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Wednesday was a classic example of traders inappropriately running up the market in the pre-market, which causes a dramatic amount of short-covering, but then the shorts come back in to clobber the market after the initial waves of buying peter out. The initial rally that took Nasdaq up to 2,110 by 10:20 a.m. was not warranted by various news items that were floating around, but under such intense buying pressure, the shorts had no choice but to cover and then everybody went long and rode the rally up to its intra-day peak at 11:30 a.m. Then they reversed and rode Nasdaq back down 12.5 points to its closing level, very slightly below the psychological 2,100 level. The good news is that Nasdaq kept almost two-thirds of its gains, so there had to be some amount of real buying in there as well. On the other hand, part of the remaining gains could have been due to short-covering by people who got burned badly enough that they would rather sit on the sidelines until the market shows some more profound and obvious weakness.
The other good news is that the Nasdaq 2,090 level survived unscathed.
Nasdaq trading volume was very heavy (2.23 billion shares), and breadth was almost strongly positive (1.91 gainers for each loser). This was a split day, with a lot of heavy buying in the first part of the day and then a moderate sell-off in the afternoon. It's difficult to draw much of a conclusion from such a day except to say that we have to look for follow-through.
The Consumer Price Index (CPI) report for October registered a moderate rise in consumer prices (+0.6% vs. +0.2% last month), and a modest rise ex food and energy (“core” inflation, +0.2% vs. +0.3% last month). This was a reasonably positive report, with no evidence of either accelerating inflation or accelerating deflation. A little inflation is a good thing, encouraging people to spend money rather than simply hoard it.
The Industrial Production and Capacity Utilization report for October registered a moderate rise in production (+0.7% vs. +0.1% last month), and a modest rise in capacity utilization (+0.4% vs. no change last month). This was a positive report, but there is a lot of volatility. We’re doing okay, but the recovery really does have a long way to go before we’re back to “cruising speed”. Capacity utilization continues to be well below the long term average, so this excess capacity should continue to help keep inflation at bay.
The New Residential Construction report for October registered a moderate decline in building permits (-0.7%), a very sharp rise in housing starts (+6.4%), and a very sharp rise in housing completions (+2.7%). This was a mixed, but reasonably positive report, but there is a lot of volatility. Unfortunately, new permits declined and new permits are a leading indicator for future economic activity, but there does tend to be a lot of volatility there as well. Housing demand continues to be quite strong and continues to baffle and befuddle "profressional" economists.
The AAA Daily Fuel Gauge Report registered a slight decline of -0.1 cents since Monday (from 1.958 to 1.957), the thirteenth consecutive decline after four consecutive days of gains. Regular unleaded gasoline is now 4.8 cents below the level of a month ago, and 9.7 cents below its May peak. Gasoline prices are likely to continue falling until Thanksgiving.
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[11/13/04] Crude Oil futures continue to be whipsawed by speculators. Traders and speculators are pausing to regroup and figure out if the next big move is up or down. Crude 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.
[11/13/04] 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. It's normal for there to be a fair amount of profit-taking as the dollar approaches a major support level such as 1.30 to the euro. The dollar will probably soon fall through the 1.30 level and then quickly run down to the 1.35 level, but is unlikely to run down as far as 1.40. On the other hand, a little bit of good economic data (or commentary by the Fed) could cause the dollar-shorts to cover their short positions and once again send the dollar bouncing towards the other edge of its trading range.
[11/27/04] Gold futures continue to remain above their prior trading range, but the durability of this new move remains to be proven. Certainly traders and speculators fully intend to push gold up to $450, but that effort is not assured, especially as the Fed remains relentless about raising short-term interest rates.
The odds of Fed rate hikes in 2005 declined modestly since the Consumer Price Index (CPI) report was far tamer than the "alarming" Producer Price Index (PPI) report from Tuesday.
[11/17/04] The fed funds futures market suggests a quarter-point hike (to 2.25%) at the December 14 FOMC meeting, a quarter-point hike (to 2.50%) at the February 1/2 FOMC meeting, no hike at the March 22 FOMC meeting, a quarter-point hike (to 2.75%) at the May 3 FOMC meeting, and possibly a quarter-point hike (to 3.00%) 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.
Kmart (KMRT) is buying Sears (S). I don't have a firm opinion on the specific merits of this deal, but it is a perfect example of the consolidation that is needed in many sectors of the economy to move companies from barely limping along to being more vibrant competitors, so my initial reaction is that this is a big plus for the economy, even though there will be a short to medium-term loss of jobs as the two operations are combined.
[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.
There was some disappointment in the Applied Materials (AMAT) outlook for the coming quarter. This could be a catalyst for some profit-taking, but if traders and speculators try to push the market down too far too fast, it may simply bounce right back in their faces.
[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.
[11/18/04] Nasdaq set a new near-term intra-day peak of 2,112.18 on Wednesday, November 17, 2004, but closed 12.50 points below that peak. It is a positive sign that we set this new peak, but a moderate yellow flag that we closed so far below the peak.
[11/18/04] Nasdaq set a new near-term closing peak of 2,099.68 on Wednesday, November 17, 2004 that is above the prior near-term intra-day peaks. This is a positive sign, but the fact that Nasdaq closed 12.50 points below its intra-day peak is a moderate yellow flag.
[11/18/04] Now that Nasdaq has successfully cleared the the prior technical resistance at the intra-day peak of 2,094.92 on February 19, 2004 and closing peak of 2,089.66 on February 11, 2004, the psychological 2,100 level is staring us in the face, followed by a veritable minefield from 2,100 to the January 26, 2004 intra-day and closing peak of 2,153.83. Nasdaq desperately needs to easily clear that entire range (on a closing basis) to definitively prove that it has broken its 2004 trend of "lower highs", and that needs to happen within the next few weeks or else speculators will lose patience and reverse and attempt to push the market down. None of these technical milestones will fall except as the economic outlook improves further.
[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): Somewhat volatile, but strongly bullish.
[11/6/04] Medium-term (6-months): Very Volatile, but modestly bullish.
[11/18/04] Medium-term (9-months): Very Volatile, but modestly bullish.
[11/5/04] Year-to-Date: Very Volatile, but 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-years): Very volatile, but modestly bearish.
[10/15/04] Longer-term (6-years): Very volatile, trading range.
[10/15/04] Longer-term (7-years): Very volatile, but slightly bullish.
[10/15/04] Longer-term (8-years): Very volatile, but modestly bullish.
[10/15/04] Longer-term (9-years): Very volatile, but modestly bullish.
[10/15/04] Longer-term (10-years): 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: November 18, 2004 12:19:49 AM -0500
Copyright © 2004 John W. Krupansky d/b/a Base Technology