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(Will be updated for Monday)
82% of the Nasdaq decline on Friday occurred within the first 45 minutes of trading. That included a negative response to the better than expected Michigan consumer sentiment report. Nasdaq actually recovered a little after that early morning low and did not make a new low until 2:45 p.m. Nasdaq was still within a point of the morning low a mere 15 minutes before the close. Clearly there was little buying interest, but there was not very much interest in selling either other than mostly during the first hour. The mid-afternoon recovery attempt was rather weak, only climbing 12 points above the morning low.
There was a modest amount of negative news, but mostly the sell-off was simply due to lousy technical sentiment. Nasdaq had struggled too much with the 1400 level during recent days, so traders threw in the towel and let the bears have at it.
Volume was very light (1.32 billion shares). Breadth was strongly negative, with 2.23 losers for each gainer. The decline and breadth were very disappointing, but are not very indicative due to the very light trading volume.
According to Thomson Financial I-Watch, institutional investors were net sellers of Nortel (NT), but net buyers of Sun (SUNW), EMC (EMC), Lucent (LU), Cisco (CSCO), Intel (INTC), JDS Uniphase (JDSU), Applied Materials (AMAT), and Motorola (MOT). Clearly institutions were not treating the dip as a sign that dramatic further declines were in store.
The Producer Price Index (PPI) report for November registered a greater than expected moderate decline in prices for finished goods. This was a mixed, but relatively neutral report. Producer prices fell slightly less when food and energy price changes were excluded. Energy prices declined sharply, but have already started to rise again. Food prices rose moderately. Prices for intermediate goods fell slightly after rising for five consecutive months. The standout was that prices for crude goods rose sharply. There is a fair amount of volatility, and this report merely erases part of the sharp rise in October, so there is not much in this report to get very excited about one way or the other. Inflation is relatively tame, and there is no strong indication of emerging deflation either. The bottom line is that there was a moderate decline in producer prices.
The Manufacturing and Trade Inventories and Sales report for October registered a moderate rise in sales, a modest rise in inventories, and a slight decline in the inventory/sales ratio. This was a slightly positive report. Business may not be booming, but it is still growing.
The preliminary University of Michigan Consumer Sentiment Survey for December registered a greater than expected moderate rise. This was a modestly positive report. Both the current conditions and expectations components of the index rose a similar amount. Note that most of these consumer confidence surveys are not leading indicators of consumer spending in the months ahead. Mostly they are lagging, or at best coincident indicators.
The Economic Cycle Research Institute (ECRI) Weekly Leading Index (WLI) registered a sharp decline, but its six-month smoothed growth rate rose moderately (but is still fairly negative) and has now risen for six consecutive weeks. This was a mixed report. There does tend to be a fair amount of volatility, which is the reason the smoothed growth rate is needed. The WLI is still suggesting anemic growth at best, and possibly some weakness in the months ahead. The negative WLI growth rate doesn’t necessarily indicate an economic contraction ahead, but simply that growth will be below what we would like to see in a robust recovery. The WLI decline is a definite disappointment, but one week does not start a new trend. Weakness in the stock market, a rise in jobless claims, and a decline in mortgage applications all weighed on the index.
The DRAMeXchange Index (DXI) for DRAM memory chip prices registered a moderately sharp gain (5%) over the past week. This was a positive report, but there is a lot of volatility (DXI fell 7.7% in the preceding week).
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, rose by 4.25% on Friday to 32.12, which is modestly below the midpoint of the high anxiety zone (30 to 35). Clearly people were disappointed by the market decline, but there was no panic. VIX peaked at 32.88 in the morning, fell off towards noon, and was in a fairly narrow range for the afternoon.
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 positive tone for the Friday evening session, closing up 0.81 points. People believe that the sell-off was overdone, but given the fierceness of recent negativity, people are reluctant to stick their necks out too far, yet.
[UPDATED 12/12/02] The Fed funds futures market suggests that there will be no Fed rate changes through the May 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 through the January 28/29 FOMC meeting.
Fed funds futures suggest a 24% (down from 29%) chance of a quarter-point rate cut by the March FOMC meeting. In other words, futures indicate that the Fed will not cut rates through the March 18 FOMC meeting.
Fed funds futures suggest a 7% (down from 10%) chance of a quarter-point rate hike by the May FOMC meeting. In other words, futures indicate that the Fed will not cut rates through the May 6 FOMC meeting.
The dollar fell sharply against the yen and fell moderately against the euro. This was just another one of those occasional speculative bouts that will probably last only a few days or a couple of weeks at most. Most of the sudden move was caused by short-covering, but most of that covering is either over or will be over within a couple of days. Maybe the dollar will poke down to 1.03 or 1.04 to the euro before pulling back to under 1.02 again.
[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.
[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 rose moderately to a new peak. It lost a lot of its momentum from Thursday, but that may just be due to profit-taking ahead of the weekend. In other words, many of these people who are supposedly buying gold as a safe haven from the “risky” dollar would rather sit in cash over the weekend. Go figure.
[UPDATED 12/14/02] The latest peak was the December 13, 2002 closing high of $332.90 and an intraday high of $335.50. The previous 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.
Inspections continue to ramp up. Inspections occurred on a Friday, a Muslim holy day, for the first time. Inspectors did have difficulty entering some rooms of a facility that that had never been inspected before, but supposedly it was simply due to the fact that the person with the keys was not at work due to the holy day.
The “war of words” continues. The U.S. is saying that a preliminary review of the Iraq weapons declaration shows that it is “far, far, far short” from being complete. Certainly the document is incomplete, but the question is how incomplete, in what ways, and what process to use to drive it towards completeness. CNN.com says that unnamed U.S. officials say that the administration is deliberately taking a slow approach toward Iraq in order to gauge the political temperature, both internationally and domestically, as well as get a better sense of the ongoing weapons inspections and the mood in Iraq. That’s a far cry from an “imminent war”. The U.S. complaints will be used to force the inspections to be more comprehensive and more intrusive. Then, everyone will be able to see that the U.S. pressure is due to incompleteness and deception by the Iraqis rather than the U.S. seeking an excuse for war.
For the week ending December 10, the Pentagon reports that 70 additional reservists are on active duty, for a total of 50,825. There is still no sign of any large-scale call-up that would be required well in advance of an all-out military conflict with Iraq. For comparison, there were 61,373 reservists on active duty as of January 2, 2002, 79,124 as of August 7, 59,097 as of October 16, and 51,358 as of November 13. There isn’t even anything remotely resembling an upwards trend in sight.
[UPDATED 12/12/02] 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. If there is to be an all-out war with Iraq, it would happen in the winter of 2004, not this winter.
[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.
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[UPDATED 8/5/02] Check out our book list.
Coca-Cola (KO) announced that “the Company will no longer provide any quarterly or annual earnings per share guidance”. This was quite a surprise. Coke says that they “believe that establishing short-term guidance prevents a more meaningful focus on the strategic initiatives that a Company is taking to build its business and succeed over the long-run”, that they are “quite comfortable measuring our progress as we achieve it, instead of focusing on the establishment and attainment of public forecasts”, and that “share owners are best served by this because we should not run our business based on short-term 'expectations.' We are managing this business for the long-term.” I have mixed feelings about this. On the one hand I strongly feel that management has a fiduciary duty to present shareholders with their plans and performance expectations with the expectation that management will be measured by their performance. On the other hand, the quarterly stock price gyrations caused by companies missing or exceeding expectations by a few pennies is one of the most horrendous aspects of Wall Street misbehavior. And the “earnings management” that resulted from those gyrations was equally abhorrent. I absolutely concur that companies should be judged on long-term expectations. On the other hand, short-term mis-pricing of stock is one of the great opportunities for speculators to make money and for long-term investors to periodically pick up great bargains (which was how Warren Buffett bought into Coke). I could settle for all companies adopting Coke’s stance, except for the fact that it puts even more emphasis on the shoddy work of conflicted stock analysts. On the other hand, that may merely put more pressure on companies to become even more transparent and disclose more facts about their businesses and plans so that analysts really do have a good shot at forecasting the performance of companies. Of course, I also believe that the best outcome would be shift emphasis away from earnings to book value, but that would require even more disclosure, especially for the future trajectory of spending plans. Note that Warren Buffet sits on the board of directors of Coke, so he undoubtedly had some influence over this decision, although the rest of the board may not have adopted his preferred decision. Overall, I would have to say that I am pleased that Coke is taking a principled stand against the destructive short-term bias that currently plagues Wall Street.
[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.
Gateway (GTW) really does need to go away. They simply do not offer any kind of compelling value to anybody over HP (HPQ) and Dell (DELL). At this stage they are simply a spoiler in the market. They won’t go away on their own since they have over a billion in cash and securities. Their market cap is actually less than their cash and securities, but it isn’t so easy or cheap to try to buy the entire company and then fire everybody, and try to get out of all the leases and other long-term commitments. I’m not sure if it would make sense for HP or Dell to buy them, and there might be some antitrust concerns. Unless something happens, Gateway will continue to burn through their cash and put pressure on not only their own profit margins, but the margins of the other players as well. Although Dell seems to be doing quite well, and HP is somehow limping along and may simply let their market share shrink to the level where they can tolerate any PC-related losses. Maybe there is some way to do a shareholder initiative to voluntarily liquidate the company.
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My forecast for Monday is that Nasdaq will close in the range -50 to +50. Nasdaq came in at -37 on Friday, only modestly above the lower end of my range of -40 to +60. 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 12/14/02] The rally is now 46 days old, and 11 days off its peak, and looking quite ragged but still retains all of the October gains even though the November gains are gone. 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). The decline on Friday more than erased the bounce of 12/10, so we are back to square one waiting for a new bounce. It is looking rather gloomy, but Nasdaq still has a 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 14, 2002 12:44:48 AM -0500
Copyright © 2002 John W. Krupansky d/b/a Base Technology