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(Updated since Saturday -- changes marked with [ * ])
Friday was yet another technical trading day as traders and speculators grappled with whether they should take a shot on pushing down on a market that is heavily over-bought on a short-term technical basis, or wait a while in just in case more buyers crawl out of the woodwork.
The fact that Nasdaq was able to hold above the 1,970 resistance level was impressive, but not too impressive since it was a Friday and short-sellers tend to close positions ahead of a weekend. On Monday they'll be more willing to apply resources to break the market's back. On the other hand, if some more buyers do appear, traders and speculators will be more than happy to ride the momentum higher.
Nasdaq closed down a mere 0.75 points, but did manage to close above its opening level (albeit by a mere 0.44 points) and well above its intra-day low (by 11 points). Those are good signs. The bad news is that Nasdaq closed 9 points below its intra-day peak and failed to close above Thursday's intra-day peak. Those are moderately bad signs. So, it was a very mixed bag on Friday.
[ * ] Nasdaq trading volume was light (1.66 billion shares) and breadth was very slightly negative.
[ * ] Trading could be lighter than usual Monday and Tuesday due to "Election Watch" anxiety over uncertainty about whether the election will show a clear winner by Wednesday morning.
[ * ] People will be positioning for the October employment report due out on Friday.
The Q3 GDP report came in at a lower than expected annualized real growth rate of 3.7%. This was an "okay" report, consistent with my view that the economy is inching along, neither booming nor busting. Unfortunately, it is a growth rate that implies that employment will be growing only modestly and unemployment will be falling at a snail's pace. Here are some of the actual numbers to put GDP in perspective. GDP is running at $11.8 trillion a year, that's $146 billion more than Q2. Real (inflation-adjusted 2000 dollars) GDP is running at $10.8834 trillion or $98.7 billion more than Q2. $98.7 billion is 0.915% of real Q2 GDP, which becomes 3.66% when you annualize it by multiplying by four, and then it becomes 3.7% when rounded to a single digit of precision.
The Chicago Business Barometer for October registered a sharp rise to a new high for this business cycle. This was a very positive report. The Production index rose sharply to its highest level since August 1950. The New Orders index rose sharply to its highest level in two decades. The Order Backlogs index rose sharply to its highest level in ten years. Employment continues to inch up, and 22% of surveyed employers are looking to cut employment further.
The final University of Michigan Consumer Sentiment report for October registered a modest decline from the final September reading, but a moderate rise from the preliminary October reading. This was a mixed report. The current expectations index actually rose, even as the expectations index fell. This disparity suggests that consumer confidence is even less likely to be useful in forecasting consumer spending in the months ahead (i.e., Christmas holiday spending). Also note that the media and political campaign rhetoric can have an outsize impact on expectations, but current conditions indicates how consumers feel about their job, their paycheck, and the money they have in their wallet to spend. Please note that there is at best only a very weak link between consumer confidence reports and future consumer spending.
The ECRI Weekly Leading Index registered a sharp decline (to its level of 12/19/03) and the six-month smoothed growth rate registered a moderate decline and remains modestly below neutral. This was a negative report, and suggests that the economy will continue to limp along for the next few months, neither booming nor busting. We're basically in a "watching paint dry" economy as we wait for ongoing business restructuring to progress.
[ * ] Saturday: The monthly Wal-Mart (WMT) Sales Results for October came in at +2.8% for year-over-year sales growth for the four weeks ended Friday, October 29, compared to a forecast of 2-4% year-over-year growth (which excludes Halloween this year, but Halloween was included in October sales last year). This was a rather mediocre report, coming in slightly below the midpoint of the forecast, but last year did include Halloween as well as lingering effects of tax rebates. The best-selling categories were bedding, clothes for children, pet supplies, and food.
The AAA Daily Fuel Gauge Report showed a slight rise of +0.1 cents since Wednesday (from 2.032 to 2.033), a fourth consecutive day of gains. Regular unleaded gasoline is now 12.1 cents above the level of a month ago, but still 2.1 cents below its May peak. Gasoline prices are likely to fall off sharply within two weeks.
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[ * ] Crude Oil futures could see another rise as a result of talks of another labor strike in Nigeria. On the other hand, such a rise could be limited and be quickly followed by another leg of profit-taking. Besides, more Gulf of Mexico production comes back online as every day passes.
[ * ] The Dollar could fall in the near term as a result of uncertainty over the election, as well as any profit-taking in crude oil that finds a new home in euro futures. It's possible that the euro could rise to 1.30 or even 1.35, but the upcoming Fed rate hike on November 10 could cap the euro rise.
[10/28/04] The fed funds futures market suggests a quarter-point hike (to 2.00%) at the November 10 FOMC meeting, no hike at the December 14 FOMC meeting, a quarter-point hike (to 2.25%) at the February 1/2 FOMC meeting, no hike at the March 22 FOMC meeting, a quarter-point hike (to 2.50%) at the May 3 FOMC meeting, and no hike at the June 29/30 FOMC meeting. Fed funds futures are at best accurate no more than six weeks out, so those longer-term moves are purely speculative, at best.
[6/18/04] The Fed is not likely to quickly raise interest rates all the way to a so-called ‘neutral’ stance (somewhere in the 3-4.5% range) over the coming year, primarily because the recovery is not yet complete (e.g., look at the lingering level of unemployment and the state of the airline, telecom, and manufacturing sectors). Rather, the Fed will simply remove the ‘excess’ stimulus (call it the ‘deflation hedge’) so that only a moderate level of ‘accommodation’ remains. In other words, despite the relatively rapid pace of expected hikes over the coming year, the initial ‘campaign’ will likely end at a target fed funds rate of 1.75% to 2.75% with the remaining rise to the fully ‘neutral’ stance coming only very gradually over the next two to three years as the remaining weakness in the economy gradually dissipates. Also, expect interest rates to be below the full ‘neutral’ level until the lingering geopolitical uncertainty related to the war on terrorism and the situation in Iraq and anxiety over the potential for oil supply disruptions dissipates. And finally, since high energy prices act as a ‘tax’, the Fed may feel pressured to keep interest rates a little lower than otherwise expected to compensate for the drag of that tax if it persists for more than a few months.
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[10/21/04] I attended 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.
[10/21/04] I'll have a write-up on the conference soon, but the simple summary is that venture investment is making a painfully slow comeback. It is coming back, but at a very slow pace. Even worse, companies are raising less money and hence hiring less (or hiring offshore) and spending less. The net effect is that current venture investment is only a very modest boost for the economy, and a much smaller boost than it could be.
[10/11/04] For some background information on venture capital, click here.
[10/29/04] Since my consulting income has picked up a bit recently, I've upped my monthly investment, by a factor of five, as of my November investment, due to occur on Tuesday, November 2.
[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.
[10/28/04] Short-term (10-day): Very volatile, but moderately bullish.
[10/28/04] Short-term (1-month): Somewhat volatile, but moderately bullish.
[10/15/04] Short-term (2-months): Moderately bullish.
[10/22/04] Medium-term (3-months): Very volatile, but moderately bullish.
[10/30/04] Medium-term (6-months): Very Volatile, and slightly bearish.
[10/15/04] Medium-term (9-months): Very Volatile, and moderately bearish.
[10/30/04] Longer-term (1-year): Very Volatile, and only very slightly bullish.
[10/15/04] Longer-term (2-years): Moderately strongly bullish.
[10/15/04] Longer-term (3-years): Very volatile, but modestly bullish.
[10/15/04] Longer-term (4-years): Very volatile, but moderately bearish.
[10/15/04] Longer-term (5-year): Very volatile, but modestly bearish.
[10/15/04] Longer-term (6-year): Very volatile, but modestly bullish.
[10/15/04] Longer-term (7-year): Very volatile, but slightly bullish.
[10/15/04] Longer-term (8-year, 9-year, 10-year): Very volatile, but modestly bullish.
[10/30/04] Nasdaq set a new near-term intra-day peak of 1,984.18 on Friday, October 29, 2004.
[10/30/04] Nasdaq has still failed to close above its intra-day peak of 1,980.36 on Thursday, October 28, 2004. This is not a good sign.
[10/29/04] Nasdaq set a new near-term closing peak of 1,975.74 on Thursday, October 28, 2004.
[10/15/04] Overall outlook: confused and volatile, but with a modest upwards trend. The economy is neither "booming" nor "busting", but making modestly positive progress at restructuring problematic industries.
[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: November 02, 2004 12:11:41 AM -0500
Copyright © 2004 John W. Krupansky d/b/a Base Technology