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.

Friday, October 1, 2004

Nasdaq is still stuck in a trading range that approximates the degree of uncertainty about the overall economy. We still appear to be in a modest up-trend from a medium-term bottom in August. Speculators have whip-sawed the market several times since that bottom without breaking to a new bottom. Unfortunately, we've stagnated on the upper end and haven't been able to break out above the April highs. High oil prices will have some negative impact, but not enough to reverse the recovery of the economy.

According to AMG Data Services there was a net outflow of $2.8 million from equity mutual funds for the week ended Wednesday, September 29. Unfortunately, the net outflow from domestic stock funds was $404 million, offset by a $402 inflow into non-domestic funds. This was a disappointing report. The market will continue to be quite volatile and choppy until we see some stability for mutual fund money flows. But, don't hold your breath.

Capital One Financial (COF) is closing a call center and laying off 220 people. This is further evidence that the "recovery" is still not complete. More corporate restructuring is needed before we get to the point where the unemployment level falls off dramatically.

Lawson Software (LWSN) is cutting about 100 jobs. This is yet more evidence of the ongoing restructuring. Companies are still in a heavy cost-cutting mode.

Miscellaneous

I finally managed to get an apartment out here in Boulder. I'm hoping to keep my New York City apartment as well, but that depends on lining up additional consulting work back there. I've got a part-time software consulting assignment out here in Boulder and will travel back and forth to New York as needed.

The good news (for me) is that it's a "renter's market" for apartments. With so many people moving up to "home ownership" and the local university building lots of student housing, there is no shortage of available apartments. In fact, the property manager I used was offering a free 27-inch color TV, an Xbox game console, or a $200 food gift card as an incentive.

I'm paying $690 a month for a TWO bedroom apartment. I only needed a studio, but there is a glut of two-bedroom apartments, so my rent is only $115 more than a one-bedroom apartment. And I'm close to downtown Boulder (and actually across the street from a place I lived in back in 1990).

The economy in Boulder is rather weird. There is lots of money sloshing around, with the university and various government facilities helping to prop up the weaker segments. There is a significant amount of excess commercial property, but there's a fair amount of building of new, high-end office space anyway. The local indoor mall is in the process of being demolished so that a brand new "retail district" can be built. They had lost a lot of business due to a newer regional mall just a few miles away. The old Exabyte facility is near where I work and a complete ghost town.

The dot-com boom of course hit Boulder and then the "bursting of the bubble" hit as well. Luckily, there is a lot of other stuff going on so that Boulder wasn't hurt as badly as Silicon Valley was (and still is).

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: October 01, 2004 03:50:11 PM -0400