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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. |
(Updated since Saturday -- changes marked with [ * ])
Well, we finally had a strong rally on Friday. Unfortunately, it was more technical in nature, possibly people trying to trade on "seasonality" rather than fundamentals.
Despite the sharp point gain, volume was still a bit on the light side.
I'm sure a fair amount of the buying was simply short covering. There may also have been some moderate real buying that supported the market after the initial wave of buying.
The bottom line is that we need to watch for some significant and sustained follow-through buying before concluding that we are doing anything other than bouncing within a "trading range"
The ECRI Weekly Leading Index is holding roughly steady at a roughly neutral level, suggesting that the economy will continue to limp along for the next few months, neither booming nor busting. The WLI is actually very modestly below neutral, but showed a slight improvement.
[ * ] There is lots of chatter and even serious discussion about "the need" for China to float its currency. Much of the discussion is extremely self-serving and not very useful. To be sure, China does eventually need to float its currency and eventually will, but there are great risks of floating too soon. The primary problems are that China does not yet have a sufficiently robust financial system to cope with the stress of the volatility that would come with a floating currency, and the second problem is that there are far too many ravenous and greedy "wolves" howling at the gates, waiting to literally rip the Chinese currency to shreds once those gates are open. The wolves include the hedge funds, the big banks who engage in in-house trading operations similar to those of the hedge funds, and many, many wealthy individuals who have giga-bucks to burn and all too eager to throw money at hedge funds and hedge-like operations as long as they feel that the stock market is a lousy place to "invest" their money. Manufacturers feel that they would benefit from a weaker Chinese currency, so they are also aboard the "floating" train. The real bottom line is that the U.S. economy will do okay without a floating Chinese currency for quite a while longer, and that we have bigger fish to fry for now (e.g., continue the restructuring of American businesses like the airlines, computer software companies, and telecom companies.)
[ * ] The money supply (M2) is growing at a reasonable pace. This is significant, because rising (short-term) interest rates can have a tendency to restrict the money supply (simple supply and demand dynamics). But since there is a glut of money and credit out there, the higher interest rates are not coming at the expense of the money supply. The key thing to remember here is that the primary motivation of the Fed right now is not to curtail economic growth (which occurs if rising interest rates cause a contraction of the money supply), but simply to eliminate the "excess" of "loose" credit at a time when that loose credit is no longer needed and when its removal will not cause any significant economic hardship. So, the good news is that the Fed is doing the right thing.
I may not be able to do much reading and writing (of this column) this weekend since I'm moving into my new apartment and won't have phone service until sometime on Monday. Qwest (Q) says it will take three business days for someone to turn on my phone line at their central office. I may go to the local library to browse on their public web stations. They may or may not have public network connections at the library, but I don't feel like lugging around my notebook and all its wires. And I don't have a Wi-Fi card to use at the local Starbucks or Barnes & Noble. If I get really motivated, I can come into the office and use my notebook on the company's network. My suspicion is that not a lot will happen this weekend that will deserve my comment.
Today I watched for a few minutes as the demolition crews pulled down the old local Montgomery Ward store. Talk about the end of an era.
My October dollar-cost averaging investment will automatically occur on Tuesday, October 5.
[6/29/04] As an experiment, I have set up a new account with ShareBuilder and will be making a modest dollar-cost averaging investment each month. At a cost of $4 per month I will be buying a fixed dollar amount of the S&P 500 Tech Sector ‘Spider’ (XLK). The money for the investment will be automatically taken from my bank checking account. My purchases will be made on the first Tuesday of each month, beginning on July 6, 2004.
[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.
[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: October 03, 2004 10:06:47 PM -0400
Copyright © 2004 John W. Krupansky d/b/a Base Technology