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(Updated since Saturday -- changes marked with [ * ] -- will be updated for Tuesday)
The market continued to digest recent gains on Friday. NASDAQ rose a slight +0.35 points (+0.02%).
The economic data was mixed but reasonably decent.
NASDAQ trading volume was barely moderate (1.77 billion shares), and breadth was moderately positive, with 1.25 gainers for each loser.
The Producer Price Index (PPI) report for December registered a moderately sharp rise (+0.9% vs. -0.7% last month), and a slight rise (+0.1% vs. +0.1% last month) ex food and energy. This was a mostly positive report, but there is a lot of volatility and no clear trend at this time. There was a modest rise (+0.2% vs. -1.2% last month) in the price of intermediate goods, which is supposed to be an indicator of future inflation, and it was a modest rise (+0.3% vs. +0.5% last month) ex food and energy. If I were the Fed, I would want to see that intermediate goods inflator, both core and with food and energy, stay down for at least another two or three months before concluding that in is truly under control.
The Retail Sales report for December registered a moderate rise (+0.7% vs. +0.8% last month), but a modest rise (+0.2% vs. -0.4% last month) ex autos; sales were +6.4% higher than a year ago (vs. +6.3% last month). This was a modestly positive report. There's a lot of volatility in these reports and the economy really is poking along on a zigzag path with some strong months mixed with some lackluster months.
The Manufacturing and Trade Inventories and Sales (Business Inventories) report for November registered a slight rise in sales (+0.1% vs. +0.8% last month, or +6.7% vs. +7.6% last month over a year ago), a moderate rise (+0.5% vs. +0.3% last month, or +3.7% vs. +4.1% last month over a year ago) in inventories, and a slight rise in the Inventories/Sales ratio (1.26 vs. 1.25 last month). This was a mixed report, but there is a lot of volatility. The low ratio of inventories to sales is bullish for future production. I'm not so happy about inventory rising faster than sales, but that may simply be monthly volatility.
The ECRI Weekly Leading Index registered a moderately sharp rise (+0.9 to 136.5 vs. +0.7 last week), and the six-month smoothed growth rate rose moderately (+0.4% vs. unchanged last week) and remains modestly above neutral (+1.8%). This was a positive report, but continues to suggest that the economy is "fluttering", undecided about whether to weaken or reaccelerate. I would expect the ongoing recovery to continue to limp along in the coming months (and years). We are still in a relative "soft patch", at least in the sense that the growth rate of the economy is not accelerating at a significant pace.
The AAA Daily Fuel Gauge Report registered a slight rise of +0.1 cents since Wednesday (from $2.335 to $2.336) in the retail price of a gallon of unleaded gasoline, a sixteenth rise after nine days without a rise after thirteen consecutive daily rises. This was a negative report. Regular unleaded gasoline is now +15.3 cents above the level of a month ago, +28.2 cents above its May 2004 peak of $2.054, and -72.2 cents below its September peak of $3.057. 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 $2.33 to $2.38 regular unleaded within a couple of weeks if the wholesale price were to remain steady. Wholesale prices remain roughly in balance with retail prices. All of that is subject to dramatic change on a daily basis. Out here in Boulder, Colorado, prices remain in the range of $2.24 to $2.29.
[ * ] Saturday: The AAA Daily Fuel Gauge Report registered a modest decline of -0.3 cents since Thursday (from $2.336 to $2.333) in the retail price of a gallon of unleaded gasoline, a decline after sixteen consecutive daily rises after nine days without a rise after thirteen consecutive daily rises. This was a positive report. Regular unleaded gasoline is now +14.1 cents above the level of a month ago, +27.9 cents above its May 2004 peak of $2.054, and -72.5 cents below its September peak of $3.057. 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 $2.33 to $2.38 regular unleaded within a couple of weeks if the wholesale price were to remain steady. Wholesale prices remain roughly in balance with retail prices. All of that is subject to dramatic change on a daily basis. Out here in Boulder, Colorado, I see numerous prices pulling back a little, with a range of $2.23 to $2.27.
[ * ] Sunday: The AAA Daily Fuel Gauge Report registered a moderate decline of -0.5 cents since Friday (from $2.333 to $2.327) in the retail price of a gallon of unleaded gasoline, a second decline after sixteen consecutive daily rises after nine days without a rise after thirteen consecutive daily rises. This was a positive report. Regular unleaded gasoline is now +12.5 cents above the level of a month ago, +27.4 cents above its May 2004 peak of $2.054, and -73.0 cents below its September peak of $3.057. 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 $2.33 to $2.38 regular unleaded within a couple of weeks if the wholesale price were to remain steady. Wholesale prices remain roughly in balance with retail prices. All of that is subject to dramatic change on a daily basis. Out here in Boulder, Colorado, I see some prices pulling back a little and one going up, with a range of $2.21 to $2.29.
[ * ] Saturday: The Wal-Mart (WMT) Weekly Sales Summary for the week ending Friday, January 13 indicated that "For the January reporting period, comparative sales for the U.S. are estimated to be within our guidance of 3 to 5 percent." This was a neutral report. The report notes that "For the week, food comparative sales were stronger than general merchandise. Average ticket drove the comp sales and the strongest region was the West." There were no changes on the storm-recovery front for a third consecutive week, with seven locations remaining closed, so I'll cease reporting the storm recovery status until it changes in some significant way. The January four-week reporting period extends from Saturday, December 31st, through Friday, January 27th.
[1/3/06] Annoyance: This column is now stored in a web page named stock_market_commentary.htm. It used to be stored in mplatest.htm, but I moved it since I'm trying to get it boosted in Google's ranking system. Sorry for the inconvenience. The old page should offer you a link to the new page, for now, but you should update your bookmark or favorites list, if you have one.
[1/3/06] Take a look at Mark Cuban's "My Investment advice for 2006". The guy is rather wealthy and clearly knows how to make money. It's interesting that a couple of things he said at the end tracked some of my recent ramblings, such as trimming expenses and investing the savings and investment in my own skills as likely having a bigger financial return for me in the near future than picking the next hot stock. His closing points:
So here is my investment advice for anyone who doesn’t have enough saved to walk away from their job and retire…
1. If interest rates stay where they are or go higher, look at 5 year or shorter maturity vehicles. It doesnt matter if its a bank CD, a money market fund, a tax free fund, treasuries or combinations there of. Bottom line is this, 4plus percent taxed, or up to 6 plus percent tax free equivalent (depending on your tax bracket), is not a bad way to go. If rates go down, do the same thing, evenif you earn a lower rate. At the end of the year, you are guaranteed to have more than you started with.
2. Evaluate your lifestyle. People forget that sometimes the best investment they can make is in wisely buying things they know they will use. If you track what you use and consume, whether its gas vs bus fare, buying bulk quantities or other discretionary spending, you can save more and earn a far greater return than you could in the stock market. If you can save 10pct per month on a hundred dollar per month budget, thats 120 bucks you can put in the bank. Thats the equivalent of earning 12 pct on a 1k dollar investment. If you can cut 100 bucks per month off 1k dollar monthly budget, thats like earning 12 pct on 10k dollars. Thats pretty darn good. Spend smart, put your savings in risk averse, interest earning offerings.
3. Invest in yourself. Do the things that can get you closer to your goals and dreams. It wont come from a brokerage commercial. It will come from preparing yourself , working hard and standing apart from your competition. You Inc is the best stock you can ever buy…if you are willing to do the work.
[12/10/05] If you ever find yourself struggling with some of the math needed for investment and financial decisions, check out Robert Hershey's All the Math You Need to Get Rich: Thinking with Numbers for Financial Success.
[ * ] An article in the NY Times on Sunday entitled "Energy Trading, Post-Enron" gives you a glimpse of the sheer magnitude and frenzy associated with energy trading and speculation. Hedge funds are into it. Even big boring banks are into it. Big Wall Street investment banks are big players as well. Obviously there is lots of money to be made here. And where does all of that money come from? Does it come out of a bunch of holes in the ground? Does it come out of thin air? Nope. It comes directly out of the pockets of energy consumers, whether they be consumers buying retail gasoline, heating oil, and natural gas, electricity producers and consumers, airlines, transportation companies, chemical companies, and on and on. That's why there is so much money to be made in trading and speculating on energy and related commodities: it's like a zillion giant suction hoses connected up to every wallet in America (and beyond), corporate and personal. Will it never end and only get worse (or better if you're an energy trader)? Well, the saving grace is that with the arrival of hedge funds and a true trader's mentality and prices that have been starting to cause people some pain to the point where they seek to cut their energy usage, the concept of "shorting" energy for short-term trades will grow in appeal. It's a simple fact that traders love trading ranges. No true trader worth his salt is willing to bet on a one-way market forever. Up and down and up and down, that's that true traders like to see. Each change in direction is a new opportunity for a profitable new trade. You're seeing this volatility now with natural gas prices. A significant amount of the run-up in energy has been due to a combination of the arrival of new players (traders and speculators) and the arrival of a lot of misguided souls who have been led to believe that energy and commodities are a one-way, long-term, buy-and-hold investment. It's beginning to look an awful lot the stock boom in 1999 and early 2000. It will be interesting to see how it all plays out over the coming months, with "investors" expecting commodities to only go up, and traders and hedge funds seeking to maximize volatility and transaction volume so that they can maximize profits regardless of the ultimate, long-term trend.
Commodities were mixed on Friday. The euro was stronger, metals were stronger, but energy was mostly weaker.
It's difficult to say if "jitters" about Iran are truly a major driving force in energy markets. My feeling is that it's simply trader BS that temporarily boosted volatility, but may evaporate fairly quickly. Underlying jitters over Iran were priced into the market a year ago.
Although front-month crude oil was weaker, prices for longer-duration contracts rose and rose by more the further out you go on the duration curve.
The speculative bubble for natural gas futures has certainly deflated significantly. This is clear evidence that speculation in energy commodities has not been based on economic and business fundamentals. Still, we should expect irrational speculation to continue for a while longer, especially since there is an enormous amount of cash sloshing around (AKA "hot money") which is looking for speculative activity.
[1/13/06] It's time for traders and speculators to shift out of the front-month February crude oil futures contract and into the March contract as the March contract becomes front-month after next Friday.
[1/12/06] Recovery from the Gulf Coast storms continues to slog along. You can read the biweekly reports from the Department of Interior's Minerals Management Service (MMS) at 1:00 p.m. Central time every other Wednesday. We have a ways to go, but progress is occurring every week. According to MMS, another 0.37% of oil production came back online, with 26.45% (vs. 26.82%) of Gulf oil production now out of service, and another 0.51% of natural gas production came back online, with 18.05% (vs. 18.56%) of Gulf natural gas production now out of service. I'm not so sure that these numbers will hit zero any time soon since some of the outages were 100% losses and will require new equipment and facilities to be fully replaced. 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". By the way, I never read any market reports suggesting that traders and speculators are taking any of these ongoing increases in production into account.
Crude oil futures remain in contango (rising prices) from February 2006 through April 2007 ($66.91 as the peak price in March and April 2007), and then backwardation (declining prices) all the way out to the December 2012 contract at the lowest price ($60.41). All contracts after December 2008 are priced below the February 2006 contract. All contracts are now above $60. The "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.
Unleaded gasoline futures remain in contango (rising prices) from January 2006 through July 2006 and then backwardation (falling prices) through December 2006, and then a slight rise in January 2007. The January 2007 contract is now priced +5.44 cents above the February 2006 contract. The bottom line is that there is no evidence of a market expectation of dramatically rising gasoline prices over the long term.
[12/16/05] Although some of the metals popped up above the thresholds I suggested at the beginning of the month, they've all pulled back significantly and below my thresholds. So, I'll give them another couple of weeks to see if they can achieve some durable gains. I'm not forecasting that all speculation will vanish any time soon, but simply that the massive bull wave they was driving all commodities up may finally be over. I suspect that soon we will revert to the traditional, garden-variety speculation that we've always had, and that can usually be ignored by true investors.
[12/9/05] There are still plenty of people interested in speculating in commodities, but the breadth does seem to be waning. Spurts of activity such as on Thursday do seem bullish, but also seem to smack of a market on its last, anxious legs. Even outright bear markets (which we aren't quite in yet) occasionally have sharp rallies, but they don't indicate the overall, longer-term trend.
[12/1/05] With metals prices being so strong lately, I'm a little reluctant to call a full end of the commodities speculation wave of the last two years. I'd like to give the metals group another couple of weeks to see whether they are able to move up significantly from their recent highs, say another 5%, with gold to $525, platinum to $1,050, silver to $8.87 and copper to $2.18. Commodities may be at a similar stage as stocks back in mid-March of 2000, with the Dow having peaked in January, NASDAQ peaked on March 11, and the S&P 500 peaking on March 24. The euro peaked a long time ago, energy a while ago, and the metals are the remaining leg of the stool still standing.
[11/11/05] It's still too early to call an end to "The Great Oil/Energy/Commodities Speculation of 2004 and 2005", but the commodities markets have clearly been knocked off their feet. The shorts are still rather timid, but it's only a matter of time before the bulls finally capitulate. If gold fails to break out above $500 and crude fails to rally back above $65 by the end of November, I will "officially" call for the end of this incarnation of the commodities bull market.
[11/23/05] Goldman Sachs lowered its estimates for crude oil to $62 from $66 a barrel this year and to $64 from $68 next year. There was no mention of their infamous call for a $105 "superspike". This is backpedaling on their part, and likely to be followed by more backpedaling as the next six months unfold. They're obviously trying to "tout" speculation in commodities futures. They collect transaction fees as well as profiting on in-house trading. These are quite obvious conflicts of interest, but are oddly considered to be legal.
[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.
[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.
[11/11/05] 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), "Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy" by Matthew R. Simmons (2005), and "The Oil Factor: Protect Yourself and Profit from the Coming Energy Crisis" by Stephen and Donna Leeb (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). I'm not offering a recommendation on any of these books, but simply note that they are popular with the commodities crowd. If you're interest in the counterargument to "Peak Oil", check out "The Bottomless Well: The Twilight of Fuel, the Virtue of Waste, and Why We Will Never Run Out of Energy" by Peter W. Huber and Mark P. Mills (2005). If I wasn't so lazy, I'd write my own book on commodities speculation called "Peak Bull".
Chicago Federal Reserve Bank President Michael Moskow gave a speech Thursday night entitled "U.S. Economic Outlook". He said that "it will take appropriate monetary policy to keep inflation and inflation expectations contained. For me, this likely entails some further policy action. Whatever actions are taken, however, will depend on economic conditions." As far as where we are relative to a neutral range for the fed funds target interest rate, he said "we're currently in the bottom end of this range." He also says that "Even if the funds rate were at neutral, further changes in policy might be appropriate. My view is that inflation will likely remain contained. Energy prices have come off their highs, and solid underlying trends in productivity should keep overall production costs in check. But, as I mentioned earlier, there are risks to the inflation outlook—namely, the potential for energy cost pass through, pressures from increases in resource utilization, or rising inflationary expectations. And with inflation near the upper end of my comfort zone, an unexpected increase in inflation would be a serious concern, while a decline in inflation would be beneficial. My views about policy will depend importantly on how various cost factors play out and affect the outlook for inflation. In addition, if inflation or inflation expectations were to rise persistently, then policy clearly would have to be tightened further. Of course, other events could transpire that result in prospects for inflation and growth that would be consistent with a less firm policy stance." He adds that "given the reduction in the degree of monetary accommodation over the past 18 months, the policy firming that is likely to be appropriate over the near term is less certain now than it was earlier in the interest rate cycle. This increases the importance of economic conditionality in the policy decision." He also uses the phrasing "As we move through 2006 and consider the appropriate stance for monetary policy", which doesn't seem to suggest that the Fed will do a "one and done" this month and then coast for the rest of the year. All of this seems to suggest that he doesn't feel that the Fed will be done in a little over two weeks, and he'd like to see inflationary pressures come down a bit further, that it will take a while longer to decide that the Fed is done. For one thing, as far as the economic data he's like to see develop, very little of that will happen over the next two weeks, and possibly not even by the March FOMC meeting. It simply doesn't sound like this guy is lobbying for January being the final hike.
Given the Fed official commentary we've heard this week, it would seem safe to conclude that the Fed will hike at least in March in addition to January. Fed funds futures price in a moderate, roughly 50/50 chance, of a hike in March, but not a certainty. So, it appears to me that the overall market is still betting the January hike being the end of the line. I do expect that to change either shortly before the January FOMC meeting or once the Fed issues its January FOMC statement.
The Fed Beige Book is due out on Wednesday and will give us a reasonable perspective on the state of the economy, maybe the best view we're going to get before the FOMC meeting at the end of the month.
It will be interesting to hear any remaining Fed officials speaking this coming week, since this will be their last chance to calibrate market perceptions. The uncertain issue is whether the Fed actually cares right now what markets think about Fed actions out in March and beyond. I suspect not, since the Fed's own studies have shown that the the fed funds futures market is really only a reliable indicator out to about 45 days. So, the Fed may only care that the market has their January action priced in. Maybe, the Fed is simply content that the futures market has priced in at least a coin flip chance of a March hike.
Maybe this will be the market's M.O. until the Fed clearly states that it believes the latest hike was the last hike: Price in 100% odds of a hike at the next meeting and 50+% odds of a hike at the meeting after that. That seems like the safe way to bet, or at least seems what the market has been doing recently.
There was a 9-basis-point inversion from the 6-month T-bill yield to the 2-year Treasury note, a 4-basis-point inversion from the 2-year to the 3-year Treasury note yield, a 1-basis-point inversion in yield to the 5-year Treasury note, a 2-basis-point positive spread between the 2-year and 10-year note, and a 7-basis-point inversion from the 6-month T-bill to the 10-year T-note. The 30-year Treasury bond yield is 2 basis points above the fed funds target rate that is expected at the end of January (4.50%) and the 10-year T-note is 15 basis points below that fed funds target rate. There is plenty of confusion and debate over what all of this means, but for true, long-term investors, there simply is nothing here to cause any alarm. For the moment, Treasury yields are not good indicators of economic activity going forward over the coming few months.
There was no change in the odds of a Fed funds target interest rate hike to 4.50% in January, a moderately sharp decline in the odds of a hike to 4.75% in March, a moderately sharp decline in the odds of a hike to 4.75% after January (March or May), and a sharp rise in the odds of a cut after May (back to 4.50%). The market continues to price in a virtually certain hike to 4.50% in January and possibly a hike to 4.75 in March. The March hike may merely be an insurance hedge rather than an outright bet.
[1/7/06] Market expectations are currently that the Fed will pause after hiking to 4.50% at the end of January. Stay tuned, as this market expectation can turn on a moment's notice. My expectation remains hiking to 5.00% in May.
[1/5/06] The fed funds futures market suggests a quarter-point hike (to 4.50%) at the January 31, 2006 FOMC meeting, possibly a quarter-point hike (to 4.75%) 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, no hike at the October, 24 2006 FOMC meeting, and no hike at the December, 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 4.50% at the January 31, 2006 FOMC meeting is virtually certain. Bets on hikes beyond January are most likely insurance hedges rather than outright bets.
[1/5/06] After carefully reading and rereading the Fed FOMC minutes for their December 13, 2005 meeting, I can only reaffirm my belief that the most likely target for the Fed FOMC for "pausing" is a fed funds interest rate of 5.00% in May. I believe this is consistent with a lot of the commentary. If anything, I would be biased higher towards 5.25% to 5.50%.
[1/5/06] PIMCO's "Bond King" Bill Gross has just posted his latest January 2006 Investment Outlook (IO), entitled "A Gift That Should Keep on Giving." I need to read it again to try to pick up any nuances, but his basic message is that "yields have peaked in the bond market and will soon peak in Fed Funds producing an economic slowdown in 2006. If the Fed goes beyond 4½% and inverts the yield curve, the possibility of recession will increase." He makes some esoteric arguments, but it's not clear if they are all really necessarily the key factors driving finance, the economy, and the Fed at this time. I made some other comments in a blog post.
[1/6/06] I read PIMCO's January 2006 Investment Outlook (IO), entitled "A Gift That Should Keep on Giving" carefully, and need to comment that the so-called "gift that should keep on giving" is simply a combination of Bill Gross' assessment that "the bond bear market" has bottomed and bond prices will rally for the foreseeable future, and that his indicator of the bottom (negative spread between the fed funds target interest rate and a composite of intermediate-term Treasury note yields) is vindicated and can be expected to work out into the future as well. Note his caveat of "should" in his title.
[1/5/06] Commodities prices will eventually moderate as higher interest rates gradually take hold and gain traction, but meanwhile, lofty commodities prices are a reality and a real inflationary effect, so the Fed does need to respond to them. That will assure that the Fed runs their interest rate hike campaign up to at least 5% (in May). Whether the commodities speculation binge peters out by Spring is a matter of debate, but it is the mere existence of that debate that will keep the Fed on a hawkish anti-inflation binge. The Fed shouldn't, and doesn't, target asset speculation, but the existence of such widespread asset speculation is an indicator that there is way too much cash (liquidity) sloshing around in the financial system.
[12/22/05] The big sport in the fixed-income arena over the coming five weeks will be the shape of the Treasury yield curve. A steep inversion (downwards sloping from left to right) is frequently a prelude to a recession, but the chatter-level goes through the roof whenever there is a flattening or even a slight inversion anywhere in the yield curve. Since a lot of investors need to hold debt as a part of their desired asset allocation and tend to do it in a "laddered" manner (spread over various durations), the yields may simply reflect actually supply and demand. And all of this is subject to change on a weekly and daily basis. There is plenty of time for Treasuries to move dramatically in any direction over the coming weeks, so there is no significance to the spread between the expected fed funds target short interest rate at the end of January and current Treasury yields. Nonetheless, it will be great sport to watch the yield curve chatter play out in the coming weeks. Click here to check Treasury yields on Bloomberg.com.
[12/29/05] Although the so-called Treasury yield curve has a 30-year data point, the closest we have to a 30-year Treasury bond is the bond that was issued for February 15, 2001, payable on February 15, 2001. That's essentially a 25-year bond. On February 15, 2006 Treasury will once again issue a fresh 30-year bond. There's no telling what yield it will come in at, but adding 5 years to the duration of that point in the yield curve is certain to cause some kind of pop. Nominally the yield should rise, but intense demand for a true 30-year bond for retirement planning puts upwards pressure on the price which means downwards pressure on the yield. Renewed issuance of the 30-year bond could also shift some demand from the 10-year note which had assumed leadership for the long end when Treasury ceased issuing the 30-year in 2001. The bottom line is that there could be some upwards pressure at the long end of the Treasury yield curve in February.
[12/28/05] One important consideration to keep in mind with the treasury yield curve is that the power to predict recessions is driven by the concept of the Fed moving above the neutral range to a clearly restrictive monetary policy. The question is not whether rates are higher, but whether they are well above the neutral range. On January 11, 2000 when the 10-year and 30-year yields inverted, the 10-year was at 6.72%. On February 2, 2000 when the 2-year and 10-year yields inverted, the 10-year was at 6.60% and the 2-year was at 6.63% and the 6-month was at 5.94%. Today, the 6-month yield is at 4.31%, the 2-year is at 4.34%, the 10-year is at 4.34%, and the 30-year is at 4.50%. We have a long way to go to get to where the Fed was at in 2000, and most sane commentators are forecasting that the Fed will pause fairly soon, with the 6-month yield likely to be at least almost a whole percentage point below its level in 2000, possibly even 144 basis points. There is no sane way to look at the real data and conclude that the Fed is currently or likely to shortly pursue the kind of restrictive monetary policy that might be considered a cause of a recession.
[12/28/05] Another consideration to keep in mind is that there are a lot of people who have specific needs for treasuries of various durations, so real demand can drive the yield curve out of all proportion to any fundamental relationship between points on the yield curve. Some people hold treasuries as collateral for specific terms. A lot of baby boomers are getting close enough to retirement that their asset allocations are shifting in favor of holding longer-duration treasuries, which increases demand, pushes up prices, and pushes down the yields. Many bond holdings are "laddered", meaning they are intentionally spread over the yield curve to control risk, regardless of the valuation of any specific points on the yield curve. And, the varieties of needs of foreign central bankers is a vast snake pit of dynamic modalities and rationales.
[12/28/05] The bottom line: If the Fed is really doing its job of keeping inflation in check, we should see a flat yield curve. And it's not unreasonable to see modest fluctuations of up to five or ten basis points anywhere along the curve based on short-term fluctuations in supply or demand. The so-called "inversion" has been no more than what might be expected for volatility of prices that are subject to an open market.
[1/12/06] New York Fed President Timothy Geithner commented on Wednesday in a speech entitled "Remarks by President Geithner: Some Perspectives on U.S. Monetary Policy" about the strength of the economy, productivity growth, asset prices and why the Fed pays attention to them but shouldn't directly attempt to avoid them or "reduce" them, low inflation expectations, and otherwise talked around monetary policy without telling as what to expect for the winding down of the Fed's interest rate hike campaign. His closing paragraph was "Perhaps it makes sense to conclude with the more general observation that changes in the size of balance sheets increase the importance of sustaining the credibility of monetary policy, because they increase the costs of a loss of credibility or a negative shock to credibility. We live with considerable uncertainty about the sustainability of the pattern of relatively low risk premia and reduction in the cost of insurance against future macroeconomic and financial volatility. That uncertainty necessarily adds to the normally substantial degree of uncertainty we face in making monetary policy judgments. All these factors strengthen the case for being open about what we do not know. And it reinforces the case for preserving confidence in our commitment to keep underlying inflation low over time, and for retaining the capacity to respond with flexibility to the challenges we face in this uncertain world." (My emphasis.) I would call attention to the phrases "the importance of sustaining the credibility of monetary policy" and "preserving confidence in our commitment to keep underlying inflation low", which seem to suggest that the Fed feels the need to remain extra vigilant about inflation, implying that maybe the Fed needs to hike more than current market expectations would seem to suggest. Further, Geithner's earlier comment that "Survey based measures of consumer inflation expectations at longer horizons have remained stable despite the large increases in energy prices, though some of them remain slightly above the 1.5 to 2.5 range for the CPI index that some have cited as a reasonable definition of price stability in the United States" suggests that inflation is still a bit too high for the Fed's comfort and that there still is too much accommodation (low-interest money) out there. My conclusion is that Geithner is probably not predisposed to pause with January's hike.
[1/10/06] Atlanta Fed President Jack Guynn said on Monday that "Given the steady diet of “measured” rate hikes the Fed has provided in the past year and a half, many of you may be wondering when enough is enough. Let me first respond by saying, the closer we get, the less explicit we can be on that point. One reason is that we don’t yet know the full economic effect of the policy moves we have already made. So in the months ahead, we’ll have to watch the data very carefully to make sure that growth is still on track and inflation expectations are well anchored." and "let me point to a phrase from our December meeting minutes, which were released last week. In those minutes, we said that in looking ahead “the number of additional firming steps required probably would not be large.” While our policy direction has been quite clear over the past 18 months, in the less certain period ahead it’s my personal opinion that as policy makers we should resist the temptation to say more than we know at any given time. And so I think it’s appropriate that our post-meeting statements have come with the caveat that “the Committee will respond to changes in economic prospects as needed." Hmm... "months ahead", would seem to imply that this is not the final month of the rate hike campaign. And "period ahead" sounds like more than this month as well.
[1/10/06] Supposedly, Guynn also answered a reporter's question by saying that he was pleased that markets have done a good job of anticipating the Fed's actions. That might suggest that the Fed will finish hiking at either the January meeting (4.50%) or the March meeting (4.75%). Or, Guynn may have been speaking more broadly, or simply referring to the closest FOMC meeting and implicitly acknowledging that only very short-term fed funds futures have any significance (45 days or less). So, maybe his answer only implies that the Fed will hike in January.
[1/10/06] Kansas City Fed President Thomas Hoenig said on Monday that the fed funds rate is near the lower end of the neutral range and reaffirmed that the biggest risk the Fed sees is the potential for fast growth spurring inflation. Both Hoenig and Guynn repeated the mantra that Fed action will be driven by the economic data and that their focus is on keeping inflation expectations low.
[1/7/06] Finally, we get some comments from Fed officials in the new year. The Reuters headline says it all: "Fed officials give no hint rate pause imminent". Boston Fed President Cathy Minehan said the fed funds target interest rate is near the bottom of what is considered a neutral range. That seemed to suggest that the Fed had further to go to get up into the middle of the range. Dallas Fed President Richard Fisher spoke, but gave no hints about monetary policy, suggesting that maybe he concurred with Minehan's assessment. Their comments don't suggest any change in course for the Fed. So, whether there is one, two, or three hikes left remains unclear. We'll have to see whether Fed official comments over the coming week change the outlook at all.
[12/22/05] Post-FOMC Fed official #1: Richmond Federal Reserve Bank President Jeffrey Lacker said that "The economic outlook is fairly encouraging", "Growth is on a solid footing, despite this year's run-up in energy prices and the disruptions of a devastating hurricane season", "Granted, housing activity seems to be softening, and at least some potential price level pressures remain, so it may be too soon to break out the eggnog", and "But inflation expectations remain contained, and we at the Fed are well-positioned to resist inflation pressures, should they emerge." That doesn't sound like someone trying to signal a pause in the interest rate hike campaign.
[12/3/05] San Francisco Fed Bank President Janet Yellen indicated on Friday that "it seems unlikely that the end of the current tightening phase is yet at hand", but her comments didn't appear to conflict with existing expectations that the Fed was likely to hike in January as well as December. One press report suggested that Yellen had said that the fed funds rate is still at the bottom of the neutral range (3.5% to 5.5%).
Tyco (TYC) says it will split into three separate public companies. That triples the financial regulatory burden, but at least opens up the opportunities for three CEO's to focus harder on more focused businesses. One problem... Tyco (TYC) is in the S&P 500 Index, so does only one of the three pieces stay, and if so, which one, or will all three get booted out?
[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.
[1/13/06] According to Dow Jones Private Equity Analyst, U.S. private-equity firms raised $151.8 billion in 2005, which is an increase of 65% from 2004 and second only to the $177.9 billion raise at the height of the 2000 bubble. The largest increase came from the buyout and corporate-finance funds sector, which raised a record $106.4 billion, 90% more than 2004. That's a lot of money sloshing around, looking for a home. Some of it will be used to take public companies private
[11/22/05] The 2005 Year-End Global Venture-Capital Investment Report from Ernst & Young and Dow Jones VentureOne states that "during the course of 2005, fund raising by venture-capital firms increased significantly with venture capitalists stockpiling the most investment capital since 2001. Mergers and acquisitions (M&A) and initial public offerings (IPOs) by venture-backed companies also showed continued strength during this period -- setting the stage for continuing investment in 2006. While investments in venture-backed companies in 2005 remained relatively consistent with 2004 levels, a strong trend toward later-stage financings suggests that investors are confident in the prospects of their portfolio companies and optimistic in regard to exit opportunities. Developments in the emerging venture-capital markets of China and India during this period underscored the increasing globalization of the venture capital industry." They conclude that "Looking forward to 2006, it is likely that the substantial fundraising that occurred in 2005, a strengthening liquidity landscape, and investors’ global interests, will lead to an increased level of venture-capital activity in the next 12 months. Because of the early signs apparent in 2005, the target for some of that investment capital may well be directed toward emerging areas such as alternative energy as well as renewed investing in the next wave of Internet start-ups." My reading on venture capital is that the sector is only slowly limping back to health and it will probably be another two or three years before venture capital investment once again makes a dramatic contribution to the health of the U.S. economy.
[11/3/05] VentureOne (a unit of Dow Jones Newswires and the publisher of VentureSource) reports that there was a 16% rise in the amount of venture capital funds raised in Q3 over the same quarter a year ago, but there was an 18% decline from the amount raised in Q2. 18% more has been raised in the first three quarters of 2005 than during the same period of 2004. These amounts are "commitments" to the venture funds which "closed" during the quarter. Please note that this is about venture funds raising their own money, not the investments that they will make with that money in the coming quarters and years.
[10/25/05] The VentureOne/Ernst & Young LLP Quarterly Venture Capital Report for Q3 registered a moderate decline (-6.4% vs. +14.1% last quarter) in the amount of money invested from last quarter, but a moderately sharp rise (+9.4% vs. -6.4% last quarter) from a year ago in equity investment in companies who have received at least one round of venture funding. This was a mixed, but reasonably positive report. Information technology (IT) continues to get the lion share of investment (57%) compared to distant second healthcare (30%). There was a modest rise (+1.0%) in the amount invested in information technology companies since last quarter, and a moderately sharp rise (+10.6%) compared to a year ago. Computer software continues to be the largest sub-sector, with 22.8% of the money invested in Q3, and rose +1.5% from Q2 and rose +0.2% from a year ago. The bottom line is that a healthy amount of money is being invested in new ventures, but it's not what could be called a real "boom". The top ten states in terms of amounts invested were California (46%), Massachusetts (12%), Florida (4%), Washington (4%), Texas (4%), North Carolina (3%), Virginia (3%), New Jersey (3%), New York (3%), and Colorado (3%). The top ten deals were FiberTower ($150 million), provider of a service that eliminates legacy copper backhaul, Replidyne ($62.5 million), developer of anti-infective biopharmaceuticals, TARGUSinfo ($60 million), provider of on-demand data to optimize customer interactions, Affymax ($60 million), developer of peptide drugs for the treatment of various blood, cancer, and kidney diseases, Amicus Therapeutics ($55 million), developer of small molecule, orally-active pharmacological chaperones for the treatment of human genetic diseases, MetroPCS ($50 milion), provider of wireless local and long distance communications services, Cerexa ($50 million), provider of hospital based anti-infective therapies for the treatment of patients with serious, life threatening infections, Force10 Networks ($46.1 million), provider of gigabit and 10-gigabit Ethernet routers and switches, Alinea Pharmaceuticals ($45 million), developer of treatments for diabetes and metabolic disorders, TherOx ($40.3 million), developer of site-specific systems for the delivery of oxygen-supersaturated solutions to oxygen deprived (ischemic) tissues. Note the dearth of software companies on that list, since the actual amount needed to fund a software business is relatively small.
[10/11/04] For some background information on venture capital, click here.
The Fidelity FPRXX taxable money market fund is up to 3.46% and the FDRXX money market fund (for non-taxable accounts) is up to 3.98%. I expect FPRXX to be up to 3.75 by the end of the month and FDRXX up to 4.15% at that time as well, with further gains beyond that as interest rates continue to rise. There is a lag between Fed rate hikes and money market yields since the money market funds hold debt that will continue to have its original yield until that short-term debt matures and the proceeds are rolled into newer and higher-yielding debt. Sometimes you see declines in the yield, but they may simply be due to people putting fresh money in or taking money out of the funds, which may result in selling higher-yielding securities in some cases. With rates rising every FOMC meeting, it can make sense to leave fresh funds as cash until after the next FOMC meeting, but that can lower the short-term yield. Click here for the top Prime Retail Money Market Funds from iMoneyNet. iMoneyNet says the average 7-day taxable simple yield is 3.68% (up from 3.61% last week). That's slightly less than the average of FPRXX and FDRXX (3.72%).
[1/11/06] My new ShareBuilder automatic monthly dollar-cost averaging investment plan executed its first buy order on Tuesday. The price for my S&P 500 Tech Sector Spider (XLK) shares was $21.98, which was 7 cents below the closing level, 2 cents above the opening level, and 9 cents below the close on Monday, so the execution wasn't too bad. The next purchase will be on the first Tuesday of February. The good news is that my short-term thinking about investing in stocks is now out of the way, for now, and on auto-pilot, for now.
[1/11/06] Last night I suddenly realized that I had incorrectly estimated my Colorado state taxes for the first half of 2005 and now will probably have to use all of my nascent rainy day fund to pay my 2005 Colorado state income taxes. Sigh. I also received a pair of certified letters from the IRS, which I had been waiting for since my bankruptcy was discharged at the end of November, so now it's time to negotiate an installment payment plan for my back taxes. That will be sheer joy.
[1/3/06] I've decided to restart my automatic monthly dollar-cost averaging investment plan with ShareBuilder.com. I'll continue buying a small slug of the S&P 500 Tech Sector Spider (XLK), but only the very modest amount I had chosen back in July 2004 when I first started the plan. Another change from my original plan is that my investments will be made on the second Tuesday of each month rather than the first Tuesday. My initial reason for this change was simply that it was too late to set up the plan for the first Tuesday of January. The commission is $4 for each monthly investment. I may have to stop the automated plan or maybe increase it, depending how my negotiations with the IRS go on setting up a payment plan for my back taxes. I had considered switching to another ETF, maybe an Internet ETF, but I have enough of a history with XLK to judge it reasonably well. One big, open question is whether Google (GOOG) will be added to the Information Technology sector of the S&P 500 Index. In any case, at least this decision is now out of the way, for now. Incidentally, the 7-day yield for ShareBuilder's money market mutual fund is 3.56%.
[12/29/05] It seems like a no-brainer that the Internet sector will experience faster growth in 2006 than the tech sector overall, so I'm a little tempted to find an ETF for the Internet sector for a very modest investment in 2006. Please email me any suggestions.
[12/27/05] Long before I focus too much of my attention on what stocks (or other assets) to buy, the simple truth is that there are three investment angles that have the potential to reward me far more handsomely than whether I get a return or 2% or 20% or even 200% on stocks over the coming few years: 1) my financial "wealth" is is so small that even the modest amounts of cash that I will contribute each month will dwarf any realistic investment return for quite some time to come, 2) "investing" in my intellectual and business skills (e.g., spending money on courses, seminars, and conferences) could result in opportunities to boost my income far in excess of any realistic investment returns on my meager "wealth" for the foreseeable future, and 3) cutting my expenses and shifting the cost savings into my investment accounts would likely also dwarf my investment returns. So, for now my optimal investment approach may be simply to leave the cash in money market mutual funds, with maybe a modest fraction of it invested in a simple market index fund.
[12/20/05] I've been thinking again about starting another small monthly dollar-cost averaging investment program with ShareBuilder. The question is which ETF or stock to use. Some possibilities include the S&P 500 (SPY), Dow Jones Industrials (DIA), S&P 500 Tech Sector (XLK), NASDAQ-100 (QQQQ), Qwest (Q), and Verizon (VZ), among other possibilities. My default first choice would be XLK, and SPY as my second choice. I'm also tempted by the S&P 500 Consumer Discretionary sector spider (XLY) since it includes Amazon (AMZN) and eBay (EBAY). I'm not sure where Google will end up when it gets added to the S&P 500. Yahoo (YHOO) is already in the XLK. I'll stick with one stock in the ShareBuilder account so that I can, if I need to, liquidate the entire account for a single $4 commission.
[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 continue to have a very, very modest portfolio in two rollover IRA accounts, but not enough to be worth speaking about.
I forgot that the stock market is closed on Monday for Martin Luther King, Jr. Day. Here's the holiday schedule for the year.
Give the market another week to blink and decide whether the rally was "real" and durable, or not.
[1/13/06] The big question is whether the decline on Thursday was simply a "pause" before the advance continues, or the end of the January rally. I lean towards the former, but more profit-taking might ensue in any case. The decline on Thursday simply didn't look like a classic market top.
[1/11/06] The market is now right at the edge, undecided whether to begin a correction or continue the advance. I lean towards the latter, but all bets are off after such a big run-up.
[1/10/06] One big question is when we'll get our first big episode of profit-taking after the recent run-up, and whether it will be a full correction or simply a modest pause before the advance continues.
[1/9/06] The big question now is whether the market is really on a true roll, or whether we simply saw a bunch of hot money hop into the market and may soon witness how quickly hot money can hop back out of the market. We'll know in a month or so as we get towards the end of the seasonal November to February period.
[1/7/06] The market remains heavily over-bought on a short-term technical basis, but that's no guarantee of a decline.
[1/6/06] The worry about a "cliff dive" in early 2006 is now significantly diminished, but is still a lingering concern. The good news is that there may still be quite a lot of money that had bet on a decline, so we could see some more short-covering and rotation into stocks as the month progresses.
[1/4/06] Give the market a full week, if not two, to find its feet in this new year.
[1/3/06] Click here for our Stock Market Outlook for 2006.
[12/30/05] The big, big question is what the "hot money", such as the hedge funds, will do in the coming weeks. There is no telling whether they will bail out like last year, or pile in more money or cover shorts and kick off another rally.
[12/28/05] People are still pondering that cliff that the market fell off at the beginning of the year. There's no reason to think that history will repeat itself, but people still worry, no matter how irrational their fears might be. We could also end up with a self-fulfilling prophesy that leads to a modest "cliff dive" at the beginning of the year and then a resumption of the advance. Anybody who was really worried about 2006 has had more than plenty of time to close out their positions. That makes a 2006 "cliff dive" less likely, although still possible.
[11/22/05] Clearly the market is bullish of late, but the big question is how much of that is due to "hot money" and market timing, the kind of money that can (and usually does) race away from the market even faster than it sloshes in, as we saw with the run-up last fall. My view is still that the market will continue to climb gradually over the long run, but that we'll see lots of volatility along the way. So, it's a bull market, but a very volatile bull market. In fact, the road will be incredibly bumpy over the next couple hundred points due to significant technical resistance. It will be quite a dramatic milestone if NASDAQ clears 2,500 and can stay there for the next six months. I'd be a lot more sanguine if we were seeing significant stock mutual fund inflows, but we're not, yet. Stay tuned.
[11/3/05] We could in fact see a seasonal rally over the next few months since traditionally the period from November through February is considered the most bullish part of the year for stocks. Unfortunately, such rallies frequently attract a lot of hot money engaged in market timing that is likely to leave the market at any time as quickly as it arrived.
[11/23/05] Overall market outlook: quite confused and susceptible to volatile swings, but a gradual drift up, over time, although short-term progress may be at risk to the downside until we see some renewed inflows into domestic equity mutual funds. There appears to be too much hot money flowing into the market for the recent gains to be sustainable for more than another month or two.
[1/13/06] The fact that there was a net inflow into non-ETF domestic equity mutual funds after five weeks of outflows after an inflow after two weeks of outflows after an inflow after thirteen consecutive weeks of outflows and the fact that we've seen inflows for 26 of the past 49 weeks, suggest that the market will continue to be quite volatile, but likely to maintain a gradual drift upwards.
[1/5/06] January 13th will mark the 3-month milestone for the rally since October 13th. Once we get past that milestone and set a new closing and intra-day highs for the rally, then I will call the rally a new cyclical bull market (that started on October 13, 2005). Until then, it's simply a "rally".
[1/7/06] NASDAQ is moderately bullish over a one-month timeframe and a moderately bullish over a 10-day period.
The major advance of NASDAQ off the October 10, 2002 low of 1,108.49 is 2 days off its closing high of 2,331.36 on Wednesday, January 11, 2006, and 2 days off off its intra-day peak of 2,332.92 on Wednesday, January 11, 2006. Technically, we did set yet another "higher high" (above the peaks in early August and December and January) on Wednesday (January 11), which indicates a bullish trend, but I insist on seeing another intra-day peak and another closing high above the intra-day peak of Friday, January 6, at least three days from that last peak before I'll say that we have established a true breakout from the recent (since August) trading range. That means a pair of new peaks after Wednesday. The wait is on. This is the moment of truth. We'll know within a week.
[11/11/05] We're actually provisionally out of the bear market (that lasted from early August to mid-October) since the current closing level is higher than three months ago, but we need to see that relationship hold for at least a month before we say that we are clearly in a bull market. In particular, there was a rally that peaked two months ago only slightly below the current closing level, so until we get well above that level, we should simply be considered to be in a trading range. By my own standards, I'd measure the market from the low over the past three months, and that was only 21 days ago. I'd prefer to see an advance of at least three months from such a low before calling a durable bull market. Another standard to use is the classic "higher highs and higher lows", meaning we'll be back to a bull market as soon as we clear the old peak from August 2-3. I would prefer to clear that peak as well, but I feel that it is only necessary to have higher highs and lows over a three-month period to indicate that we're in a bull market. So, I'll indicate that we are clearly in a bull market once we get three months past the October intra-day low, and we'll be in a strong bull market once we clear the August peak at least three months past the October low. Of course, being in a bull market doesn't mean we'll stay there.
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 178 days old, 2 days off its closing high of 2,331.36 on Wednesday, January 11, 2006, and 2 days off off its intra-day peak of 2,332.92 on Wednesday, January 11, 2006. 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".
The sharp gain of +35.24 (+1.71%) points on Wednesday, October 20, 2005 confirmed the new up-leg of the October 2002 advance for NASDAQ that began with the intra-day low of 2,025.58 on Thursday, October 13, 2005. This up-leg is now 63 days old, 2 days off its closing high of 2,331.36 on Wednesday, January 11, 2006, and 2 days off off its intra-day peak of 2,332.92 on Wednesday, January 11, 2006. The key signal to watch for now is a day on which the market opens sharply higher but closes sharply off both the open and the intra-day peak, which could indicate a "market top". Presently, this is technically a rally (since October 13, 2005) within a trading range (back to August), within a longer cyclical bull market (back to 2002), within a secular bear market (back to 2000), within the long-term secular bull market, at least until this leg extends for three months.
The sharp gain of +28.75 (+1.26%) points on Friday, January 6, 2006 confirmed the new up-leg of the October 2002 advance for NASDAQ that began with the intra-day low of 2,189.91 on Tuesday, January 3, 2006. This up-leg is now 9 days old, 2 days off its closing high of 2,331.36 on Wednesday, January 11, 2006, and 2 days off off its intra-day peak of 2,332.92 on Wednesday, January 11, 2006. The key signal to watch for now is a day on which the market opens sharply higher but closes sharply off both the open and the intra-day peak, which could indicate a "market top". Presently, this is technically a rally (since October 13, 2005) within a trading range (back to August), within a longer cyclical bull market (back to 2002), within a secular bear market (back to 2000), within the long-term secular bull market, at least until this leg extends for three months.
[1/12/06] NASDAQ closed at 2,331.36 on Wednesday, January 11, 2006, at its highest closing level since it closed at 2,425.38 on February 16, 2001. The next older closing high was 2,552.91 on February 15, 2001.
[1/12/06] The NASDAQ intra-day peak of 2,332.92 on Wednesday, January 11, 2006 was its highest intra-day peak since the peak of 2,353.51 on February 21, 2001. The next older peaks were 2,442.99 on February 20, 2001, 2,457.65 on February 16, 2001, and 2,593.09 on February 15, 2001.
NASDAQ is now bullish on all timescales except the 5-year, 6-year, and 7-year charts (and the 1 and 2-day charts).
[1/14/06] Short-term (1-day): Flat, trading range.
[1/14/06] Short-term (2-day): Modestly bearish.
[1/14/06] Short-term (5-day): Very modestly bullish.
[1/5/06] Short-term (10-day): Moderately bullish.
[1/7/06] Short-term (1-month): Moderately bullish.
[12/21/05] Short-term (2-months): Moderately bullish.
[1/4/06] Medium-term (3-months): Moderately bullish.
[12/22/05] Medium-term (6-months): Moderately bullish.
[1/6/06] Year-to-Date: Moderately strongly bullish. [NASDAQ closed 2005 at 2,205.32]
[11/18/05] Medium-term (9-months): Moderately bullish.
[1/6/06] Longer-term (1-year): Moderately bullish.
[11/5/05] Longer-term (2-years): Moderately bullish.
[10/22/05] Longer-term (3-years): Moderately strongly bullish.
[10/18/05] Longer-term (4-years): Modestly bullish.
[1/10/06] Longer-term (5-years): Modestly bearish. About a 4% decline each year.
[1/10/06] Longer-term (6-years): Moderately strongly bearish. This was the grand finale of the "boom" in 2000.
[1/10/06] Longer-term (7-years): Modestly bearish. This was the start of the big run-up for the "boom" in 1999.
[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.
[11/28/05] The post-boom bear market that started in 2000 was signaled by the Dow Industrials closing at a high of 11,722.98 on January 14,2000 after hitting an intra-day peak of 11,908,50, by NASDAQ closing at a high of 5,048.62 on March 10, 2000 after hitting an intra-day peak of 5,132.52, and by the S&P 500 closing at a high of 1,527.46 on March 24, 2000 after hitting an intra-day peak of 1,552.87.
[11/28/05] The end of the post-boom bear market that started in 2000 was signaled by the Dow Industrials closing at a low of 7,286.27 on October 9, 2002, with an intra-day low of 7,181.47 on October 10, 2002, by the NASDAQ Composite closing at a low of 1,114.11 on October 9, 2002, with an intra-day low of 1,108.49 on October 10, 2002, and by the S&P 500 closing at a low of 776.76 on October 9, 2002, with an intra-day low of 768.63 on October 10, 2002. Some people claim that the market bottomed in March of 2003, but that is not the case. The intermediate lows in March 2003 attempted to test the market and instead proved that the bear market was over with the Dow Industrials closing at a low of 7,524.06 on March 11, 2003 and an intra-day low of 7,397.31 on March 12, 2003, with the NASDAQ Composite closing at a low of 1,271.47 on March 11, 2003 and an intra-day low of 1,253.22 on March 12, 2003, and with the S&P 500 closing at a low of 800.73 on March 11, 2003 and an intra-day low of 788.90 on March 12, 2003.
[1/13/06] The challenge for estimating the economic outlook is not so much the overall level of activity, but drilling down to sectors themselves, including business investment, consumer spending, energy production and pricing, transportation activity and costs, supply and demand for commercial real estate, major corporate layoffs, formation of new businesses, hiring by small businesses, etc. I'm not even sure we have any reliable information for much of that at all. It is so much easier to simply say that 2006 GDP growth will be in the 2.75% to 4.25% range (midpoint of 3.50%).
[1/10/06] Financier George Soros has forecast a recession in 2007. That's possible, but too far in the future to try to be accurate about. He (along with a chorus of others) claim vociferously that the Fed has "got to overshoot because they can't stop until the economy shows signs of a slowdown. By the time it shows those signs, it may be a little too late". I and some Fed officials would beg to disagree. I predict that the Fed will pause within a few months (May, actually, and at 5.00%, as opposed to the 4.75% in March that Soros predicts), and that the economy will give all appearances of still being quite strong at that point. The Fed wants to remove the last vestiges of "accommodation", but has no interest in causing a recession. So, why are Soros, et al, so wrong about this? For reasons unknown, they are acting as if the Fed rate hike campaign had started at neutral and was heading up into restrictive territory. If that were the case, the Fed would definitely be looking for a slowdown, since that would be the purpose of the hikes. But, instead, the goal of the Fed's current campaign is to end in the neutral range, which by definition means that monetary policy is neither accommodative nr restrictive, and if it isn't restrictive, then by definition it won't be slowing down the economy. In short, no recession in 2006, and the economy will continue to zigzag along through 2006 at a reasonable clip. As far as a recession in 2007, I think that would require some significant "unhinging" of economic factors that just doesn't appear in the cards. Sure, a housing slowdown might do it, but there is just as likely to be some positive forces developing as well (e.g., positive results from ongoing corporate restructuring and employment gains). And remember that regardless of Fed policy, there is an incredible amount of cash (liquidity) sloshing around looking for all manner of opportunities, so innovation and other aspects of the economy's growth engine won't be restricted at all, maybe not for the next several years.
[1/5/06] I'll withhold further judgment on the strength of the economy until I run across some data that relates to what's going on this month as opposed to last month or the month before. I may have to settle for anecdotal reports such as companies announcing major deals or out of the ordinary hiring plans.
[12/30/05] Hilton Hotels (HLT) says it plans to open 175 to 200 hotels in North America in 2006 and another 15 to 20 hotels internationally. That's impressive and suggests a bit more optimism about the economy in 2006 than I've been encountering lately.
[12/29/05] Despite chatter about a slowdown in the housing sector, I still feel that there are enough "good cylinders firing" in the rest of the economy to get reasonably decent growth in 2006.
[12/23/05] The final Q3 GDP report and the November personal income and expenditures report suggest that there is some real underlying resilience in the economy, despite lofty energy prices, the big hurricanes, and rising short interest rates.
[12/21/05] The latest housing construction report showed the economy humming along nicely, but that's not necessarily a reliable prediction of future economic activity.
[12/16/05] The latest industrial production report showed the economy humming along nicely, but that's not necessarily a reliable prediction of future economic activity.
[12/14/05] The latest monthly retail sales report was mixed and lackluster, but still consistent with a reasonably healthy zigzag economy that continues to plug along on a gradual upwards path.
[12/1/05] Based on the latest economic data and preliminary initial holiday shopping reports, the economy appears to be growing at a moderately strong pace, not truly strong or a real boom, but reasonably decent nonetheless. I expect this pace will continue for the foreseeable future (one to two years), albeit with occasional zigs and zags.
[12/2/05] One of the disturbing readings in the October personal income and expenses report is that savings has been in negative territory for five consecutive months. I'm willing to blame that on elevated oil and gasoline prices, but we need to see savings pop back up into positive territory before we can really say that the economy is truly healthy. The good news is that the savings deficit has shrunk each month since July and shrank from $70.9 billion in September to $61.5 billion in October.
[10/22/05] The recent decline in oil and gasoline prices should help to provide some additional boost to the economy. There is lots of talk about higher heating and electricity bills this winter, but it remains unclear how that drag will really play out.
[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
[9/19/05] 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.
[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.
[1/13/06] Obviously, Apple (AAPL) has been doing quite well, but they don't seem to represent the rest of the tech sector.
[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: January 15, 2006 09:51:23 PM -0500
Copyright © 2006 John W. Krupansky d/b/a Base Technology