Finaxyz

Daily Stock Market Perspective

Our daily stock market commentary and views on the economy and geopolitical events are posted weekdays and Saturday by 12:30 a.m. ET.

NOTICE: I'm out in Boulder, Colorado for some software consulting work (started on Wednesday 9/15/04). It's unclear when I'll be able to once again spend the five hours a day it takes me to research, write, and publish my full column. I'll endeavor to write at least something each day. The last full column was for Wednesday, September 15, 2004. My apologies for any inconvenience.

Monday, September 27, 2004

Don't worry about the short-term market direction (e.g., whether September will be another down month or even what happens in October), but focus on the medium-term economic trends. Nobody can predict how the longer-term economic trends (i.e., further out than a year) will pan out, but there is plenty of information to allow even rank amateurs to at least attempt to piece together the medium-term puzzle. High energy prices and the string of Hurricanes will certainly weigh on near-term economic performance, but the expenditures to rebuild over the medium term will actually be a net addition to the economy.

Most professional economists are truly befuddled able how to forecast the economy over ANY period of time. The economy seems to have a mind of its own. That's actually a good thing. The economy is really just the sum of each of our individual economic decisions (including individual business and government decisions as well), and a dynamic economy is a healthy economy. It is those unpredictable dynamics which make our economy "great" and allow it to rapidly adjust to changing real-world conditions.

You really should seriously consider writing to your congressman, senators, and the SEC to investigate the role of hedge funds in artificially pumping up the market for commodities (especially oil) as well as the distortions they cause to foreign exchange markets. Maybe all that is really needed is a healthy dose of disclosure, that would cause major embarrassment to large financial institutions who are effectively trading against the interests of their retail customers. On the other hand, the Fed's "relentless" campaign to raise short-term interest rates may alone do enough to curtail the hedge fund appetite for such speculation by making money more expensive and gradually making stocks of good companies more attractive.

One area that hasn't gotten much attention is the impact on corporate earnings of higher interest rates for companies such as Microsoft (MSFT), Cisco (CSCO), Intel (INTC), and Oracle (ORCL) who are sitting on mountains of cash. Higher interest rates should be a net positive for them due to interest income, but the precise benefit will depend on precisely what forms of "cash" (i.e., short-term liquid investments) these companies are using.

Economic Outlook

[8/23/04] Clearly the elevated price of crude oil has to have some negative impact on the economy, but the big question is how much impact. Overall, the economy is less sensitive to the price of oil and “oil shocks” than in past decades, but some sectors (such as airlines and chemical companies) are significantly more sensitive, whereas most sectors are only modestly sensitive. The current price escalation in fact has not been caused by any supply shortage or any excess demand by end users, but is merely due to a dramatic level of speculation in crude futures. The bad news is that we don’t know how much longer that speculative ‘bubble’ will continue to grow. The good news is that oil at these prices is not as attractive an ‘investment’, so the speculation will be increasingly susceptible to profit-taking and renewed interest in short-selling. Besides, if oil really were expected to rise dramatically from here, we’d see it in the price of futures in coming years, and we don’t. In fact, futures ‘predict’ that the price of crude will decline in coming years. In any case, elevated oil prices will be a moderate drag on the economy, but not so much as to spur accelerating inflation or to trigger a recession. Maybe it will trim a quarter to half-point off GDP, but that’s about it. Besides, people and businesses will adjust their lives and operations to further reduce their dependence on expensive oil. And finally, high-efficiency hybrid-electric vehicles are beginning to debut and anxiety over the price of gasoline will simply accelerate the development and introduction of such innovative products, which will dramatically moderate the demand for oil a few years from now.

[8/7/04] The latest economic data continues to support the thesis that the U.S. economy is solidly into a gradual, zigzag, underappreciated, stealth recovery. It will be another two years before the economy is fully back on track. Unemployment will decline only gradually. The bankruptcy rate will decline off recent highs, but remain at a fairly high level for another two years. There are still quite a number of businesses (and entire sectors) that will need to be restructured over the next two years as well.

[7/3/04] A major uncertainty is the state of the economy in Q4 and the first half of 2005. We currently have enough momentum to do well in the current quarter (Q3), but nobody really has even a halfway decent handle on how that momentum will play out towards the end of the year and into next year. We have the looming specter of rising interest rates, but the Fed would certainly back off if the economy started to sputter. The bottom line is that the economy is likely to be doing “okay”, but probably not a lot better than “okay”, in Q4 and early 2005.

[7/6/04] Some people are protesting that company profits could suffer as companies run out of costs that they can cut. That’s complete nonsense. First, companies will never run out of costs to cut. But more importantly, one of the factors that has been holding back growth of business revenues (and profits) over the past three years is the fact that companies have been dramatically cutting costs and the cutting of a cost for one company is the cutting of the revenue of one or more other companies. That cost-cutting binge was exerting a distinct headwind on businesses, but that headwind will in fact fall off as the cost-cutting moderates. And as revenues begin to grow more strongly, companies will begin to reverse the process and both spend more and hire more workers. Continued technological advances will spur further cost-cutting, but on a more moderate basis.

[3/13/04] A major uncertainty that will begin to loom over the economy and the financial markets is the impact of the outcome of the Presidential election. Although the political rhetoric can get very intense, the fairly even split in Congress makes it very unlikely that either party in the White House will be able to dramatically change federal economic policy significantly over the next four years. Besides, both parties are interested in reducing the federal budget deficit. The proposals from both parties will be hotly debated, but I can’t see that either side is either a clear winner or a clear loser for the economy and the markets.

[12/29/03] 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.

[12/29/03] A big wildcard in 2004 will be the possibility of a new wave of corporate cost-cutting as companies burn through the easy part of revenue growth and are forced to revert to cost-cutting to keep up earnings growth. The problem is that one company’s cost is another company’s revenue or an employee’s income, so more cost-cutting can boost earnings in the near-term but risk putting intense downwards pressure on business spending and employment. This cost-cutting process will moderate once companies begin to build up a deep enough backlog of unfilled orders so that they can keep revenue growth at a consistently strong pace to keep earnings growth up. The economy will survive this process, but the zigging and zagging of the pace of the recovery will continue.

Tech Stock ‘Safe’ Signal

[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.

Disclaimer

[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)

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Updated: September 27, 2004 01:55:17 AM -0400