Our daily stock market commentary and views on the economy and geopolitical events are posted weekdays and Saturday by 12:30 a.m. ET.
[ Market Activity | Market Outlook | Market Trend | Economic Reports | Miscellaneous | Commodities | Fed Futures | Restructuring | Venture Capital | My Investments | Economic Outlook | Tech Stock 'Safe' Signal | Disclaimer | Archive | Books | Resources | Charts | Adages | Glossary | Lore | Search | Reform | Telecom | Technology | Payment - Please! | Contact Us ]
(Updated since Saturday -- changes marked with [ * ])
A number of superficial reasons were given for the sharp sell-off on Friday (oil, Greenspan), but the real reason for the decline is that traders and speculators sensed a lack of buyers before the holiday week and took advantage of the situation to pile on and push the market down. Also, there are frequently speculators who maintain open positions during the week, but close them (or at least hedge them) for the weekend and holidays. Also, we have been overdue for more than a little profit-taking anyway. So, the sharp 33.65-point Nasdaq decline was a big disappointment, but is not a big concern.
Nasdaq trading volume was heavy (2.03 billion shares), and breadth was strongly negative. This was a heavy sell-off, with a big point loss, on heavy volume, and wide (negative) breadth. Normally, such a strong sell-off would be a concern, but the nature of the recent run-up and the high probability of profit-taking at some point made such a sell-off rather predictable.
The ECRI Weekly Leading Index registered a moderate rise, to its highest level since the first week of July, and the six-month smoothed growth rate registered a moderate rise but remains modestly below neutral. This was a reasonably positive report, and suggests that the economy will continue to limp along for the next few months, neither booming nor busting, but there is a growing hint of improvement. We're basically in a "watching paint dry" economy as we wait for ongoing business restructuring to progress, but the WLI is beginning to "hint" that the economy is starting to re-accelerate.
The AAA Daily Fuel Gauge Report registered a modest decline of -0.3 cents since Wednesday (from 1.951 to 1.948), the fifteenth consecutive decline after four consecutive days of gains. Regular unleaded gasoline is now 7.1 cents below the level of a month ago, and 10.6 cents below its May peak. Gasoline prices are likely to continue falling until Thanksgiving.
[ * ] Saturday: The weekly Wal-Mart (WMT) Sales Outlook is still on track for 2-4% year-over-year growth for November (October 30 through November 26). This was an okay report. The best-selling categories were bedding, ladies wear, food, and pet supplies. Sales picked up in the apparel categories, including strength in licensed apparel and active wear. Both traffic and average ticket were positive for the week, with the average ticket making up almost three-quarters of the same-store sales increase for the week.
[ * ] Sunday: The biweekly Lundberg Survey of Gasoline Prices registered a very sharp decline (about 5 cents) in the average retail price of a gallon of self-serve gasoline for the two weeks ended November 19th. This was a positive report. The report notes that "Crude oil prices continued to edge downward in the period (during a) seasonally low gasoline demand period. We are in our low-consumption season, relieving pressure on gasoline prices."
Greenspan actually gave a very good, solid, and comprehensive speech on Friday. Unfortunately, any attempt to put it into sound-bite form is doomed to failure. Click here to read his prepared remarks. He basically laid out the issues related to fiscal budget, trade, and investment imbalances and how they interact with foreign exchange rates. There is no disaster or crisis brewing, but foreign exchange speculators may talk that way so that they can convince people to bet their way. But be careful: if you follow the advice of these speculators, they almost certainly won't give you good advice as to when to unwind your bets against the dollar. Investing in fixed income securities, especially outside the U.S. is a very dicey proposition. You could do very well, or you could see a significant erosion of your principle if you don't repatriate your money well in advance of the time when in becomes clear that its too late. If you think you've got foreign exchange speculation all figured out and have your risks covered (yeah, right), then go with your best judgment, otherwise, stay out of that game and leave it for the pros. If you really want to gamble on foreign exchange rate movements, do it with a smaller amount of money in futures or options and assume that you might lose all of that "bet", but don't gamble with your principle. The U.S. economy is doing okay and will be doing even better in the next couple of years, so don't waste your time and money betting against the U.S. economy. And finally, don't forget that each Fed rate hike makes the U.S. incrementally more attractive to foreign investors as the relative interest rate advantage of foreign countries declines. The dollar may decline modestly as imbalances are gradually adjusted, but it's very difficult to profit from those declines given the fluctuations and volatility that depends on many different factors.
[ * ] Here's an interesting comment within John Mauldin's latest "Thoughts from the Frontline" weekly e-letter:
Why the Dollar May Rise
Now, after all that, let me tell you why we could see the dollar rise in the
near term. Everybody (well, most everybody) and their dog expect to see the
dollar fall. That is the way the bets have been made. But when "everybody" is on
the same side of the trade, there is no one on the other side, and you can get
some violent corrections. While the trend may still be there, we could see a
nasty "adjustment" or two. Indeed, if the central banks of the world actually do
coordinate a gradual fall in the dollar, expect to see them "reverse" policy
from time to time, just to jerk the chains of the speculators and hedge funds.
If you play this market, expect volatility and lots of it.
For those who want to invest in foreign currencies, I would point you to
Everbank (www.everbank.com ) in St. Louis. You can buy an FDIC insured CD in
almost any currency.
[ * ] Mauldin is definitely a doom and gloom kind of guy, but if even he is warning you to be careful about betting on the decline of the dollar ("in the near term"), then you had best tread carefully when betting against the dollar.
[ * ] Werner Renberg, a freelance financial journalist writing an article for CBS MarketWatch, writes that Michael W. Roberge, chief fixed income officer for MFS Investment Management, notes that the average annual total return of the S&P 500 for the 12 months following each of the Fed's tightening cycles of the last 20 years was 11.8%. In the second 12 months, it was 17.2%. This is a clear rebuttal to the claim floated by some bears that rising interest rates spell doom for stocks. There is no guarantee that stocks will rise, but I would suggest that an improving economy will be good for stock market returns.
[11/13/04] Crude Oil futures continue to be whipsawed by speculators. Traders and speculators are pausing to regroup and figure out if the next big move is up or down. Crude futures may once again be poised to resume their run at $60, but this could once again be a ruse to attract naive long positions that the shorts will then be poised to clobber. Crude oil will be susceptible to sharp moves in either direction, for the next couple of months, until the Fed raises interest rates enough to dampen the attraction of hedge fund speculation in commodities.
[11/13/04] The Dollar appears to be poised to continue declining, but that could also be a ruse to attract naive long positions that the shorts will then be prepared to clobber. Although there may be longer-term pressure for the dollar to cheapen, excessive volatility will remain the norm until the Fed raises interest rates enough to dampen the appeal of foreign exchange speculation. It's normal for there to be a fair amount of profit-taking as the dollar approaches a major support level such as 1.30 to the euro. The dollar will probably soon fall through the 1.30 level and then quickly run down to the 1.35 level, but is unlikely to run down as far as 1.40. On the other hand, a little bit of good economic data (or commentary by the Fed) could cause the dollar-shorts to cover their short positions and once again send the dollar bouncing towards the other edge of its trading range.
Greenspan's comments about deficits and foreign exchange caused quite a stir, but there was essentially nothing new in them. The policies of the U.S. government remain on track.
[11/27/04] Gold futures continue to remain above their prior trading range, but the durability of this new move remains to be proven. Certainly traders and speculators fully intend to push gold up to $450, but that effort is not assured, especially as the Fed remains relentless about raising short-term interest rates.
Greenspan's commentary on deficits and foreign exchange raised some eyebrows, but otherwise raised no new issues. Nonetheless, his comments caused a moderate rise in the odds of Fed rate hikes over the coming year.
[11/17/04] The fed funds futures market suggests a quarter-point hike (to 2.25%) at the December 14 FOMC meeting, a quarter-point hike (to 2.50%) at the February 1/2 FOMC meeting, no hike at the March 22 FOMC meeting, a quarter-point hike (to 2.75%) at the May 3 FOMC meeting, and possibly a quarter-point hike (to 3.00%) 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.
[11/2/04] Personally, I think that the Fed is likely to go ahead with another quarter-point hike (to 2.25%) at the December 14 FOMC meeting unless the economic data at that point is quite "soggy". There would be very little benefit for the Fed to pause at that point in time and the pause would force everybody to second guess the Fed and actually conclude that the Fed paused because they were worried that the economy was deteriorating. My current thinking is that the Fed will maintain quarter-point hikes at each FOMC meeting until they get somewhere in the 2.50% to 3.00% range and then pause until unemployment starts to fall off more significantly, and then resume hikes until a neutral rate is reached.
[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.
.
[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.
[11/3/04] My next dollar-cost averaged investment will occur on Tuesday, December 7.
[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.
Trading could slow down this week as some people leave early for Thanksgiving. In fact, expect lackluster trading volumes until Monday, November 29. Lower trading volumes can mean greater volatility or wilder price swings, so we might expect some sharper rally days or some sharper correction days.
[ * ] Although we could see a continuation of Friday's sell-off, it is just as likely that traders and speculators might once again push down on the market too hard too fast, with the result that the market could see a sharp relief bounce.
[11/8/04] The market is very clearly heavily overbought on a near-term technical basis, which means that it is quite susceptible to significant profit-taking. The good news is that there are plenty of people who seem committed to the thesis that November through February is the most profitable period to own stocks. The other good news is that any significant correction at this stage would simply be treated as a buying opportunity and lead to further gains in the months ahead.
[11/19/04] Nasdaq set a new near-term intra-day peak of 2,112.18 on Wednesday, November 17, 2004, but closed 12.50 points below that peak. It is a positive sign that we set this new peak, but a moderate yellow flag that we closed so far below the peak. It's another moderate yellow flag that we still haven't closed above that intra-day peak.
[11/19/04] Nasdaq set a new near-term closing peak of 2,104.28 on Thursday, November 18, 2004. This is a positive sign, but the fact that Nasdaq still has not closed above previous recent intra-day peaks is a moderate yellow flag.
[11/19/04] Now that Nasdaq has successfully closed above the psychological 2,100 level, it faces a veritable minefield all the way up to the January 26, 2004 intra-day and closing peak of 2,153.83. Nasdaq desperately needs to easily clear that entire range (on a closing basis) to definitively prove that it has completely broken its 2004 trend of "lower highs", and that needs to happen within the next few weeks or else speculators will lose patience and reverse and attempt to push the market down.
[11/6/04] Short-term (10-day): Somewhat volatile, but strongly bullish.
[11/3/04] Short-term (1-month): Somewhat volatile, but modestly bullish.
[11/6/04] Short-term (2-months): Somewhat volatile, but moderately strongly bullish.
[10/22/04] Medium-term (3-months): Somewhat volatile, but strongly bullish.
[11/6/04] Medium-term (6-months): Very Volatile, but modestly bullish.
[11/18/04] Medium-term (9-months): Very Volatile, but modestly bullish.
[11/19/04] Year-to-Date: Very Volatile, but modestly bullish.
[11/6/04] Longer-term (1-year): Very Volatile, but modestly 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-years): Very volatile, but modestly bearish.
[10/15/04] Longer-term (6-years): Very volatile, trading range.
[10/15/04] Longer-term (7-years): Very volatile, but slightly bullish.
[10/15/04] Longer-term (8-years): Very volatile, but modestly bullish.
[10/15/04] Longer-term (9-years): Very volatile, but modestly bullish.
[10/15/04] Longer-term (10-years): Very volatile, but modestly bullish.
[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 21, 2004 11:50:00 PM -0500
Copyright © 2004 John W. Krupansky d/b/a Base Technology