgan Stanley, is forecasting real Q4 GDP growth of 1% (as of 12/2/02). He had been adamant that the economy would have a double-dip recession, but now admits that we have escaped two “double-dip alerts” this year. He does still expect that there will be more double-dip scares in the months and quarters ahead. He is a very smart former-Fed economist and even though I don’t share his gloominess, at least he does offer a solid lower bound for the likely performance of the economy.
[UPDATED 11/27/02] A panel of professional forecasters of the National Association for Business Economics (NABE) estimates that real Q4 GDP should grow at a rate of 1.4%. Q1 GDP should grow at a 2.5% rate. Full year 2003 GDP should grow at a rate approaching 3%. The survey was taken from November 9th to 14th.
[UPDATED 12/18/02] 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 December 7), “The behavior of the economy this year indicates that the decline in activity that began last year may have come to an end. But recent data show 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: December 20, 2002 12:55:14 AM -0500
Copyright © 2002 John W. Krupansky d/b/a Base Technology