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Nasdaq tried to probe further above the 1400 level, but there just wasn’t any significant amount of ‘real’ buying to support it, so down it went. The good news is that Nasdaq didn’t fall very far (15 points) at the worst level of the day and actually recovered to close only 8 points below the 1400 level. It’s not fatal that Nasdaq failed to stay above 1400, unless we can’t break through strongly within the next few days.
A sharp little upwards tail of buying in the last 15 minutes of trading suggests that day traders were very active in trying to short the market. They weren’t particularly successful, but the good news is that there wasn’t much in the way of ‘real’ selling.
Volume was very light (1.3 billion shares). Breadth was moderately negative, with 1.43 losers for each gainer.
According to Thomson Financial I-Watch, institutional investors were net sellers of Cisco (CSCO), Intel (INTC), and JDS Uniphase (JDSU), but net buyers of Sun (SUNW), Oracle (ORCL), EMC (EMC), Applied Materials (AMAT), Lucent (LU), and Nortel (NT). There was plenty of buying into the dip, so it would not seem that institutions are betting on a dramatic further deterioration of the October recovery.
The Consumer Price Index (CPI) report for November showed that inflation was very benign and no hint of deflation. This was a positive report.
The New Residential Construction report for November registered a moderately sharp decline in total housing permits, a slight gain in single-family permits, a moderately sharp decline in multi-family permits, a moderately sharp gain in housing starts, a moderate gain in single-family starts, a moderately sharp gain in multi-family starts, a very sharp gain in total housing completions, a very sharp gain in single-family completions, and a moderate rise in multi-family completions. This was a fairly positive report. The decline in permits raises a yellow flag, but the decline was limited to multi-family housing and there was actually a gain in permits for single-family housing.
The Industrial Production report for November registered a slight gain, but would have been a moderate decline if motor vehicles and parts were excluded. Capacity utilization rose modestly (good news). This was a mixed, but slightly positive report. Production of business equipment declined moderately, but at a slower pace than in the preceding two months. Production of consumer goods rose moderately sharply. The decline in production in October was revised to be a moderately smaller decline. The manufacturing sector is not contributing much to the growth of the economy, but at least it is not deteriorating further.
The Bank of Tokyo-Mitsubishi (BTM)/UBS Warburg Weekly Chain Store Sales Snapshot registered a relatively sharp rise. This was a positive report. According to the report, “The 2002 holiday season-to-date performance is now on track for a better season than the last two years, but still -- so far -- below average.” Weekly sales were 4.5% higher than in the same week in 2001.
The weekly Reuters Instinet Redbook Research National Retail Sales report registered a moderate gain for the first two weeks of December compared to the same two weeks one month ago. This was a mixed, but slightly positive report. According to the report, “Sales continued to be soft during the second week of December.” There was an expectation that sales would be significantly stronger.
After the close: The weekly ABC News/Money Magazine Consumer Comfort Index registered a modest decline to -23 from -22 (out of a range from -100 to +100), to its lowest level in nine years. This was a slightly negative report. There was a 2% decline in how consumers view their own finances, no change in how people view the overall economy, and no change in how consumers view the buying climate. The stock market decline and rising anxiety over Iraq certainly contributed to the decline in confidence. As usual, consumer confidence reports are not leading indicators (except maybe for other consumer confidence reports). The weekly report tends to be somewhat volatile, so it will take a couple weeks to see if this negative report is just a blip or the start of a new downtrend. We had a sharp decline last week, but this modest decline may indicate a stabilization after an adjustment rather than a new trend.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, rose by 0.60% on Tuesday to 30.16, which is modestly above the bottom end of the high anxiety zone (30 to 35). The market decline was a modest disappointment, but no big deal.
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 negative tone for the Tuesday evening session, closing down 5.64 points. People were rather disappointed that Micron (MU) fell far short of expectations.
[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 an 8% (down from 8%) 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 25% (up from 19%) 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 very slightly against the yen and fell moderately sharply against the euro. It’s possible that speculators might run the euro up to 1.04 or 1.05 dollars, but unlikely that they would get much further before taking profits. Much of the current “rally” in the euro was simply short-covering by speculators who were long on the dollar in the expectation that exchange rates would stay fairly stable for a while. Obviously they were wrong and paid for their mistake, but the new batch of speculators (who are betting on a continued slide in the dollar) will eventually run up against a wall and be forced to disgorge their positions as well.
The White House at least semi-officially reaffirmed the so-called “strong dollar policy”, saying “Our policy is unchanged. We support a strong dollar and believe growth policies lead to a strong dollar.” The dollar gained back some of its losses after the comment hit the market. There had been some confusion in the foreign exchange markets ever since Treasury Secretary O’Neill tendered his resignation. In truth, there has been confusion over the policy since former secretary Rubin. The market has had trouble believing that the U.S. really has a strong dollar policy. Most of the problem is that currency traders and the policy guys in Washington have differing views as to what constitutes a “strong dollar policy”. To the policy guys, it simply means having economic policies that lead to a strong economy (or at least relatively strong compared to Japan and Europe) and it is that economic strength which will cause currency traders to favor the dollar. But, as far as Washington is concerned, it is the marketplace that determines the value of the dollar, not some specific policy or manipulation in Washington. The currency traders and strategists think in terms of governments (such as Japan) actively seeking to strengthen or weaken the value of their currency through market intervention if the exchange rate moves too far from the target of the policy makers. To a currency trader or strategist, that would imply that a strong dollar policy means that the government actively props up the dollar if its value begins to decline. Or, more specifically, fear of possible intervention keeps speculators from pushing too hard to force a currency up or down because they know that policy makers will respond. Somehow, speculators and strategists think that if the U.S. no longer had a “strong dollar policy”, then the U.S. would default to a weak dollar policy and actively take steps to weaken the dollar. The recent euro rally was merely wishful thinking on the part of speculators and strategists who had been hoping that the U.S. would actively start to weaken the dollar in a bid to boost U.S. exports. The real problem here is that a number of the major Wall Street banks are actively playing the currency markets (and encouraging major clients to do the same) with the same effect as if they were manipulating the markets (which would be illegal).
[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 was unchanged, and is modestly above the psychological $30 level. Most of the recent gain was simply momentum speculation keying off of Venezuela and Iraq.
In response to the problems in Venezuela, the White House announced that the Department of Energy has temporarily suspended its program to fill the Strategic Petroleum Reserve to take a little pressure off the demand for oil. This should assure that even more supply of oil is available. For the most part, there is no shortage of oil that would justify the recent run-up. OPEC has committed to make up for any shortfall from Venzuela, but so far there has been no need. This “rally” is purely based on short-term speculation.
[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 slightly to a new peak closing price of $336.80 and a new peak intraday price of $342.70. There did appear to be a large amount of profit-taking off the intra-day high, so we might be near the end of the current rally.
Some of the recent interest in gold is a play on expectations that inflation will reappear in the U.S. in 2003 as the economic recovery strengthens.
[UPDATED 12/17/02] The latest peak was the December 16, 2002 closing high of $336.40 and an intraday high of $337.30. 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.
Eight more inspectors arrived in Baghdad, bringing the total to 113, with 94 in UNMOVIC and 19 for IAEA.
Although the administration keeps insisting that Iraq will not get any “second chances”, that’s exactly what is happening right now. Maybe the administration only intended that comment as rhetoric, but it does do a little damage to the credibility of the U.S. There is some expectation that there would be some give and take with the inspectors as intermediaries to highlight issues for the Iraqis and pursue them without the U.S. having to get directly involved with a big-deal diplomatic confrontation. This process won’t go on indefinitely, but as long as Iraq is at least somewhat responsive, the dogs of war will be kept at bay.
Iraq has informally agreed to supply lists of scientists who were involved in the banned weapons programs by the end of the month. It is not clear whether this was supposed to be part of the original weapons declaration or is a wholly new request. This would appear to be a “second chance” item. In any case, Iraq at least appears to be cooperating.
[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.
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.
A Merrill Lynch survey of 300 fund managers around the world showed that a net 25% were now overweight in stocks compared to 3% in November and a net 10% underweight in October. They are now a net 33% underweight in bonds compared to 14% underweight in November. Of course this doesn’t tell us where they will be in January or even for the rest of December, but at least some kind of stock-oriented trend was in place.
Some good news in Micron’s (MU) quarterly report and outlook was that they reaffirmed their capital spending guidance. This is good news for the chip equipment sector.
No activity.
With Nasdaq sitting less than 8 points below the 1400 level, traders may take another shot at it, or they may just punt since the market had plenty of chance to break through that level on Tuesday.
Traders will continue to position themselves for quarterly reports due this week from Oracle (ORCL), 3Com (COMS), Palm (PALM), Jabil (JBL), Solectron (SLR), Research In Motion (RIMM), Manugistics (MANU), and TIBCO Software (TIBX). The market could rally a bit in advance of the reports in anticipation that results won’t be as bad as had been expected.
My forecast for today is that Nasdaq will close in the range -40 to +50. Nasdaq came in at -8 on Tuesday, well below the midpoint of my range of -40 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 12/18/02] The October recovery is 48 days old, but the correction off the peak is now 13 days old. Nasdaq is looking quite ragged but still retains all of the October gains even though most of the November gains are gone. It may or may not completely unravel. I’ll give the market five more days (I add a day if Nasdaq rises and subtract a day if it declines) 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). Now that we saw a decent bounce on Monday 12/16 and one day of modest loss, we need to see another day go by without setting a new low and then we need to see a solid 1-2% bounce somewhere between Thursday and next Tuesday on higher volume than the preceding day without setting a new low of any of those days. That would be confirmation that we are embarking on a new rally, the next leg up of the October recovery.
[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 12/18/02] There seems to be some amount of consensus that the economy will continue to grow at a sluggish pace in the first half of 2003, but then accelerate in the second half of the year. Of course, that’s what people said about 2001 and 2002. Part of this new consensus is an expectation of war with Iraq in Q1, possibly spilling into Q2, but then the economy would pick up after Iraq is out of the way. I don’t concur with the consensus on Iraq, but I am fully prepared to assume growth in Q1 and Q2 may be no more than modest. On top of this economic expectation, we layer an expectation that the stock market is typically expected to react six months in advance of economic changes.
[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 12/16/02] The economy is looking even more mixed than before. Although there are plenty of signs of weakness, there are increasingly tantalizing tidbits of improvement. 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 12/18/02] 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 December 7), “The behavior of the economy this year indicates that the decline in activity that began last year may have come to an end. But recent data show 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 18, 2002 12:28:35 AM -0500
Copyright © 2002 John W. Krupansky d/b/a Base Technology