| NOTICE: I regret to inform you that I will probably no longer to be able to
provide this column on a daily basis after the end December, possibly even
sooner. I may occasionally provide commentary, but not on an regular,
daily basis. Hopefully I will be able to resume daily service at some
point. The web site and archive will remain at least through May.
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here if you wish to be notified by email if and when service resumes. Basically, I have been living off capital for the past four years (stock profits from "the boom"), but my capital burn rate for my living expenses has significantly exceeded my rate of return, even for the past year. The result is that I regretfully will be forced to seek a full-time "normal" job and hence I will be unlikely to be able to devote the five or more hours that go into this column every day. I had hoped that the market would bounce back more strongly so that my return would exceed my burn rate, but that didn't happen and I had burned through too much of my capital base by the time the market did start to take off in October 2002. I had also hoped that I would be able to build interest in this site via word of mouth, and that really didn't happen either. I would have to have ten times as many readers and have each of them pay the full suggested rate to make the site financially viable on its own. There is simply too much competition in the investment newsletter/web site business to expect that kind of interest. My thanks to all those loyal readers who have paid for their usage of the site. -- Jack Krupansky -- still The Unrepentent Optimist - 12/6/03 |
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Superficially, the market decline gets blamed on the Fed, but we have to give the market a couple of days for the dust to settle after any FOMC announcement to determine what the net reaction to the Fed really was. My suspicion is that buyers decided to wait for the FOMC statement to come out and be fully digested and for the dust to settle before making any move. That left the market completely open to the sellers. It is complete nonsense to assert that the market fell because of the Fed, especially since the FOMC statement effectively continues the monetary policy that was in effect before the announcement and is close to what most people expected. Of course that wouldn’t stop the volatility crowd from chattering that the Fed had made major changes in policy.
Nasdaq opened up nicely, but people were selling into the rally right from the start. Nasdaq headed straight down, hitting a morning low shortly before 11:30 a.m. It recovered modestly by noon and meandered until the 2:15 p.m. FOMC announcement. Obviously none of that decline was due to the FOMC statement which wasn’t even out yet. There was a slight bounce on the FOMC announcement, but the people once again sold into the rally. Nasdaq headed straight down, losing 27 points after the FOMC announcement and bouncing only very slightly right before the close.
Money flows vary dramatically from day to day, so Tuesday may simply have been one of those days where some market participants (e.g., some mutual funds or foreign investors) were selling some assets in preparation for deploying them elsewhere (whether into other stocks or outside the stock market). These kind of days happen on occasion without necessarily meaning that a new trend is being established.
Nasdaq volume was moderate (1.81 billion shares). Breadth was strongly negative, with 2.28 losers for each gainer. This was almost a strong sell-off, except that volume wasn’t very heavy.
According to Thomson Financial I-Watch, institutional investors were net sellers of Microsoft (MSFT) and Oracle (ORCL), but net buyers of Sun (SUNW), EMC (EMC), Cisco (CSCO), Texas Instruments (TXN), AMD (AMD), HP (HPQ), and JDS Uniphase (JDSU). Institutions were clearly buying the dip, strongly suggesting that the market is not about to dramatically fall off a cliff any time in the near future.
The Federal Reserve FOMC statement noted that the Fed is keeping the target for the fed funds rate unchanged and that “output is expanding briskly, and the labor market appears to be improving modestly” but “the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal”. This was a mixed, but relatively positive report. The economy is making good progress, but clearly is not out of the woods yet. The committee said that “with inflation quite low and resource use slack, the Committee believes that policy accommodation can be maintained for a considerable period”, signaling the bond market that they should try to keep the 10-year treasury yield down and not anticipate a rise of either the target fed funds rate or inflation for quite a number of months. How long? Well, the first part of the statement referred to risks being equal for “the next few quarters”, and I would suggest that “few” means at least 2 or 3, meaning 6 to 9 months. That’s not a hard date, but simply indicates how far the Fed imagines that they can peer out into the future with some level of confidence. Here are the specific changes to the statement… First, the Fed switched from saying that “spending is firming” to “output is expanding briskly”, which is a more positive statement about the economy. Second, they switched from “labor market appears to be stabilizing” to “labor market appears to be improving modestly”, which is also a more positive statement about the economy. Third, they switched from saying “Business pricing power and increases in core consumer prices remain muted” to “Increases in core consumer prices are muted and expected to remain low”, which drops the reference to business pricing power and emphasize that inflation is not expected to be a problem for the foreseeable future. They may mean that muted business pricing power is no longer a concern. Note that pricing power is an important, positive, good thing for the economy as long as it doesn’t kick off significant inflation. Fourth, they switched from saying that the probability of an unwelcome fall in inflation “exceeds that of a rise in inflation from its already low level” to “has diminished in recent months and now appears almost equal to that of a rise in inflation”. Fifth, the Fed dropped the statement that “The Committee judges that, on balance, the risk of inflation becoming undesirably low remains the predominant concern for the foreseeable future.” People are interpreting those two changes as a shift in bias from “easing” to “neutral”. That may not be a very good analysis of the Fed position since the Fed very clearly stated (in this announcement and the prior announcement) that “the upside and downside risks to the attainment of sustainable growth for the next few quarters are roughly equal”. In other words the imaginary “bias” was neutral and balanced before and has not changed. In theory, the so-called bias is supposed to be about price stability versus sustainable growth, not inflation versus deflation/disinflation. But, the chatterers need something to chatter about. Furthermore, the Fed clearly stated its concern about slack use of resources, which is clearly not an indication of a potential need to tighten monetary policy. In truth, the Fed bias has been roughly “stay where we are for months to come unless something bad happens” for many months. Sixth, the Fed switched from saying “In these circumstances, the Committee believes” about policy accommodation being maintained for a considerable period to “However, with inflation quite low and resource use slack, the Committee believes.” They explicitly stated that low inflation and slack resources are the main criteria that they will use to determine what to do about monetary policy. There were also two changes in the FOMC “lineup”: new vice-chairman Timothy F. Geithner voted for the first time and Jamie B. Stewart, Jr. was not voting. Geithner is the new President of the New York Federal Reserve Bank, who is a permanent member of the FOMC as Vice Chairman, and Stewart was the acting New York Fed President after McDonough resigned. Sometimes, changes in the committee membership can change the discussion and resulting statement. In summary, there were a lot of changes in the statement, but no net change to the “considerable period” statement other than to make it a little more clear. Still, the new statement with its numerous changes and supposed “change in bias” will only increase the chattering level. But for true investors the message is the same: the Fed has monetary policy well under control, is unlikely to change it soon, and true investors need lose no sleep over it.
The Wholesale Trade report for October registered a sharp gain in sales of merchant wholesalers, a moderate gain in inventories, and a modest decline in the inventories/sales ratio. This was a positive report. It is good to see wholesalers a little more comfortable boosting inventories (in anticipation of better business ahead). Sales of computer equipment were very strong, but inventories declined, which may be a good thing for tech equipment. Shrinking inventories are viewed as bullish for future production.
The BTM/UBS Weekly Chain Store Sales Snapshot registered a sharp decline (2.5%) compared to the prior week. This was a negative report, but much of it gets blamed on the big winter storms. Still, sales were up a strong 4.9% over a year ago. BTM is forecasting 3.5-4.5% growth in December compared to a year ago. Although BTM will be dropping out of this report, the International Council of Shopping Centers will be stepping in, so rumors (and reports by me) of the imminent demise of this report can now be safely discounted.
The weekly Reuters Instinet Redbook Sales Average report registered a moderate decline in chain store sales (1.0%) for the first week of December compared to the corresponding week of November, but registered a relatively sharp gain (3.2%) for the week ended December 6 compared to a year ago. This was a mixed, but somewhat negative report. The winter storms get the blame for the decline. One interesting issue this year is that stores have been maintaining very tight inventory control, so shoppers “may be unable to find what they are looking for.” It will be interesting to see how all of this plays out. There might be heavier use of gift cards which don’t get counted as part of sales until they are actually used, and that might be after the holidays are over, especially when the sales begin.
After the close: The weekly ABC News/Money Magazine Consumer Comfort Index registered no change at -11 (out of a range from -100 to +100), the highest level since August 2002. This was a neutral, but slightly positive report, showing some stability. There was no change in the consumer view of the overall economy, a 1% decline in how consumers feel about their own finances, and no change in how consumers view the buying climate. Please note that there is no clear and indisputable link between consumer confidence reports and future consumer spending.
NOTICE: I am still using the “old” VIX even though CBOE began offering the “new” VIX on September 22nd. The old VIX is based on options for the S&P 100 index whereas the new VIX is based on options for the more popular S&P 500 index. I’m still investigating how to switch over to the new VIX and how that relates to historical data.
The old CBOE Market Volatility Index (VIX), which measures the level of anxiety in the market, rose by 4.72% on Tuesday to 17.08, which is in the lower half of the low anxiety (moderate complacency) zone (15 to 20). People were somewhat surprised by the sharp market decline. The bears will continue to beat their drums about the market being filled with the kind of excessive complacency that frequently presages a dramatic market decline. I wouldn’t bet the farm on that outcome, but it is a yellow flag.
The new VIX rose by 6.59% on Tuesday to 17.63. People were really spooked by the sharp market decline (at least for Nasdaq). This could well be a contrarian bullish indicator, suggesting that people were selling irrationally and that a strong bounce is overdue.
The Nasdaq-100 VIX (VXN) rose by 2.79% on Tuesday to 28.32. VXN moved up less than VIX, suggesting that maybe people are a little more worried that the S&P 500 and Dow Industrials have moved higher relative to Nasdaq having moved down. The Dow has been stronger lately, possibly due to rotation out of tech stocks, and maybe we’re due for a little trading back into tech stocks now.
The Nasdaq-100 After Hours Indicator had a positive tone for the Tuesday evening session, closing up 1.41 points. People were comfortable believing that the sell-off was overdone, but they’re still quite cautious about diving back into the market, yet.
The FOMC announcement caused a modest increase in the probability of an earlier rate cut, but not by much and not enough to suggest a cut before May, which was where we were before Tuesday.
[12/6/03] The fed funds futures market suggests that the Fed will leave the fed funds target rate unchanged for the rest of the year, but possibly raise the fed funds target rate by a quarter-point in May or June, or possibly not until July. Fed funds futures are at best accurate no more than six weeks out, so those longer-term moves are purely speculative, at best.
The dollar fell moderately against the yen and the euro. The dollar is quite sound and no true investor should lose any sleep worrying about whether the dollar is ‘weak’ or ‘strong’ on any given day, week, month, quarter, or year.
The price of oil fell sharply, and is now modestly back under the $32 “anxiety” level. In any case, the price of oil continues to be relatively well-behaved and no true investor should lose any sleep worrying about it.
The price of gold rose moderately. In any case, there is nothing about the current price of gold that should give any true investor any reason to lose any sleep.
[7/29/03] The relative calm continues. Investors should always be prepared to buy any dip caused by panicky reactions by traders to any incidents.
[7/29/03] 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. Investors should always be prepared to buy any dip caused by panicky reactions by traders to any incidents or rumors of incidents.
[7/29/03] As messy as the mopping-up phase of the war continues to be, great progress is indeed being made and there is little need for true investors to fret over the negative news that so captivates the media. Over time, the economic impact of the war will be a large net positive, even if there is some short-term negative impact.
SBC Communications (SBC) announced that they will cut 3,000 to 4,000 jobs in Q4 as part of an “ongoing staff reduction program.” Some of the cuts will be due to attrition and others to an “enhanced retirement program.” This is another good example of how the business restructuring process continues and will continue to be somewhat a drag on the economy in the near-term. Business restructuring has near-term pain, but produces a healthier economy for the longer run. Please note that the telecom sector is in worse shape than much of the economy and will continue to restructure for years to come.
Verizon (VZ) did not announce any new layoffs, but did announce the cost: up to $3.7 billion, or $2.8 billion in Q4 and $700-900 million in Q1 for pensions. 21,600 workers were involved in this voluntary layoff. It’s not clear when these workers actually hit the streets.
AOL (TWX) will be laying off 450 people in California. This is another example of the ongoing restructuring wave that will continue to be a near-term drag on the economy, but provide longer-term lift.
And finally, infamous Global Crossing has just emerged from bankruptcy. Now a private company controlled by Singapore Technologies Telemedia, they wiped out $12.4 billion in debt (and all the old shareholders). They are still struggling and need additional cash to get them back on their feet, but they are now on their way. This is another great example of the business restructuring process in action. The debt holders and shareholders got the shaft, but despite all that short-term pain and the past drag on the economy, the economy will benefit in the long run as a result of having such a player back on the field again.
[6/25/03] I have suspended my dollar-cost averaging investment plan since my exposure to the market is now about where I want it to be.
It usually takes a couple of days for the market to find its feet after an FOMC announcement, especially one where the immediate reaction appeared to be quite negative.
Nasdaq is now deeply oversold on a short-term technical basis. That’s not to say it couldn’t decline further, but simply that a significant bounce is overdue.
My forecast for today is that Nasdaq will close in the range -40 to +50. Nasdaq came in at -41 on Tuesday, slightly below the lower end of my range of -40 to +50.
The confirmed bull market for Nasdaq that began on October 9, 2002 (and was confirmed on June 16, 2003) has run for 293 days (1 year and 43 days). The market now has a longer-term upwards bias despite near-term volatility. The path of the market through the end of the year is of course uncertain, but Nasdaq will most likely be moderately higher at the end of December than where it was at the beginning of November. Nasdaq should break above the 2,000 level fairly soon, so the question is whether we hit 2,100 or 2,250 by the end of the year. The important thing is that we continue to see inflows into equity mutual funds while the economy, revenues, and earnings continue to incrementally improve.
Nasdaq is 21 days off its 52-week intra-day high of 1,992.27 on November 7. Nasdaq is 5 days off its 52-week intra-day high of 1,996.08 on December 2. Nasdaq is 4 days off its 52-week intra-day high of 2,000.92 on December 3. We need to track all three of these intra-day highs until Nasdaq manages to close above them for at least a couple of days. Technical traders will be chattering about Nasdaq establishing a “triple top”, a rather bearish sign, so we do need to give this a relatively severe yellow flag.
The confirmed up-leg for Nasdaq that began with the intraday low of 1,253.22 on March 12 has run for 186 days. Nasdaq is 6 days off its closing peak of 1,989.82 on December 1 for the up-leg and for the overall post-October 2002 bull market. That closing peak is also the current 52-week closing high.
The confirmed minor up-leg of the Nasdaq advance that started on Friday, August 8 with an intra-day low of 1,640.88 is now 85 days old and 6 days off its closing peak. This is a minor leg nested within the larger leg that started on March 12 which is itself nested in the larger advance that started on October 9, 2002.
The confirmed minor up-leg of the Nasdaq advance that started on Friday, October 24 with an intra-day low of 1,841.62 is now 32 days old and 6 days off its closing peak. This is a minor leg nested within the larger leg that started on August 8 which is itself nested in the larger advance that started on March 12. Multiple nested up-legs are a sign of deep strength in the market. This leg is still significantly broken, and it won’t be fully recovered until it closes above the previous peak of 1,976.37 for at least three days and sets a new closing peak at least 1% above that old peak (1,996.13).
The Nasdaq correction off the intra-day high of 1,992.27 on November 7 is now 21 days old. It reached an intra-day low of 1,878.07 on Friday, November 21, a decline of 114 points or 5.73%. It may be over, but we do need to see a new 52-week closing high above that old intra-day high.
We have a secondary correction off the intra-day high of 2,000.92 on December 3 that is now 4 days old. It reached an intra-day low of 1,906.84 on Tuesday, December 9, a decline of 94 points or 4.70%. It may be over or close to over, but we do need to see a new 52-week closing high above that old intra-day high.
The confirmed minor up-leg of the Nasdaq advance that started on Friday, November 21 with an intra-day low of 1,878.07 is now 12 days old and 6 days off its closing peak. The fact that Nasdaq is 94 points off the intra-day peak for this new leg indicate that this leg is significantly broken, but not yet destroyed. Give it a couple more days before deciding for sure.
We have to invalidate the potential up-leg of the Nasdaq advance that started on Monday, December 8 with an intra-day low of 1,926.94 and a bounce of 22 points into the close due to setting a new intra-day low of 1,906.84 on Tuesday, December 9. We now look for the start of a new up-leg.
We now have yet another potential up-leg of the Nasdaq advance starting on Tuesday, December 9 with an intra-day low of 1,906.84 and a bounce of a mere 1.48 points into the close. We now wait for confirmation of this potential up-leg. We ignore Days 2 and 3 of the up-leg as long as a new intra-day low is not set. Then on Days 4 through 10 we look for a gain of at least 1% on volume higher than the previous day to signal confirmation.
The fact that Nasdaq is still 94 points off its recent 52-week intra-day high is a strong yellow flag and suggests that Nasdaq still hasn’t broken out of its near-term ‘consolidation’ phase. That does not mean that a full-blown correction is necessarily likely. We may still be in a short-term trading range. There may have been as much as 125 points of ‘trading froth’ at the peak, so we could see up to another 31 points of decline before a true correction might be indicated. Note that we’re still 30 points above the starting level of the most recent confirmed minor up-leg that started on November 21. The big wildcard remains mutual fund money flows – which were inflows of $2.6 billion in the most recent week, $2.1 billion the previous week, and $3.5 billion in each of the two weeks before that.
[11/5/03] The latest economic data continues to support the thesis that the U.S. economy is solidly into a gradual, zigzag, underappreciated, stealth recovery. The Q3 GDP report certainly convinced a lot of people that the economy is stronger than previously thought, but the cynics continue to promote the idea that the recent strength was almost solely due to short-term fiscal stimulus. I disagree. I believe that the economy would have been reasonably strong without the stimulus (ala Q2) and that we will see incremental improvement (compared to Q2) over the next four quarters. Some people will be shocked or raise alarm when Q4 comes in ‘weaker’ than the ‘artificially sweetened’ Q3, but there is no reason for alarm. That’s part of the zigzag process. The two key factors driving the pace of the recovery will continue to be the ongoing process of shutting down or restructuring ‘problem’ businesses and the pace of the formation of new businesses which will create new jobs.
[9/1/03] Our Tech Stock ‘Safe’ Signal is still stuck at 0.00 (no safety) since none of the big tech companies are even hinting that they are seeing any significant improvement in demand. There does seem to be some sense of stabilization and a modest hint of improvement, but no clear and decisive indication of a dependable ramp up in revenues and earnings.
[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 09, 2003 08:33:13 PM -0500
Copyright © 2003 John W. Krupansky d/b/a Base Technology