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NOTICE: I'm out in Boulder, Colorado for some software consulting work (started on Wednesday 9/15/04). My daily column will be a bit shorter for the next couple of months, but I will endeavor to write at least something each day. The last full column was for Wednesday, September 15, 2004. |
(Updated since Saturday, changes marked with [ * ])
The recent rally was a classic run-up in advance of "earnings season" and was followed by an equally-classic bout of profit-taking (including Friday's sharp 29-point Nasdaq decline) just as the quarterly reports are about to trickle in. In addition, speculators felt that the market looks "overbought" and that recent trading had suggested that the market was "topping". That combination meant that the "path of least resistance" was for the market to reverse and run back down. What isn't known is how much money the speculators are willing to put into shorting the market, as well as what the net stock mutual fund money flows will be over the coming days. The good news is that Nasdaq is no longer "overbought" on a short-term technical basis.
[ * ] Nobody expects that Q3 quarterly results will be very impressive. Everybody expects lots of disappointments as a result of the "soft patch". There is concern that the market might "tank" as the disappointing results roll in, but the market has "priced in" disappointment since the end of June. So, the open question is whether stocks might rally as each increment of anticipated disappointment is taken out of the way. Or, the results could be even worse than expected and lead to a further sell-off. Also remember that the concept of the "stock market barometer" is based on anticipating the economy three months to a year in advance, so what happened in Q3 really is immaterial, to the extent that people don't expect a continuation of the same. Some people worry (too much) about the effects of rising interest rates, although long-term interest rates haven't been rising even as the Fed raises its fed funds target rate.
The Employment report for September was a modest disappointment, but is completely consistent with the assessment that the economy is inching forward, neither booming nor busting.
The ECRI Weekly Leading Index was mixed, with the index itself rising modestly, but the six-month smoothed growth rate deteriorated modestly, but is only modestly below neutral. This was a mixed, but relatively neutral report, suggesting that the economy will continue to limp along for the next few months, neither booming nor busting.
Global Crossing will be cutting 15% of its workforce or about 600 jobs. The business restructuring process continues.
[ * ] Saturday: The weekly Wal-Mart (WMT) Sales Outlook is still on track for 2-4% year-over-year growth for the four weeks ending October 29 (which excludes Halloween this year, but Halloween was included in October sales last year) and sales will "probably" be up from September.
[ * ] Sunday: The biweekly Lundberg Survey of Gasoline Prices registered a sharp rise (7.8 cents) in the average retail price of a gallon of self-serve gasoline for the two weeks ended October 8th. This was a negative report. Worse, Lundberg suggests that the price could continue to rise. Hurricane Ivan gets most of the blame since it disrupted oil operations in the Gulf of Mexico.
[ * ] Sunday: The Machine Tool Consumption report, released by the American Machine Tool Distributors’ Association (AMTDA) and the Association for Manufacturing Technology (AMT), for August registered a sharp rise (+6.4% vs. -12.7% last month) in demand (dollar sales volume) for machine tools. This was a positive report, but there is a lot of volatility and seasonality. The report noted that “Trends for investment in capital equipment continue thanks to an improving economy and the desire to take advantage of year-end tax incentives and the need to reduce manufacturing costs. Seven months into 2004, manufacturing has displayed consistent signs of a rebound capable of worldwide competition.” The big, open question is what machine tool demand will look like next year after the tax incentives run out at the end of this year. This report is based on a survey of about 200 manufacturers, distributors and importers of machine tools that represent 76% of the machine tool market.
[ * ] I plan on attending the VentureOne Exchange venture capital conference up in Boston on Tuesday, October 19 and Wednesday, October 20. Click here for my write-up of last year's conference.
[ * ] For some background information on venture capital, click here.
[6/29/04] As an experiment, I have set up a new account with ShareBuilder and will be making a modest dollar-cost averaging investment each month. At a cost of $4 per month I will be buying a fixed dollar amount of the S&P 500 Tech Sector ‘Spider’ (XLK). The money for the investment will be automatically taken from my bank checking account. My purchases will be made on the first Tuesday of each month, beginning on July 6, 2004.
[8/23/04] Clearly the elevated price of crude oil has to have some negative impact on the economy, but the big question is how much impact. Overall, the economy is less sensitive to the price of oil and “oil shocks” than in past decades, but some sectors (such as airlines and chemical companies) are significantly more sensitive, whereas most sectors are only modestly sensitive. The current price escalation in fact has not been caused by any supply shortage or any excess demand by end users, but is merely due to a dramatic level of speculation in crude futures. The bad news is that we don’t know how much longer that speculative ‘bubble’ will continue to grow. The good news is that oil at these prices is not as attractive an ‘investment’, so the speculation will be increasingly susceptible to profit-taking and renewed interest in short-selling. Besides, if oil really were expected to rise dramatically from here, we’d see it in the price of futures in coming years, and we don’t. In fact, futures ‘predict’ that the price of crude will decline in coming years. In any case, elevated oil prices will be a moderate drag on the economy, but not so much as to spur accelerating inflation or to trigger a recession. Maybe it will trim a quarter to half-point off GDP, but that’s about it. Besides, people and businesses will adjust their lives and operations to further reduce their dependence on expensive oil. And finally, high-efficiency hybrid-electric vehicles are beginning to debut and anxiety over the price of gasoline will simply accelerate the development and introduction of such innovative products, which will dramatically moderate the demand for oil a few years from now.
[8/7/04] The latest economic data continues to support the thesis that the U.S. economy is solidly into a gradual, zigzag, underappreciated, stealth recovery. It will be another two years before the economy is fully back on track. Unemployment will decline only gradually. The bankruptcy rate will decline off recent highs, but remain at a fairly high level for another two years. There are still quite a number of businesses (and entire sectors) that will need to be restructured over the next two years as well.
[7/3/04] A major uncertainty is the state of the economy in Q4 and the first half of 2005. We currently have enough momentum to do well in the current quarter (Q3), but nobody really has even a halfway decent handle on how that momentum will play out towards the end of the year and into next year. We have the looming specter of rising interest rates, but the Fed would certainly back off if the economy started to sputter. The bottom line is that the economy is likely to be doing “okay”, but probably not a lot better than “okay”, in Q4 and early 2005.
[7/6/04] Some people are protesting that company profits could suffer as companies run out of costs that they can cut. That’s complete nonsense. First, companies will never run out of costs to cut. But more importantly, one of the factors that has been holding back growth of business revenues (and profits) over the past three years is the fact that companies have been dramatically cutting costs and the cutting of a cost for one company is the cutting of the revenue of one or more other companies. That cost-cutting binge was exerting a distinct headwind on businesses, but that headwind will in fact fall off as the cost-cutting moderates. And as revenues begin to grow more strongly, companies will begin to reverse the process and both spend more and hire more workers. Continued technological advances will spur further cost-cutting, but on a more moderate basis.
[3/13/04] A major uncertainty that will begin to loom over the economy and the financial markets is the impact of the outcome of the Presidential election. Although the political rhetoric can get very intense, the fairly even split in Congress makes it very unlikely that either party in the White House will be able to dramatically change federal economic policy significantly over the next four years. Besides, both parties are interested in reducing the federal budget deficit. The proposals from both parties will be hotly debated, but I can’t see that either side is either a clear winner or a clear loser for the economy and the markets.
[12/29/03] The two key factors driving the pace of the recovery will continue to be the ongoing process of shutting down or restructuring ‘problem’ businesses and the pace of the formation of new businesses which will create new jobs.
[12/29/03] A big wildcard in 2004 will be the possibility of a new wave of corporate cost-cutting as companies burn through the easy part of revenue growth and are forced to revert to cost-cutting to keep up earnings growth. The problem is that one company’s cost is another company’s revenue or an employee’s income, so more cost-cutting can boost earnings in the near-term but risk putting intense downwards pressure on business spending and employment. This cost-cutting process will moderate once companies begin to build up a deep enough backlog of unfilled orders so that they can keep revenue growth at a consistently strong pace to keep earnings growth up. The economy will survive this process, but the zigging and zagging of the pace of the recovery will continue.
[9/1/03] Our Tech Stock ‘Safe’ Signal is still stuck at 0.00 (no safety) since none of the big tech companies are even hinting that they are seeing any significant improvement in demand. 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.
[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: October 11, 2004 01:18:15 AM -0400
Copyright © 2004 John W. Krupansky d/b/a Base Technology