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Credit for the strong 41.20-point Nasdaq rally on Wednesday was given to the plunge in the price of crude oil which was in turn blamed on a rise in the weekly oil inventory level, but I simply don't buy any of it. First, the rise in the crude inventory level was within the range of weekly fluctuations and doesn't change the overall inventory picture very much at all. Second, the distillate (heating oil) inventory level in fact declined, which is not a good thing to happen, but is nonetheless understandable at this time of year. Third, the speculative bubble of demand for crude oil futures was due for a correction anyway, and a correction does not automatically mark the end of a trend and signal "happy days are here again" for stocks. No, something else had to have been the catalyst.
Clearly there was a spike in buying shortly before 11:00 a.m. that caused to market to jump up a cliff (no mean feat). It could have been a big institutional buyer, a program trade that kicked in for whatever obscure reasons, some real buying, or simply a moderate amount of short-covering. There's a fair chance that some rumors were flying around among traders which would only accelerate the short covering. Before the spike, the market actually looked like it had a shot at rolling over and resuming its recent decline, so it's very possible that too many people had gone short and all it took was a modest amount of buying pressure to force all those shorts to cover.
Looking at the Nasdaq chart a little more carefully, it is clear that the buying started very shortly after 10:00 a.m. and trended up nicely, but modestly, for over half an hour. Traders then tried to sell the rally off, and managed to do so for about 10 minutes, but then they saw that buying pressure was really starting to build up. As soon as they backed off, the market shot up like a rocket, Nasdaq rising 30 points in 20 minutes. That was an impressive short squeeze.
The bad news is that the buying pressure diminished significantly later in the day. Nasdaq poked through the 1,970 level numerous times in the final hour, but each time encountered selling pressure. It remains unclear how "deep" that "resistance" selling pressure is and will be over the coming days. It could peter out very quickly, or could mark the end of the rally.
Nasdaq is now poised in the general vicinity of the top edge of the trading "channel" that slopes down from the January market peak. It is very important to see some strong buying over the coming week to push Nasdaq well above the late-June peak and above the 2,060 level, otherwise traders and speculators will simply go back into sell-off mode.
Nasdaq trading volume was reasonably heavy (2.1 billion shares) and breadth was strongly positive, so this was clearly a strong rally.
[10/25/04] People will continue to position in advance of the advance Q3 GDP report due out on Friday. Unfortunately, it is is now ancient history and people are much more interested in what's happening since Q3 ended in September.
The advance Durable Goods Manufacturers’ Shipments, Inventories, and Orders report for September registered a modest rise in new orders (+0.2%), a sharp decline in shipments (-1.2%), a moderately sharp rise in unfilled orders (+0.7%), and a modest rise in inventories (+0.3%). This was a mixed report, but there tends to be a lot of monthly volatility for orders and shipments, primarily since few customers buy manufactured goods on a nice, smooth monthly cycle. It's not clear how the hurricanes may have impacted shipments. The good news is that the backlog of unfilled orders continues to grow, signifying higher production in the months ahead and giving manufacturers an improving ability to smooth out their financial performance. Higher inventory levels are both a vote of confidence in growth in the months ahead and a buffer to keep prices under control. Shipments for nondefense capital goods fell sharply (-1.7%) even ex aircraft. New orders for nondefense capital goods, which are a good proxy for business capital spending, rose moderately (+0.6%) and very sharply ex aircraft (+2.6%). Shipments for computers and related products fell very sharply (-5.8%), but new orders rose sharply (+3.9%), and unfilled orders rose very sharply (+7.2%). Shipments for communications equipment fell very sharply (-7.7%) but new orders rose VERY sharply (+35.6%). Shipments for semiconductors fell very sharply (-4.4). Semiconductor orders are not included in this report..
The AAA Daily Fuel Gauge Report showed a sharp rise of +0.8 cents since Monday (from 2.019 to 2.027), a second consecutive day of gains. Regular unleaded gasoline is now 14.1 cents above the level of a month ago, but still 2.7 cents below its May peak.
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The plunge in the price of crude oil was nominally "caused" by an increase in the crude inventory level over the past week, but it was really simply profit-taking as some speculators decided to move on. BUT, this may not be the end of the "run" for this speculative bubble. $60 had been the targeted level and there is still more than enough cash sloshing around to put a lot of pressure on short-sellers who are chomping at the bit to push oil down another 5, 10, 15, or even 20 points. Nonetheless, the inventory report really indicated that we're basically "okay", not great, but not terrible in terms of supply.
Partially as a reaction to the sudden plunge in oil prices, the odds of Fed interest rate hikes increased moderately.
[10/28/04] The fed funds futures market suggests a quarter-point hike (to 2.00%) at the November 10 FOMC meeting, no hike at the December 14 FOMC meeting, a quarter-point hike (to 2.25%) at the February 1/2 FOMC meeting, no hike at the March 22 FOMC meeting, a quarter-point hike (to 2.50%) at the May 3 FOMC meeting, and no hike at the June 29/30 FOMC meeting. Fed funds futures are at best accurate no more than six weeks out, so those longer-term moves are purely speculative, at best.
[6/18/04] The Fed is not likely to quickly raise interest rates all the way to a so-called ‘neutral’ stance (somewhere in the 3-4.5% range) over the coming year, primarily because the recovery is not yet complete (e.g., look at the lingering level of unemployment and the state of the airline, telecom, and manufacturing sectors). Rather, the Fed will simply remove the ‘excess’ stimulus (call it the ‘deflation hedge’) so that only a moderate level of ‘accommodation’ remains. In other words, despite the relatively rapid pace of expected hikes over the coming year, the initial ‘campaign’ will likely end at a target fed funds rate of 1.75% to 2.75% with the remaining rise to the fully ‘neutral’ stance coming only very gradually over the next two to three years as the remaining weakness in the economy gradually dissipates. Also, expect interest rates to be below the full ‘neutral’ level until the lingering geopolitical uncertainty related to the war on terrorism and the situation in Iraq and anxiety over the potential for oil supply disruptions dissipates. And finally, since high energy prices act as a ‘tax’, the Fed may feel pressured to keep interest rates a little lower than otherwise expected to compensate for the drag of that tax if it persists for more than a few months.
LSI Logic (LSI) mentioned a "Reduction of global workforce by approximately 510 positions" in its press release, but it wasn't clear if that was an additional layoff or simply referring to layoffs that may have been previously announced..
[10/21/04] I attended the VentureOne Exchange venture capital conference up in Boston on Tuesday, October 19 and Wednesday, October 20. Click here for my write-up of last year's conference.
[10/21/04] I'll have a write-up on the conference soon, but the simple summary is that venture investment is making a painfully slow comeback. It is coming back, but at a very slow pace. Even worse, companies are raising less money and hence hiring less (or hiring offshore) and spending less. The net effect is that current venture investment is only a very modest boost for the economy, and a much smaller boost than it could be.
[10/11/04] For some background information on venture capital, click here.
[10/12/04] Since my consulting income has picked up a bit recently, I'm going to up my monthly investment, by at least a factor of three, as of my November investment.
[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.
[10/28/04] Short-term (10-day): Very volatile, but moderately bullish.
[10/28/04] Short-term (1-month): Somewhat volatile, but moderately bullish.
[10/15/04] Short-term (2-months): Moderately bullish.
[10/22/04] Medium-term (3-months): Very volatile, but moderately bullish.
[10/26/04] Medium-term (6-months): Very Volatile, and moderately bearish.
[10/15/04] Medium-term (9-months): Very Volatile, and moderately bearish.
[10/28/04] Longer-term (1-year): Very Volatile, but very modestly bullish.
[10/15/04] Longer-term (2-years): Moderately strongly bullish.
[10/15/04] Longer-term (3-years): Very volatile, but modestly bullish.
[10/15/04] Longer-term (4-years): Very volatile, but moderately bearish.
[10/15/04] Longer-term (5-year): Very volatile, but modestly bearish.
[10/15/04] Longer-term (6-year): Very volatile, but modestly bullish.
[10/15/04] Longer-term (7-year): Very volatile, but slightly bullish.
[10/15/04] Longer-term (8-year, 9-year, 10-year): Very volatile, but modestly bullish.
[10/15/04] Overall outlook: confused and volatile, but with a modest upwards trend. The economy is neither "booming" nor "busting", but making modestly positive progress at restructuring problematic industries.
[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 27, 2004 10:43:14 PM -0400
Copyright © 2004 John W. Krupansky d/b/a Base Technology