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(Updated since Thursday -- changes marked with [ * ] -- will be updated for Saturday, and Monday)
The moderate 18.26-point Nasdaq rise on Wednesday was probably mostly short covering ahead of the long holiday weekend. There may have been a little real buying in there as well, but not enough give us any significant comfort.
Nasdaq closed only modestly (less than 2 points) below its peak for the day and less than 2 points below the recent closing peak. This is okay and actually a relief, but a mixed signal in that we've almost recovered all of the recent losses, but haven't managed to recover all of them. I do hope you like sitting on pins and needles.
Nasdaq trading volume was light (1.65 billion shares), and breadth was moderately positive. Despite the decent point gain, this was not a strong rally. That's not a warning sign, but we shouldn't take much comfort from the rally either.
The advance Durable Goods Manufacturers’ Shipments, Inventories, and Orders report for October registered a moderate decline in new orders (-0.4%), a moderate rise in shipments (+0.6%), a moderate rise in unfilled orders (+0.6%), and a moderate rise in inventories (+0.5%). This was a mixed report, but there tends to be a lot of monthly volatility for orders and shipments, primarily since few customers buy manufactured goods on a nice, smooth monthly cycle. The good news is that the backlog of unfilled orders continues to grow, signifying higher production in the months ahead and giving manufacturers an improving ability to smooth out their financial performance. Higher inventory levels are both a vote of confidence in growth in the months ahead and a buffer to keep prices under control. Shipments for nondefense capital goods rose very sharply (+3.0%) even ex aircraft (+3.1%). New orders for nondefense capital goods, which are a good proxy for business capital spending, fell very sharply (-3.3%) and very sharply ex aircraft (-3.6%). That bears watching but is not yet a clear trend. Shipments for computers and related products rose very sharply (+8.1%), but new orders fell very sharply (-10.3%), and unfilled orders fell very sharply (-8.3%). Shipments for communications equipment rose very sharply (+2.%) and new orders rose very sharply (+7.9%). Shipments for semiconductors rose very sharply (+4.9). Semiconductor orders are not included in this report.
The final University of Michigan Consumer Sentiment report for November registered a modest rise from the final October reading (from 91.7 to 92.8), but a moderate decline from the preliminary November reading (95.5). This was a mixed report. Please note that there is at best only a very weak link between consumer confidence reports and future consumer spending.
The weekly Unemployment Claims report registered a moderate decline in initial claims and a modest decline in continuing claims, and a moderate decline in the 4-week moving average of initial claims and a modest decline in the 4-week moving average of continuing claims, but nothing significant enough to change the picture of the overall economy. This was a positive report. Claims (both initial and continuing) are reasonably low, but not as low as would be expected if the economy was completely recovered. Unadjusted initial and continuing claims both rose moderately, but that's typical at this time of season as some of the workers involved with producing and getting holiday goods to the stores in time for Thanksgiving are already no longer needed.
The New Residential Sales report for October registered a modest rise (+0.2) in sales of new one-family houses. This was a positive report, but there is a lot of volatility. Housing demand continues to be quite strong and continues to baffle and befuddle the economists and pundits.
The Conference Board Help Wanted Index for October registered a slight rise in help-wanted advertising, slightly above the level of a year ago. This was a modestly positive report, and continues to suggest that the labor market continues to be rather lackluster. The Conference Board refers to their Help-Wanted Advertising Index as “a key barometer of America’s job market”. They note that “Despite the outsized job gain in October, the measure of labor demand going forward remains relatively flat, as does the number signing up for their unemployment checks. Both initial jobless claims and want-ad volume have remained flat since early 2004. Except for two outbursts of job growth (one in the spring and one in October) the lack of steady improvement in employment has weakened consumer confidence, especially with respect to where the labor market is going in the next six months. Moreover, with the Leading Economic Index declining for five straight months, prospects are that the economy will be growing too slowly to allow the labor market more than an occasional good month in the first half of 2005.” I would note that in today’s job market and with the internet, companies simply don’t have to do as much newspaper advertising.
The weekly Mortgage Applications report registered a sharp decline (-5.7% vs. +4.3% last week) for the week. This was a negative report, but there does tend to be a lot of volatility and demand remains quite strong. Refinancing applications were down sharply (-8.3%), and applications to purchase were down sharply (-3.5). Professional economists and pundits continue to be baffled and bewildered by the continued strength of the housing market. A typical comment is "I think the peak in housing has been seen, but we are still seeing exceedingly strong numbers."
The ECRI Weekly Leading Index registered a slight rise (+0.1 to 132.7), to its highest level since the first week of July (133.4), and the six-month smoothed growth rate registered a sharp rise (+0.9 from -0.8 to +0.1) and is now slightly above neutral. This was a positive report, with a growing hint of improvement, but suggests that the economy will continue to limp along for the next few months, neither booming nor busting. We're basically still 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 smoothed WLI growth rate is now back up to where it was at the end of July.
After the close: The AMG Data Services Weekly Mutual Fund Flows report for the four-day week ended Wednesday, November 23, registered a net inflow of $1.161 billion to equity mutual funds, but with only $313 million (27%) flowing into domestic equity funds. This was a slightly positive report, somewhat disappointing, but probably affected by the holidays and the shortened reporting period. Unfortunately, next week's report will have similar holiday-related effects, so we'll have to wait two weeks to get a clean report so that we can sense whether the trend is moving in a favorable or unfavorable direction.
The AAA Daily Fuel Gauge Report registered a slight rise of +0.1 cents since Monday (from 1.942 to 1.943), the first rise after seventeen consecutive days of decline. Regular unleaded gasoline is now 7.5 cents below the level of a month ago, and 11.2 cents below its May peak. We may see a modest rise as a result of the Thanksgiving travel period. I suspect that gasoline prices now reflect the current price level of Crude oil. We may not see much of a trend in gasoline except as we see a new sustained trend in crude oil (either a further rise into the $50's or a decline back towards the low $40's. Please note that gasoline prices will lag changes in crude prices, possibly by as much as several weeks.
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Yet another day has passed without ANY significant evidence of the much-discussed "dollar crisis" taking root.
[ * ] The dollar could well fall a bit further in the near-term, but most of this would be due to technical trading as traders and speculators continue to raise the chatter level about an imagined "dollar crisis". It wouldn't surprise me if the dollar fell to 1.35 to the euro within a few days or a week, but again that would be all speculation driven by "hot money" rather than based on economic fundamentals or true investment flows.
[ * ] There was a story about China reducing its dollar-denominated foreign reserves, but that is effectively old news since it is describing transactions that have already occurred and there was no mention of any future forex transactions.
[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.
The EIA Weekly Petroleum Inventory report showed a slight rise for crude oil to a level 2% above a year ago, heating oil showed a modest rise but to a level that is still 14.1% below a year ago, and gasoline showed a modest rise to a level that is 1.7% above a year ago. This was a modestly positive report. My belief is that heating oil inventories are low because demand is still light and refiners are reluctant to build inventory at these lofty crude prices (i.e., they are expecting crude to decline before the onset of heavy Winter demand).
[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.
The dollar did finally fall below the 1.31 euro level, but it was a long time in coming and did not show any crisis-level of activity and was well within the range of activity for a typical trading day.
[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.
Gold almost poked up to the $450 level, but there appears to be some significant resistance just under that level.
There was a moderate increase in the odds of Fed interest rate hikes from May through July. A hike in December is still fairly likely, but no means absolutely locked in since there are still a fair number of doom-and-gloom purveyors who think the economy is weakening rather than strengthening. A quarter-point hike to 3.00% at the end of June now looks fairly certain.
[11/25/04] 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 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.
[11/25/04] 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 2.50% to 3.25% 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.
[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.
The market will be open until 1:00 p.m. on Friday.
[ * ] The market could react to all the mindless chatter about an imagined "dollar crisis", or it may dip and then bounce, or maybe the market will ignore the mindless chatter of forex speculators and continue the recent advance. In any case, true investors should ignore all the chatter about the so-called "dollar crisis".
[ * ] Rumors about preliminary post-Thanksgiving retail sales could also filter into the market.
[11/24/04] Traders and speculators may make yet another run at trying to continue Friday's sell-off, or they may make an even less half-hearted effort due to their failures on Monday and Tuesday and then we could see the market rally moderately, or they may "go with the flow" and jump on the bandwagon and play the upside momentum. On the other hand the dramatic petering-out of the advance since last week might be emboldening the shorts to take a more strategic and selective approach to timing their attack.
[11/23/04] We need to see Nasdaq recover the rest of Friday's loss plus another 10-20 points within a week, otherwise speculators will take more profits out of the market and bet more heavily on the downside.
[11/22/04] 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.
[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.
Although Nasdaq has recovered most of its losses since Friday, we're still a little below Thursday's peak (less than 2 points), so we haven't yet established the "higher high" that would indicate the likelihood that the advance will continue. We still need to close above both the 2,104.28 closing high and the 2,112.18 intra-day peak, and do so within a week or so.
[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.
[11/24/04] Short-term (10-day): Somewhat volatile, but moderately bullish.
[11/24/04] Short-term (1-month): Somewhat volatile, but moderately bullish.
[11/6/04] Short-term (2-months): Somewhat volatile, but moderately strongly bullish.
[11/24/04] Medium-term (3-months): Somewhat volatile, but moderately strongly bullish.
[11/6/04] Medium-term (6-months): Very Volatile, but modestly bullish.
[11/24/04] Medium-term (9-months): Very Volatile, but very 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.
[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 26, 2004 01:44:36 AM -0500
Copyright © 2004 John W. Krupansky d/b/a Base Technology