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It’s very difficult to assign a true meaning to the market trading on Tuesday since it was such an equal mix of good and bad. It’s good news that the sell-off did not accelerate and certainly good news that the market lost very little ground (down 1.68 points). It’s bad news that the market was unable to bounce strongly from the decline on Monday. It’s actually okay that the market didn’t bounce sharply immediately, since people may need a little time to get comfortable with whether the sell-off is really over. It’s good news that the market did not decline substantially on the news of the terrorist threat level being raised to Level Orange (High). It’s good news that the market did not decline substantially on the rumors of a mad cow outbreak. It’s bad news that the market was unable to power through these relatively minor negatives. It’s bad news that the market declined below the opening level and that the general trend through the day was down. It’s good news that Nasdaq was able rally moderately in the final hour of trading. It’s bad news that the market did not bounce ‘smartly’ when it hit the November closing peak. It’s good news that Nasdaq was able to bounce back and close above the November closing peak as a successful ‘test’ of that level.
Tuesday was not a “throw in the towel” day like Monday, but more of a “sit back and wait” day. People were also anxiously awaiting the HP (HPQ) quarterly report after the close as well as Greenspan’s congressional testimony of Wednesday morning.
This was yet another example of how the pre-market trading level can be a very poor predictor of the closing level. The pre-market was up, but the market closed down slightly and almost turned into a significant decline.
The good news is that there was no significant evidence of substantial ‘real’ selling. The bad news is that we didn’t see any evidence of ‘real’ buying either.
Volume was light (1.67 billion shares). Breadth was modestly negative, with 1.11 losers for each gainer.
According to Thomson Financial I-Watch, institutional investors were net sellers of EMC (EMC), JDS Uniphase (JDSU), and Nortel (NT), but net buyers of Intel (INTC), Sun (SUNW), Lucent (LU), Cisco (CSCO), AMD (AMD), and Applied Materials (AMAT). Clearly institutions were doing a fair amount of buying the dip.
The quarterly Philadelphia Fed Survey of Professional Forecasters registered a moderate decline in expectations for GDP growth. This was a somewhat negative report, but not unexpected. Expectations for year-over-year real GDP growth in 2003 are now 2.2%, down from 2.5%. Expectations for Q2 are 1.8%, down from 2.7%. Expectations for Q3 are unchanged at 3.4%. Expectations for Q4 are also 3.4%, but down from 3.6%. Expectations for GDP growth in 2004 were roughly unchanged at 3.6%. Expectations for unemployment are unchanged at 5.9%. Expectations for inflation are slightly higher for 2003 at 2.4%, up from 2.2%. Expectations for inflation are slightly lower for 2004 at 2.3%, down from 2.4%. Expectations of the risk that Q2 could come in with negative real GDP growth are now 20%, down slightly from 21%. Expectations of the risk that Q3 could come in with negative real GDP growth are now 14%, down moderately from 18%. Long-term (10-year) expectations for inflation were unchanged at 2.5%. There was no hint of deflation anywhere in these survey results.
The BTM/UBSW Weekly Chain Store Sales Snapshot registered a slight decline. This was a slightly negative report. The report opined that “Consumers’ desire to shop has been relatively restrained, except for staples, such as pharmacy and other consumable goods.”
The weekly Reuters Instinet Redbook Sales Average report registered a moderately sharp decline (3%) in chain store sales for the two weeks ended May 17 compared to the same period in April. This was a negative report. Sales were up only modestly (0.3%) for the week compared to a year ago.
After the close: The weekly ABC News/Money Magazine Consumer Comfort Index registered no change from -24 (out of a range from -100 to +100), after three consecutive week of declines after four consecutive weeks of gains, and shedding two-thirds of the post-war gains. This was a neutral report, but did hint at stabilization. Unfortunately the raising of the terror threat level to Level Orange (High) could easily depress consumer comfort in the weeks ahead, unless consumers (correctly) perceive that there is so significant increase in the threat here in the U.S. Please note that there is no clear and indisputable link between consumer confidence reports and the outlook for consumer spending.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, rose by 1.43% on Tuesday to 23.37, which is in the upper half of the moderate anxiety zone (20 to 25). That’s a perfectly orderly response to the slight market decline and lack of a strong bounce after the sell-off on Monday. The good news is that VIX spiked sharply up to 25.08 shortly after 3:00 p.m. (from 23.0 at 2:30 p.m.) in response to Nasdaq falling moderately below the November closing peak, and then retreated into the close. That effectively marks a near-term capitulation and probably selling exhaustion by the weaker hands. On the other hand, spikes sometimes come in clusters, so we need to wait a couple of days to see that VIX really does start to taper off after the recent rise. In any case, there is no near-term ‘need’ for a further market decline based on the behavior of VIX.
[4/12/03] The elevated level of VIX remains a contrarian bullish indicator, but the market could decline further before rallying again. Most of the ‘premium’ in VIX is due to anxiety over the pace of the economic recovery, concern over corporate profit growth, and the perception that most stocks are still ‘overvalued’. Those concerns will continue to linger for many months.
The Nasdaq-100 After Hours Indicator had a positive tone for the Tuesday evening session, closing up 4.34 points. Credit a solid quarterly report from HP (HPQ) with the jump in market sentiment. It was interesting how HP was able to enhance market sentiment so much better than Dell (DELL) last week.
HP (HPQ) beat consensus estimates for both earnings and revenues. They also reaffirmed guidance for the second half of their fiscal year.
[5/15/03] The Fed funds futures market suggests that the Fed will cut interest rates by a quarter-point in June and then leave them unchanged through September.
[5/21/03] The Fed will probably cut interest rates by either a quarter or half-point at the June FOMC meeting, unless the economy shows a distinct and marked improvement before then. After that cut, interest rates will probably then remain unchanged through at least September (and probably the end of the year) unless the economy exhibits a very strong rebound.
Fed funds futures suggest a 94% (up from 80%) chance of a quarter-point rate cut by the June FOMC meeting. In other words, futures indicate that the Fed will cut rates at the June 25/26 FOMC meeting.
Fed funds futures suggest a 3% chance of a second quarter-point rate cut by the August FOMC meeting. In other words, futures indicate that the Fed will not change rates by the August 12 FOMC meeting beyond a quarter-point cut at the June meeting. But August is too far in the future for fed futures to be reliable. These far-out futures simply indicate how sentiment is trending. I personally don’t consider odds less than 66% as being indicative of a likelihood of action.
Fed funds futures suggest a 34% chance of a second quarter-point rate cut by the September FOMC meeting. In other words, futures indicate that the Fed will not change rates by the September 16 FOMC meeting beyond a quarter-point cut at the June meeting. But September is too far in the future for fed futures to be reliable. These far-out futures simply indicate how sentiment is trending. I personally don’t consider odds less than 66% as being indicative of a likelihood of action.
The dollar fell moderately sharply against both the yen and the euro.
The “war of the-meaning-of-the-word-strong” continues, with both Greenspan and George Soros adding their own volleys. According to Reuters, Greenspan told visiting Germany Economic Affairs and Labor Minister, Wolfgang Clement that he did not believe the Bush administration was deliberately pursuing a policy to lower the value of the dollar. Soros said “I have to disclose that I now have a short position against the dollar because I listen to what the Secretary of the Treasury is telling me.” Soros also suggested that Snow was “somewhat irresponsible by talking down the dollar”, when Soros knows full well that Snow did no such thing. It has been the currency traders (as well as analysts and strategists at the big Wall Street bnaks) that have been “talking down the dollar.” Soros, the acknowledged master of foreign exchange speculation, of course knows exactly what he’s doing, but is also being extremely disingenuous as well as very misleading. Soros also disingenuously asserted that the U.S. policy is a “beggar-thy-neighbor policy”, when it is no such thing. Many countries (including Japan, Germany, Brazil, et al) desperately need to reform their fiscal, banking, and labor practices, and that is what is holding those countries back, plus the fact than many countries, including the European Central Bank, need to cut their interest rates as well as increase their money supplies (especially in the case of Japan). I would suggest that Soros read and endorse a ‘leader’ in the latest issue of The Economist entitled “The joy of inflation”, rather that take such cheap pot-shots at the U.S. Traders (including Soros) are far less concerned with what anyone said or meant, and choose to twist and spin anything they can in support of manipulating the volatility of the markets to enhance their own gain. I’m sure that Soros knows full well precisely what Snow literally said and literally meant. Soros is more than capable of correctly evaluating the technical and fundamental aspects of foreign exchange, so it is laughingly unlikely that he would need to use Snow’s innocuous comments (which changed nothing about U.S. policy) as the basis for a speculative trade, unless Soros’ purpose was solely to vindictively attack the administration to show that the traders’ view of the meaning of ‘strong dollar’ was somehow superior to the view of the U.S. government. Most likely, Soros was simply engaging in a little ‘grandstanding’ to aid his own investments. Soros knows full well that the U.S. policy for some time has been to avoid intervening in the foreign exchange markets and that the Fed has interest rates low in a (correct) attempt to stimulate the U.S. economy rather than to try to manipulate the ‘value’ of the dollar. Neither of those two facts is in any way altered by Snow’s weekend comments or any other administration or Fed comments over the past few years.
Federal Reserve Governor Susan Bies also joined the fray, saying that “In the long run the dollar seeks the appropriate level.” That’s perfectly consistent with my belief and certainly consistent with the concept of a ‘strong dollar policy’. That said, traders will continue to protest that such a floating dollar is not ‘strong’ – unless its ‘value’ is rising relative to other currencies at any particular moment in time.
[5/20/03] Here’s my own definition of a ‘strong dollar policy’: economic policies that seek to foster long-term price stability, sustainable growth, high employment, and rising corporate profits, and to do so without explicitly targeting an exchange rate for the dollar or significantly intervening in the foreign exchange markets. Sometimes that means interest rates are relatively high (causing the dollar to appreciate or appear to be stronger) and sometimes relatively low (causing the dollar to depreciate or appear to be weaker). Longer-term, the dollar will fluctuate around an average that reflects relative price stability in the U.S. As long as the long-term policy goals are being met, the dollar will remain ‘strong’, regardless of how the foreign exchange markets may view the ‘value’ of the dollar in the near-term.
[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.
[5/10/02] 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 and boost corporate profits of U.S. multinationals.
The price of oil rose sharply, and is only moderately below the $30 “comfort” level. Certainly raising the terrorist threat level had an impact, as well as concerns over skimpy inventory levels.
[7/23/02] In any case, the price of oil continues to be well-behaved and no true investor should lose any sleep worrying about it.
The price of gold rose moderately sharply.
[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.
[7/6/02] The relative calm continues.
[4/18/03] The concern about the U.S. and Syria has been proven to be a classic tempest in a teapot rather than a true crisis. Syria is far more pragmatic than many people give them credit for.
[4/18/03] North Korea is a thorny problem, but there is no immediate or imminent ‘crisis’. They are a long-term ‘issue’ and require lots of low-key diplomatic wrangling, including involvement of both the Chinese and the Russians (as well as the Japanese). The bottom line: there is nothing here for investors to worry about, although short-term traders will occasionally have field days playing off any positive or negative news.
[7/23/02] Investors should always be prepared to buy any dip caused by panicky reactions by traders to any incidents.
[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.
[5/21/03] It is unclear whether the latest upgrade of the threat advisory level to Level Orange (High) will significantly impact consumer or business spending. It’s very possible, but not a given. Certainly an actual attack in the U.S. would change everything, but despite the upgraded threat level, the actual risk of significant terrorist attacks in the U.S. homeland is rather low. The statement from the Department of Homeland Security states that “The U.S. Intelligence Community believes that Al Qaida has entered an operational period worldwide, and this may include attacks in the United States.”
[7/23/02] Investors should always be prepared to buy any dip caused by panicky reactions by traders to any incidents.
Everyone is waiting to see whether there is sufficient support for the new U.S. proposed UN Security Council resolution that would pave the way to the resumption of Iraqi oil exports. Its prospects do seem promising.
[5/19/03] Although there is still a lot of chaos in Iraq and progress towards stabilization has been slower than hoped, real progress is being made. Although the media seems to have lost a lot of their interest, you can follow the day-to-day news at the U.S. Army CENTCOM web site: www.centcom.mil. It’s refreshing and even amusing to see the U.S. Army doing a better job at news dissemination than the media itself. It’s also refreshing to see the U.S. Army being so forthcoming and factual, with minimal ‘propaganda’.
[4/17/03] Iraq is now safely on a path towards greater stability and less risk to the world. There will certainly be occasional if not frequent bumps and potholes on the road to stability, but net progress will be made with each passing week. We are now in the mopping-up phase and stabilization and restoration of services phase. The new governance phase has started. The reconstruction phase is coming. Oil production may not be significantly restored until June, but it’s coming.
[5/5/03] There is an expectation that the interim Iraqi ‘government’ (U.S.-appointed ‘authority’) will be in place within about four weeks (early June).
[5/7/03] There is also talk that the “nucleus of a temporary Iraq government” could be in place by mid-May.
[4/17/03] The war will be a net positive for the U.S. economy and the global economy. The reconstruction will be a tremendous boon for both the global economy and the U.S. economy in particular.
[4/17/03] The risk of Iraq-inspired terrorist acts in the domestic U.S. is now virtually nil, although there will be ongoing risks to U.S. forces and administrators within Iraq and other countries in the Persian Gulf region for some time to come.
[4/17/03] The bottom line is that investor concerns over the pace of the economic recovery and the state of corporate revenue and earnings growth still drive the market more than all the other non-economic factors. Traders merely use Iraq, et al as excuses for any market fluctuations. There is now little need for true investors to fret at all about Iraq.
Click here for our more extensive commentary on The Iraq Problem.
Click here for our more extensive commentary on Technology.
No activity.
[5/19/03] Check out our book list.
[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.
Forbes columnist Ken Fisher is reminding everyone that “The 3rd year of a US presidential cycle is BEST for stocks!” I don’t fully subscribe to ‘theories’ of historic stock trading patterns, but it does make sense that a president up for re-election would put in extra effort to boost the economy the year before the election year, which is this year. President Bush is certainly expending a lot of effort to push his tax cut package through Congress.
Enron has until June 30 to submit its bankruptcy reorganization plan. Many elements of the plan are already in place, but there is still some amount of squabbling among the creditors. The company says that it is confident of meeting the deadline, but there could be a fair amount of “activity after filing”. There are 90 Enron ‘entities’ in bankruptcy. Since some are more solvent than others, some creditors think they should get a higher rate of return and are strongly resisting any attempts to consolidate the entities, which would then give all creditors the same level of return. It is very possible that the plan may not be approved until December and distributions may not occur for months after that. There are 26,000 claims that have been filed. It is also not clear what may happen with any shareholder suits or SEC investigations, but after the WorldCom settlement, I would presume that something is in the works. Incidentally, Enron is hiring, with their web site listing 15 openings, mostly IT, with 9 posted in May.
No activity.
People will react to the HP quarterly report as well as the analyst comments on the report.
People will also listen intently to Greenspan’s congressional testimony before the Joint Economic Committee this morning on the state of the U.S. economy and future economic policy. People will be looking for a few more clues on the economy, deflation, the dollar, fiscal policy, tax cuts, and interest rates. One thing I am positive of, and that’s that at least two senators or representatives will ask about the dollar and Greenspan will patiently remind them that the Fed does not even comment on foreign exchange rates, although they could ask him to comment on the good and bad effects of a weaker dollar. By agreement, only the Treasury comments on the exchange rate of the dollar.
People will continue to focus on whether the sell-off is over or has more to play out, but I suspect that it has played out.
[5/10/03] This will be one of those moments of truth, where the market is either poised to strike for higher ground or to wobble and collapse. It’s also possible that the market will wobble and retreat a little more before summoning the energy to boldly move forward. It will be interesting to watch.
[5/12/03] People will position themselves for the next wave of corporate quarterly reports due out this week.
[5/5/03] It’s difficult to sense whether people are getting ready to take a significant amount of their money (profits) off the table or whether they will let the rally run for a while longer.
[3/19/03] Once again, don’t be lured into believing that the action in the futures market will indicate how the stock market may close. Traders have their own ‘sense’ of the market, but that doesn’t help much when non-traders are entering and exiting the market or when unexpected ‘events’ or news happen during the day.
[3/19/03] If traders do run the market down in the early going, it is very likely that we’ll see some ‘selling exhaustion’ followed by a bounce.
[3/19/03] The “war bounce” may already be over, or maybe we’ll see a little pause before the real rally kicks in.
[3/12/03] The market will continue to focus on the economic and business outlook regardless of the geopolitical headlines. Geopolitical concerns and short-term ‘technical’ considerations can move the market dramatically on a short-term basis, but such movements are only a modest ‘veneer’ on the overall market.
[4/14/03] With the March quarter ended, companies will be issuing warnings and even actual reports concerning their financial performance in the quarter. It probably won’t be a pretty sight, but the expectations for three to nine months down the road should be much more optimistic. It’s difficult to say what timeframe ‘investors’ will focus on right now, other than the simple fact that different investors will focus on different timeframes with no clear consensus and a lot of daily volatility.
My forecast for today is that Nasdaq will close in the range -30 to +60. Nasdaq came in at -1.68 on day, well below the midpoint of my range of -30 to +60.
[5/6/03] The market continues to be so crazy that it could go up, down, or sideways, but I still believe there is a longer-term upwards bias even if the near-term volatility is all over the map. Always remember that a bull market climbs a wall of worry.
[5/3/03] We now have a tentative bull market on our hands since we’ve finally been able to set a new closing high for the October recovery. I won’t call it a ‘confirmed’ bull market until we close at least 5% above the highest peak (1487.94 + 5% = 1562) of the first three months of the October recovery and stay there for at least two weeks and then set yet another new high after those two weeks.
We’re now 71 points below that November peak+5% target, but we not only have to get there, but stay there. We’re actually in fairly decent shape, despite the decline on Monday.
The Nasdaq October recovery is 153 days old. The October recovery still may or may not completely unravel, but it does seem to be hanging in there tenaciously.
I’ll give the market sixteen more days (I add a day if Nasdaq rises at least 1% and subtract a day if it declines at least 1% and I reset to 15 whenever we set a new closing high) 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). If we break the October Nasdaq low before my timer runs out then clearly we are still in a bear market, otherwise we’re in a trading range or what Charles Dow of Dow Theory fame called “drawing a line”.
The Nasdaq rally on Monday, March 17, was a solid confirmation of the “potential up-leg” that started with the intraday low of 1253.22 on March 12. The “confirmed up-leg” is now 49 days old. Nasdaq is 3 days off its closing peak (1,551.38 on May 15) for the up-leg. The leg is starting to look rather ‘tired’, so we may have to wait a week or two to make sure that it isn’t going to have a relapse and head back under the November peak.
Although Nasdaq has managed to close above the November closing peak for 13 consecutive days, it still has not managed to solidly, and convincingly break out above that range. We’ve dropped the first shoe of the ‘moment of truth’ for the October recovery, so now we must patiently wait for the other shoe to drop.
We closed 3 points above the November closing peak, so it is important that we bounce cleanly from here, although it would be okay if we fell another 10 points and then bounced. This would be a good test of the strength of the ‘support’ provided by the November closing peak. Unfortunately, some ‘technical’ traders might see this chart as suggesting that we are setting up for a classic ‘head and shoulders top’ to mark the end of the recent run-up.
[5/20/03] This is another one of those dicey situations where you really can’t tell if the market has ‘topped’ or is simple doing some serious consolidation. Technical traders can read their charts and act according to their rules, but ultimately the question is whether we will see a sufficient level of money flow into mutual funds to keep the run-up alive.
[5/16/03] For historical reference, Nasdaq closed at 1554.88 (via a 40-point decline) on June 7, 1553.29 (via a 48-point gain) on June 17, 1542.77 on June 18, and 1496.83 on June 19.
[5/6/03] There are plenty of people who think the market has rallied “too far, too fast”, that the market is ‘overbought’, that stocks are ‘overvalued’, or that prices anticipate more improvement in earnings than are likely over the next two or three quarters or even the entire coming year. But since many of these people weren’t participating (as holders) in the current rally anyway, their opinions are simply noise. The real question is whether current stock holders now share those bearish views, and whether potential buyers buy into that bearish sentiment as well. Fortunately, many participants are simply momentum traders anyway, and will jump in whenever it seems that short-term bearish sentiment peters out (as it has many times since March 12).
[5/3/03] Now that we have hit a new closing high for the October recovery, we’re right at that critical, make-or-break juncture where either we sustain the new peak high for the next few weeks or we run the risk that the ‘recovery’ reverts to being a trading range. But it doesn’t look likely that we will go back into a bear market with a new low.
[5/5/03] With such a strong run-up in recent weeks, it is only natural to see some sort of dramatic correction, some profit-taking. The problem is that nobody knows when or how deep the inevitable correction will be. The other problem is that it’s not easy to tell the difference between a correction and the start of a new bear downtrend. The result is that there will be a lot of commotion, hand-wringing, and fevered commentary when the correction does take place. The key defense is to focus on the prospects for the economy and corporate revenues and profits six to nine months out. The stock market usually acts as a barometer, predicting future economic activity well in advance of actual evidence of such activity.
[4/30/03] There is an old Wall Street adage – Sell in May and go away – which posits that ‘historically’, investors have done better by selling their stocks in May and buying them back in November. In other words, the months from May through October are supposedly a ‘bad’ time to be in the market. Ned Davis Research is alleged to have said that their research indicates the optimal ‘bad’ period (based on history) lasts from the sixth trading day of June to the fifth to last trading day of October. I don’t put much faith in this kind of folklore, but some people do and to some extent that could make it a self-fulfilling prophesy.
[4/25/03] Nasdaq has now closed above the January peak close of 1461.01 on January 14. Note that the January 14 peak close was on lower volume and followed a day on which Nasdaq had risen above that peak close but then fallen off for a loss for the day. That was clear ‘topping’ action back then. The January run was then broken the following day due to weak capex guidance from Intel. The current up-leg is in much better shape.
[4/25/03] The peak close of the October rally was 1487.94 on November 27 (day before Thanksgiving). Nasdaq opened higher on November 29, but then closed moderately lower. Nasdaq opened up very strongly on December 2, rising well above 1500, but gave up most of the gains and closed only modestly higher for the day and still below the November 27 peak close. That was also very clearly ‘topping’ action unlike what we are seeing now.
[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.
[3/12/03] The incredible level of disbelief in the current Nasdaq recovery strongly suggests that a contrarian bullish view may be appropriate. It’s the exact flip-side of where we were in August of 2000 when people refused to believe that the bull market was over and that a bear market had already taken root for a number of months.
[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.
[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.
[4/1/03] I’ll refrain from forecasting the Nasdaq level for 2003 until we get some sense of how Q2 is shaping up. Back in December, I had forecast for Nasdaq in 2003: 2800 at end of year, 1800 at mid-year, 1600 at end of first quarter. That presumed that the majority of tech companies return to solid revenue and earnings growth. So far we are not seeing any significant improvement. Once tech starts moving up, there will be a truly mind-boggling number of short positions to cover. The majority of mutual funds that want to stay in business and attract new funds will have no choice but to head back to techland.
[5/10/03] A survey by the Blue Chip Economic Indicators newsletter has pegged real 2003 GDP growth at 2.3% (down from 2.4% in April), with 2.1% in Q2 (down from 2.2%), 3.5% in Q3 (down from 3.6%), and 3.7% in Q4 (down from 3.8%).
[5/10/03] The monthly survey of economists by The Economist shows an expectation for real GDP growth of 2.2% in 2003 (low of 1.3 to 2.8) – unchanged from last month. Actually, the range last month was 1.7 to 2.8, so I suspect that they goofed and the average for this month should be 2.05%, not 2.2%. There was no hint or suggestion of deflation for the U.S. in this survey, with respondents averaging a 2.3% gain in consumer prices in 2003 – unchanged from last month. For 2004, the expectation is GDP growth of 3.2% (down from 3.3%), the second best in the major developed countries of the world, with Australia at 3.5% and Canada also at 3.2%. Inflation in 2004 is forecast at 1.7% - down from 1.8% last month.
[5/12/03] I forecast real GDP growth of 2% in Q2, 2.5% in Q3, 2.75% in Q4, 3% in Q1 2004, and 3.25% in Q2 2004. My expectation is that this forecast will be low. I’m trying to avoid the “Oh, don’t worry, the second half will be very strong” trap that we’ve been suffering from for several years, where sentiment is damaged because too many people are actually depressed by the wild over-optimism for “the second half”. I also expect the process to be very ‘lumpy’, with some of those quarters being quite weak and some much stronger (much as Q3 2002 was strong). The key issue is whether productivity will grow at a slow enough pace that payroll employment can also begin to grow modestly. This is very possible since a great many companies have trimmed their employment about as dramatically as they dare, so that even modest economic growth will require at least a meager expansion of employment. My other conjecture is that the pace of bankruptcies has slowed while the pace of bankruptcy reorganizations is picking up, so that more companies that had been a drag on the economy will begin to make a positive contribution after shedding so much debt burden and so many ‘excess’ employees. That said, the recovery process will probably continue to be a somewhat slow, gradual process over the coming year until the past ‘over-investment’ is mostly gone.
[5/10/03] I’ve decreased my estimate of the probability of a double-dip recession to 15% (from 20%) due mostly to the fact that the economy seems to be holding up relatively well at a time when the double-dip should have taken hold. Reasonable performance of the ECRI Weekly Leading Index also guides my view. I still think a double-dip is unlikely, but I do want to quantify my beliefs as well as risks.
[5/7/03] What about the post-war economic boom we were supposed to get? It’s coming! We’re in the early stages and it will take six months to a year for it to play out. We won’t see the boom begin to show up in the economic reports until June or even July. Some people had mistakenly thought that there would be a sudden (and short) ‘pop’ to the economy after the war, but that was a silly idea to begin with. The prospect for war with Iraq ate away at the economy over the entire last year, accelerating last fall and into the first quarter of 2003. It will certainly take more than a few weeks to gradually unwind all that negativity. Companies pulled in their horns in anticipation of the war, and now they will only gradually become more optimistic in their planning.
[5/5/03] The decline of the dollar relative to the yen and euro is a distinct positive in terms of economic stimulus for U.S. companies that export to those areas, including technology companies. U.S. multinational companies get a financial boost when they translate foreign currency back to U.S. dollars.
[5/5/03] A number of commentators are opining that companies have been boosting earnings by cutting costs rather than growing revenues and that this process can’t continue much longer. There is a lot of truth to this, but it also highlights key points about where we’ve been over the past year and where we’re going. One key truth in all economies: one company’s expense is another company’s revenue. Every time a company cuts its expenses, that means less revenue for a number of other companies (as well as less income for workers) and those venders are in turn then under pressure to cut their costs further, and so on. It’s a vicious cycle, and it was probably the main restraining influence on business spending over the past couple of years. But as the critics point out, that cost-cutting process may be winding down, so that means than the main downwards pressure on business spending may be winding down. With this downwards pressure removed (or at least somewhat diminished), the upwards pressures (low interest rates, aging equipment needing replacement or upgrade, higher government spending, needs for better security, need to attract more customers and stimulate more customer spending) will begin to take over. The timing is uncertain and it is certainly possible that the cynics are wrong about cost-cutting, but it does seem that this trend will soon enough work to our favor.
[5/2/03] The economic data available to date does not give us a true picture as to how economic activity will be shaping up over the next month or two. We are still too close to the war (and the long run-up to the war) to get even a vague view of post-war economic activity.
[4/16/03] People are willing to believe that the war put a crimp in spending in March and the first half of April, but that business should pick up from here.
[5/15/03] The potential economic impact of the SARS ‘epidemic’ on the U.S. is unclear, but certainly has not been significant in the U.S. and is unlikely to be so. The media and cynical analysts like to play up its ‘potential’, but its practical potential is most likely far less than its hypothetical, theoretical potential. If it hasn’t caused a significant impact by now, then it is unlikely to do so in the future. Although the ‘epidemic’ may continue for another month or two, it peaked at the end of April (although Taiwan is still experiencing a rise in cases) and public awareness and health precautions will further curtail the ‘epidemic’. Clearly there are some economic sectors that are affected, such as travel and tourism, but even in the best of economies there are always some factors affecting some sectors which the overall economy moves on.
[4/9/03] The Economic Cycle Research Institute (ECRI) notes that despite current anxiety over the sluggish pace of the recovery, the economy has come out of the 2001 recession in much better shape than after the 1990-91 recession. After 15 months, unemployment is unchanged at 5.8% and GDP has grown by 2.9%, whereas after the 1990-91 recession unemployment had rise from 6.8% to 7.8% and GDP had risen by only 2.3%.
[3/17/03] The elevated level of oil prices is an implicit ‘tax’ on the economy, but the effect is not easy to measure because energy price changes tend to be volatile and temporary and different segments of the economy respond at different paces to oil price changes. The drag on the economy of $35-$40 oil may be somewhere in the range of 0.25 to 0.75% of GDP. One of the difficulties with estimating the impact is that the U.S. economy has become less energy dependent over the years and depressed conditions in sectors such as air travel can further reduce the direct net impact of the oil ‘tax’.
[3/17/03] I disagree with those who say that Iraq is “holding back the economy”. Iraq is another one of these implicit ‘taxes’, but I would conjecture that the net drag (not counting higher oil prices which are also affected by situations like Venezuela) on GDP growth is significantly less than 0.5%, maybe 0.25%.
[3/17/03] The impact of state government “budgetary problems” is grossly overrated. State government budgets and spending do not drive the economy, but are driven by the economy. Their contribution to the economy is mere “icing on the cake”.
[2/1/03] The ‘stealth recovery’ continues. Economic activity will continue to gradually zigzag upwards for quite some time. Overall demand is increasing, but we are simultaneously continuing the restructuring of an unprecedented number of industries, everything from telecom, airlines, cars, technology, national defense, security, federal government, state, and local governments, and personal balance sheets. Bankruptcies and layoffs will continue for some time, even as overall growth of economic activity increases. This massive restructuring parallels the build-up of the so-called ‘bubble’ from 1995-2000, and is the part that is actually good for the long-term health of the economy compared to all the excesses that built up during the ‘bubble’. As painful as such restructuring can seem, it is precisely the brutal efficiency of this process that sets America apart from all other economies in the world. Continual restructuring is the hallmark of the American economy. The true nature of the ‘bubble’ was that a confluence of forces temporarily boosted demand so that needed incremental restructuring was delayed and forced to occur in a much more compressed timeframe. Far from being negative economic forces, geopolitical forces such as the ‘war’ on terrorism, increased security, and Iraq are all boosting overall demand in a way that actually enables an acceleration of more of the overall restructuring which will continue to wind down. There will actually be an increase in consolidation of companies over the coming year, but that won’t be a drag on the overall economy and will actually result in an improvement in business spending. So-called ‘journalists’ will continue to highlight every possible negative angle on even the most minor scandals or perceived scandals (because it is their ‘job’ – to attract viewer and reader ‘interest’) even as the net, overall economic effect is positive. That’s why I feel the need to label this the ‘stealth recovery’ – the recovery that gets no respect. We could be in ‘stealth’ mode for the rest of the year.
[3/27/03] There is no good reason to assume that war with Iraq will be drawn-out and expensive. Sure, it is theoretically possible, but it is not the likely outcome. Likewise, there is no good reason to assume that the post-war reconstruction of Iraq will be a huge expense for the U.S. or even be a drag on the global economy. Sure, it is theoretically possible that things could get out of control, but that is not the likely outcome. I’m comfortable with an estimate of $75 billion for the war and then $20 billion a year for five years for reconstruction. Much of this money will flow to U.S. firms and actually have a ‘multiplier effect’ through the U.S. economy. Some of that money will flow back to the U.S. Treasury in tax payments. In truth, any expenditures on war, preparations for war, and recovery from war are always going to be a net economic gain. Defense and security expenditures do shift economic resources from other parts of the economy, but that’s exactly what you want in an economy that is still suffering from investment “overhang”, with lots of money floating around to chase dubious “investments” such as hedge funds, shorting of stocks, currency futures, gold, oil futures, et al. The investment opportunities in Iraq could be huge. And if war does not transpire, then the expense of preparing for possible war will still have filtered back into the economy as a net positive. Sure, there is much talk that “geopolitical uncertainty” is holding back business investment and consumer, but there is no evidence to support that. Businesses can easily blame Iraq, et al, but any hold-up in business spending is much more likely to simply be the result of the sluggish economy and slow pick-up in corporate profits.
[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.
[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.
[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.
[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.
[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.
[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.
[3/8/03] A panel of professional forecasters of the National Association for Business Economics (NABE) estimates that the real GDP growth rate in 2003 will be 2.7% (down from “approaching 3%” in their November survey), but the growth rate is expected to exceed 3.5% in the second half of the year. The survey was taken from January 27th to February 4th.
[4/18/03] As of April 10, the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) is still uncertain whether the recession truly ended or whether the end was merely temporary with a second dip to follow. In summary, “According to the most recent data, the U.S. economy continues to experience growth in output and income without growth in employment.” The committee does not use GDP to define recessions, but a combination of industrial production, employment, real income, and wholesale sales. Output has recovered (somewhat), but employment is still depressed: “Because of the behavior of employment, it remains our conclusion that additional time is needed to interpret the movements of the economy last year and this year.”
[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 are 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.
[4/17/02] Our Tech Stock ‘Safe’ Signal is still stuck at 0.00 since none of the big tech companies is even hinting that they see a sense of significant improvement in the next few months. There does seem to be some sense of stabilization, but not even a hint of a dependable ramp up in revenues and earnings.
[4/17/03] 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 Q2 forecasts, and virtually nobody is beating the drum for a great Q2 or Q3. And nobody has any real sense of visibility into Q4. 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.
[9/14/02] For our complete list of resources, click here.
[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: August 31, 2003 06:07:42 PM -0400
Copyright © 2003 John W. Krupansky d/b/a Base Technology