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(Will be updated for Monday)
Nasdaq trading on Friday seemed driven more by technical and sentiment considerations than economic and business fundamentals. Despite decent pre-market news, Nasdaq was in the red by 10:30 a.m. The decline seemed to have been driven by Nasdaq’s inability to break out through the 1710 level. The good news is that Nasdaq found solid support at the 1685 level, and that seemed to kick off a strong wave of (technically-driven) buying that took Nasdaq up on almost a straight line right into the close, rising 45 points off the morning low which was reached a few minutes before 11:00 a.m.
The mysterious ‘cliff event’ on Thursday afternoon seems to have been a one-shot event that the market decided to disregard by 11:00 a.m.
Some of the sharp gain on Friday may simply have been short covering by people who had used the weakness on Thursday as an opportunity to bet that the market was on the verge of a collapse.
The good news is that we were able to reclaim the Nasdaq 1710 and 1725 levels by a decent margin. We even reclaimed the 1730 level, but only barely.
The bad news is that we still don’t have positive confirmation that the recent sell-off is over. The point gain on Friday was good enough, but volume was way too low to be considered as a confirmation move.
Volume was light (1.58 billion shares). Breadth was moderately positive, with 1.41 gainers for each loser. The light volume and only moderate breadth leads us to conclude that the rally on Friday was not as strong as the point gain would lead you to believe.
According to Thomson Financial I-Watch, institutional investors were net sellers of Nortel (NT), EMC (EMC), HP (HPQ), Cisco (CSCO), and Microsoft (MSFT), but net buyers of Lucent (LU), Sun (SUNW), JDS Uniphase (JDSU), and Western Digital (WDC). Institutions were doing a combination of buying the early dip and selling into the later rally. They were also doing a fair amount of rotation between stocks. In any case, there is no hint of any dramatic decline looming in the near-term.
The Durable Goods report for June registered a moderately sharp gain in both new orders and shipments, a slight gain in unfilled orders, and a moderate decline in inventories. This was a positive report. Both new orders and shipments for nondefense capital goods rose moderately sharply. Ex aircraft, shipments for nondefense capital goods rose moderately sharply, but new orders rose only moderately. Shipments for computers and related products rose sharply, but new orders rose only moderately. Shipments for communications equipment rose sharply, but new orders declined very sharply. Please note that there tends to be a lot of monthly volatility for orders and shipments, primarily since few customers buy durable goods on a nice, smooth monthly cycle.
The New Home Sales report for June registered a moderately sharp gain. This was a positive report.
The Existing Home Sales report for June registered a moderate decline, but was still moderately above the level in April. This was a slightly negative report, but sales are still quite high and the unadjusted sales did actually rise.
The Economic Cycle Research Institute (ECRI) Weekly Leading Index (WLI) registered a moderately sharp rise, and its six-month smoothed growth rate also rose sharply to another new 52-week high – higher than even its level in June 1991 (or any time since then). This was a positive report. The developing trend is getting stronger, although it is still too soon to take its continuance for granted. We’ve seen positive trends in the past, only to see them fizzle within a month, but the current up-trend started in mid-March, so it is starting to look like a sustainable trend. I would wait until September before calling it a sustainable trend. Economist Paul Krugman wrote in a New York Times Op-Ed piece on Friday that “There is very little evidence in the data for a strong recovery ready to break out.” The ECRI WLI is the data that Krugman (and everybody else, for that matter) should be looking at.
From Thursday: The Mass Layoffs report for June registered a modest decline in the number of layoff events (50 people at one location) and a moderate decline in the total number of people laid off. This was a positive report. There were more layoff events than in April, but fewer people were laid off than in April.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, fell by 2.54% on Friday to 19.94, which is slightly below the top end of the low anxiety/moderate complacency zone (15 to 20). People were quite relieved by the market’s bounce after Thursday’s mysterious decline. VIX actually jumped up to 21.12 at the open and peaked at 21.29 as the market bottomed shortly before 11:00 a.m. VIX trailed off only modestly until shortly after 1:00 p.m. when it dropped more sharply. VIX was relatively flat between 1:30 p.m. and 3:00 p.m., but then dropped more sharply into the close. VIX did not fall below 20.0 until about 3:30 p.m. VIX has not closed below 20.0 since March/April 2002. I’m sure there are plenty of pessimists who view such a ‘low’ level of VIX to be a contrarian bearish indicator, but the low level may simply reflect the elimination of numerous risk factors than mindless complacency.
The low-point for VIX on Friday was 19.86, which was modestly above the 19.75 level that I suspected might have been a ‘sell’ trigger on Thursday afternoon.
[5/28/03] The bottom line is that people are truly clueless about where the market might head next, and the level of VIX is not giving much guidance. Sure, VIX has fallen dramatically over the past two months and some people see that as a bearish contrarian indicator, but VIX has only fallen to a level which indicates that a lot of geopolitical uncertainty is no longer priced into the market. Some people claim that VIX is now below its “long-term average”, but that’s not really true unless you include the many panic spikes in the ‘average’ and does not subtract off the ‘premium’ that has built up in VIX since 1996.
The Nasdaq-100 After Hours Indicator had a mixed tone for the Friday evening session, closing down 1.41 points. People felt the rally on Friday was a little bit excessive.
[7/15/03] The fed funds futures market suggests that the Fed will leave rates unchanged for the rest of the year, but with a slight bias towards another cut.
[7/15/03] The Fed will probably leave the Fed funds rate unchanged through the rest of the year, unless the economy changes dramatically one way or the other.
[7/25/03] Fed funds futures suggest no chance of a rate change by the August FOMC meeting. In other words, futures indicate that the Fed will not change rates by the August 12 FOMC, or for the rest of the year.
The dollar fell modestly against the yen and fell moderately sharply against the euro.
[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 fell slightly, but is still very modestly above the $30 “comfort” level. There is still plenty of confusion about how Iraqi oil production will be shaping up. And there is still concern about low crude 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 modestly. There is concern that a possible strike by miners may crimp production.
[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.
[6/19/03] President Bush has indicated that it is unacceptable for Iran to develop nuclear weapons. The U.S. will continue to put pressure on Iran, but the emphasis will be on verbal and diplomatic pressure, with little chance of any military intervention.
[6/7/03] I don’t have a strong opinion on how the so-called ‘roadmap’ for peace in Palestine will play out. It will certainly be a rocky road. Also, ultimately, there will be no true, lasting peace until Saudi Arabia, Syria, and Iran recognize Israel and cease supporting terrorist operations in the region.
[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.
[6/16/03] The real bottom line is that the average American is far more likely to die or be injured or to have their life severely disrupted by accidents, bad weather, bad driving habits, natural disease, poor nutrition, lack of proper medical care, faulty design or construction, or crime, stupidity, or malice from their fellow, non-terrorist Americans than by anything any member of any international terrorist group might do. There are probably far more home-grown serial killers and nuts out there than terrorist cells. Sure, law enforcement and security professionals do need to remain vigilant and continue to beef up their efforts, but the ‘threat’ to the average American, even in New York and Washington, is simply not high enough for citizens to lose any sleep over or to adjust their lifestyles in any way. The media will continue to beat their drums, but citizens should see those efforts for what they are, simply a transparent effort to enhance the revenues of the media enterprises by attempting to cause unnecessary alarm so that people will read or watch more of the ‘coverage’.
[7/23/02] Investors should always be prepared to buy any dip caused by panicky reactions by traders to any incidents.
[7/23/03] It is not yet clear how much impact there will be from the elimination of Saddam Hussein’s two sons Uday and Qusay. There could well be a dramatic reduction of the attacks against U.S. troops, or maybe not. Time will tell.
[7/21/03] The ongoing saga of the specifics of intelligence on Iraq before the war will drag on a bit further, but will eventually dissipate. Unfortunately, the White House has done a poor job of orchestrating their responses to the allegations, effectively pouring gasoline on what was originally a small fire. The intelligence dispute is mostly partisan politics and doesn’t change the simple facts that we are there in Iraq now and need to focus on making forward progress on post-Saddam Iraq.
[6/26/03] Radio Free Europe/Radio Liberty (RFE/RL) posts its fairly extensive Post-Saddam Iraq report every day. Click here to read it.
[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’.
[6/28/03] The official Pentagon web site, www.DefenseLink.mil, also contains information about operations in Iraq (as well as everywhere else), but of course it does have the, uh, political perspective of the administration. Still, the stories, news releases, and pictures are at least somewhat informative, including transcripts of press briefings and interviews.
[7/19/03] Click here for the infamous Google Weapons of Mass Destruction ‘error’ page. It is rather tasteless, but worth reading anyway.
[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.
[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.
[6/23/03] 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.
[7/16/03] Jobs: There are still too many companies announcing job cuts. The economy and corporate profits can and will grow even in the face of additional job cuts, but employment at major companies will continue to lag the recovery until GDP growth accelerates significantly.
[7/2/03] Back to School Build: It’s about time for people to start chattering about how they think the PC sector will be ramping up for purchasing of computers for the school season in the fall. Not a peep yet.
[7/22/03] Convertible Craze: Note that convertible offerings in general are not a good sign (for that particular stock) and can cause shorting of the stock. Also, the conversion ‘feature’ dilutes earnings.
[7/2/03] Research ‘Calls’: Note that the primary motivation for research calls is for the ‘calling’ firm to profit from commissions and transaction revenue. That clear conflict of interest makes it very unlikely that a research ‘call’ would be a sound basis for an investment decision (buy, sell, or hold), although traders do like the volatility incited by these ‘calls’. At best, most research (from brokerage and trading service firms) can be simply regarded as marketing literature. The scary thing is that the brochures for cars and stereos and time-share condos are much more likely to be accurate and of value than most brokerage research reports for stocks.
[7/15/03] SARS Update: The WHO has ceased posting of daily SARS case updates as of July 14th. SARS will continue to linger as a health issue for another week or two, but will most likely become a mere footnote by the end of July. Corporate quarterly reports may continue to ‘feature’ SARS as a convenient excuse for any performance shortfalls in Asia until the last company has reported results for a quarter that includes June (that would be the August quarter, reported in September). It is more likely that most quarterly reports will be free of SARS once we get the last report for a quarter that included May (that would be the July quarter, reported in August).
[6/25/03] I have suspended my dollar-cost averaging investment plan since my exposure to the market is now about where I want it to be.
People are still quite perplexed as to what direction the market will head next.
The low level of the VIX Volatility Index is causing some people to be more cautious about stocks, but not everybody pays attention to VIX.
[7/21/03] Although the quarterly reporting ‘blizzard’ continues, the market reaction will tend to be more muted. With the biggest of the big tech dogs out of the way, it’s difficult to believe that we will get any dramatic surprises that would change the overall market perception of Q2 and the Q3 outlook (“mixed”). It may be time for people to start focusing on the smaller wave of reports that will come out in August for companies whose Q2 includes July as its final month. That will be the first real data point for business performance in the infamous “second half”.
[6/5/03] Despite the strength of the recent rally, people remain quite skittish of whether the gains will stick. It will simply take a little more time for people to forget the past and focus on the fact that they are missing out on the train roaring by.
[6/3/03] It would be perfectly reasonable for the market to take a little breather here and do a little consolidation. But, the market rarely is anything close to ‘reasonable’. Nasdaq could consolidate a little, or rally a little, or rally a lot, or correct a little, or correct a lot, or a combination of any or all of the above. That said, the market does seem like it would like to run up a little further before any serious consolidation.
[5/29/03] Traders may look at the market and say that it’s ‘overbought’ on a short-term technical basis and then decide whether to buy or sell short to try to nudge the market higher or lower, but the ultimate determinant of market direction is simply supply and demand of buyers and sellers. The market will continue to rally as long as people keeping dribbling money into the market, and will correct as soon as money starts flowing heavily out of the market.
[7/14/03] 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.
[6/24/03] It’s difficult to sense whether people will be taking a lot more of their money (profits) off the table or whether they will let the rally resume.
[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.
My forecast for Monday is that Nasdaq will close in the range -35 to +65. Nasdaq came in at +29 on Friday, moderately above the midpoint of my range of -35 to +65.
[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.
We now have a confirmed bull market (for Nasdaq) as of the close on June 16, 2003. The advance started on October 9, 2002 and has run for 199 days.
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 92 days old. Nasdaq is 9 days off its closing peak (1,754.82 on July 14 – previous high was 1,747.46 on July 9) for the up-leg and for the overall post-October bull market. That closing peak is also the current 52-week closing high. Nasdaq needs to set a new closing peak within a week or so, and only 25 points are needed to do it.
We’re in the process of waiting to recover from the mini-correction that began at the intraday high of approximately 1,774 on July 14. Call this a tentative recovery. We did get a modest bounce off the intra-day low of 1,675.18 on Monday, July 21. Call that new low Day 1. It doesn’t matter what happens on Days 2 and 3, except that we not set a new intra-day low. We did get a nice bounce on Tuesday for Day 2 and we did get an ‘okay’ bounce for Day 3 on Wednesday. On Days 4-10 we will look for a 1% gain on higher volume than the previous day as confirmation that we really have started to recover from the mini-correction. We had a moderate decline on Thursday, Day 4, but that’s okay, for now. It’s okay if Nasdaq sees some declines during that period, as long as a new intra-day low is not set below that of Day 1. Friday was Day 5 and looked quite promising with a 1.7% gain, but volume was way too light to consider it to be a confirmation rally. The maximum decline off the June 14 peak was 99 points on Monday (93 points to the close), which is still well within my estimate of the “froth level” for Nasdaq (the amount of short-term trading that can occur without indicating that a further dramatic decline due to ‘real’ selling could be in store.)
Nasdaq closed 491 points (40%) above its level a year ago. Nasdaq has closed more than 400 points above the year-ago level for 4 days (consecutively) so far. Nasdaq has closed more than 300 points above the year-ago level for 15 days (14 days consecutively) so far. Nasdaq has closed more than 200 points above the year-ago level for 19 days (18 days consecutively) so far. Nasdaq has closed more than 100 points above the year-ago level for 32 consecutive days so far. There is no cosmic economic or financial significance to these statistics, but it could have a dramatic impact on market psychology. After 3 years of dispiriting bear market agony, just the thought of setting a new 52-week closing high seems novel and quite exhilarating and could cause some people to believe that maybe now the market finally is “back on its feet.” Of course, many people will want to wait until that novelty actually wears off before putting a lot more faith in the market. Although there is no truly rigorous definition of a bull market, a great operational definition would be: A bull market is a period of months when the market is setting new 52-week closing highs on a fairly regular basis (say, at least once a month). For historical reference the closing levels a year ago were: 1950.42 on 12/31/01, 1979.25 on 1/2/02, 2044.27 on 1/3, 2059.38 on 1/4, 2037.11 on 1/7, 2044.89 on 1/9, 2047.24 on 1/10, 2022.46 on 1/13, 1990.74 on 1/14, 2000.91 on 1/15, 1944.44 on 1/16, 1985.82 on 1/17, 1930.34 on 1/18, 1882.53 on 1/22, 1922.38 on 1/25, 1942.58 on 1/26, 1937.70 on 1/27, 1943.91 on 1/28, 1892.99 on 1/29, 1913.44 on 1/30, 1934.03 on 1/31, 1911.25 on 2/1, 1855.53 on 2/4, 1838.52 on 2/5, 1812.71 on 2/6, 1782.10 on 2/7, 1818.88 on 2/8, 1846.66 on 2/11, 1834.21 on 2/12, 1859.16 on 2/13, 1843.37 on 2/14, 1805.19 on 2/15, 1750.61 on 2/19, 1775.59 on 2/20, 1716.24 on 2/21, 1724.54 on 2/22, 1769.88 on 2/25, 1766.86 on 2/26, 1751.88 on 2/27, 1731.52 on 2/28, 1802.75 on 3/1, 1859.32 on 3/4, 1866.30 on 3/5, 1890.39 on 3/6, 1881.63 on 3/7, 1929.67 on 3/8, 1929.49 on 3/11, 1897.12 on 3/12, 1862.03 on 3/13, 1854.14 on 3/14, 1868.30 on 3/15, 1877.06 on 3/18, 1880.87 on 3/19, 1832.87 on 3/20, 1868.83 on 3/21, 1851.39 on 3/22, 1812.49 on 3/25, 1824.17 on 3/26, 1826.75 on 3/27, 1845.36 on 3/28, 1862.62 on 4/1, 1804.40 on 4/2, 1784.35 on 4/3, 1789.75 on 4/4, 1770.03 on 4/5, 1785.87 on 4/8, 1742.57 on 4/9, 1767.07 on 4/10, 1725.25 on 4/11, 1756.19 on 4/12, 1753.78 on 4/15, 1816.79 on 4/16, 1810.67 on 4/17, 1802.43 on 4/18, 1796.83 on 4/19, 1758.68 on 4/22, 1730.29 on 4/23, 1713.34 on 4/24, 1713.70 on 4/25, 1663.89 on 4/26, 1656.93 on 4/29, 1688.23 on 4/30, 1677.53 on 5/1, 1644.86 on 5/2, 1613.03 on 5/3, 1578.48 on 5/6, 1573.82 on 5/7, 1696.29 on 5/8, 1650.48 on 5/9, 1600.85 on 5/10, 1652.54 on 5/13, 1719.06 on 5/14, 1725.56 on 5/15, 1730.44 on 5/16, 1741.39 on 5/17, 1701.59 on 5/20, 1664.19 on 5/21, 1673.45 on 5/22, 1697.63 on 5/23, 1661.49 on 5/24, 1652.17 on 5/28, 1624.39 on 5/29, 1631.91 on 5/30, 1615.66 on 5/31, 1562.56 on 6/3, 1578.12 on 6/4, 1595.25 on 6/5, 1554.88 on 6/6, 1535.48 on 6/7, 1530.69 on 6/10, 1497.18 on 6/11, 1519.12 on 6/12, 1496.89 on 6/13, 1504.74 on 6/14, 1553.29 on 6/17, 1542.77 on 6/18, 1496.83 on 6/19, 1464.75 on 6/20, 1440.93 on 6/21, 1460.34 on 6/24, 1423.99 on 6/25, 1,429.33 on 6/26, 1459.20 on 6/27, 1464.95 on 6/28, 1403.76 on 7/1, 1357.85 on 7/2, 1380.17 on 7/3, 1448.36 on 7/5, 1405.61 on 7/8, 1381.13 on 7/9, 1346.01 on 7/10, 1374.43 on 7/11, 1373.55 on 7/12, 1382.49 on 7/15, 1375.26 on 7/16, 1397.25 on 7/17, 1356.95 on 7/18, 1319.07 on 7/19, 1282.65 on 7/22, 1229.05 on 7/23, 1290.23 on 7/24, 1240.08 on 7/25, 1262.12 on 7/26, 1335.25 on 7/29, 1344.19 on 7/30, 1328.27 on 7/31, 1280.00 on 8/1.
We managed to reclaim the Nasdaq 1705, 1710, 1715, 1720, 1725, and even the 1730 levels. We really need to keep the 1725 level and reclaim the Nasdaq 1750 level ASAP and even take out the 1775 level within two weeks in order to maintain positive market sentiment. We may even have to take out the 1800 level to restore a sense of confidence in this new bull market.
[7/14/03] Different market participants will have different behavior throughout the quarterly reporting season. One of the problems is that there is no clear definition of what constitutes a ‘good’ report. Everybody has their own expectations. Some people insist on beating expectations by a wide margin. Some people will be tolerant of even a moderate miss and simply want to make sure there is no truly horrendous news. And now we are starting to have whisper numbers which can be well beyond consensus expectations. Some people buy or short a stock ahead of a report based on their expectations and then reverse their position when the report comes out (or maybe shortly before the report comes out). This is classic “buy the rumor, sell the fact” behavior. Some traders will buy or short the stock after the report based on the degree of surprise of the report. Some people will buy or sell the stock after the initial market reaction to the report based on the extent of an overreaction by the market. Some people will buy or sell or short based in part on how far the stock has advanced before the report. Some people will buy after the report in relief that the uncertainty of the report has been eliminated. One group of people could go one way based on earnings, another group another way based on revenues, another group could go its own direction based on the outlook, and yet another group on its own direction based on the initial market reaction (or wait a few days for the dust to settle first). The overall market reaction is the sum of all of these individual behaviors, so anything goes. Another factor to keep in mind is that there are traders who take a position (long or short) for the earnings season as a whole, and will close their positions when the bulk of the important reports have come out or incrementally take some profits as the season progresses or reverse their positions as the market goes against them. Sometimes people can be dead-on right about how the reports will come in and dead-wrong about the market reaction (and vice versa). Then we have ongoing mutual fund money flows which will cause buying or selling (based more on fundamentals and outlook) based primarily on when the money comes in (or needs to flow out for redemptions) and independent of other events. We also do have at least a modest amount of activity by the retail investor, although clearly well below the levels we saw in 1998-2000. World and business events can also move the market on any given day, but won’t affect things like mutual fund money flows as much. Another big factor to keep in mind is that there is probably a huge amount of cash sitting on the sidelines waiting for the uncertainty of Q2 to be eliminated. The net market action on any given day will be the sum of all curves and will ebb and flow based on the sum of the various forces on that day. Mutual fund flows can be very lumpy and lead to real strength on one day and then weakness on the next. About the only thing we can say with absolute certainty is that there will be a lot of volatility and that different camps will rule on different days.
[7/14/03] My expectations are that quarterly results will be somewhat mixed (relative to consensus expectations) since the economy is still struggling to find its legs. Some companies will do quite well, possibly simply because they are able to steal market share from the competition. Other companies will do quite poorly due to having their market share stolen from them by the competition. Some companies will have met or beaten their number though extraordinary marketing and sales effort. Other companies will do poorly and complain that “customers are delaying and deferring purchase decisions”. Some companies will meet or beat expectations despite revenue shortfalls by cutting costs. Some companies will do so-so or have shortfalls for Q2, but announce a much more positive outlook for Q3. Some companies will do better than expected for Q2, but announce a more negative outlook for Q3. A few companies will report both great results and a great outlook, but even then the question will be whether the results and outlook are above the whisper numbers and whether there are really more people lined up wanting to get into their stock after the recent run-up. I don’t expect any truly horrible news from any of the big techs, but I do expect that a fair number of them will have to fall back to simply saying that they are “seeing a hint of a pick-up” coupled with “visibility is still quite limited”.
[7/14/03] Clearly the market has risen on expectations of some good news. What isn’t clear is how much of the market advance was due solely to expectations for the Q2 quarterly reporting season versus simply expectations for a better second half or simply a belief that the bear market is finally over. Even if a lot of traders bail out of the market as each report gets ticked off, there may be just as much money ready to buy any dips that the traders create, plus money which has been simply waiting for the uncertainty over Q2 to be removed.
[7/14/03] My belief is that there is probably something on the order of 50 to 125 points of “froth” on the market (Nasdaq). That means if there was absolutely no news for two weeks, the market would go up or down as much as 50 to 125 points to return to equilibrium. In other words short-term traders are adding or subtracting as much as 50 to 125 points based on short-term speculation. This means that we should not be surprised if the market suddenly jumps or declines by 50 or even 125 points over a couple of days (although a 125-point jump would be likely only after a sharp decline that burned off all the froth and inspired a lot of short selling). A 125-point gain over a week does not mean that the longer-term trend is clearly up. Similarly, a 125-point decline over a week does not mean that the longer-term trend is down. The bottom line is that even if traders completely abandon the market (e.g., due to a lack of short-term momentum or lack of perceived catalysts), that would mean at most a 125-point decline. Hedge funds and other intermediate-term speculators could add further to market volatility, but usually they are focused on some intermediate-term fundamentals (or technicals) rather than simply short-term momentum and news flow. The main point is that there is only a limited amount of ‘damage’ that traders can do to the market by themselves.
[7/14/03] The most important thing I can say about the quarterly reporting season is that you should not trust the initial market reaction to any report. Traders have their reasons for buying or selling or shorting, but those initial reactions could mostly be reversed as the reporting season progresses and winds down. It’s the reaction of investors that matters most and that will come days or even weeks after each report. Sometimes you will see periods of time where the market does not appear to be moving hardly at all, but in reality it’s a changing of the guard where short-term traders are closing their positions even as true investors are opening or closing or changing their positions. The media will focus on the immediate, in-your-face market reaction, but that doesn’t mean that the initial reaction means anything at all for true investors. The media invariably will talk about investor reactions when in fact they really mean trader reactions.
[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).
[5/5/03] 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.
[6/2/03] According to the Stock Trader's Almanac, Nasdaq gains an average of 1.2% and the S&P a gain of 0.2% in June, compared to an average decline of 0.1% for the Dow Industrials. This ‘rule’ conflicts with the “sell in May and go away” nostrum, so take your pick! I personally do not put any faith in such historical trading patterns, but there are a lot of people who do, so sometimes they can be self-fulfilling prophesies.
[6/17/03] There are those who will say that while we may be in a cyclical bull market, we are still in a secular bear market, but they’ll keep saying that until we close cleanly above the March 2000 ‘bubble’ high. All that really matters is that the one-year trend line slopes upwards and that we continue making new post-October highs on a reasonably regular basis.
[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.
[6/19/03] Famous last words from Anonymous: “I don’t know which sector will lead the next advance, but it won’t be technology.” Yeah, right. I heard this last year a number of times and again recently. Tech led the advance from October, leads now, and in all likelihood will continue to lead the advance. These anti-tech guys simply won’t give in, ever. Two or three years from now when we finally do have another (mini) bear market, then these anti-tech guys will crow about being vindicated. But even then, we won’t establish a new low (below October 9, 2002).
[7/3/03] For all the enthusiasm and action in tech stocks, please note that there is still a significant level of risk with the sector as even our Tech Stock ‘Safe’ Signal is still stuck at 0.00 (not very safe at all) since none of the big tech companies is even hinting that they see a sense of significant improvement in the next few months
[6/16/03] How long can the market continue to rise? The market can continue to rise as long as the economy continues to grow and corporate earnings continue to grow and as long as there are net inflows to domestic equity mutual funds. It’s always possible for the market to “get ahead of itself” and grow faster than the anticipated rate of growth of the economy and earnings, but we should always expect the market to anticipate economic growth and corporate earnings growth by 3 to 6 to 9 or even 12 months.
[6/16/03] The real bottom line is that the stock market will tend to rise and fall based on expectations of future economic growth and corporate earnings, with the market moving 3 to 6 to 9 or even 12 months in advance of actual changes in the economy or earnings. Traders and short-term speculators will certainly focus on the daily news flow and current quarterly results, but the bulk of a market rise or decline will be based on longer-term expectations.
[7/26/03] The June Durable Goods report strongly suggests that the economy is starting to perk up.
[7/26/03] The upward trend of the ECRI Weekly Leading Index over the past month strongly suggests that the economy will be picking up speed in the months ahead.
[7/23/03] Retail sales appear to be quite strong in July.
[7/11/03] Recent Unemployment Claims reports have not been very inspiring, but this simply emphasizes the continued zigzag nature of the recovery. Note that although initial claims have been above 400,000 for some time, they have been only moderately above 400,000 and rarely above 450,000 and never above 475,000. Actually, it’s quite amazing that net employment has been roughly flat in recent months (on an adjusted basis) while we’ve been seeing something like 1.72 million new unemployment claims each month (4 times 430,000). So, the economy is definitely recovering and creating a lot of jobs, even as the restructuring process continues.
[7/7/03] The Employment report for June was actually significantly better that the headline numbers suggested. Contrary to the claim that “30,000 nonfarm jobs were lost last month”, there was actually a gain of 349,000 nonfarm payroll jobs once you strip off the quirky seasonal adjustment. And when you go to the household survey, there are now 251,000 additional people at work (on a seasonally adjusted basis), or actually 901,000 additional people at work once you strip off the quirky seasonal adjustment. Most importantly of all, when you strip off the quirky seasonal adjustment from the household survey you find that employment is now at an all-time high (although only 229,000 higher than the previous high in July 2001). Even with the quirky seasonal adjustments, household employment is only 108,000 below the January 2001 peak and 25,000 below the March 2001 secondary peak. Yes, we do need to see nonfarm payroll employment show stronger growth before we can say that the economy is firing on all cylinders again, but right now a check “under the hood” reveals that employment is much stronger than the headlines would suggest.
[7/4/03] The ISM Non-Manufacturing report showed real strength in the services sector, overwhelming any negative implications of the weaker employment and unemployment claims reports. The recovery is incrementally improving with each passing week.
[7/2/03] The ISM Manufacturing report was actually significantly better than the headline numbers suggested. In particular, the production and new orders indexes showed faster growth. The bottom line is, as noted by the report, “manufacturing is positioned for a recovery in the second half” and that the “mood of the survey respondents has definitely turned upbeat.” The zigzag stealth recovery continues its stealthy ways.
[7/1/03] The Chicago PMI report was actually significantly better than the headline numbers suggested. Strip off the misleading seasonal adjustments, and the report showed some significant strength. This is an example of the stealth aspect of the zigzag stealth recovery.
[6/30/03] The recent Durable Goods report was not as bad as it seemed. The problem is the seasonal adjustments which are designed to smooth out seasonal variations, but really only work well when the economy is in a steady state and not when it is moving through an extended turning-point as it is now. With seasonal adjustment, durable goods new orders declined in May by 0.32% and shipments declined by 0.30%, but without the quirky seasonal adjustment the decline of new orders becomes a gain of 2.39% and the decline of shipments becomes a gain of 3.82%! Those are actually very respectable gains. Ex seasonal adjustment, the 0.54% decline of Nondefense capital goods excluding aircraft new orders goes to a gain of 1.99% and the 0.84% decline of shipments goes to a gain of 2.95%. Those are also very respectable numbers. Ex seasonal adjustments, the 1.12% decline of computer and related products new orders becomes a gain of 14.60%, although the 7.80% decline of shipments shrinks a decline of 4.36%. That latter number is a disappointment but simply illustrates the month-to-month volatility of durable goods numbers (a separate factor from seasonality of the overall durable goods report, but each tech sub-sector also has its own seasonality) and it is really the new orders number (which was up sharply) which is the leading indicator of business in the months ahead.
[6/28/03] There are basically two main camps for how people view the prospects for economic recovery: those who believe that the economy is really much stronger than the numbers (and the media and most economists) suggest, and those who believe that the economy is much weaker than the numbers suggest. I belong to the first camp and believe that there are enough ‘good’ forces at work (especially the ongoing restructuring process) so that the economy is incrementally becoming the strongest that the U.S. (and the world) has ever seen in its entire history. The key to the latter camp is that they do have a lot of good points, but mostly in a hypothetical sense. They understand what could happen and talk at length about all the risks, but their problem is that they spend too much effort extrapolating worst case scenarios and don’t even bother worrying about most likely scenarios. Skepticism is an important quality for analysis (e.g., challenging assumptions), but a poor guide for forecasting. The immediate problem is that the skeptics have been viscerally energized by the “bursting of the Nasdaq equity bubble” and the seemingly endless stories of corporate fraud and bad governance. The skeptics are great for routing out issues and problems, but forecasting involves a more balanced combining of upside potential as well as risk assessment. The key to solid risk assessment is that every potentially bad event (and good events as well) has both potential consequences and a probability that the event will actually transpire. The two camps may be further subdivided into those who are zealots (e.g., the bulls who still believe that the New Economy will ultimately replace the Old Economy and the bears who sincerely believe that a new Even Greater Depression is looming) and the Practical Professionals who have a moderate, dispassionate bias towards either the upside or downside. At present, all four of these camps are locked in a fierce battle over the rights to the economic outlook for the coming year(s). Unfortunately, we may not have a clear winner until the fall or possibly even the beginning of the new year (after all, the double-dip crowd will always be arguing that any improvement is merely temporary). I am trying to temper my optimism by refraining from making a quarterly GDP forecast above 3% until 1Q04. My bottom line: gradual improvement is definitely in the cards and gradual improvement is not only good, but is actually best if we want to see a more structurally sound economy.
[6/26/03] The weak Durable Goods report for May illustrated the zigzag nature of the recovery, or at least the difficulty of looking at month-to-month changes. A lot of economic activity occurs in spurts with lags between, plus seasonality, so these month-to-month changes have to be taken with a grain of salt. Despite the general disappointment with the durable goods report, it still does look (and feel) like the recovery (in its zigzag stealth mode) is continuing.
[6/17/03] The zigzag stealth recovery continues. The Empire State Manufacturing Survey for June indicated a modest burst of optimism in at least one niche of the economy. There will continue to be a semi-confused combination of good and bad economic reports for some time to come as the economy continues to work through the restructuring of underperforming companies. The good news is that the restructuring process is well underway and beginning to wind down.
[5/31/03] There is a very old school of thought for economic forecasting called “The Stock Market Barometer” which is described in a classic 1922 book entitled The Stock Market Barometer by William Peter Hamilton, a disciple of Charles Dow of Dow-Jones fame. Dow, the founder and first editor of The Wall Street Journal, accumulated a set of beliefs that are now known as “The Dow Theory” and expressed them in editorials in the WSJ. Hamilton codified the concepts from the editorials and added his own elaboration. One of Hamilton’s beliefs (and possibly Dow’s as well) was that the stock market itself acted as a ‘barometer’ for the economy. In other words, much as a weather barometer senses changes in air pressure that ‘anticipate’ the actual weather change that is coming along, the changes in the stock market anticipate changes in the economy that are coming along. So, rather than using economic data to try to forecast where the economy was going, Hamilton believed that the stock market was where people came together to ‘share’ their views and place their bets on how deeply they believed that the economy would unfold in a particular direction in the months ahead. This stuff is not hard science and is not always reliable, but the essence is that anecdotal evidence about underlying trends in the economy will ‘show’ the direction of the economy months (even many months) in advance of ‘hard’ economic reports or quarterly business revenue and earnings reports. The strength of the recent market advance strongly suggests that the economy will pick up strongly within months.
[5/24/03] With the war out of the way, the primary issue holding back the economy remains the same as it was before the war: the ongoing process of restructuring businesses to remove overcapacity that has been limiting growth of business investment. Mostly that means bankruptcies, closing of weak divisions, dropping weak product lines, cutting costs, and layoffs. That’s the bad news. The good news is that the process is well along, not yet sufficient to cause a sharp rise in economic output, but certainly on a gradual, albeit zigzag and stealthy, path upwards. The net growth of the economy is driven by the sum of all the ‘lift’ factors minus the sum of all the ‘drag’ factors. There are plenty of lift factors, but we simply have to patiently work through the elimination of the drag factors. Every bankruptcy reorganization eliminates a drag factor. Unfortunately, layoffs and cost-cutting offer a ‘package’ of both lift and drag. Each worker must find a new job, but the net result will be a more efficient and productive economy. Each cut in costs takes away from another business’ revenue, but frees up money to be spent elsewhere in a more productive manner.
[5/21/03] The quarterly Philadelphia Fed Survey of Professional Forecasters indicates that expectations are for year-over-year real GDP growth in 2003 of 2.2%, down from 2.5%. Expectations are for Q2 GDP of 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.
[6/10/03] A survey by the Blue Chip Economic Indicators newsletter has pegged real 2003 GDP growth at 2.4% (up from 2.3% in May), with 2.0% in Q2 (down from 2.1%), 3.5% in Q3 (unchanged), and 3.7% in Q4 (unchanged).
[7/7/03] The monthly survey of economists by The Economist shows an expectation for real GDP growth of 2.3% in 2003 (low of 1.9 to 2.6) for the U.S. – up 0.1% from 2.2% last month. There was no hint or suggestion of deflation for the U.S. in this survey, with respondents averaging a 2.2% gain in consumer prices in 2003 – down 0.1% from 2.3% last month. The expectation is real GDP growth of 3.4% in 2004 (up from 3.3%), the second best in the major developed countries of the world, with Australia at 3.5% (down from 3.6%) and Canada at 3.0% (down from 3.1%). Inflation in 2004 is forecast at 1.5% (down from 1.7%).
[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.
[5/22/03] A panel of professional forecasters of the National Association for Business Economics (NABE) estimates that the real GDP growth rate in 2003 will be 2.3% (down from 2.7% in their February survey). They expect the growth rate in the second half of the year to exceed 3%, down from exceeding 3.5%. GDP growth in 2004 is expected to be 3.6%, unchanged from the previous survey. None of the forecasters was predicting deflation.
[7/18/03] The Recession of 2001: On July 17, 2003, the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) announced that they have finally determined that the recession that began in March 2001 ended in November 2001. Contrary to expectations, they decided to ignore the weakness in employment. Now that we no longer have to argue about whether we’re still in recession (due to employment), we still have to argue about what it is that we are still in. I suppose the primary candidate for it is “a jobless recovery”, although we also have to note that business spending has been flat. Recovery seems to be too weak a term to describe the sluggishness and pain of this stealth recovery. Actually, the NBER does use the term slump to describe a “period of diminished activity”, which is the period from the trough that marked the end of the recession (November 2001) until we surpass the previous peak that marked the onset of the recession (March 2001). So, we’re in an employment slump as well as a business spending slump. As investors, we don’t wait until the slump ends, but are simply interested in when employment and business spending finally hit their troughs and begin trending up again. It does appear that business spending has troughed and is trending up, albeit on a tentative basis. Payroll employment has yet to mark a clear trough (although it has on an unadjusted basis or if the household survey data is used.)
[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.
[7/22/02] 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 and a modest hint of improvement, but no clear and decisive indication of a dependable ramp up in revenues and earnings.
[7/22/03] 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 of both revenue and earnings. 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 advance 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 Q3 or even Q4. And nobody has any real sense of visibility into 2004. 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 06:07:31 PM -0400
Copyright © 2003 John W. Krupansky d/b/a Base Technology