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| NOTICE: I'll be traveling on Monday, so I won't be posting a column for Tuesday. I should have at least a minimal column for Wednesday. |
(Updated since Saturday -- changes marked with [ * ])
Trading was a bit confused on Friday with optimism over Intel's (INTC) mid-quarter update and disappointment over the lackluster monthly employment report tugging the market in opposite directions. It was also a typical Friday with a little profit-taking, especially after the recent run-up. A lot of people are continuing to sell into the rally, especially on the kind of spike you see early in the day that is caused by short-covering.
Nasdaq trading volume was very heavy (2.44 billion shares), but breadth was modestly negative. This was another "rip-tide" trading session, with a significant amount of selling despite significant buying as well. Clearly a lot of people remain in a profit-taking mood.
The Employment Situation report for November registered modest rise in nonfarm payroll employment, and a slight decline in the unemployment rate. This was a modestly positive report. The headline job gain was +112K, which is not a statistically significant gain. Ex the fluky seasonal adjustment, we actually gained +224K nonfarm payroll jobs. Manufacturing employment was down modestly (-5K), and down -18K ex adjustment. Temporary help (a leading indicator of future employment) was up a modest +8.9K, but actually down -41K ex adjustment. Unemployment declined by 45K, but actually rose by +134K ex adjustment. Ex adjustment, the unemployment rate in fact rose slightly. There was a decline of -209K in the number of people who were no longer in the labor force, but that was only a decline of -38K ex adjustment. The civilian population grew by an estimated +230K. The civilian labor force grew by +439K, or by +268K ex adjustment. Household employment rose by +483K, and grew by +134K ex adjustment. Household employment is higher than a year ago by 1.728 million. On a seasonally adjusted basis, household employment is at its highest level ever, although ex adjustment it is -119K below the peak in July. Nonfarm payroll employment is now -432K below the peak level of 132.507 million (seasonally adjusted) in March 2001, but actually +2.048 million above a year ago (or 2.091 million higher ex adjustment). Hourly earnings rose slightly, but average weekly earnings fell modestly. The average workweek shrank slightly, as did the average manufacturing workweek. Manufacturing overtime was unchanged. Computer and electronic product firms cut -3.8K jobs, or -3.2K ex the fluky seasonal adjustment. The household survey covers the calendar week containing the 12th of the month, and the payroll survey covers the pay period that includes the 12th. Please note that employment is a lagging indicator for economic activity and won’t show any truly dramatic growth and unemployment will not show any dramatic decline until GDP growth kicks up above 4.5% for several quarters (assuming productivity remains high). Please note that the ‘recovery’ is not over or complete (another two to three years will be needed). The bottom line is that you should never get too excited or too depressed by the latest data point (or two) in a series. It takes time (up to six months or even a year) for a trend to develop or to change and some volatility is to be expected.
The ISM Report on Business for Non-Manufacturing for November registered a moderate rise in the pace of business activity, to the fastest pace since July. This was a positive report. New orders continue to grow at a fast, but modestly slower pace. The backlog of orders continues to grow, and at a moderately faster pace. New export orders continue to grow, but at a moderately slower pace. Employment continues to grow, but at a modestly slower pace.
The ECRI Weekly Leading Index registered a moderate decline (-0.4 vs. +0.1 last week), and the six-month smoothed growth rate was unchanged (vs. +0.9 last week) and remains slightly above neutral. This was a mixed report, and 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 AAA Daily Fuel Gauge Report registered a modest decline of -0.3 cents since Wednesday (from 1.936 to 1.933). Retailers continue to struggle to find an optimal price level after the heavy Thanksgiving weekend. Regular unleaded gasoline is now 8.4 cents below the level of a month ago, and 12.1 cents below its May peak. Please note that gasoline prices will lag changes in crude prices, possibly by as much as several weeks.
[ * ] Sunday: The biweekly Lundberg Survey of Gasoline Prices registered a sharp decline (about 3 cents) in the average retail price of a gallon of self-serve gasoline for the two weeks ended December 3rd. This was a positive report. The report notes that "The most important reason is more plentiful crude oil supplies, which brought oil prices down, affecting the prices of refined products, including gasoline."
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[12/02/04] Yet another day has passed without ANY significant evidence of the much-discussed "dollar crisis" taking root. I would have expected the dollar to have fallen to 1.35 euros by now, simply as a result of normal speculation, so clearly the sky is not falling, despite the intense chatter.
[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
[11/30/04] Gold futures continue to remain above their prior trading range, but the durability of this new move remains to be proven. Speculators have managed to push above the $450 level, but profit-taking may ensue before long.
As a result of the mediocre employment report, there was a moderately sharp decline in the odds of Fed rate hikes from March through July.
[ * ] [12/6/04] A Reuters poll shows that all 20 of the primary treasury dealers expect a quarter-point rate hike at the December FOMC meeting and 16 of the 20 expect another quarter-point hike at the FOMC meeting in February.
[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.
All bets are off as to the short-term trend. We could see a continuation of the sharp run-up, an equally sharp decline, or anything in between. The likely scenario is for more gains, but higher volatility is also likely.
[12/2/04] A moderate amount of profit-taking would not be a big surprise due to the out-size gain on Wednesday, but we could also see another spike if speculators jump the gun again and place too many bets on a pullback and end up causing a continuation of the short squeeze.
[12/2/04] Although the market has been rather erratic on a near-term technical basis due to being overbought (on a technical basis), the unresolved question that will really determine the market trend is how money flows for mutual funds will trend in the coming months. Recently, money flows have been erratic, but basically maintaining an upward trend.
[11/30/04] Although Nasdaq is still looking overbought on a short-term technical basis, and hence susceptible to a decline, short-sellers continue to make bad premature bets on a decline and are then forced to cover.
[11/26/04] 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".
[11/26/04] Rumors about preliminary post-Thanksgiving retail sales could also filter into the market.
[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.
[12/4/04] Nasdaq set a new near-term intra-day peak of 2,164.63 on Friday, December 3, 2004, but closed 14.67 points below that level. It is a positive sign that Nasdaq managed to set such a new intra-day peak, but a negative sign and clear yellow flag to close so far below it. It's also a yellow flag that Nasdaq has failed to close above the other recent intra-day peak of 2,156.14 on Thursday, December 2, 2004.
[12/4/04] The new Nasdaq near-term intra-day peak of 2,164.63 on Friday, December 3, 2004 was also a new intra-day peak for the year-to-date, for the year, and for the entire advance since the October 2002 low. That's quite a bit of progress, but we do need to close above the January peak and other recent intra-day peaks to solidify these gains.
[12/4/04] Nasdaq set a new near-term closing peak of 2,147.96 on Friday, December 3, 2004. This is a positive sign, except for the fact that we closed well off the intra-day peak and still have closed above the recent intra-day peaks.
[12/4/04] Nasdaq has successfully navigated more than 89% of the way through the veritable minefield that runs from the psychological 2,100 level all the way up to the January 26, 2004 intra-day and closing peak of 2,153.83. This is great progress, but Nasdaq really does need to 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.
[12/3/04] Short-term (1-day): Very volatile, but modestly bullish.
[12/4//04] Short-term (2-day): Very volatile, but modestly bullish.
[12/2/04] Short-term (5-day): Moderately strongly bullish.
[12/2/04] 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.
[12/4/04] Medium-term (6-months): Very Volatile, but moderately bullish.
[12/4/04] 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.
[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: December 05, 2004 11:42:10 PM -0500
Copyright © 2004 John W. Krupansky d/b/a Base Technology