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It’s difficult to say whether Tuesday’s gain was due to the “deal” with Iraq on readmitting the arms inspectors or may merely have been a bounce due to the market being technically oversold. It could also have been due to relief that the economic reports were not worse. Some commentators claimed that the rally was due to favorable analyst comments on Dell (DELL). In any case, a hefty chunk of the rally was due to short-covering. There may have been a little ‘real’ buying as well, but not too much.
Volume was modest (1.71 billion shares), but that was heavier than we’ve seen in a long time. Breadth was decent, with 1.25 gainers for each loser. A strong gain on decent volume is a good sign.
The ISM Manufacturing Index for September declined moderately and now indicates that the manufacturing sector is contracting. This was a negative report, but we shouldn’t get too excited with one month’s data. The index showed a very slight contraction and certainly not enough to suggest that the overall economy is contracting. The backlog of unfilled orders is shrinking, but production is still expanding. The good news is that new orders rose after declining in August. Employment continues to contract at roughly the same pace as in recent months. New export orders and imports are still growing. All in all, this was a mixed report, but nowhere near negative enough to suggest that the economy is about to do a double-dip.
The weekly Bank of Tokyo-Mitsubishi (BTM) Chain Store Sales Snapshot registered a sharp decline. This was a negative report. This report tends to be very volatile, but the decline was a disappointment. The weather was blamed for some of the decline.
The Construction Spending report for August registered a moderate decline. This was a negative report. There is some concern about construction spending, but it’s too soon to suggest that there is a problem here.
The Challenger Report for September registered the smallest number of announced job cuts since November 2000. This was a positive report. The labor market is still very unsettled, but at least this was a good report, for now. Ultimately, this report does need to fall another 28% to get to the levels associated with a “normal” economy.
The Semiconductor Billings report for August registered a moderate gain in global chip sales. This was a positive report, although sales in the Americas did decline modestly.
The Vehicle Sales report for September registered a moderately sharp decline, due to fewer sales incentives. This was a moderately negative report, but not unexpected.
After the close: The weekly ABC News/Money Magazine Consumer Comfort Index was unchanged at -15 (out of a range from -100 to +100) for the third consecutive week. The was a slightly positive report since the index has stabilized. Consumer comfort with the overall economy was unchanged. Consumer comfort with their own finances fell by 1%, but not enough to move the overall index. The consumer view of the buying climate was unchanged.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, fell by 9.96% on Tuesday to 40.13, which is just above the bottom of the extremely high anxiety zone (40 to 45). The rally relieved a lot of anxiety, but people desperately need to see a more substantial trend of good news fall into place before anxiety can fall more dramatically.
The Nasdaq-100 After Hours Indicator had a very positive tone for the Tuesday evening session, closing up 8.92 points. Dell (DELL) said earnings would come in at the high end of earlier guidance and even said that revenue would be modestly higher than previous guidance.
Fed funds futures suggest a 100% (unchanged) chance of a quarter-point rate cut in November. Futures also suggest an 8% (down from 13%) chance of a half-point cut. In other words, futures indicate that the Fed will cut rates at the November 6 FOMC meeting.
December is still too far away for futures to reliably predict the actual fed funds rate (according to studies that the Fed itself has done.)
[UPDATED 9/25/02] I forecast that the Fed will hold interest rates steady through the Fall election (November 5) and likely through the November 6 FOMC meeting as well, unless some dramatic, new, unforeseen crisis erupts.
The dollar rose moderately against the yen and rose modestly against the euro.
[UPDATED 7/23/02] There are still no signs of any economic fundamentals that would make either Europe or Japan dramatically more attractive than the U.S. for long-term investment. Rather, the relative weakening of the dollar has been primarily driven by speculative currency trading and sentiment (such as the accounting scandals) and that sentiment will most likely reverse over the coming months as the forces depressing sentiment dissipate.
In any case, the dollar is still quite sound and no true investor should lose any sleep worrying about potential negative implications from a weaker dollar. And, a weaker dollar will boost U.S. exports.
The price of oil rose modestly, and is still slightly above the psychological $30 level. Nominally, the gain was due to Hurricane Lili starting to move across the Gulf of Mexico and causing companies to start shutting down oil production and refining facilities.
In any case, the price of oil price continues to be well-behaved and no true investor should lose any sleep worrying about it.
The price of gold decline moderately.
In any case, there is nothing about the current price of gold that should give any true investor any reason to lose any sleep.
The relative calm continues.
Investors should always be prepared to buy any dip caused by panicky reactions by traders to any incidents.
The eerie calm continues.
Investors should always be prepared to buy any dip caused by panicky reactions by traders to any incidents.
At least superficially we made some progress with Iraq with their “finalizing” arrangements to permit inspectors in two weeks, but the lingering issue of inspecting presidential palaces remains, as does U.S. resistance. Actually, I’m not so sure that any WMD projects remain in the palaces since Iraq has known for four years that everyone thought that’s were the WMD stuff was hidden and eventually the U.S. would either get in or bomb the places, so it would have made a lot of sense for Iraq to move the WMD stuff elsewhere, such as out of the country to Syria, Libya, or Sudan. Also, there had been reports of Iraq digging 60-foot deep pits to bury things so that U.S. bombs would not destroy them.
We’re still waiting for resolutions from Congress and the U.N. It still looks likely that France, Russia, and China will insist on a watered down resolution. According to recent polls (which are very important to the Fall elections), the American people do want to see U.N. backing for any major military action against Iraq.
[UPDATED 9/16/02] The bottom line is that investor concern over the sluggish economic recovery and weakness in corporate revenue and earnings growth still weigh more heavily on the market than all the other non-economic factors. Traders merely use Iraq, et al as excuses for any market weakness.
Click here for our more extensive commentary on The Iraq Problem.
Click here for our more extensive commentary on Technology.
No activity.
[UPDATED 8/5/02] Check out our book list.
Absolutely nothing more is needed at this point other than to simply let the current market-driven corrective processes play themselves out.
Click here for our more extensive commentary on financial reform.
Click here for our more extensive commentary on The Telecom Problem.
I finally attended one of the congressional 9-11 “inquiry” hearings. It was actually the final “fact-finding” hearing of the Joint Intelligence Committee (both House and Senate). Their next hearing, on Thursday, begins to focus on developing recommendations. Yesterday’s hearing focused on sharing of intelligence, or why the various agencies have so much difficulty sharing intelligence. There are legal, cultural, and technical issues that impede sharing intelligence among agencies. This is not limited to federal agencies, but also includes state and local organizations, especially the so-called “first responders” (e.g., local police). Many of the issues have already been aired, but the hearing provided a lot more context. It was interesting to hear from a former governor (of Virginia) and a current police commissioner (of Baltimore) saying that the situation is not much better than before. The FBI, CIA, and INS may be sharing more intelligence (sometimes), but even big city police departments feel left out of the loop. For example, the locals might talk to or even arrest someone and then release them without knowing that a federal investigation of that person was in progress. As another example of poor communication, the first that the police commissioner of Baltimore heard of the upgrade to orange alert status was seeing it on the news on TV. One of the highlights of the hearing was when one of the witnesses (maybe he was from the Defense Intelligence Agency) talked about the importance of using XML (eXtensible Markup Lanaguage) for achieving interoperability of intelligence data. My conclusion is that although there are numerous issues that can be resolved with better technology, the primary problem is that we need a central clearing agency (sometimes called a “fusion center”) to override all the cultural incompatibilities of the various agencies. On the other hand, maybe Americans aren’t really ready for Big Brother yet anyway.
No activity.
Maybe the rally will continue on the strength of Dell, or maybe it’s time for some profit-taking again. It could go either way.
The market will continue to be whipsawed based on the news du jour, especially warnings and the occasional upside surprises.
My forecast for today is that Nasdaq will close in the range -40 to +80. Nasdaq came in at +42 on Tuesday, well above the midpoint of my range of -30 to +80. The market continues to be so crazy that it could go either way, but I still believe there is a longer-term upwards bias even if the near-term bias is all over the map.
[UPDATED 10/1/02] The market performance in recent days suggests that maybe we aren’t back in a bear market (yet) and we could still be in a trading-range market. But if we can’t make much progress over the next several days, then we could easily fall back into bear market mode.
[UPDATED 9/25/02] Technically, we are back in a bear market (as of Monday) since we have broken below the July 24 low. But whether we continue downwards depends on whether the recent declines were driven by ‘real’ selling or simply due to short-selling. Short-sellers do eventually have to buy their borrowed shares back. The lofty level of the market Volatility Index (VIX) suggests that professional investors are bracing for the worst. That sounds bad, but frequently, those precautions are a harbinger of a turn in the market. The only question is whether the turn occurs within the next few days, a few weeks or a few months.
[UPDATED 8/22/02] The incredible level of disbelief in the current rally strongly suggests that a contrarian bullish view may be appropriate. It’s the exact flip-side of where we were in April and May of 2000 when people refused to belief that the bull market was over and that a bear market had begun.
[UPDATED 6/24/02] Regardless of how crazy the market behaves, the economic recovery is well underway. Market participants may not yet be ready to acknowledge the recovery, but it is inevitable, even if the timing is uncertain. There are more than enough differences in the current market cycle than any in recent memory, but inevitably the market will rise as people anticipate earnings growth down the road. Investing for the long term is still an excellent strategy even if it feels painful in the near term.
[UPDATED 6/24/02] The market will rally when the selling peters out. The market religiously obeys the law of supply and demand, but many buyers have a habit of waiting until the sellers exhaust themselves.
[UPDATED 9/14/02] I’ve decreased my estimate of the probability of a double-dip recession to 20% (from 25%) due to higher retail sales in August. I still think a double-dip is unlikely, but I do want to quantify my beliefs as well as risks.
[UPDATED 6/24/02] There is absolutely no question that the economic recovery in the U.S. is going at a somewhat slower pace than had been expected by this point in time, but the recovery is well along nonetheless. We are still winding our way through an extended turning point, but virtually every day brings news that we are making incremental progress, even as there are still plenty of negative data points as well. Impatient observers fail to recognize that turning points are bumpy affairs and that negative data points do not necessarily mean that something has gone wrong.
[UPDATED 6/24/02] Spending on technology has picked up only modestly, at best. And the telecom sector continues to decline. That said, the recovery is in fact well along, with the manufacturing sector leading the way. Manufacturers have plenty of excess capacity so that they can increase production without spending too much and without needing to hire many workers, yet.
[UPDATED 6/24/02] Even as unemployment continues to rise modestly, actual employment has already begun to rise, although at a very modest pace. The average paycheck has also been rising, and at a rate faster than inflation. That combination of more people working with larger paychecks means that overall national income is rising, which is a very good thing and will continue to fuel consumer spending.
[UPDATED 6/24/02] Companies are reluctant to dramatically increase their spending on technology until they become more comfortable that ‘final demand’ is increasing at a dependable pace. Demand is increasing, but at a slow enough pace that companies are proceeding with great caution. But as each day goes by, an additional increment of that caution evaporates. It may be as painful as watching grass grow or watching paint dry, but investors can be sure that their patience will be rewarded. Sure, it will take some time to get back to ‘normal’, but that result is inevitable even if the timing is uncertain.
[UPDATED 9/10/02] I still don’t have a forecast for Q3 GDP. The accounting is so inscrutable as to defy any rational forecast. At this point it does feel like Q3 is moderately worse than Q2, but the crazy accounting could take it either way. A Reuters poll of economists places Q3 GDP growth around 3%.
[UPDATED 6/24/02] Although the end of the recession has not been officially ‘called’ yet (by the National Bureau of Economic Research), March is the most likely candidate for the ending month of the recession since that was the last month that showed declining employment. Industrial production’s last decline was in December.
[UPDATED 8/14/02] We are still in the turning point where the view in front of your nose is mixed and confusing. Recent economic reports have been weak or mixed, so we probably need another month of data to be able to see where we are going. For me personally, it’s a no-brainer that we very close to the final edge of the turning point, but so many people have lost confidence that they need a truly monumental level of evidence to believe again. But that’s always the way it is with turning points: it’s darkest before the dawn.
[UPDATED 8/24/02] I’ve reset the Tech Stock ‘Safe’ Signal back to 0.00 since it has the last change is over six weeks old. There needs to be a sense of ‘freshness’ to the outlook for tech business that simply isn’t there right now.
[UPDATED 8/24/02] Our ‘safe’ signal requires at least 20% (1 out of 5, or 10 out of 50) of the top 50 tech companies to signal acceleration. Expect one or two quarters to elapse from the time of the first indications of an upturn and the return of solid growth. The theory is that the stock market should begin a sustainable rally four to six months in advance of the return of strong growth. Many companies are still trimming Q3 forecasts, and virtually nobody is beating the drum for a great Q4. A lot of people are saying that even Q1 of 2003 will be sluggish. That said, if you want to get the early stock market gains, you'll have to jump the gun and get in before our signal triggers. But if you do, you have to be prepared for some significant volatility and possibly some big losses. You have to decide for yourself whether you want safety in the short run or higher potential returns in the long run.
[UPDATED 9/14/02] For our complete list of resources, click here.
[NEW 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 01, 2002 11:29:59 PM -0400
Copyright © 2002 John W. Krupansky d/b/a Base Technology