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(Will be updated for Thursday, December 26)
Slow pre-holiday trading plus some weak economic data gave Nasdaq a modestly negative tone.
The good news was that there was no significant ‘real’ selling pressure.
Volume was very light (525 million shares). Breadth was moderately negative, with 1.33 losers for each gainer.
According to Thomson Financial I-Watch, institutional investors were net sellers of Sun (SUNW), Qwest (Q), and JDS Uniphase (JDSU), but net buyers of Seagate Technology (STX), EMC (EMC), Cisco (CSCO), Lucent (LU), HP (HPQ), and Microsoft (MSFT). Trading was way too light to attach any significance to it, other than that institutions did not buy into the enthusiasm for Sun after its court win against Microsoft.
The Bank of Tokyo-Mitsubishi (BTM)/UBS Warburg Weekly Chain Store Sales Snapshot for the week ended December 21 registered a slight gain. This was a slightly positive, but somewhat disappointing report. According to the report, “Although Saturday's sales were relatively good, the week’s overall sales performance was less than spectacular.” Weekly sales were 1.7% higher than in the same week in 2001.
The Durable Goods report for November registered a moderate decline in new orders (substantially worse than the gain expected), a moderate decline in unfilled orders, and a moderate decline in shipments. This was a negative report. One bright spot was a sharp increase in new orders for defense goods. Orders and shipments for computers and related products were down moderately sharply. Another bright spot was that shipments of communications equipment were up sharply and new orders were up moderately. These reports do tend to be quite volatile, so there is no reason to expect that this decline is any more than a fluctuation. Note that the decline in November was less than the gain in October. The overall view of the manufacturing sector is that it is still barely limping along, sometimes contracting and sometimes expanding.
The Mass Layoffs report for November registered a sharp rise (44%) in the number of mass layoff actions and a sharp rise (40%) in the number of workers involved. This was a negative report. The only good news was that the numbers were well below the level of a year ago.
The CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, rose by 2.32% on Tuesday to 30.01, which is just barely above the bottom of the high anxiety zone (30 to 35). People were a little disappointed that the market couldn’t rally a little before the holidays.
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 Tuesday afternoon session, closing up 0.21 points. People are simply reluctant to bet on the market direction (up or down).
[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 fell modestly against the yen and fell moderately 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 moderately, and is still moderately above the psychological $30 level. After the close, the American Petroleum Institute reported that inventories of crude oil had risen by 2.71 million barrels in the past week compared to an expected decline of 3.75 million barrels. There was a 4 million barrel ‘build’ on the West Coast that more than compensated for a 1.3 million barrel ‘draw’ east of the Rockies. This shows that the disruption in Venezuela is not having as big an impact as expected.
[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, but is still well below the recent peak.
[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.
North Korea is beginning the process of repairing the nuclear reactor that it has threatened to restart. The IAEA believes that it will take at least a month or two for the North Koreans to make the reactor operational. There is no imminent threat there. There was a report that they were removing the nuclear fuel rods, but there has been no confirmation of that report. The North Koreans also removed the IAEA seals and surveillance cameras from another facility that is used for reprocessing spent nuclear fuel to produce weapons-grade plutonium. The White House needs to work on these issues, but there is no imminent threat for the rest of us (or the market) to worry about, 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.
[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 inspections continue. They have in fact performed the first ‘private’ interview of an Iraqi scientist. The inspectors offered to do the interview in private, but the scientist insisted on having Iraqi officials present. You can’t blame the guy since otherwise the government would be “wondering” what he might have told the inspectors. This further illustrates the need to take scientists out of the country, or at least insist that the interviews be in private even if the interviewee refuses.
Israel’s Prime Minister has suggested that Iraq may be hiding chemical and biological weapons in Syria, although he admits that he has no verified proof. I wouldn’t be surprised that Iraq might have gone to such lengths. I’ve had the same concern for many months.
The head of Israel’s IDF intelligence says that he expects that a U.S. attack on Iraq would occur in early February. Most importantly, he feels that Iraq is unlikely to launch a preemptive attack on Israel with non-conventional weapons since that would clearly reveal that Iraq was in possession of such weapons. He also expects that the Palestinians, Hizbullah (in Lebanon), and Syria will also keep a low profile to avoid being targeted by Israel. Nominally, Israel will go on high alert in mid-January and is planning mass vaccinations for smallpox.
Saudi Arabia is busily lobbying Iraq and its neighbors in an intense effort to head off a war between the U.S. and Iraq. None of these countries have any desire to see a dramatically stronger U.S. influence in the region.
For the week ending December 24, the Pentagon reports that 2,313 fewer reservists are on active duty, for a total of 53,217. 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. The Pentagon has issued “alerts” to an undisclosed number of reservists so they can begin working through the logistics so that their eventual call-up will take substantially less time. 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.
The Pentagon is moving ahead with a plan to provide military training to Iraqi opposition forces, but such training won’t even begin until after the first of the year.
[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.
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My forecast for Thursday is that Nasdaq will close in the range -30 to +40. Nasdaq came in at -9 on Tuesday, well below the midpoint of my range of -30 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 12/25/02] The October recovery is 53 days old, but the correction off the peak is now 18 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 two days without seeing a new low, we’re now looking 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 11:47:13 PM -0500
Copyright © 2002 John W. Krupansky d/b/a Base Technology