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Although the modest 4.88-point Nasdaq rise on Monday was welcome, it was yet another technical trading day as traders and speculators grappled with a major election staring them in the face and whether they should take a shot at pushing down on a market that is heavily over-bought on a short-term technical basis, or wait a while in just in case more buyers crawl out of the woodwork.
The good news is that Nasdaq tested the 1,970 level of support and bounced strongly, and managed to closed above the 1,975 level as well. The bad news is that volume was very light and Nasdaq showed very little momentum to push even 1% above the 1970 level. Nasdaq also had significant difficulty with the 1,980 level. Those are clear yellow flags.
Nasdaq trading volume was very light (1.44 billion shares) and breadth was very modestly positive.
Trading could be lighter than usual today due to "Election Watch" anxiety over uncertainty about whether the election will show a clear winner by Wednesday morning.
People will be positioning for the October employment report due out on Friday.
Although the market has been tagged as being in favor of Bush, I think the spirit with which Kerry has hung in there is something that the market has learned to respect. Otherwise, we would have expected a moderate sell-off as Kerry has moved to a position where he has a believable shot at unseating Bush. In other words, I wouldn't expect a significant sell-off if Kerry does win and in fact the market could rally in relief as soon as the vanquished opponent concedes and withdraws their legal forces. Besides, the market knows that Kerry would face a Republican Congress (House and possibly the Senate), and so is unlikely to push through much in the way of market-unfriendly legislation.
The ISM Report on Business for Manufacturing for October registered a moderate decline in the PMI, but is still indicating moderate growth. This was a mixed report. Despite the overall slowing of the rate of growth, new orders grew at a faster pace and employment does continue to grow. Unfortunately the backlog of unfilled orders contracted, albeit very modestly. The report noted that "if the PMI for October (56.8 percent) is annualized, this corresponds to a 5.1 percent increase in GDP." That's good news.
The Personal Income and Outlays report for September registered a modest rise (+0.2%) in personal income and a moderate rise (+0.6%) in personal consumption expenditures, but only a slight rise (+0.1%) in disposable income and no significant improvement (less than +0.1%) in real disposable income. This was a mixed report, but consistent with the notion that the economy continues to plod along, neither booming nor busting.
The Construction Spending report for September registered no change in the value of construction put in place, but there was a modest rise (+0.3%) in public construction, while there was a slight decline (-0.1%) in private construction. This was a slightly negative report.
The CIO Magazine Tech Poll for October indicated that CIOs, on average, plan to increase spending by 8.7% (vs. 7.4% reported last month), over the next 12 months. This was a positive report. There had been a slight dip in September. The report notes that “October's 8.7% forecast, the strongest October since 2000, suggests chief information officers are winning the 2005 budget battles. After three years of operating in a 'do more with less' business environment, CIOs are approaching the coming year with 'do more, more quickly' marching orders.” The report also notes that "small and medium businesses have more aggressive IT spending intentions than larger enterprises, especially for security, storage and data networking solutions."
The AAA Daily Fuel Gauge Report showed a modest decline of -0.2 cents since Friday (from 2.033 to 2.031), the first decline after four consecutive days of gains. Regular unleaded gasoline is now 10.5 cents above the level of a month ago, but still 2.3 cents below its May peak. Gasoline prices are likely to fall off sharply over the next couple of weeks.
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Crude Oil futures showed another leg of profit-taking, but partly this could have been due to an unwillingness to leave too much money at risk given the uncertainty over the election. Crude oil is susceptible to sharp moves in either direction, for the next couple of months, until the Fed raises interest rates enough to dampen the attraction of hedge fund speculation in commodities.
The Dollar continues to wobble around as people remain afraid to bet too heavily pending the election outcome. Although there may be longer-term pressure for the dollar to cheapen, excessive volatility will remain the norm until the Fed raises interest rates enough to dampen the appeal of foreign exchange speculation.
[11/2/04] 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 flip a coin whether there will be a quarter-point hike (to 2.75%) 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.
[11/2/04] Personally, I think that the Fed is likely to go ahead with another quarter-point hike (to 2.25%) at the December 14 FOMC meeting unless the economic data at that point is quite "soggy". There would be very little benefit for the Fed to pause at that point in time and the pause would force everybody to second guess the Fed and actually conclude that the Fed paused because they were worried that the economy was deteriorating. My current thinking is that the Fed will maintain quarter-point hikes at each FOMC meeting until they get somewhere in the 2.50% to 3.00% range and then pause until unemployment starts to fall off more significantly, and then resume hikes until a neutral rate is reached.
[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.
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[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.
Since my consulting income has picked up a bit recently, I've upped my monthly investment, by a factor of five, as of my November investment, due to occur today.
[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.
[11/2/04] Short-term (10-day): Very volatile, but modestly 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.
[11/2/04] Medium-term (6-months): Very Volatile, but slightly bullish.
[10/15/04] Medium-term (9-months): Very Volatile, and moderately bearish.
[11/2/04] Year-to-Date: Very Volatile, and modestly bearish.
[10/30/04] Longer-term (1-year): Very Volatile, and only very slightly 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.
[11/2/04] Nasdaq has still failed to close above its intra-day peak of 1,980.36 on Thursday, October 28, 2004. This is not a good sign.
[11/2/04] Nasdaq set a new near-term intra-day peak of 1,984.18 on Friday, October 29, 2004, but has still failed to close above it. Setting a new intra-day peak on two different without closing above either is a strong warning sign. But, a little real buying can overcome the problem very quickly.
[11/2/04] Nasdaq set a new near-term closing peak of 1,979.87 on Monday, November 1, 2004.
[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: November 02, 2004 12:11:49 AM -0500
Copyright © 2004 John W. Krupansky d/b/a Base Technology