Brigitte
03.01.2001, 12:05
* * * *
1/02/01 Investment House Daily
* * * *
Investment House Daily Subscribers:
TONIGHT:
- No buying today as stocks sell across the board.
- More lousy economic news hurts stocks but increases the odds of early
Fed intervention.
- Subscriber Questions
- Team Trades
A new year and a new low.
The late, high-volume buying spurt on Friday afternoon did not bear out
this morning as stocks opened flat to down and then started selling, and
selling and selling. Some tried to hold off, but those that did only
waited until the last two hours before they too sold down hard. Tech
stocks were not singled out as selling was across the board. Perhaps some
capital gains were being taken on year 2000 winners in addition to the
usual tech selling. Volume was lighter on the Nasdaq, but the key stocks
on Friday's late rise were singled out by downgrades before the open
today. Those stocks sold on heavy volume today, indicating that the tech
sector is not ready to stage any type of meaningful rise at this time.
When stocks continue to be punished based on an analyst downgrades, they
still have a lot of work to do before they are ready to move up. As for
the sudden selling in what have been the 'safe' sectors (for capital gains
reasons or not, we cannot know for sure just yet), that is another good
reason to maintain strict sell rules in this market as we have seen too
many good gains turn over on us.
Once again we see another rally attempt and weak confirmation day on the
Nasdaq tossed aside in another wave of selling that quickly wiped out 5
sessions of building. We can hardly call it an aberration given that this
has happened ever since the Nasdaq tried to rally after the May 2000 low.
Still, there are potentially competing forces at work. The January effect
that actually started in the last week or so of December has the
underpinnings to be strong: lots of money on the sidelines, more money
coming into 401k accounts, and stocks that have been really knocked around
the previous nine months. That sounds like a good equation for a nice
January rise. On the other side, however, there is the fear of earnings
that are just around the corner with possibly more warnings this week and
an economy that just seems to slow as each day progresses (e.g., today's
December NAPM report).
Fear and the Fed will help.
The medicine at this point is the Fed. When the major indexes finish down
for a year in which the Fed raises interest rates, they have managed
double digit gains the following year if the Fed initiated rate cuts.
That is a pretty good track record, and that goes to our argument that
markets are built on future expectations, not past earnings. As long as
the Fed acts fast enough and forcefully enough to satisfy investors (and
pump up the money supply and actually get things moving economically),
they have been willing to invest. At this point, however, with the daily
economic news detailing a rapidly slowing economy, investors need action;
hope is a scarce commodity right now.
That too is a good thing, once again drawing on the perversity of the
stock market. The market plays on investor emotion; how many times have
you seen things get so bad you just decide to get out, and almost at that
minute the market turns? It amplifies your fears, and that overwhelms
reason. When fear hits peak levels markets turn, especially when they
have help. We have to recognize that. Today was a downer. A new year
starts with more across the board selling that pushes the Nasdaq to a new
low for the year. That stinks. What we need to do at this point,
however, is keep calm and recognize that we have help on the way despite
the worries over earnings to be announced over the next three weeks and
the glum economic news. Hey, we all knew this was coming; we have been
saying this for the past six months at least. Now the Fed may cut rates
as soon as Friday given today's horrible NAPM report and the slew of
remaining economic news coming out this week. The VIX shot back up today
as well. Fear and the Fed on our side. Not a bad combination. Pick your
entry points, take small gains, and cut losses fast on our trades in the
interim as we wait for the Fed to act and leading stocks to right
themselves before we commit more money to the market. Don't succumb to
the fear; recognize it and beat it back. Then keep sharp on what stocks
are shaping up well or recovering from some profit taking to start the
year. We are still banking on a good year sooner than later as techs have
been clobbered down to incredibly low levels and we have a Fed that is
going to be on our side. Again, that is a good combination for some
stellar profits ahead.
THE ECONOMY
NAPM hits lowest level in almost ten years. The National Association of
Purchasing Managers index thudded to 43.7% in December after expectations
of 47.1 and a November reading of 47.7. July 2000 was the last time the
NAPM was at 50 or better, an indication of an expanding economy. A
reading of 42.2 is considered a recession-level reading; indeed, the NAPM
reading for December was the lowest since April 1991 when the U.S. was
just starting to pull out of recession.
Keeping that 42.2 level in mind, not that the new orders element of the
report came in at 42 (48.4 in November); the production index was 42.4
(49.6 in November); the employment element was 42.8 (46 in December).
Those are some pretty nasty numbers. The one rise was not a good one:
prices paid rose from 56.6 in November to 61 in December. That is an
indication of possible inflation to come. Again, we have not seen
inflation show itself at all until the Fed started raising rates and
choking off supply by curtailing investment in the economy. Only recently
have we seen demand start to slacken; it remained strong even as
production fell flat on its face. That is where the imbalances came from.
Without investment in the supply side of the economy, goods and services
could not keep up with demand that was not falling until recently. That
is where we get some inflationary pressure, and that is the fault of the
Fed.
How the currencies reacted. The Fed Funds futures contract jumped from a
32% probability of an interim FOMC meeting to a 40% probability on the
news. That is good news. The Euro jumped again against the dollar as the
dollar weakened further. Those long-time readers know that a strong
dollar is key to keeping inflation at bay. When the U.S. dollar is strong
and U.S. workers can purchase greater quantities of goods and services
with the same number of dollars, there is no pressure on wages to rise.
The slowing U.S. economy has weakened the dollar and made investing in
other economies more attractive. Funds flowing from the U.S. weakens the
dollar as dollars are sold in favor of that other currency. That is not
good for the U.S. The Fed has opened Pandora's Box by fiddling with what
was a very healthy, very efficient economy. It crashed the stock market,
trimmed $4 trillion in wealth from U.S. retirement accounts, severely
damaged the U.S economy, and threatened the world economy by chasing
supposed inflation. As we know now, it was not inflation at all that was
driving the Fed. It was the rest of the world wanting to keep up with the
U.S. and maintain the 'order' of the globe as the Fed and the other
central banks see it.
THE MARKETS
Stocks were hit with some apparent capital gains selling (the year 2000
winners) and a downgrade of one of the hallowed areas of technology,
networking. EMC was a target along with NTAP, VRTS, and others. The
sympathy selling was widespread and heavy as AMCC, JNPR, BRCD, CSCO and
others involved in networking were slammed. Dane Lewis at Robertson
Stephens sees a slowdown in this area because information technology<B
1/02/01 Investment House Daily
* * * *
Investment House Daily Subscribers:
TONIGHT:
- No buying today as stocks sell across the board.
- More lousy economic news hurts stocks but increases the odds of early
Fed intervention.
- Subscriber Questions
- Team Trades
A new year and a new low.
The late, high-volume buying spurt on Friday afternoon did not bear out
this morning as stocks opened flat to down and then started selling, and
selling and selling. Some tried to hold off, but those that did only
waited until the last two hours before they too sold down hard. Tech
stocks were not singled out as selling was across the board. Perhaps some
capital gains were being taken on year 2000 winners in addition to the
usual tech selling. Volume was lighter on the Nasdaq, but the key stocks
on Friday's late rise were singled out by downgrades before the open
today. Those stocks sold on heavy volume today, indicating that the tech
sector is not ready to stage any type of meaningful rise at this time.
When stocks continue to be punished based on an analyst downgrades, they
still have a lot of work to do before they are ready to move up. As for
the sudden selling in what have been the 'safe' sectors (for capital gains
reasons or not, we cannot know for sure just yet), that is another good
reason to maintain strict sell rules in this market as we have seen too
many good gains turn over on us.
Once again we see another rally attempt and weak confirmation day on the
Nasdaq tossed aside in another wave of selling that quickly wiped out 5
sessions of building. We can hardly call it an aberration given that this
has happened ever since the Nasdaq tried to rally after the May 2000 low.
Still, there are potentially competing forces at work. The January effect
that actually started in the last week or so of December has the
underpinnings to be strong: lots of money on the sidelines, more money
coming into 401k accounts, and stocks that have been really knocked around
the previous nine months. That sounds like a good equation for a nice
January rise. On the other side, however, there is the fear of earnings
that are just around the corner with possibly more warnings this week and
an economy that just seems to slow as each day progresses (e.g., today's
December NAPM report).
Fear and the Fed will help.
The medicine at this point is the Fed. When the major indexes finish down
for a year in which the Fed raises interest rates, they have managed
double digit gains the following year if the Fed initiated rate cuts.
That is a pretty good track record, and that goes to our argument that
markets are built on future expectations, not past earnings. As long as
the Fed acts fast enough and forcefully enough to satisfy investors (and
pump up the money supply and actually get things moving economically),
they have been willing to invest. At this point, however, with the daily
economic news detailing a rapidly slowing economy, investors need action;
hope is a scarce commodity right now.
That too is a good thing, once again drawing on the perversity of the
stock market. The market plays on investor emotion; how many times have
you seen things get so bad you just decide to get out, and almost at that
minute the market turns? It amplifies your fears, and that overwhelms
reason. When fear hits peak levels markets turn, especially when they
have help. We have to recognize that. Today was a downer. A new year
starts with more across the board selling that pushes the Nasdaq to a new
low for the year. That stinks. What we need to do at this point,
however, is keep calm and recognize that we have help on the way despite
the worries over earnings to be announced over the next three weeks and
the glum economic news. Hey, we all knew this was coming; we have been
saying this for the past six months at least. Now the Fed may cut rates
as soon as Friday given today's horrible NAPM report and the slew of
remaining economic news coming out this week. The VIX shot back up today
as well. Fear and the Fed on our side. Not a bad combination. Pick your
entry points, take small gains, and cut losses fast on our trades in the
interim as we wait for the Fed to act and leading stocks to right
themselves before we commit more money to the market. Don't succumb to
the fear; recognize it and beat it back. Then keep sharp on what stocks
are shaping up well or recovering from some profit taking to start the
year. We are still banking on a good year sooner than later as techs have
been clobbered down to incredibly low levels and we have a Fed that is
going to be on our side. Again, that is a good combination for some
stellar profits ahead.
THE ECONOMY
NAPM hits lowest level in almost ten years. The National Association of
Purchasing Managers index thudded to 43.7% in December after expectations
of 47.1 and a November reading of 47.7. July 2000 was the last time the
NAPM was at 50 or better, an indication of an expanding economy. A
reading of 42.2 is considered a recession-level reading; indeed, the NAPM
reading for December was the lowest since April 1991 when the U.S. was
just starting to pull out of recession.
Keeping that 42.2 level in mind, not that the new orders element of the
report came in at 42 (48.4 in November); the production index was 42.4
(49.6 in November); the employment element was 42.8 (46 in December).
Those are some pretty nasty numbers. The one rise was not a good one:
prices paid rose from 56.6 in November to 61 in December. That is an
indication of possible inflation to come. Again, we have not seen
inflation show itself at all until the Fed started raising rates and
choking off supply by curtailing investment in the economy. Only recently
have we seen demand start to slacken; it remained strong even as
production fell flat on its face. That is where the imbalances came from.
Without investment in the supply side of the economy, goods and services
could not keep up with demand that was not falling until recently. That
is where we get some inflationary pressure, and that is the fault of the
Fed.
How the currencies reacted. The Fed Funds futures contract jumped from a
32% probability of an interim FOMC meeting to a 40% probability on the
news. That is good news. The Euro jumped again against the dollar as the
dollar weakened further. Those long-time readers know that a strong
dollar is key to keeping inflation at bay. When the U.S. dollar is strong
and U.S. workers can purchase greater quantities of goods and services
with the same number of dollars, there is no pressure on wages to rise.
The slowing U.S. economy has weakened the dollar and made investing in
other economies more attractive. Funds flowing from the U.S. weakens the
dollar as dollars are sold in favor of that other currency. That is not
good for the U.S. The Fed has opened Pandora's Box by fiddling with what
was a very healthy, very efficient economy. It crashed the stock market,
trimmed $4 trillion in wealth from U.S. retirement accounts, severely
damaged the U.S economy, and threatened the world economy by chasing
supposed inflation. As we know now, it was not inflation at all that was
driving the Fed. It was the rest of the world wanting to keep up with the
U.S. and maintain the 'order' of the globe as the Fed and the other
central banks see it.
THE MARKETS
Stocks were hit with some apparent capital gains selling (the year 2000
winners) and a downgrade of one of the hallowed areas of technology,
networking. EMC was a target along with NTAP, VRTS, and others. The
sympathy selling was widespread and heavy as AMCC, JNPR, BRCD, CSCO and
others involved in networking were slammed. Dane Lewis at Robertson
Stephens sees a slowdown in this area because information technology<B