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Trading was light on Monday, but the really good news was that there was no sign of any significant selling. For all the expressions of “worry” about Iraq and other geopolitical concerns, there was no comparable amount of selling.
Volume was very light (1.16 billion shares). Breadth was fairly positive, with 1.24 gainers for each loser.
According to Thomson Financial I-Watch, institutional investors were net sellers of JDS Uniphase (JDSU) and Qwest (Q), but net buyers of Sun (SUNW), Cisco (CSCO), EMC (EMC), Microsoft (MSFT), Lucent (LU), Intel (INTC), and Dell (DELL). Institutions were seeing something that they liked.
The Personal Income and Outlays report for November registered a moderate gain in personal income and a moderately strong gain in personal spending. This was a positive report.
The “final” University of Michigan Consumer Sentiment Survey for December registered a moderate gain, slightly better than expectations, but modestly below the preliminary reading. This was a slightly positive report. The expectations component fell modestly from the preliminary reading, but the current conditions component held up. Unfortunately, these consumer confidence surveys are not very effective at forecasting future consumer spending.
Wal-Mart (WMT) said its sales last week (through Friday, December 20) were at the low end of its expectations for December. This was a relatively neutral, but slightly negative report. The company did say that it was still counting on last-minute holiday shoppers to take up the slack. They said that sales of seasonal merchandise were strong last week but it was difficult to predict sales in the holiday season as customers buy “closer to the event” of Christmas.
Federated Department Stores (FD) said its sales for the November-December period would likely fall short of its forecast as demand did not pick up as much as it had hoped in the third week of December (through Saturday, December 21). This was a moderately negative report. However, Federated said it was difficult to forecast results because of an expected jump in sales in the last few shopping days before Christmas and the post-Christmas sales period. Federated’s December sales period ends Jan. 4.
J.C. Penney (JCP) said last week's sales were slightly weaker than expected, but it was still on track to beat its forecast for December. This was a neutral, mixed report. Shoes and children’s and home products were among the strongest categories last week.
Target (TGT) said sales fell well below its expectations for the third straight week, hurt by dismal sales of apparel and sporting goods. This was a negative report. Same-store sales for December so far are sharply off its growth forecast of between 3 percent and 5 percent.
ShopperTrak, which captures total sales at 22,000 stores nationwide, says that sales reached $7.2 billion on Saturday, up 4.5 percent from the year-ago period, barely edging out the $7 billion in revenues tallied the day after Thanksgiving. But the weekend’s receipts were up only 1.6 percent to $12.6 billion, as Sunday’s sales significantly weakened. Retail sales volume has actually been fairly decent, but the promotions have been so excessive that there is significant concern about the profitability of retailers. A significant level of consolidation will be needed in 2003 since there are simply too many stores chasing the available pool of shoppers.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, fell by 6.80% on Monday to 29.33, which is modestly below the top end of the moderately high anxiety zone (25 to 30). There was clearly relief that the market did not fall apart due to anxiety over all the geopolitical stuff.
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 mixed tone for the Monday evening session, closing up 0.24 points. A court ruling against Microsoft (MSFT) in favor of Sun (SUNW) set the market on an initial negative tone, but it recovered. People are still effectively clueless as to which direction the market is headed next.
[UPDATED 12/12/02] The Fed funds futures market suggests that there will be no Fed rate changes through the May FOMC meeting.
[This is the info from Friday since my source gave no update today.]
Fed funds futures suggest a 12% 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% 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% 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 rose modestly against the yen and euro. The dollar had fallen further in early trading, but that “rally” ran out of steam as it became clear that stocks were not falling off a cliff and there was quite a bit of profit-taking.
[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 sharply, and is now moderately above the psychological $30 level. The nominal cause for the spike is that some number of U.S. refineries are now running below capacity due to the lack of oil flowing from Venezuela. OPEC says it won’t compensate for the loss until 20 days have passed with the price of oil above OPEC’s own “basket” price. That will take another two weeks. Still, there is plenty of oil sloshing around, so mostly this new shortfall will simply mean rerouting other supplies. And, maybe finding a few maverick producers (Russia, etc.) who are more than willing to over-produce at these lofty prices. There is no crisis yet, so there is no need for OPEC to act or for the U.S. to release oil from the Strategic Petroleum Reserve. In fact, the giant Hovensa refinery in St. Croix, which was one of the main destinations for Venezuelan crude oil, announced that it has purchased crude oil from other sources, although it is not clear when that oil will arrive. In any case, even with the cuts from Venezuela, Hovensa has been able to meet its commitments to U.S. customers for heating oil and gasoline. Hovensa has indicated to the Department of Energy that they would be interested in buying oil from the SPR, if and when it should become available.
[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 sharply, but is still well off the recent high.
[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.
The little flap over North Korea restarting its nuclear reactor/reprocessing plant is not worth any major anxiety, at least at this stage. It is something that the White House needs to work on, but there is no imminent threat worth losing any sleep over. The media will of course talk it up as a new “crisis”, but it is little more than an issue to be worked on between the U.S. and the two Koreas. The three countries are still trying to figure out how to dance together. North Korea may already have a couple of nuclear weapons and could build some more, but there is zero chance that they would give them away to terrorists. This latest spat is less about building nuclear weapons and more about politics between the three countries.
[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.
The head of the IAEA inspections team said that they are beginning the process of interviewing people who would know about Iraq’s nuclear weapons program.
The head of the IAEA inspections team stated even more forcefully that his team needs access to the concrete evidence that the U.S. says it has.
Iraq essentially admitted that they had tried to import partially processed uranium from Niger. Iraq disputed the State Departments assertion that Iraq had tried to procure uranium by claiming that it was uranium oxide, not uranium (metal) that they were trying to acquire. That distinction is irrelevant since the whole point was that Iraq had no other possible use for the uranium other than for building weapons. Although, I suppose they could have claimed that they wanted the uranium for the same purpose that the U.S. military uses depleted uranium: to make bullets that can penetrate armor. But, they did not make even that argument. Iraq did say that the attempted procurement was in the mid-1980’s, so it would all seem to be moot unless the state department has evidence of more recent procurement attempts.
Some new inspectors arrived in Baghdad, but some earlier inspectors left. This was a normal, expected “rotation”. There are now 108 inspectors in Baghdad. Additional IAEA inspectors are expected on December 29.
Iraq managed to shoot down another one of our Predator reconnaissance drones. That’s the third one. For whatever reasons, shooting down drones is not considered an act worthy of any more response than what we do when they shoot at (but do not hit) our planes.
[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.
The judge in Sun’s private antitrust suit against Microsoft issued a preliminary injunction that will require Microsoft to distribute Sun’s Java with Windows. There will be no dramatic short-term impact from this injunction since Microsoft has been carrying Java anyway, except for some period time since Windows XP was released. Microsoft changed that and decided to continue to carry Java until 2004. Now, Microsoft will have to distribute Sun’s version of Java, and beyond 2004. This should not have any significant financial impact on Microsoft, although the Sun suit could ultimately result in $1 billion or more of damages, when it is ultimately tried and decided a couple of years from now. Microsoft will be appealing the preliminary injunction. The market may view this decision as a slight negative for Microsoft since it indicates that the judge accepts at least some of the arguments that Sun will be using in the full case. In any case, I don’t foresee any dramatic improvement in Sun’s business or loss to Microsoft’s business from this decision since anybody who wants Java can already easily get it. The same judge oversees the AOL/Netscape suit against Microsoft, so there could be some expectation that Microsoft could be required to distribute the Netscape browser (in addition to, but not replacing, the Microsoft browser).
[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.
Qwest (Q) was able to restructure some of its debt in such a way that some debt holders were forced to take a “haircut” so that Qwest now has more favorable terms that won’t force them into bankruptcy within the next couple of years and their total debt burden is reduced by $1.9 billion. Qwest still has a long way to go to get back to health, but this was excellent progress.
Click here for our more extensive commentary on The Telecom Problem.
Yahoo’s (YHOO) announcement of their intent to acquire Inktomi (INKT) is a great example of the kind of consolidation that will gradually work its way through the tech sector. It is a very good sign when a company acquires another for cash. This also shows that Yahoo is doing better financially than many people give it credit for. This move incrementally reduces the number of shares (and companies) consuming the interest of investors. And now some investors will have an incrementally greater amount of cash that they need to do something with. There is also the question of how many other companies like Inktomi are still floating around and might be good takeover candidates at these low stock prices.
It remains to be seen how well the newly elected Republican Senate Majority Leader, Tennessee Senator Bill Frist, can do his job in the coming year. He is qualified, competent, and well-respected, but his job will be to pursue the President’s legislative agenda and to keep both his own party under control as well as to keep the Democrats on as short a leash as possible. He’ll need to demonstrate a lot of skill at throwing enough bones to the Democrats to get enough of their votes, but to keep the bones to a minimum so as to avoid excessively diluting the value of the legislation. I think most people are willing to give Frist the benefit of the doubt, at least for the first two months. I view his selection as a net positive for the economy and business. Lott was getting tired and actually wasn’t showing the kind of leadership that was needed for the previous agenda, let alone for the even-tougher demands of the year to come.
No activity.
Trading is expected to be very light since it is Christmas Eve and the stock market will close early at 1:00 p.m. Note that the market will not close early on New Year’s Eve. Thursday and Friday will also tend to be light.
Investors will continue to struggle to make sense out of the economic and business outlook for the coming year. When they get bored they may allow themselves to get distracted by Iraq or whatever irrelevant issues the media choose to obsess over today.
My forecast for today is that Nasdaq will close in the range -30 to +40. Nasdaq came in at +19 on Monday, well above the midpoint of my range of -40 to +40. 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 12/24/02] The October recovery is 52 days old, but the correction off the peak is now 17 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 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 an initial bounce on Friday and a good day on Monday, we another day (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 24, 2002 12:30:10 AM -0500
Copyright © 2002 John W. Krupansky d/b/a Base Technology