Our daily stock market commentary and views on the economy and geopolitical events are posted weekdays and Saturday by 12:30 a.m. ET.
[ Market Activity | Market Trend | Economic Reports | Miscellaneous | Commodities | Fed Futures | Restructuring | Venture Capital | My Investments | Economic Outlook | Tech Stock 'Safe' Signal | Disclaimer | Archive | Books | Resources | Charts | Adages | Glossary | Lore | Search | Reform | Telecom | Technology | Payment - Please! | Contact Us ]
(Updated since Saturday -- changes marked with [ * ])
The moderate Nasdaq rally on Friday was driven by the monthly employment report being better than expected, as well as some amount of short covering by speculators who believe that Nasdaq is heavily overbought on a short-term technical basis and due for some profit-taking fairly soon.
Unfortunately, it wasn't a very clean rally. The euphoria over the employment report may have caused the shorts to cover their short positions, but they'll be back as soon as the market quiets down a bit, unless a serious amount of real buying materializes real soon.
Despite the 15.31-point gain for Nasdaq, that was only a 4-point gain over the opening level and 8 points off the intra-day peak. Trading was very volatile and the intra-day peak was reached fairly early in the morning. These are moderate yellow flags.
The two critical technical milestones staring Nasdaq in the face are the closing peak of 2,047.79 of Wednesday, June 30, 2004 and the intra-day peak of 2,055.65 on Wednesday, June 30. Nasdaq desperately needs to easily clear both of those levels (on a closing basis) to break its 2004 trend of "lower highs".
Nasdaq trading volume was moderate (1.91 billion shares), and breadth was moderately positive. This was not a strong rally.
People will remain in "Fed Watch" mode in preparation for Wednesday's FOMC announcement that will probably be another quarter-point rate hike. The unknowns are the Fed's near-term prognosis for the economy and whether the Fed is likely to pause its rate-hike campaign within the next couple of months.
[ * ] [11/8/04] The market is very clearly heavily overbought on a near-term technical basis, which means that it is quite susceptible to significant profit-taking. The good news is that there are plenty of people who seem committed to the thesis that November through February is the most profitable period to own stocks. The other good news is that any significant correction at this stage would simply be treated as a buying opportunity and lead to further gains in the months ahead.
The Employment Situation report for October registered moderately sharp rise in nonfarm payroll employment, but a slight rise in the unemployment rate. This was a fairly positive report. The headline job gain was +337K, which is finally a statistically significant gain. Ex the fluky seasonal adjustment, we actually gained +1.051 million nonfarm payroll jobs. Manufacturing employment was down modestly (-5K), and down -14K ex adjustment. Temporary help (a leading indicator of future employment) was up a moderate +47.6K, and actually up +70.6K ex adjustment. Unemployment rose by 69K, but actually declined by -14K ex adjustment. Ex adjustment, the unemployment rate in fact declined very slightly. There was a decline of -116K in the number of people who were no longer in the labor force, and that was actually a decline of -541K ex adjustment. The civilian population grew by an estimated +251K. The civilian labor force grew by +367K, or by +792K ex adjustment. Household employment rose by +298K, and grew by +806K ex adjustment. Household employment is higher than a year ago by 1.828 million. On a seasonally adjusted basis, household employment is at its highest level ever, although ex adjustment it is -253K below the peak in July. Nonfarm payroll employment is now -490K below the peak level of 132.507 million (seasonally adjusted) in March 2001, but actually +2.073 million above a year ago (or 2.066 million higher ex adjustment). Hourly earnings rose modestly, and average weekly earnings rose modestly as well. The average workweek was unchanged, but the average manufacturing workweek shrank slightly. Manufacturing overtime also shrank slightly. Computer and electronic product firms cut -1.3K jobs, but there was no change ex the fluky seasonal adjustment. The household survey covers the calendar week containing the 12th of the month, and the payroll survey covers the pay period that includes the 12th. Please note that employment is a lagging indicator for economic activity and won’t show any truly dramatic growth and unemployment will not show any dramatic decline until GDP growth kicks up above 4.5% for several quarters (assuming productivity remains high). Please note that the ‘recovery’ is not over or complete (another two to three years will be needed). The bottom line is that you should never get too excited or too depressed by the latest data point (or two) in a series. It takes time (up to six months or even a year) for a trend to develop or to change and some volatility is to be expected.
The ECRI Weekly Leading Index registered a sharp rise (to its second highest level since the second week of July) and the six-month smoothed growth rate registered a modest rise but remains modestly below neutral. This was a reasonably positive report, and suggests that the economy will continue to limp along for the next few months, neither booming nor busting, but there is a hint of improvement. We're basically in a "watching paint dry" economy as we wait for ongoing business restructuring to progress.
[ * ] Saturday: The weekly Wal-Mart (WMT) Sales Outlook is still on track for 2-4% year-over-year growth for November (October 30 through November 26). This was an okay report. The best-selling categories were bedding, ladies wear, food, and pet supplies. The company said that both traffic and the average ticket were positive for the week, with traffic accounting for most of the sales increase.
[ * ] Sunday: The biweekly Lundberg Survey of Gasoline Prices registered a sharp decline (2.67 cents) in the average retail price of a gallon of self-serve gasoline for the two weeks ended November 5th. This was a positive report. The report notes that "Some of the production lost to Hurricane Ivan in the U.S. Gulf is back. As those repairs continue, and oil supply is further enhanced, the likelihood for gasoline is further price cuts."
The AAA Daily Fuel Gauge Report showed a moderate decline of -0.4 cents since Wednesday (from 2.011 to 2.007), the fifth consecutive decline after four consecutive days of gains. Regular unleaded gasoline is now 6.7 cents above the level of a month ago, but 4.7 cents below its May peak. Gasoline prices are likely to continue falling until Thanksgiving.
.
Crude Oil futures may once again be poised to resume their run at $60, but this could once again be a ruse to attract naive long positions that the shorts will then be poised to clobber. Crude oil will be 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 appears to be poised to continue declining, but that could also be a ruse to attract naive long positions that the shorts will then be prepared to clobber. 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. One interesting factor is that there is now an unusually high level of "short" dollar positions which would have to be covered in any short-squeeze, forcing the dollar to rise sharply when the next strong economic report comes out. Speculators treated the strong employment report as a transient fluke and remain committed to pushing the dollar down. They'll have to see a string of solid reports before they lose faith in the weakness of the dollar.
Gold futures continued their pop above their recent trading range, but the durability of this new move remains to be proven.
The reasonably strong employment report caused a sharp rise in the odds of Fed rate hikes over the coming year. There is still disagreement over whether a hike is likely in December, but a faster pace of hikes is now expected in 2005.
[11/2/04] The fed funds futures market suggests a quarter-point hike (to 2.00%) at the November 10 FOMC meeting, a quarter-point hike (to 2.25%) at either the December 14 FOMC meeting or the February 1/2 FOMC meeting, a quarter-point hike (to 2.50%) at the March 22 FOMC meeting, and a quarter-point hike (to 2.75%) at either the May 3 FOMC meeting or 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.
SBC Communications (SBC) will be cutting another 10,000 jobs or about 6% of its workforce by the end of 2005, partially through attrition. They've already cut about 7,000 jobs over the past year, mostly through attrition.
Delta Air Lines detailed plans for cutting 6,900 jobs beginning January 1, 2005. They had already made a preliminary announcement on September 8.
United Airlines says it needs to cut another $2 billion from costs per year.
[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.
[11/3/04] My next dollar-cost averaged investment will occur on Tuesday, December 7.
[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.
[11/6/04] Short-term (10-day): Somewhat volatile, but strongly bullish.
[11/3/04] Short-term (1-month): Somewhat volatile, but modestly bullish.
[11/6/04] Short-term (2-months): Somewhat volatile, but moderately strongly bullish.
[10/22/04] Medium-term (3-months): Very volatile, but moderately bullish.
[11/6/04] Medium-term (6-months): Very Volatile, but modestly bullish.
[11/6/04] Medium-term (9-months): Very Volatile, and relatively flat.
[11/5/04] Year-to-Date: Very Volatile, and slightly bullish.
[11/6/04] Longer-term (1-year): Very Volatile, but 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, trading range.
[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.
[11/6/04] Nasdaq set a new near-term intra-day peak of 2,046.92 on Friday, November 5, 2004, but closed 8 points off that level. That's a moderate yellow flag.
[11/6/04] Nasdaq set a new near-term closing peak of 2,038.94 on Friday, November 5, 2004, and closed above all other recent intra-day peaks. That's a positive sign.
[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 07, 2004 10:41:23 PM -0500
Copyright © 2004 John W. Krupansky d/b/a Base Technology