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| NOTE: I'm back in Boulder from my trip to Boston. My apologies for missing a day of market coverage. |
The modest market gain on Thursday may simply have been a little breather or some profit-taking by short sellers after the recent sell-off, maybe simply a classic dead-cat recovery bounce that could be followed by renewed selling. This type of bounce happens all the time and tells us nothing about the trend going forward. NASDAQ rose a moderate +9.75 points. The market continues to trade primarily on short-term technical considerations rather than true long-term economic and business fundamentals.
There were net outflows from domestic stock mutual funds for a tenth consecutive week. This is not a good sign and is consistent with the overall market trend over that period, but does not give us any indication of the trend going forward.
NASDAQ trading volume was moderate (1.82 billion shares), and breadth was slightly positive, with 1.006 gainers for each loser.
The weekly Unemployment Claims report registered a modest decline in initial claims, a slight decline in continuing claims, a sharp decline in the 4-week moving average of initial claims, and a moderate rise in the 4-week moving average of continuing claims. This was a mixed report. Initial claims remain well above a year ago. Continuing claims are modestly above a year ago. Please note that despite traditional rules of thumb, there is no safe extrapolation from jobless claims to payroll employment growth. The data will be incredibly skewed or misleading for the next month or two as the economic impact of Katrina and Rita plays out.
The International Trade in Goods and Services report for August registered a modest rise in exports (+$1.8 billion vs. +$0.4 billion last month), a moderate rise in imports (+$2.9 billion vs. -$1.1 billion last month), and a modest rise in the trade deficit (+$1.0 billion vs. -$1.6 billion last month). This was a mixed report. The trade balance will gradually shift over time and eventually begin to move back towards stronger exports and weaker imports as structural elements of the economy evolve. Until then, maybe up to five years from now, there is no action required by anybody, other than to remain patient. We'll have to wait two or three months to get a clean post-storm report.
From Wednesday: The weekly Mortgage Applications report registered a moderate decline (-2.6% vs. -1.1% last week) for the week ended October 7. This was a negative report, but there does tend to be a lot of volatility. Refinancing applications fell moderately (-4.9% vs. +0.04% last week), and applications to purchase fell modestly (-0.9% vs. -1.9% last week). The volatility will probably remain quite high from here on out, especially as the Fed continues to raise interest rates and demand for housing gradually (eventually) begins to revert to a more normal pace.
The DOE EIA Weekly Petroleum Status Report registered a modest rise (+0.3% or +1.0 million barrels to 306.4 million barrels) in the inventory level of crude oil, and it remains above the upper end of the average range for this time of year. This was a mixed report, but still indicates that we have plenty of crude oil and that the lofty price level is due primarily to speculation rather than real supply or demand. The crude oil inventory level is +11.2% above a year ago, and well above the level which would indicate a shortage or tightness of supplies (250 million barrels). The Strategic Petroleum Reserve (SPR) fell moderately (-0.4% or -2.8 million barrels to 690.5 million barrels). The gasoline inventory level fell sharply (-1.4% or -2.7 million barrels to 192.8 million barrels), and is -5.7% lower than a year ago. The heating oil (distillate fuel oil) inventory level fell very sharply (-2.7% or -3.4 million barrels to 124.6 million barrels), and is +2.0% above a year ago. Note: It may take a few more weeks for reports to accurately reflect the impact of Katrina and Rita. What these weekly reports do make quite clear is that there is no shortage of oil, gasoline, or heating oil at the overall, national level. As the EIA report puts it, "Total commercial petroleum inventories declined by 6.9 million barrels last week, but remain in the upper half of the average range for this time of year." That doesn't sound like a very particularly bad place to be, unless you're an energy and commodities bull.
The AAA Daily Fuel Gauge Report registered a sharp decline of -1.7 cents since Tuesday (from $2.854 to $2.837) in the retail price of a gallon of unleaded gasoline, an eighth consecutive decline. This was a positive report. Regular unleaded gasoline is now -11.9 cents below the level of a month ago, +78.3 cents above its May 2004 peak of $2.054, and -22.0 cents below its September peak of $3.057. It will take a couple more weeks for prices to settle into a post-Katrina/Rita range. Using the rule of thumb that retail prices will tend to converge about 60 to 65 cents above the front-month NYMEX futures price (the so-called "wholesale price"), we could see $2.35 to $2.40 regular unleaded within a couple of weeks if the wholesale price were to remain steady. All of that is subject to dramatic change on a daily basis. Any net impact from Rita will become clear only as the details of the impact and recovery process incrementally become more clear. I see that some stations out here in Boulder, Colorado have reduced prices from $2.89 to $2.85. I noticed $2.79 on my way into Boulder from the airport last night.
After the close: The AMG Data Services Weekly Mutual Fund Flows report for the week ended Wednesday, October 12, registered a net inflow of $493 billion into equity mutual funds and ETFs, with net non-ETF outflows of $409 million, and net outflows of $512 million from domestic equity funds, or non-ETF outflows of $891 million from domestic equity funds. This was a negative report, for a tenth week. I continue to be concerned that Katrina and Rita victims may be pulling money out of mutual funds or at least not putting in as much money as before the storms.
After the close: The weekly Fed Money Stock Measures report showed that the money supply (M2, which includes retail money market mutual funds) for the week ended October 3 registered a sharp rise (+$23.7 billion to $6.6224 trillion) and is 3.97% above a year ago. This was a neutral report, showing that there is neither a shortage of money, nor any inflationary excess. The 4-week moving average continues to rise, and the 13-week moving average continues to rise. It's possible that the Fed is finally starting to put a bit of a crimp in the growth of the money supply relative to the growth of total economic activity. Nominal year-over-year M2 is growing significantly slower than (pre-Katrina/Rita) nominal GDP, but we know that there is a tremendous amount of cash sloshing around in the economy. Looking at this one week of data, I'd surmise that the Fed is not really getting tighter with the supply of money.
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Commodities are floundering again, but this could simply be a bout of profit-taking, a breather before a further rise. Or, it could be evidence that commodities really are past their peak.
The scandal over Refco (RFX) is something to keep an eye on, especially when some customers are being told that they can't access their accounts. Refco is the big dog of the commodities trading and speculation business. The big question is whether the latest problems are simply brief and temporary or symptomatic of even greater difficulties in commodities trading land. My suspicion is that investment funds may be pulling in their horns on the commodities front, and that this reduction in liquidity may be putting extra pressure on the commodities trading firms. And one has to wonder whether smaller commodities firms are really in that much better shape than Refco. There is a distinct possibility that investment funds may cut back their exposure to commodities simply to limit their exposure to Refco and crew.
It is once again time for short-term speculators to shift out of front-month oil contracts (November) and into the next month (December) which will become the front month after next Friday. Some people may sell long positions and buy new long positions, while others buy to close out short positions and then sell to open new short positions. Expect a lot of volatility. The open question is how many people actually want to take physical delivery of the oil covered by November futures.
Recovery from Katrina and Rita continues to slog along. You can read what the Department of Energy's Energy Information Administration has to say each day. We have a ways to go, but progress is occurring every day. Another 1% of oil production came back online by Wednesday, with 66.4% of Gulf oil production now out of service.
After the market close, Chevron (CVX) said that it has restarted its Pascagoula, Mississippi refinery, which was shut down prior to Hurricane Katrina. This is a giant leap forward. This could cause a simultaneous correction in gasoline and a rally in oil, although there is no shortage of oil anyway.
[9/27/05] The next two months could in fact be the "moment of truth" for the commodities boom. Crude oil's inability to break out above $70, even after two "body blows" is quite telling.
[9/21/05] Some of the intense interest in commodities is driven by something call the Asset Allocation Clock. A fair number of people have the misguided belief that the U.S. is on the verge of a recession or significant economic contraction, and the Asset Allocation Clock diagram tells them that commodities are the place to be when a business cycle is well beyond its peak and about to roll over.
[4/15/05] The commodities markets remain "loopy". That's the most charitable thing I can say. There's simply too much "hot money" chasing a lot of unrealistic, concocted "stories", not unlike the old dot-com boom. Tears to follow for anyone who sincerely buys into any of those cockamamie stories as other than very short-term trading plays.
[10/7/05] Ongoing anxiety: One potentially significant factor to consider for oil prices is the potential for a supply disruption as a result of the ongoing saber-rattling between the U.S. government and Iran, especially now that a new hard-liner has been elected. The administration is talking a harder line with Syria as well. I don't have any information to suggest that a disruption might be likely, but at some point there could be some increased chatter to that effect that may spook traders and speculators.
The June 2006 crude oil futures contract has the highest price ($63.73), giving us eight months of "contango" (rising prices for consecutive contracts). All contracts after January 2007 are priced below the November 2005 contract. This "backwardation" of longer-term contracts strongly suggests that elevated oil prices are primarily a speculative "bubble" due to deep-pocket investment funds rather than due to actual or prospective supplies or demand. The proposition that elevated oil prices are due to long-term demand growth and long-term supply shortages is simply not born out by futures contracts for outlying years ($57.96 for December 2011). Figure another week or two before the market settles down with respect to the intermediate-term impact of Katrina and Rita. Interestingly, December crude was priced below November crude for a seventh day, which is not normally the case. We'll have to see how this erratic behavior evolves. The January 2006 contract is also below the November contract, but above the December contract. It's too soon to tell for sure, but speculators may be in the process of completely reshaping the duration curve for crude oil demand. Or, maybe they're simply trying to price in the near-term availability of SPR oil as well as a near-term lack of demand for crude due to shutdown refineries.
Unleaded gasoline futures remain quite erratic. They rise from November through January, fall through March, then rise for April 2006 and May, and then fall through October 2006. The October 2006 contract is priced about 2.08 cents below the November 2005 contract. The bottom line is that there is no evidence of a market expectation of dramatically rising gasoline prices over the long term, but there is plenty of evidence of lots of confusion and possibly even some mischief in the near term. It could take more than another week for the market to properly price in the effects of Katrina and Rita.
[8/4/05] Disclosure: I actually have some very small positions in some oil and gas production limited partnerships (Geodyne), less than $1,000 total, dating from the early 1980's. I've hung on to them merely because there isn't a liquid market for trading them, so I'd have to take a bath to sell them. The total return plus residual value since the early 1980's is probably significantly less than if I had invested in rolling T-bills for that period. These positions are small because they were actually quarterly payments (from a larger position that I dumped long ago) that were made in the form of fractional units of whatever their latest limited partnership was.
There was a modest rise in the odds of a Fed interest rate hike to 4.25% in December and a moderate rise in the odds of a hike to 4.50% in February or March. The market continues to price in a hike to 4.00% in November, a hike to 4.25% in December, and a hike to 4.50% in February or March. The latter may merely be an insurance hedge rather than an outright bet. The hike to 4.00 in November is virtually locked in.
I continue to forecast a pause at 4.25% in December, but I'm almost ready to consider a hike to 4.50% in February, as soon as I see some more definitive evidence of economic strength. I'll try to focus on resolving my view within two or three weeks. I'd like to see the weekly jobless claims numbers retreat significantly first, a more dramatic recovery of Gulf Coast energy production and a dramatic pullback in retail gasoline prices, and a recovery in retail sales, including a more buoyant outlook from Wal-Mart (WMT).
[10/4/05] Bill Gross of PIMCO has a new, October 2005 Investment Outlook essay out, but it doesn't give a revised fed funds target interest rate. He focuses on the so-called "housing bubble", concluding that "If real housing prices decline in the U.S. in 2006 or 2007, a recession is nearly inevitable. If higher yields simply slow the pace of appreciation to a more rational single digit number, then we could escape with a 1-2% GDP economy. In either case, however, our Fed with its new Chairman will likely be in the enviable position of lowering rates come mid-year 2006." Of course, that doesn't tell us if interest rates will be higher or lower next year, especially since the Fed doesn't set longer-term interest rates such as the yield on the 10-year Treasury note anyway. I feel like I should be deferring to Gross' deep knowledge and bond expertise, but his analysis simply seems rather tentative and subject to change and subject to such a huge margin of error as to render it rather meaningless.
[9/27/05] I'm actually beginning to warm up to the possibility that the Fed could hike up to 4.50% or even 4.75%, or maybe even 5.00%, given the impressive resilience of the overall economy in the face of persistently high oil prices and two major storms. It all depends on whether the national economy shows any signs of buckling over the next two months.
[9/17/05] PIMCO bond fund honcho Bill Gross reaffirmed his belief that the Fed will pause at 4.00%.
[6/25/05] Persistently higher oil prices make it very difficult to judge the pace of economic growth for the coming months. Nobody has any visibility as to whether oil will be significantly higher or significantly lower in a few months, and what the economic impact might be.
[9/21/05] I remain sitting on the fence as to whether the Fed pauses at 4.00% or 4.25%. There seems to be a fair amount of economic strength even in the face of high energy prices, and the Katrina recovery effort will provide the economy with some significant fiscal stimulus. Since 4.00% seems like a popular bet, I'll go out on a limb and suggest a pause at 4.25% in December. After all, there is likely to be little difference in short-term effects of pausing in November as opposed to December and the higher interest rate gives the Fed an additional increment of flexibility. A short rate of 4.25% would have a better chance of nudging long rates higher. Besides, the higher interest rate will serve as a disincentive for people who are on the fence as to whether to rotate some more of their money out of their commodity speculation funds.
[10/1/05] The fed funds futures market suggests a quarter-point hike (to 4.00%) at the November 1 FOMC meeting, a quarter-point hike (to 4.25%) at the December 13 FOMC meeting, a quarter-point hike (to 4.50%) at the January 31 - February 1, 2006 FOMC meeting, no hike at the March 28, 2006 FOMC meeting, no hike at the May 10, 2006 FOMC meeting, no hike at the June 28/29, 2006 FOMC meeting, no hike at the August 8, 2006 FOMC meeting, no hike at the September 20, 2006 FOMC meeting, and no hike at the October, 24 2006 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. Futures are normally quite accurate in the short-term, so a hike to 4.00% at the November 1 FOMC meeting is fairly likely. Bets on hikes beyond December are most likely insurance hedges rather than outright bets.
[9/21/05] The Fed is not likely to raise short interest rates all the way to the middle of a so-called ‘neutral’ stance (somewhere in the 4.50% to 5.50% 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, technology, and manufacturing sectors). Rather, the Fed will simply remove the ‘excess’ stimulus (call it the ‘deflation hedge’) so that only a modest level of ‘accommodation’ remains. The initial ‘campaign’ will likely end at a target fed funds rate of 4.00% to 4.50% 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. My best estimate is that the Fed hikes to 4.00% in November or 4.25% in December and then 'pauses' for at least a year or two before hiking to the middle of the full-neutral range (5.00%).
Delta's (DAL) Comair said it will cut up to 1,000 jobs and sell up to one-fifth of its planes.
[1/26/05] For the most recent rumors about companies that are laying people off, going out of business, shuffling management, or otherwise restructuring, check out F****dCompany.com.
The Q3 venture capital investment money flow numbers should be out soon. I expected them to be out at the Dow Jones Emerging Ventures conference, but they only had some preliminary numbers since some venture firms haven't yet submitted final Q3 investment data.
[10/11/04] For some background information on venture capital, click here.
I continue to struggle with whether or when to dip my toe back into the investing waters, especially with what sort of asset allocation model I should use and whether to take an index approach to try to do some old-fashioned stock picking. I may simply start using my old Muriel Siebert account since it uses Fidelity for its money funds, which pays a fairly decent interest rate, and then incrementally buy the S&P 500 index tracking stock (SPY) or the S&P 500 Tech Sector Spider (XLK) with a relatively small fraction of the cash (maybe 20%), and then buy and sell on a monthly basis to maintain a fixed percentage asset allocation (i.e., sell if the market is up or I have less than 80% cash, and buy if the market is down or I have more than 80% cash). My fixed asset allocation would become more aggressive once I accumulate enough cash to feel that I have a sufficient rainy day fund. I'll also start doing the same with a Roth IRA once I've got a sufficient short-term financial cushion in place. I'm thinking of eventually running my Roth and taxable accounts in parallel with the same strategy, although the Roth could have a much more aggressive stock allocation (maybe 70-85%). My feeling is that individual stocks won't be worth the hassle until I have a large enough portfolio where a 3% position in a stock (that's 3% of the stock allocation) would be at least $1,000, with a 3% position meaning that I could have 20 stocks comprising 60% of my stock allocation, leaving 40% for index investment. That might take me a couple of years since I also have to pay down a lot of back taxes, but at least I'd have a credible plan that can start small and not get too unwieldy as my savings grow.
[9/24/05] I've started to think about starting up a new small investment plan once my bankruptcy case finally gets discharged in early December. I may just restart my previous small plan. I really haven't given it any intensive thought yet, and won't until I really am free and clear. I also need to give thought to resuming a Roth IRA plan as well. Unfortunately, I won't have a lot of money to work with anyway. My priorities right now are 1) getting back onto a sane, balanced budget, and paying down my back taxes over the next four years, 2) accumulating some money in a classic rainy day fund, part cash and part stock, 3) bulking up my Roth IRA, and 4) accumulating a little money I can speculate with.
[6/23/05] I'm out. As advertised, I did in fact liquidate my year-long dollar-cost averaging experiment with ShareBuilder. My net taxable gain since last July was 1.43%, which was not much better than a money market and a whole lot more volatile. It wasn't my intention to liquidate so soon, but being cut back to part-time work and back taxes (and buying a new notebook PC) forced my hand.
[6/23/05] My decision to sell was not in any way an attempt to "time" the market. I had expected to sell on the anniversary of starting the plan (July 6, 2004), but I'll be traveling and going to a venture capital conference next week and I just wanted to get it off my list of things to do over the next two weeks. And, I had also used my July rent money to buy the new notebook PC, and I just signed the lease for my new apartment in Boulder, so there was a confluence of factors that made Wednesday a very convenient time to sell.
[6/23/05] I continue to have a very, very modest portfolio in two rollover IRA accounts, but not enough to be worth speaking about.
We had a nice bounce on Thursday, but it may have been a classic dead-cat recovery bounce, the kind that is likely followed by renewed selling. The lack of any significant inflows into stock mutual funds puts somewhat of a damper on the market.
[10/11/05] We remain at square one, with market participants struggling to decide whether the recent correction has run its course and is ready to head back up, or is just starting to get a head of steam on its way down. From a fundamentals perspective, people are struggling to decide whether the economy and businesses are likely to do worse than were expected last week, or maybe significantly better over the next six to nine months. Unfortunately, if Katrina and Rita victims are continuing to pull back from investing in stock mutual funds, that dramatically increases the odds that the market may be in for a prolonged downdraft, albeit peppered with occasional technical and speculative rallies and corrections.
[10/11/05] The recent little bounce has clearly lost its momentum. That means that traders and speculators will be angling to push the market down, but tells us nothing about whether sellers rally are gaining a stronger upper hand in the market, or whether their strength may be on the verge of evaporating.
[9/27/05] The market will continue to struggle as the impact and recovery outlook for Rita incrementally trickle in over the coming couple of weeks.
[9/17/05] There is a chance that Katrina could put additional downwards pressure on the stock market as people may need to sell stock in their retirement plans to raise cash to meeting storm-related needs. A new loan exemption for retirement plans may alleviate at least some of the need to liquidate retirement portfolios.
[4/26/05] Overall market outlook: quite confused and susceptible to volatile swings, but a gradual drift up, over time.
[10/14/05] The fact that there was a net outflow from domestic equity mutual funds for a tenth week and we've seen inflows for 23 of the past 37 weeks, suggests that the market will continue to be quite volatile, but likely to maintain a gradual drift upwards.
[1/1/05] Click here for Market Outlook for 2005.
[10/12/05] NASDAQ is moderately strongly bearish over a one-month timeframe and moderately strongly bearish over a 10-day period.
The major advance off of the NASDAQ October 2002 low is now in a correction, 50 days off its closing high of 2,218.15 of Tuesday, August 2, 2005, and 49 days off its intra-day peak of 2,219.91 on Wednesday, August 3, 2005.
The sharp gain of 29.16 points on Wednesday, May 4, 2005 confirmed the new up-leg of the October 2002 advance for NASDAQ that began with the intra-day low of 1,889.83 on Friday, April 29, 2005. This up-leg is now 116 days old, 50 days off its closing high of 2,218.15 of Tuesday, August 2, 2005, and 49 days off its intra-day peak of 2,219.91 on Wednesday, August 3, 2005. The key signal to watch for now is a day on which the market opens sharply higher but closes sharply off the intra-day peak, which could indicate a "market top".
The sharp gain of 37.22 points on Friday, July 8, 2005 confirmed the new up-leg of the Spring advance that began with the intra-day low of 2,039.69 on Monday, June 27, 2005. This up-leg is now 74 days old, 50 days off its closing high of 2,218.15 of Tuesday, August 2, 2005, and 49 days off its intra-day peak of 2,219.91 on Wednesday, August 3, 2005. The key signal to watch for now is a day on which the market opens sharply higher but closes sharply off the intra-day peak, which could indicate a "market top".
We continue to look for confirmation of the start of the next up-leg of the longer-term advance starting with the intra-day low of 2,025.58 on Thursday, October 13, 2005. We now look for a 1% rise on higher volume than the previous day to confirm the new leg, but we ignore what happens on Days 2 and 3 since dead-cat bounces are common then.
[8/3/05] NASDAQ closed at 2,218.15 on Tuesday, August 2, 2005 at its highest closing level since it closed at 2,264.00 on June 7, 2001. The intra-day peak of 2,219.00 on Tuesday, August 2, 2005 was its highest intra-day peak since the peak of 2,263.75 on June 8, 2001.
[10/14/05] Short-term (1-day): Moderately bullish.
[10/14/05] Short-term (2-day): Moderately bearish.
[10/14/05] Short-term (5-day): Moderately bearish.
[10/12/05] Short-term (10-day): Moderately strongly bearish.
[10/12/05] Short-term (1-month): Moderately strongly bearish.
[10/8/05] Short-term (2-months): Moderately bearish.
[10/12/05] Medium-term (3-months): Moderately bearish.
[10/7/05] Medium-term (6-months): Modestly bullish.
[10/7/05] Year-to-Date: Moderately bearish. [NASDAQ closed 2004 at 2,175.44]
[10/12/05] Medium-term (9-months): Modestly bearish.
[10/6/05] Longer-term (1-year): Moderately bullish.
[10/14/05] Longer-term (2-years): Modestly bullish.
[7/14/05] Longer-term (3-years): Moderately strongly bullish.
[9/15/05] Longer-term (4-years): Moderately bullish.
[12/23/04] Longer-term (5-years): Strongly bearish.
[4/23/05] Longer-term (6-years): Moderately bearish. This was the big run-up for the "boom" in 1999.
[10/15/04] Longer-term (7-years): Modestly bullish.
[10/15/04] Longer-term (8-years): Modestly bullish.
[10/15/04] Longer-term (9-years): Modestly bullish.
[10/15/04] Longer-term (10-years): Modestly bullish.
[1/1/05] The NASDAQ "bubble" (above the 3,000 level, including intra-day "flirtations") lasted from November 2, 1999 through December 13, 2000, a year and six weeks.
The economy seems to be booming in Boston, with plenty of tourists and crowded restaurants. I wandered by the Marriott Long Wharf hotel and checked the room rates. $399 per night and no weekend rate. This is a nice hotel and located in a popular, convenient, and pleasant location, but not in the luxury category. I'm amazed that so many people are willing and able to pay that much. I've only stayed there a couple of times years ago, including shortly after they opened back in the early 1980's.
[10/7/05] I don't have great confidence that I have a solid handle on the pace of the economy, but it seems to be hanging in there reasonably well considering the shocks of the recent storms and persistently high energy prices. Q3 GDP will be a statistical mess, but Q4 will most likely show some nice growth.
[10/5/05] The Fed seems to think that inflation is in the upper end of the acceptable range. That will keep the Fed interest rate hike campaign active for at least a couple more months. The Fed is vigilant enough that dramatic inflation simply won't be an issue at all. On the other hand, a little inflation really does help to grease the skids of the economy and offers everybody incentives to buy and invest now rather than to wait.
[10/3/05] Some supposedly competent economists are now actually chattering about the prospects for a recession. Sorry guys, but the odds of a recession over the next year are close enough to zero to suggest that it's not a topic worthy of discussion. These recession-mongers crawl out of the woodwork every time there is even a slight bit of stress on the economy and they are almost always wrong. This time is no different. What these guys do know with certainty is that if they even bring up the "R" word, they get lots of press attention, and that's all they're really after anyway
[9/29/05] It will take some time for the net economic impact of Katrina and Rita to become clear, but my view is that we will lose no more than about 0.5% to 1.0% from GDP in Q4, but possibly 0.25% to 1.5% loss from Q3 GDP depending on the quirky statistical process. The advance report for Q3 won't even include a fair amount of the data from September, so the "adjustments" could be all over the map. Q1 of 2006 will be an interim quarter, with some significant strength tempered by any lingering "outages", so it could be normal or well above par, but possibly a little weak as well.
[9/27/05] The pace of the economy over the next two months is a big question mark. We'll need to wait at least two weeks after Rita has passed and then listen carefully to the anecdotal reports about how business seems to be shaping up in October.
[9/23/05] The economy continues to be in a gradual zigzag recovery mode, so it's not unexpected to see some modest weak patches mixed in with evidence of real strength. Sad to say, but we have another three years of this meandering in front of us.
[9/19/05] The latest economic data continues to support the thesis that the U.S. economy remains in the early stages of a protracted recovery. Some people are talking as if the economy is nearing the end of a business cycle, when we are really only in the early stages of a protracted business cycle. It will be another THREE years before the economy is fully back on track. Unemployment will decline only gradually. Creation of new businesses which will be the titans of tomorrow has yet to even commence, let alone take off. The bankruptcy rate will decline off recent highs (after a temporary blip for the October 17 deadline before the law changes go into effect), 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 to three years as well. The sad thing is that a number of them don't yet know it or are afraid to admit it. Cost cutting and head count reductions will be ongoing mantras for the next two to three years. That said, there will be plenty of corporations that see increasing profits over the next few years as consolidation boosts their efficiency.
[9/17/05] Despite any short-term slump due to Katrina, the intermediate-term economic outlook will be significantly brighter than if Katrina had not struck. Note that a lot of people had been expecting the economy to slow even before Katrina appeared. There is a modest risk of higher inflation, but no significant risk of accelerating, runaway inflation.
[9/15/05] The bulk of economic reports over the coming weeks and through mid-November will not give us much in the way of clues for how the economy will perform in the coming post-Katrina months. For example, we won't have clean, post-Katrina retail sales and industrial production reports until the middle of November.
[9/12/05] I'm raising my expectations for the economy over the coming months and year. Katrina will result in a lot of near-term volatility, but will be a strongly positive catalyst for the next couple of years. Even after the Gulf area energy infrastructure is restored, the recent disruption will be a strong incentive for additional investment to meet growing demand and to reduce risk for future disruptions.
[4/2/05] For the record, we simply are not going to see consistently large payroll employment rises (200K/month or 2.4 million per year) until the vast bulk of "old economy" companies have finally worked their way through the restructuring process, which could be another two or maybe even three years. We still have quite a number of companies "hanging in there", resisting further (and inevitable) restructuring as they wait for the economy to turn up more strongly. This includes the old major airlines, the car companies, retailers, a fair number of technology companies, etc.
[2/18/05] Clearly higher interest rates will have some negative impact on the economy, but the extent of the impact is not so certain. First, the Fed is not trying to constrain demand, but simply getting rid of excessively cheap money that has the potential for causing speculative excesses. In other words, raising interest rates to roughly "neutral" won't cause normal economic demand to decline significantly, but could, for example, help to curb speculation on commodities and foreign exchange. Second, the Fed essentially sets only some short-term interest rates, but the market and the law of supply and demand set longer-term rates. The key factor right now is that there remains a credit glut; corporations remain more interested in trimming their debt load rather than expanding it.
[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.
[5/21/05] I heard that Greenspan says oil prices may be taking 0.75% off of GDP, but prices have risen significantly since last August.
[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.
[3/12/05] A continuing big wildcard in 2005 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 13, 2005 10:09:13 PM -0400
Copyright © 2005 John W. Krupansky d/b/a Base Technology