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Cynical traders and short-term speculators had bet too heavily on the story about October being a bad month for stocks and a crash being inevitable, but they played that story out to the point where they reached the point of selling exhaustion, causing purely technical traders and speculators to reverse and kick off a rally. There was probably at least a little real buying, possibly even one or more asset allocation or market timing calls, pushing money into stocks, that boosted the rally and kept it going. The cynics had probably bet too heavily on a crash and were forced to do a lot of short-covering. Whether this rally really has legs or was simply a one-day stand remains to be seen. NASDAQ rose a very sharp +35.24 points.
The gain confirms the new up-leg that began with the intra-day low of 2,025.58 on Thursday, October 13, 2005. It was a somewhat weak confirmation due to lackluster trading volume and market breadth, but does fit the basic requirements.
The economic data remains mixed, with enough bright spots to keep hope alive.
NASDAQ trading volume was moderate (1.89 billion shares), and breadth was moderately strongly positive, with 1.86 gainers for each loser. This was a semi-decent rally, but despite the very sharp gain, volume and breadth were a bit too lackluster to call this a strong rally.
The New Residential Construction report for September registered a very sharp rise in building permits (+2.4% vs. -2.2% last month), a very sharp rise in housing starts (+3.4% vs. -1.1% last month), and a very sharp rise in housing completions (+3.2% vs. -0.2% last month). This was a positive report, but there is a lot of volatility. Residential construction is still very strong.
The Fed Beige Book for the period from September through October 10 for the twelve Fed regional banks indicated that “Economic activity continued to expand.” This was a reasonably positive report, but it was somewhat mixed. The report noted that "Most Districts described the pace of activity as moderate or gradual. Richmond reported some quickening in the pace of growth while New York reported a slowdown. Atlanta reported mixed economic conditions, with significant negative effects on the District economy from hurricane damage. Dallas reported expansion overall but also experienced noticeable disruptions to the District economy as a result of Hurricanes Katrina and Rita. Retail sales of general merchandise increased in most Districts, but a number of Banks reported that retail sales were either below plan or weak. Auto sales fell throughout the Districts. Tourism activity was mixed. Service sector activity continued to expand. Manufacturing advanced in all Districts except St. Louis and Atlanta. Commercial real estate markets continued to firm up. Residential real estate activity remained generally strong, but reports that demand for homes has eased have become somewhat more common. Agricultural conditions were viewed as mostly good. Mining and energy production increased except in the Gulf of Mexico, where damage to onshore and offshore oil and gas facilities is still being repaired. Bank loans and deposits rose. Employment has been rising, and Federal Reserve Districts reported some tightening in labor markets. Wage increases have been moderate, although a number of Districts noted increased upward pressure on wages and salaries in the service sectors and for some skilled occupations in several industries. All Districts reported cost increases for energy, petroleum-based products, building materials, and shipping. Several Districts indicated that input cost increases are being passed through to retail prices." It's not clear whether the Fed's interest rate hike campaign itself has put any dent in the economy, or whether the moderation is a natural consequence of the apparent maturing of the business cycle. I would note that the economy still is in recovery mode, with quite a number of sectors continuing to restructure. Maybe higher interest rates and elevated energy prices will give them a stronger incentive to restructure at a faster pace.
The weekly Mortgage Applications report registered a moderately sharp rise (+6.1% vs. -2.6% last week) for the week ended October 14. This was a positive report, but there does tend to be a lot of volatility. Refinancing applications rose moderately (+4.5% vs. -4.9% last week), and applications to purchase rose moderately sharply (+7.3% vs. -0.9% last week). The volatility will probably remain quite high from here on out, especially as the Fed continues to raise interest rates and demand for housing gradually (eventually) begins to revert to a more normal pace.
The DOE EIA Weekly Petroleum Status Report registered a sharp rise (+1.8% or +5.6 million barrels to 312.0 million barrels) in the inventory level of crude oil, and it remains above the upper end of the average range for this time of year. This was a positive report, and indicates that we have plenty of crude oil and that the lofty price level is due primarily to speculation rather than real supply or demand. The crude oil inventory level is +11.9% above a year ago, and well above the level which would indicate a shortage or tightness of supplies (200 million barrels). The Strategic Petroleum Reserve (SPR) fell modestly (-0.3% or -1.8 million barrels to 688.7 million barrels), but is still +2.7% above a year ago. The gasoline inventory level rose sharply (+1.5% or -2.9 million barrels to 195.7 million barrels), and is -4.2% lower than a year ago. The heating oil (distillate fuel oil) inventory level fell sharply (-1.5% or -1.9 million barrels to 122.7 million barrels), but is +1.3% above a year ago. What these weekly reports do make quite clear is that there is no shortage of oil, gasoline, or heating oil at the overall, national level. As the EIA report puts it, "Total commercial petroleum inventories jumped by 6.3 million barrels last week, and remain in the upper half of the average range for this time of year." That doesn't sound like a very particularly bad place to be, unless you're an energy and commodities bull.
The AAA Daily Fuel Gauge Report registered a very sharp decline of -1.9 cents since Monday (from $2.742 to $2.723) in the retail price of a gallon of unleaded gasoline, a fourteenth consecutive decline. This was a positive report. Regular unleaded gasoline is now -8.2 cents below the level of a month ago, +66.9 cents above its May 2004 peak of $2.054, and -33.4 cents below its September peak of $3.057. It may take a little while longer for prices to settle into a post-Katrina/Rita range. Using the rule of thumb that retail prices will tend to converge about 60 to 65 cents above the front-month NYMEX futures price (the so-called "wholesale price"), we could see $2.27 to $2.32 regular unleaded within a couple of weeks if the wholesale price were to remain steady. All of that is subject to dramatic change on a daily basis. Out here in Boulder, Colorado prices have stabilized, for the moment.
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Commodities were mixed on Wednesday. Energy and gold stumbled, but foreign exchange was bullish. It remains unclear how much impact "Refco Madness" is having on the commodities markets. It also remains unclear whether we are seeing simply profit-taking and range trading, or whether there really is a dramatic exodus brewing.
[10/19/05] Since some people are convinced that a recession is coming, the Asset Allocation Clock will tend to start moving those people out of commodities and into cash or other short-term fixed-income assets. The Fed campaign to raise short-term interest rates provides a further incentive for such a shift.
Recovery from Katrina and Rita continues to slog along. You can read what the Department of Energy's Energy Information Administration has to say each day, as well as the Department of Interior's Minerals Management Service (MMS). We have a ways to go, but progress is occurring every day. According to MMS, another 0.60% of oil production came back online by Tuesday, with 64.87% (vs. 65.47%) of Gulf oil production now out of service, and another 1.04% of natural gas production is back, with 52.42% (vs. 53.46%) of Gulf natural gas production now out of service. It's rather interesting how well the economy is doing and how moderated energy prices are considering those outages; so much for the persistent argument that energy markets are "tight".
The dramatic shifting in the crude oil futures price curve continued on Wednesday, finally returning to full backwardation (declining prices) all the way from the front-month November 2005 contract which has the highest price ($62.41) out to the December 2011 contract at the lowest price ($53.50). All contracts after January 2007 are now under $60 and the 2009, 2010, and 2011 contracts are now under $55. This "backwardation" of longer-term contracts strongly suggests that elevated oil prices are primarily a speculative "bubble" due to deep-pocket investment funds rather than due to actual or prospective supplies or demand. The proposition that elevated oil prices are due to long-term demand growth and long-term supply shortages is simply not born out by futures contracts for outlying years ($53.50 for December 2011). It's still too early to call an end to "The Great Oil/Energy/Commodities Speculation of 2004 and 2005", but the market is clearly struggling and shuddering. The shorts are still rather timid, but it's only a matter of time before the bulls finally capitulate. It may still take a while longer until the market settles down with respect to the intermediate-term impact of Katrina and Rita, although the "Refco madness" may persist for a while.
Unleaded gasoline futures remain quite erratic. We have contango (rising prices) from November 2005 through May 2006 and then backwardation (falling prices) through October 2006. The October 2006 contract is priced about -0.11 cents below the November 2005 contract. The bottom line is that there is no evidence of a market expectation of dramatically rising gasoline prices over the long term, but there is plenty of evidence of lots of confusion and possibly even some mischief in the near term. It may still take a while longer until the market settles down with respect to the intermediate-term impact of Katrina and Rita, although the "Refco madness" may persist for a while.
[10/17/05] Since Refco clients had both long and short positions in commodities, it's difficult to say whether unwinding of positions at Refco will be a net gain or loss for any particular commodity. It is fair to expect an excess of volatility until the initial impact of Refco plays out.
[10/15/05] Intense chatter about Refco probably had some impact on the commodities markets, but probably more psychologically than financially. But the full story of Refco has yet to play out, so stay tuned.
[10/14/05] Commodities are floundering again, but this could simply be a bout of profit-taking, a breather before a further rise. Or, it could be evidence that commodities really are past their peak.
[10/14/05] The scandal over Refco (RFX) is something to keep an eye on, especially when some customers are being told that they can't access their accounts. Refco is the big dog of the commodities trading and speculation business. The big question is whether the latest problems are simply brief and temporary or symptomatic of even greater difficulties in commodities trading land. My suspicion is that investment funds may be pulling in their horns on the commodities front, and that this reduction in liquidity may be putting extra pressure on the commodities trading firms. And one has to wonder whether smaller commodities firms are really in that much better shape than Refco. There is a distinct possibility that investment funds may cut back their exposure to commodities simply to limit their exposure to Refco and crew.
[9/27/05] The next two months could in fact be the "moment of truth" for the commodities boom. Crude oil's inability to break out above $70, even after two "body blows" is quite telling.
[9/21/05] Some of the intense interest in commodities is driven by something call the Asset Allocation Clock. A fair number of people have the misguided belief that the U.S. is on the verge of a recession or significant economic contraction, and the Asset Allocation Clock diagram tells them that commodities are the place to be when a business cycle is well beyond its peak and about to roll over.
[4/15/05] The commodities markets remain "loopy". That's the most charitable thing I can say. There's simply too much "hot money" chasing a lot of unrealistic, concocted "stories", not unlike the old dot-com boom. Tears to follow for anyone who sincerely buys into any of those cockamamie stories as other than very short-term trading plays.
[10/7/05] Ongoing anxiety: One potentially significant factor to consider for oil prices is the potential for a supply disruption as a result of the ongoing saber-rattling between the U.S. government and Iran, especially now that a new hard-liner has been elected. The administration is talking a harder line with Syria as well. I don't have any information to suggest that a disruption might be likely, but at some point there could be some increased chatter to that effect that may spook traders and speculators.
[8/4/05] Disclosure: I actually have some very small positions in some oil and gas production limited partnerships (Geodyne), less than $1,000 total, dating from the early 1980's. I've hung on to them merely because there isn't a liquid market for trading them, so I'd have to take a bath to sell them. The total return plus residual value since the early 1980's is probably significantly less than if I had invested in rolling T-bills for that period. These positions are small because they were actually quarterly payments (from a larger position that I dumped long ago) that were made in the form of fractional units of whatever their latest limited partnership was.
[10/18/05] Some popular books related to the "Peak Oil" fad: "Beyond Oil : The View from Hubbert's Peak" by Kenneth S. Deffeyes (2005), "Hubbert's Peak : The Impending World Oil Shortage" by Kenneth S. Deffeyes (2003), "The End of Oil : On the Edge of a Perilous New World" by Paul Roberts (2004), "The Coming Oil Crisis" by C. J. Campbell (2004), and "Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy" by Matthew R. Simmons (2005). And if you're simply gung-ho about commodities in general, take a look at "Hot Commodities : How Anyone Can Invest Profitably in the World's Best Market" by Jim Rogers (2004).
Federal Reserve Board Governor Donald Kohn stated very clearly and directly that "we are not yet at a point where we can stop and watch the economy evolve for a while." Even so, many Wall Street pundits, traders, and speculators will endlessly debate how to precisely interpret Kohn's words. Yes, the Fed will hike to 4.00% in November, and most likely to 4.25% in December, but February is a very long ways away and the economy could well evolve quite dramatically in three long months.
The latest release of the Fed Beige Book, coupled with comments fresh comments from Fed officials had little effect on fed futures expectations. There was a moderate decline in the odds of Fed interest rate hikes after December. The market continues to price in a hike to 4.00% in November, a hike to 4.25% in December, and a hike to 4.50% in February or March. The latter may merely be an insurance hedge rather than an outright bet. The hike to 4.00% in November is virtually locked in. The market is also close to pricing in a coin flip for a hike to 4.75% out in November 2006, but that is probably also an insurance hedge rather than an outright bet.
[10/19/05] I still don't see quite enough economic strength to justify a hike to 4.50%, but I'm poised for such a shift. A hike to 4.25% in December seems like a slam-dunk to me, but the strength of the economy in January also seems like a big unknown to me. I may hold off until the results for retail sales for Thanksgiving weekend come in before betting more confidently on Fed action in February. I think strong retail sales in December and January are likely, but certainly not a slam-dunk, yet.
[10/19/05] Federal Reserve Bank of San Francisco President Yellen finally gave the markets a clear view of the so-called neutral rate and neutral range, saying that it is "reasonable to put the current neutral rate in the range of 3-1/2 to 5-1/2 percent. At 3-3/4 percent, the current federal funds rate is toward the lower end of this band. This suggests a presumption that the rate will need to be raised further. Indeed, financial markets now appear to expect the funds rate to peak at about 4-1/2 percent -- in the middle of this neutral range. Again though, I want to emphasize that there is no way to know precisely what the neutral stance is." At least she has offered the markets a solid target. This is not to say that 4.50% is the precise interest rate at which the Fed will pause, but unless she is rebutted by other Fed officials, it will stand as the rough target.
[10/15/05] Still no recent chatter from PIMCO's Bill Gross about where he thinks the Fed is headed. Almost a month ago he forecast 4.00% as the pause point, but that was before Rita and Refco.
[10/14/05] I continue to forecast a pause at 4.25% in December, but I'm almost ready to consider a hike to 4.50% in February, as soon as I see some more definitive evidence of economic strength. I'll try to focus on resolving my view within two or three weeks. I'd like to see the weekly jobless claims numbers retreat significantly first, a more dramatic recovery of Gulf Coast energy production and a dramatic pullback in retail gasoline prices, and a recovery in retail sales, including a more buoyant outlook from Wal-Mart (WMT).
[10/4/05] Bill Gross of PIMCO has a new, October 2005 Investment Outlook essay out, but it doesn't give a revised fed funds target interest rate. He focuses on the so-called "housing bubble", concluding that "If real housing prices decline in the U.S. in 2006 or 2007, a recession is nearly inevitable. If higher yields simply slow the pace of appreciation to a more rational single digit number, then we could escape with a 1-2% GDP economy. In either case, however, our Fed with its new Chairman will likely be in the enviable position of lowering rates come mid-year 2006." Of course, that doesn't tell us if interest rates will be higher or lower next year, especially since the Fed doesn't set longer-term interest rates such as the yield on the 10-year Treasury note anyway. I feel like I should be deferring to Gross' deep knowledge and bond expertise, but his analysis simply seems rather tentative and subject to change and subject to such a huge margin of error as to render it rather meaningless.
[9/27/05] I'm actually beginning to warm up to the possibility that the Fed could hike up to 4.50% or even 4.75%, or maybe even 5.00%, given the impressive resilience of the overall economy in the face of persistently high oil prices and two major storms. It all depends on whether the national economy shows any signs of buckling over the next two months.
[9/17/05] PIMCO bond fund honcho Bill Gross reaffirmed his belief that the Fed will pause at 4.00%.
[6/25/05] Persistently higher oil prices make it very difficult to judge the pace of economic growth for the coming months. Nobody has any visibility as to whether oil will be significantly higher or significantly lower in a few months, and what the economic impact might be.
[9/21/05] I remain sitting on the fence as to whether the Fed pauses at 4.00% or 4.25%. There seems to be a fair amount of economic strength even in the face of high energy prices, and the Katrina recovery effort will provide the economy with some significant fiscal stimulus. Since 4.00% seems like a popular bet, I'll go out on a limb and suggest a pause at 4.25% in December. After all, there is likely to be little difference in short-term effects of pausing in November as opposed to December and the higher interest rate gives the Fed an additional increment of flexibility. A short rate of 4.25% would have a better chance of nudging long rates higher. Besides, the higher interest rate will serve as a disincentive for people who are on the fence as to whether to rotate some more of their money out of their commodity speculation funds.
[10/1/05] The fed funds futures market suggests a quarter-point hike (to 4.00%) at the November 1 FOMC meeting, a quarter-point hike (to 4.25%) at the December 13 FOMC meeting, a quarter-point hike (to 4.50%) at the January 31 - February 1, 2006 FOMC meeting, no hike at the March 28, 2006 FOMC meeting, no hike at the May 10, 2006 FOMC meeting, no hike at the June 28/29, 2006 FOMC meeting, no hike at the August 8, 2006 FOMC meeting, no hike at the September 20, 2006 FOMC meeting, and no hike at the October, 24 2006 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. Futures are normally quite accurate in the short-term, so a hike to 4.00% at the November 1 FOMC meeting is fairly likely. Bets on hikes beyond December are most likely insurance hedges rather than outright bets.
[9/21/05] The Fed is not likely to raise short interest rates all the way to the middle of a so-called ‘neutral’ stance (somewhere in the 4.50% to 5.50% 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, technology, and manufacturing sectors). Rather, the Fed will simply remove the ‘excess’ stimulus (call it the ‘deflation hedge’) so that only a modest level of ‘accommodation’ remains. The initial ‘campaign’ will likely end at a target fed funds rate of 4.00% to 4.50% 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. My best estimate is that the Fed hikes to 4.00% in November or 4.25% in December and then 'pauses' for at least a year or two before hiking to the middle of the full-neutral range (5.00%).
AOL is cutting more than 700 employees. AOL is effectively "on the block", so the big question is who will "get" them. They just don't seem to fit in with Time Warner.
GM (GM) denies considering bankruptcy. That makes sense to me, for now. They need to focus 1,000% of their attention on restructuring their entire business, and a bankruptcy court isn't the place for the type of long-term decisions they need to make.
[1/26/05] For the most recent rumors about companies that are laying people off, going out of business, shuffling management, or otherwise restructuring, check out F****dCompany.com.
[10/14/05] The Q3 venture capital investment money flow numbers should be out soon. I expected them to be out at the Dow Jones Emerging Ventures conference, but they only had some preliminary numbers since some venture firms haven't yet submitted final Q3 investment data.
[10/11/04] For some background information on venture capital, click here.
My old Roth account at Muriel Siebert seems to be open again, so I went ahead and made a modest Roth contribution and a modest deposit to my Siebert taxable account to get my new, post-bankruptcy savings plan underway. Money will be very tight for me for some time, but I have to give this a reasonably high priority.
[10/15/05] I put in a request to reopen my old Roth IRA account at Muriel Siebert. I had withdrawn all assets and closed the account back in December 2003 as I was spiraling into insolvency due to a lack of income, but apparently it was a soft rather than hard close and they said a simple fax should get it reopened. I'm going to try to put at least a little money into both my taxable and Roth IRA accounts at Siebert by the end of November, to at least get started on a new savings program. I may also put a little cash back into my ShareBuilder account just to keep it segregated for yet another rainy day. I don't have to make any payments on back taxes while my bankruptcy is pending, so I'll have at least that cash to start with.
[10/14/05] I continue to struggle with whether or when to dip my toe back into the investing waters, especially with what sort of asset allocation model I should use and whether to take an index approach to try to do some old-fashioned stock picking. I may simply start using my old Muriel Siebert account since it uses Fidelity for its money funds, which pays a fairly decent interest rate, and then incrementally buy the S&P 500 index tracking stock (SPY) or the S&P 500 Tech Sector Spider (XLK) with a relatively small fraction of the cash (maybe 20%), and then buy and sell on a monthly basis to maintain a fixed percentage asset allocation (i.e., sell if the market is up or I have less than 80% cash, and buy if the market is down or I have more than 80% cash). My fixed asset allocation would become more aggressive once I accumulate enough cash to feel that I have a sufficient rainy day fund. I'll also start doing the same with a Roth IRA once I've got a sufficient short-term financial cushion in place. I'm thinking of eventually running my Roth and taxable accounts in parallel with the same strategy, although the Roth could have a much more aggressive stock allocation (maybe 70-85%). My feeling is that individual stocks won't be worth the hassle until I have a large enough portfolio where a 3% position in a stock (that's 3% of the stock allocation) would be at least $1,000, with a 3% position meaning that I could have 20 stocks comprising 60% of my stock allocation, leaving 40% for index investment. That might take me a couple of years since I also have to pay down a lot of back taxes, but at least I'd have a credible plan that can start small and not get too unwieldy as my savings grow.
[9/24/05] I've started to think about starting up a new small investment plan once my bankruptcy case finally gets discharged in early December. I may just restart my previous small plan. I really haven't given it any intensive thought yet, and won't until I really am free and clear. I also need to give thought to resuming a Roth IRA plan as well. Unfortunately, I won't have a lot of money to work with anyway. My priorities right now are 1) getting back onto a sane, balanced budget, and paying down my back taxes over the next four years, 2) accumulating some money in a classic rainy day fund, part cash and part stock, 3) bulking up my Roth IRA, and 4) accumulating a little money I can speculate with.
[6/23/05] I'm out. As advertised, I did in fact liquidate my year-long dollar-cost averaging experiment with ShareBuilder. My net taxable gain since last July was 1.43%, which was not much better than a money market and a whole lot more volatile. It wasn't my intention to liquidate so soon, but being cut back to part-time work and back taxes (and buying a new notebook PC) forced my hand.
[6/23/05] My decision to sell was not in any way an attempt to "time" the market. I had expected to sell on the anniversary of starting the plan (July 6, 2004), but I'll be traveling and going to a venture capital conference next week and I just wanted to get it off my list of things to do over the next two weeks. And, I had also used my July rent money to buy the new notebook PC, and I just signed the lease for my new apartment in Boulder, so there was a confluence of factors that made Wednesday a very convenient time to sell.
[6/23/05] I continue to have a very, very modest portfolio in two rollover IRA accounts, but not enough to be worth speaking about.
We are once again back at square one, with market participants struggling to decide whether the recent correction has run its course and is ready to continue heading up, or is just starting to get a head of steam on its way down. From a fundamentals perspective, people are struggling to decide whether the economy and businesses are likely to do worse than were expected last week, or maybe significantly better over the next six to nine months. Unfortunately, if Katrina and Rita victims are continuing to pull back from investing in stock mutual funds, that dramatically increases the odds that the market may be in for a prolonged downdraft, albeit peppered with occasional technical and speculative rallies and corrections.
[9/17/05] There is a chance that Katrina could put additional downwards pressure on the stock market as people may need to sell stock in their retirement plans to raise cash to meeting storm-related needs. A new loan exemption for retirement plans may alleviate at least some of the need to liquidate retirement portfolios.
[4/26/05] Overall market outlook: quite confused and susceptible to volatile swings, but a gradual drift up, over time.
[10/14/05] The fact that there was a net outflow from domestic equity mutual funds for a tenth week and we've seen inflows for 23 of the past 37 weeks, suggests that the market will continue to be quite volatile, but likely to maintain a gradual drift upwards.
[1/1/05] Click here for Market Outlook for 2005.
A bear market is frequently defined in terms of a 15% or 20% or 25% decline in the overall market index level, or a prolonged period of market decline measured in months or years. I use the latter definition, with three months as my threshold. By my definition, in another 6 trading days (or 11 if you use a strict day of month definition rather than simply 20 trading days per month) we will "officially" be in a bear market. We will return to a bull market only after the market closes higher than its level of three months ago. In some sense we are already in a bear market since the closing level is below that of three months ago, but with such an obvious peak back on August 3, we should measure from that peak.
[10/20/05] NASDAQ is moderately bearish over a one-month timeframe and modestly bearish over a 10-day period.
The major advance off of the NASDAQ October 2002 low is now in a correction, 54 days off its closing high of 2,218.15 of Tuesday, August 2, 2005, and 53 days off its intra-day peak of 2,219.91 on Wednesday, August 3, 2005.
The sharp gain of 29.16 points on Wednesday, May 4, 2005 confirmed the new up-leg of the October 2002 advance for NASDAQ that began with the intra-day low of 1,889.83 on Friday, April 29, 2005. This up-leg is now 120 days old, 54 days off its closing high of 2,218.15 of Tuesday, August 2, 2005, and 53 days off its intra-day peak of 2,219.91 on Wednesday, August 3, 2005. The key signal to watch for now is a day on which the market opens sharply higher but closes sharply off the intra-day peak, which could indicate a "market top".
We continue to look for confirmation of the start of the next up-leg of the longer-term advance starting with the intra-day low of 2,025.58 on Thursday, October 13, 2005. We now look for a 1% rise on higher volume than the previous day to confirm the new leg, but we ignore what happens on Days 2 and 3 since dead-cat bounces are common then. Friday was Day 2, with a moderately sharp rally, but too little and too weak to classify as a confirmation even if it wasn't on Day 2 or 3. Monday was Day 3, with a modest rally, but too little, too weak, and too soon to classify as a confirmation even if it wasn't on Day 2 or 3. Tuesday was Day 4, with a moderate decline, but the intra-day low remained intact. Wednesday was Day 5, with a very sharp gain on higher volume (+35.24 or +1.71%), which therefore confirms this up-leg, which now has a closing high and intra-day peak of 2,091.24. The key signal to watch for now is a day on which the market opens sharply higher but closes sharply off the intra-day peak, which could indicate a "market top".
[8/3/05] NASDAQ closed at 2,218.15 on Tuesday, August 2, 2005 at its highest closing level since it closed at 2,264.00 on June 7, 2001. The intra-day peak of 2,219.00 on Tuesday, August 2, 2005 was its highest intra-day peak since the peak of 2,263.75 on June 8, 2001.
[10/20/05] Short-term (1-day): Very strongly bullish.
[10/20/05] Short-term (2-day): Moderately bullish.
[10/20/05] Short-term (5-day): Moderately strongly bullish.
[10/20/05] Short-term (10-day): Modestly bearish.
[10/18/05] Short-term (1-month): Moderately bearish.
[10/8/05] Short-term (2-months): Moderately bearish.
[10/12/05] Medium-term (3-months): Moderately bearish.
[10/18/05] Medium-term (6-months): Moderately bullish.
[10/7/05] Year-to-Date: Moderately bearish. [NASDAQ closed 2004 at 2,175.44]
[10/20/05] Medium-term (9-months): Modestly bullish.
[10/6/05] Longer-term (1-year): Moderately bullish.
[10/14/05] Longer-term (2-years): Modestly bullish.
[10/18/05] Longer-term (3-years): Moderately bullish.
[10/18/05] Longer-term (4-years): Modestly bullish.
[12/23/04] Longer-term (5-years): Strongly bearish.
[4/23/05] Longer-term (6-years): Moderately bearish. This was the big run-up for the "boom" in 1999.
[10/15/04] Longer-term (7-years): Modestly bullish.
[10/15/04] Longer-term (8-years): Modestly bullish.
[10/15/04] Longer-term (9-years): Modestly bullish.
[10/15/04] Longer-term (10-years): Modestly bullish.
[1/1/05] The NASDAQ "bubble" (above the 3,000 level, including intra-day "flirtations") lasted from November 2, 1999 through December 13, 2000, a year and six weeks.
We continue to see occasional bright spots for the economy. Superficially, the economy continues to "flutter", unsure of whether the road is simply bumpy or whether the bright spots are a "last hurrah".
[10/15/05] Retail sales were okay in September, but I'm not so sure that report is representative of what we will see going forward. We might see a little retrenchment in October, but I suspect we will see some significant renewal of growth in November, if not sooner.
[10/14/05] The economy seems to be booming in Boston, with plenty of tourists and crowded restaurants. I wandered by the Marriott Long Wharf hotel and checked the room rates. $399 per night and no weekend rate. This is a nice hotel and located in a popular, convenient, and pleasant location, but not in the luxury category. I'm amazed that so many people are willing and able to pay that much. I've only stayed there a couple of times years ago, including shortly after they opened back in the early 1980's.
[10/7/05] I don't have great confidence that I have a solid handle on the pace of the economy, but it seems to be hanging in there reasonably well considering the shocks of the recent storms and persistently high energy prices. Q3 GDP will be a statistical mess, but Q4 will most likely show some nice growth.
[10/5/05] The Fed seems to think that inflation is in the upper end of the acceptable range. That will keep the Fed interest rate hike campaign active for at least a couple more months. The Fed is vigilant enough that dramatic inflation simply won't be an issue at all. On the other hand, a little inflation really does help to grease the skids of the economy and offers everybody incentives to buy and invest now rather than to wait.
[10/3/05] Some supposedly competent economists are now actually chattering about the prospects for a recession. Sorry guys, but the odds of a recession over the next year are close enough to zero to suggest that it's not a topic worthy of discussion. These recession-mongers crawl out of the woodwork every time there is even a slight bit of stress on the economy and they are almost always wrong. This time is no different. What these guys do know with certainty is that if they even bring up the "R" word, they get lots of press attention, and that's all they're really after anyway
[9/29/05] It will take some time for the net economic impact of Katrina and Rita to become clear, but my view is that we will lose no more than about 0.5% to 1.0% from GDP in Q4, but possibly 0.25% to 1.5% loss from Q3 GDP depending on the quirky statistical process. The advance report for Q3 won't even include a fair amount of the data from September, so the "adjustments" could be all over the map. Q1 of 2006 will be an interim quarter, with some significant strength tempered by any lingering "outages", so it could be normal or well above par, but possibly a little weak as well.
[9/27/05] The pace of the economy over the next two months is a big question mark. We'll need to wait at least two weeks after Rita has passed and then listen carefully to the anecdotal reports about how business seems to be shaping up in October.
[9/23/05] The economy continues to be in a gradual zigzag recovery mode, so it's not unexpected to see some modest weak patches mixed in with evidence of real strength. Sad to say, but we have another three years of this meandering in front of us.
[9/19/05] The latest economic data continues to support the thesis that the U.S. economy remains in the early stages of a protracted recovery. Some people are talking as if the economy is nearing the end of a business cycle, when we are really only in the early stages of a protracted business cycle. It will be another THREE years before the economy is fully back on track. Unemployment will decline only gradually. Creation of new businesses which will be the titans of tomorrow has yet to even commence, let alone take off. The bankruptcy rate will decline off recent highs (after a temporary blip for the October 17 deadline before the law changes go into effect), 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 to three years as well. The sad thing is that a number of them don't yet know it or are afraid to admit it. Cost cutting and head count reductions will be ongoing mantras for the next two to three years. That said, there will be plenty of corporations that see increasing profits over the next few years as consolidation boosts their efficiency.
[9/17/05] Despite any short-term slump due to Katrina, the intermediate-term economic outlook will be significantly brighter than if Katrina had not struck. Note that a lot of people had been expecting the economy to slow even before Katrina appeared. There is a modest risk of higher inflation, but no significant risk of accelerating, runaway inflation.
[9/15/05] The bulk of economic reports over the coming weeks and through mid-November will not give us much in the way of clues for how the economy will perform in the coming post-Katrina months. For example, we won't have clean, post-Katrina retail sales and industrial production reports until the middle of November.
[9/12/05] I'm raising my expectations for the economy over the coming months and year. Katrina will result in a lot of near-term volatility, but will be a strongly positive catalyst for the next couple of years. Even after the Gulf area energy infrastructure is restored, the recent disruption will be a strong incentive for additional investment to meet growing demand and to reduce risk for future disruptions.
[4/2/05] For the record, we simply are not going to see consistently large payroll employment rises (200K/month or 2.4 million per year) until the vast bulk of "old economy" companies have finally worked their way through the restructuring process, which could be another two or maybe even three years. We still have quite a number of companies "hanging in there", resisting further (and inevitable) restructuring as they wait for the economy to turn up more strongly. This includes the old major airlines, the car companies, retailers, a fair number of technology companies, etc.
[2/18/05] Clearly higher interest rates will have some negative impact on the economy, but the extent of the impact is not so certain. First, the Fed is not trying to constrain demand, but simply getting rid of excessively cheap money that has the potential for causing speculative excesses. In other words, raising interest rates to roughly "neutral" won't cause normal economic demand to decline significantly, but could, for example, help to curb speculation on commodities and foreign exchange. Second, the Fed essentially sets only some short-term interest rates, but the market and the law of supply and demand set longer-term rates. The key factor right now is that there remains a credit glut; corporations remain more interested in trimming their debt load rather than expanding it.
[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.
[5/21/05] I heard that Greenspan says oil prices may be taking 0.75% off of GDP, but prices have risen significantly since last August.
[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.
[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.
[3/12/05] A continuing big wildcard in 2005 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 19, 2005 08:01:28 PM -0400
Copyright © 2005 John W. Krupansky d/b/a Base Technology