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Monday was a very clear “throw in the towel day for Nasdaq, with no real hint of a bounce and an ugly drop-off in the final hour.
There was some disappointing business news, general anxiety over the pace of the economic recovery, some negative analyst comments, continued anxiety over Iraq, and the bankruptcy of United Airlines (UAL) to weight down the market, but the real catalysts for the sell-off were disappointment over the ‘new’ Bush economic team and just a general technical concern that the October/November rally may be really over and likely to unwind.
In truth, Monday was not a complete “throw in the towel” day since the initial decline petered out shortly before noon and Nasdaq then actually stayed fairly flat until 3:20 p.m. when it gave up the final 13 points of its decline into the close.
It is difficult to say if there was a lot of ‘real’ selling going on or simply the evaporation of momentum positions which will flock back as soon as the Nasdaq once again establishes upwards momentum.
Volume was rather light (1.47 billion shares). Breadth was very negative, with 2.68 losers for each gainer. The decline would have been much more significant if it had been on heavy volume, but was otherwise merely an unpleasant event.
According to Thomson Financial I-Watch, institutional investors were net buyers of technology stocks, including Sun (SUNW), Cisco (CSCO), EMC (EMC), HP (HPQ), Rational Software (RATL), Oracle (ORCL), BEA Systems (BEAS), Amazon (AMZN), Verisign (VRSN), eBay (EBAY), and Yahoo (YHOO). Clearly institutional investors were buying the dip. Obviously somebody was selling, but ownership may have been simply shifting from “weak hands” to “smart money”.
The Kansas City Fed Manufacturing Survey for November registered a moderately sharp decline to a slightly negative reading, indicating a modest contraction, after being positive all year. This was a negative report. Production and employment both contracted. Shipments and orders continued to grow, but just barely and at a dramatically reduced pace. The sole bright spot was that the six-month outlook actually improved (slightly) to the highest level since April. It is definitely heartening that new orders were in fact still growing even though production was contracting. Certainly October and November have been gloomy for manufacturers, but the rosier outlook for Q1 and Q2 should be somewhat a relief for the stock market.
Wal-Mart (WMT) reported that their latest weekly sales were at the low end of expectations. Other retailers reported somewhat gloomy retail sales outlooks. The vicious winter storm last week most certainly was the culprit, not weak demand. Also, it is worth noting that online purchases are growing and now a significantly larger portion of overall retail sales.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, rose by 5.48% on Monday to 34.47, which is near the top end of the high anxiety zone (30 to 35). Clearly the sell-off was anxiety-provoking, but there was no panic. There were several mini-spikes, but nothing above 35.
The high level of VIX remains a contrarian bullish indicator, but the market could decline further before rallying again.
The Nasdaq-100 After Hours Indicator had a modestly negative tone for the Monday evening session, closing down 0.74 points. People are not quite ready to believe that the sell-off is near to being over, but they’re not betting strongly on a massive further decline either.
Fed funds futures suggest a 12% (unchanged) chance of a quarter-point rate cut by the December FOMC meeting. In other words, futures indicate that the Fed will not cut rates at the December 10 FOMC meeting.
Fed funds futures suggest a 12% (unchanged) chance of a quarter-point rate cut by the January FOMC meeting. In other words, futures indicate that the Fed will not cut rates at the January 28/29 FOMC meeting.
The dollar fell moderately against the yen and fell modestly against the euro. Speculators are not completely convinced that the “new” administration economic team will abandon the “strong dollar” policy or that any new fiscal policy will “break the bank”.
[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.
[UPDATED 7/23/02] 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 moderately, but is still well below the psychological $30 level. The debilitating strike and civil unrest in Venezuela are weighing on the market, but not too badly. It is actually surprising that Iraq is not weighing more heavily. The heightened anxiety over the weakness of the U.S. economic recovery is probably the trumping “culprit” keeping the price of oil well under $30 despite all the other “turmoil”.
[UPDATED 7/23/02] 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 fell modestly, but is still fairly close to the June peak.
[UPDATED 12/6/02] The last peak was the June 2 closing high of $327 and the June 3 intraday high of $331.
[UPDATED 7/23/02] In any case, there is nothing about the current price of gold that should give any true investor any reason to lose any sleep.
[UPDATED 7/6/02] The relative calm continues.
[UPDATED 7/23/02] Investors should always be prepared to buy any dip caused by panicky reactions by traders to any incidents.
[UPDATED 10/14/02] The eerie calm continues. There may continue to be attacks or alleged attacks abroad, but the U.S. “homeland” may be relatively immune, at least for now.
[UPDATED 7/23/02] Investors should always be prepared to buy any dip caused by panicky reactions by traders to any incidents.
There is lots of speculation about the contents of the Iraqi weapons declaration, but we simply need to wait a few days for some detailed preliminary analysis. Nobody really expects that it is truly complete or even accurate, but it should have enough to keep “the dogs of war” at bay for a while longer. An Iraqi official hinted that the declaration would name the countries and companies who had helped Iraq with its weapons programs. This could result in some truly embarrassing disclosures, possibly even for some U.S. companies or companies they work with, and possibly even some former or even current government officials.
I took a look at nine pages of the declaration that CNN posted on their web site and much of it was certainly a recitation of previously known information. These were mostly table of contents pages, so there is no way for us to know if the actual content is old or may contain at least some new information. There were some notations about translation from Arabic, but I think that the document pages may actually have been translated by Iraq before presentation to the U.S. The photos from Iraq showed covers in English and the bindings appear to be for English rather than Arabic (right-to-left) documents. The Arabic documents are probably limited to original supporting documentation. I imagine that the paranoid Iraqis forced their scientists and engineers to do the original documents in Arabic so that they could be carefully reviewed and then translated by a separate, loyal staff so that the scientists could not surreptitiously sneak out important details.
The inspectors continue to incrementally ramp up. Even by the end of the month it is not likely that they will be able to complete much more than even a modest amount of cursory inspections. They will also begin to need some hard intelligence assistance from the various national intelligence agencies. The U.S. may be reluctant to hand over much “solid” evidence that might compromise sources, but the Brits may be more forthcoming.
The whole process with Iraq is very dynamic. I would not categorize the situation as a true crisis such as the Cuban Missile Crisis. It is more of a low-grade crisis. It is interesting to note that even with Cuba, which was a definite, high-grade definite crisis, Fidel Castro is still in charge after all these (forty) years.
[UPDATED 10/11/02] My assessment remains that there is virtually no chance of an all-out military conflict with Iraq this year and only a 20% chance next year.
[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.
[UPDATED 7/23/02] 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 know the infamous dot-com internet “new economy” is over, but it’s rather difficult to believe that a guy from a railroad company that gets government subsidies is the right choice for Secretary of the Treasury. How disappointing. Sure, maybe Snow will give “better” television interviews and work more effectively with Congress, but I don’t see what the administration thinks this guy will deliver to Wall Street. Sure, he will show respect and deference to Wall Street, but it will be a monumental task on his part to truly inspire great confidence and respect on Wall Street. The choice of a Wall Street insider for the position of chief economic advisor does little – in fact nothing – to make up for the seemingly poor choice to head Treasury. Maybe Snow really will turn out to be a great Treasury Secretary, but he’ll be starting out in a very deep hole and have to spend a lot of time convincing Wall Street that he’s going to deliver something for them. One of the first big hurdles is convincing the foreign exchange crowd that the U.S. “dollar policy” is sound – and clear. Nominally we still have a “strong dollar” policy, but people have begun to challenge that assertion and in fact the dollar has depreciated significantly over the past year. Tax cuts and fiscal spending can certainly help the economy, but this poor guy has a really tough row to hoe to convince the Wall Street bond market that the new fiscal policy will manage the looming fiscal deficit responsibly. The market reacted very negatively to Snow’s appointment (futures were up Sunday evening before the rumored appointment leaked out, but then reversed and plunged as the rumor hit the market, and that was only the beginning), but maybe the market has now fully discounted the potential negative implications of the Snow appointment.
There have been a large number of analyst downgrades over the past few weeks. Obviously they weigh heavily on traders who usually opt to sell heavily on even the hint of bad news. But, once the initial trader reactions subside, stocks should be much better positioned to advance. The actual rating changes really do not matter since no sane investor will pay any attention to Wall Street “sell-side” research or recommendations. The real impact of the analyst comments is simply to scare traders and momentum investors out of those stocks in the near term. I’m sure there will be plenty of additional analyst downgrades over the next few weeks, but the lion share of the important ones are probably behind us. Note that quite a number of downgrades were due to valuation and the recent plunge erased a good portion of that overvaluation.
I’ll probably go ahead with my weekly dollar-cost averaging purchase today. I’ll certainly get a better price than last week.
The market will anxiously await a revised economic outlook and risk statement from the Fed FOMC meeting today.
It will be interesting to see if the market attempts another bounce after Monday’s washout. There is a good chance of it.
My forecast for today is that Nasdaq will close in the range -50 to +60. Nasdaq came in at -55 on Monday, moderately below the lower end of my range of -50 to +50. 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 12/10/02] The rally is now 42 days old, and 7 days off its peak, and definitely unraveling. It may or may not completely unravel. I’ll give the market five more days before concluding whether we’re truly back to a bear market or just in a trading range (or, heaven forbid, starting on a new bull market). If Nasdaq can’t break out by the end of the week, the entire rally could fizzle and evaporate. The short-term goal is to simply wait for the next bounce and then wait a few more days for a confirmation of the bounce. That’s the signal that will tell us when the “carnage” is over. It is looking rather gloomy, but Nasdaq still has a good shot at breaking out for a solid year-end “Santa Claus” rally.
[UPDATED 9/25/02] Technically, we are back in a bear market (as of Monday, 9/23) 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 11/30/02] I rate the probability of serious deflation in the U.S. over the coming year at 1 in 1,000 (0.1%). It’s easy to make a hypothetical case for deflation – in any economy – by simplify hypothesizing that a whole bunch of factors all turn south and policymakers do all the wrong things. Fortunately, that’s not likely to happen in the U.S. Sure, there are plenty of sectors where prices have come down either to excess capacity or suppressed demand, but capacity has a way of adjusting and suppressed (or pent-up) demand eventually has a way of reasserting itself. Policymakers are well aware of previous episodes of deflation, so there is little reason to believe that they will make “all the wrong moves” needed to force the economy into a deflationary depression. In truth, we are actually looking at a higher risk of inflation next year since prices of intermediate goods have risen at ever higher rates for each of the five past months. In short, don’t make the mistake of assuming that hypothetical, theoretical, potential disasters are the likely scenario.
[UPDATED 11/9/02] The ECRI Weekly Leading Index (WLI) tells us that the economy is starting to pick up a little. Not enough to make people happy, but enough to offer encouragement that neither a double-dip recession nor deflation are in our cards.
[UPDATED 10/21/02] The economy is looking even more mixed than before. Although there are plenty of signs of weakness, there are increasingly tantalizing tidbits of improvement. Here in New York, street traffic and business in restaurants has dramatically picked up. In fact, quite a number of new restaurants have opened, with more on the way. And this is despite the weakness on Wall Street. In Q3 tech profits and Q4 guidance, there is certainly a fair amount of weakness, but there have also been quite a number of bright spots, even if they are small bright spots. I suspect that a number of companies did their best to get as much bad news out as possible so that Q4 would be as strong as possible. I also went back and looked at the September Employment report and noticed that the loss of 43,000 non-farm payroll jobs was actually a 478,000 gain once you remove the seasonal adjustment. It turns out that the change from August to September varies widely over the years, so the seasonal adjustment is rather harsh. And finally, the 400,000 “threshold” for initial unemployment claims is not as hard a boundary as it seems, and 401,000 to 425,000 over the past seven weeks probably does not indicate a true employment contraction since the population and workforce have been growing over the years since the 400,000 rule of thumb was concocted. The bottom line is that the economy is hanging in there and even growing a little, even if it is not up to its full potential.
[UPDATED 11/7/02] I’ve decreased my estimate of the probability of a double-dip recession to 10% (from 20%) due to hefty half-point Fed rate cut. 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 12/9/02] I don’t yet have a forecast for Q4 GDP. The accounting is so inscrutable as to defy any rational forecast. People expect economic activity to slow dramatically from the pace of Q3, so real GDP growth in the range of -1.5% to 3.5% (midpoint of 1.0%) is possible. A survey of economists by The Economist shows an expectation for real GDP growth in 2002 of 2.4% (low of 2.3 to 2.6), which implies Q4 GDP growth of -0.7% (low of -1.1 to 0.1). The same survey forecast real GDP growth of 2.6% in 2003 (low of 2.0 to 3.3). There was no hint or suggestion of deflation in these survey results. In fact, The Economist poll for consumer prices forecast a gain of 2.1% in 2003.
[UPDATED 12/4/02] Even Stephen Roach, the gloom-and-doom economist from Morgan Stanley, is forecasting real Q4 GDP growth of 1% (as of 12/2/02). He had been adamant that the economy would have a double-dip recession, but now admits that we have escaped two “double-dip alerts” this year. He does still expect that there will be more double-dip scares in the months and quarters ahead. He is a very smart former-Fed economist and even though I don’t share his gloominess, at least he does offer a solid lower bound for the likely performance of the economy.
[UPDATED 11/27/02] A panel of professional forecasters of the National Association for Business Economics (NABE) estimates that real Q4 GDP should grow at a rate of 1.4%. Q1 GDP should grow at a 2.5% rate. Full year 2003 GDP should grow at a rate approaching 3%. The survey was taken from November 9th to 14th.
[UPDATED 11/8/02] The Business Cycle Dating Committee of the National Bureau of Economic Research (NBER) is still uncertain whether the recession truly ended of whether the end was merely temporary with a second dip to follow. In their words (as of November 5), “The behavior of the economy in the first eight months of 2002 indicates that the decline in activity that began last year may have come to an end. But recent data indicate that additional time is needed to be confident about the interpretation of the movements of the economy last year and this year.”
[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: December 10, 2002 12:26:28 AM -0500
Copyright © 2002 John W. Krupansky d/b/a Base Technology