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(Will be updated for Monday)
Friday was another strange day for Nasdaq, with the market staying in a much narrower band than usual (+8/-4 relative to the closing level). Trading was very choppy, which may have been due to the so-called “quadruple-witching” with various futures and options contracts all expiring on the same day.
The good news was that there was no further sell-off on concern about Iraq.
Volume was somewhat light (1.66 billion shares). Breadth was moderately positive, with 1.33 gainers for each loser.
According to Thomson Financial I-Watch, institutional investors were net sellers of Intel (INTC), Cisco (CSCO), JDS Uniphase (JDSU), and Qwest (Q), but net buyers of Sun (SUNW), EMC (EMC), AT&T Wireless (AWE), Sprint PCS (PCS), and Micron (MU). Institutions are shuffling around without a clear overall market trend.
The “final estimate” for GDP in Q3 registered no change since the preliminary estimate for real GDP growth of 4.0%. This was a slightly positive report since there was no downwards revision.
The Economic Cycle Research Institute (ECRI) Weekly Leading Index (WLI) registered a modest gain (but after last week’s WLI was revised downwards), and its six-month smoothed growth rate rose moderately (but is still fairly negative) and has now risen for seven consecutive weeks. This was a somewhat positive report. 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 DRAMeXchange Index (DXI) for DRAM memory chip prices registered a moderate decline (2.1%) over the past week. This was a negative report, but there is a lot of volatility (DXI rose 5.5% in the preceding week).
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, fell by 8.91% on Friday to 31.47, which is in the lower half of the high anxiety zone (30 to 35). The market rally relieved a lot of anxiety.
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 slightly negative tone for the Friday evening session, closing down 0.21 points, basically flat. This was the usual Friday evening ambivalence and unwillingness to place any further bets on the market direction.
[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% (down from 14%) 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 38% (unchanged) 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 cut 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 modestly against the yen and fell slightly 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.
[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 modestly, and is only modestly above 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 fell sharply on speculative profit-taking. Some of this profit-taking was due to speculators not wanting to sit on their gold positions over the weekend when anything could happen, so it is very possible that gold could pop up again on Monday. On the other hand, the holidays will result in overall lower levels of trading, so the lack of liquidity over the next two weeks could cause speculative activity to result in very dramatic volatility.
[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 wasn’t much in the way of new news on the Iraq front. President Bush personally affirmed the administration’s already-stated position that Iraq has come up short on detailed information on its weapons programs. There was more talk about the expected military build-up in the Gulf region, which certainly helps send the message to Iraq that “or else” is not a good choice for them to make.
The heads of the two UNMOVIC inspections team made a public appeal for the members of the UN Security Council to supply the inspectors with specific intelligence that would help the inspectors find what they are looking for. The administration at least informally agreed to do so, but doesn’t seem to be in any hurry.
Meanwhile, inspections continued for a second time on a Friday holy day. They continued to perform gamma radiation surveys to discover any hints of efforts of work with radioactive materials. Two more inspectors arrived, bringing the count to 115.
[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.
Two trade associations that represent Microsoft competitors have petitioned the judge to allow them to file an appeal of the settlement in the antitrust case. Since, by definition, the parties to the settlement (MS, DOJ, and 9 settling states) have no interest in appealing (since they agreed to the settlement), third parties filing for an intervention are the only route for appealing the settlement. The two trade associations contend that their members will be directly adversely affected by the settlement. The judge does not have to agree to allow these third parties to intervene, and even if she did, the appeals court is not likely to find any problems (“reversible errors”) in her handling of the settlement.
[UPDATED 8/5/02] Check out our book list.
I have mixed feelings about the big stock research settlement. On the plus side, this big mess will be behind us and the market and investors can go back to focusing on the economy and business outlook. On the negative side, I’m not sure how big a dent the settlement will really make in the mountain of shoddy business practices engaged in by Wall Street. I have always been more concerned about the conflict between ‘research’ and brokerage operations (collecting commissions that result from changes in research opinions) than with investment banking. The primary reason most people are really upset is that stocks fell from the March 2000 peak. All people really want is for stocks to start going back up again. The real questions are sustainability, and avoiding stocks that don’t meet an investor’s objectives. There is a real danger that the “new” system will simply result in a lot of churning (buy, sell, buy, sell, …) rather than putting people into stocks for the long haul. In other words, more profits (commissions) for the brokerage firms, but not necessarily better value for the investor. The real problem that inspired the current settlement was simply that the stock analysts were putting people into stocks that were far too speculative for the average investor. The other problem was mutual funds where investors piled onto the hot funds (anything Janus) and then the money managers simply kept buying their favorite stocks without limit. Janus did eventually close some of its funds in the spring of 2000, but that simply shut off the spigot and helped fuel the reversal of the ‘bubble’. Nobody has proposed or implemented any solution to that problem. We do want investors to flock back to the stock market, but that will inevitably simply start yet another boom/bust cycle. The “system” is still as messed up as it always was, but maybe that’s okay. Caveat emptor, ad infinitum.
I also have mixed feelings about stock analyst Jack Grubman being fined $15 million and being permanently banned from working in the securities industry. Sure, he did some bad things and deserves punishment, but he wasn’t working in isolation, so it is really the whole culture (the Wall Street “system”) that he was working in that should be reformed. Even the huge research/investment banking settlement won’t do it. The heart of the problem is having research, investment banking, and brokerage under the same umbrella. They really need to be kept completely separate, without even a high-level executive overseeing them as an “integrated” operation. The problem is that the brokers are really just salesmen for the investment banking and so-called “research” is simply marketing literature to aid the salesmen (brokers). The fact that your broker also helps you buy and sell other stocks is simply supporting the “aftermarket” which is essential for investment banking to work in the first place. Even with the best “Chinese walls”, somehow the people on each side will be very aware that the financial success of the umbrella organization (and the employees who own stock in the umbrella organization) will be enhanced if there is some “synergism” between the different units even if there is no direct interaction or direct compensation. The system is a mess. Grubman was simply using the system the way it was supposed to be used. They should be going after the generals, not the foot soldiers. Fix the system and then the temptation for abuse will go away.
[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.
There may not be a significant amount of business or economic news for the rest of the year due to the holidays. Of course, we will hear more clues about holiday retail sales. The post-Christmas sales could be quite interesting.
I made my weekly dollar-cost-averaging purchase of January 2004 S&P 500 Tech Sector ‘Spider’ (XLK) LEAP call options with a strike price of $20.
People are still struggling to fathom the direction and pace of the economy and the various business sectors. But, they’ll also worry about Iraq and oil prices when they lack other, more pressing news.
Trading could get rather slow with the holidays right in the middle of the next two weeks. A lot of people will simply be gone for the duration. Others will be taking off early before the holidays. And a lot of traders will be reluctant to carry positions into days with low liquidity when anything can happen.
My forecast for Monday is that Nasdaq will close in the range -40 to +40. Nasdaq came in at +9 on Friday, modestly below the midpoint of my range of -30 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 12/21/02] The October recovery is 51 days old, but the correction off the peak is now 16 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 four more days (I add a day if Nasdaq rises at least 1% and subtract a day if it declines at least 1%) 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 had another initial bounce on Friday, we wait two days (Monday and Tuesday) without seeing a new low, and then look for a 1.5% bounce on Thursday thru the following Tuesday on volume higher than the previous day with no intervening test of the low on the day of the initial bounce. Such a “confirmed bounce” would signal the start of a new up-leg 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 12/21/02] The Blue Chip economic forecasters group has estimated real Q4 GDP growth at 1.4%.
[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 12/21/02] 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 Q4 forecasts, and virtually nobody is beating the drum for a great Q4 or Q1. And nobody has any real sense of visibility into Q2. 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 21, 2002 12:41:31 AM -0500
Copyright © 2002 John W. Krupansky d/b/a Base Technology