12/30/00 Investment House Daily
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TONIGHT:
- One last selling binge to end the year, but the last 15 minutes Friday
spoke volumes?
- More economic gloom in the morning overshadows the last day of the year.
- Looking forward.
Heavy selling to end the year.
Stocks tried to run up early on, but as we stated Thursday night, we did
not expect it to last. Stocks quickly started selling, and muddled their
way through the middle of the session. Then in the last hour institutions
did their final housecleaning for the year, and many stocks were sold down
on high volume. Indeed, the volume on the Nasdaq was amazing given it was
the Friday of a holiday week. Looking at the raw numbers, the session
looked bleak.
But, as we always stress with our writers and analysts, you have to put
everything into perspective given the relevant facts. This was a year of
major losses in some major stocks, and there was a lot of last-minute
shuffling going on for end of year and end of quarter reasons. Moreover,
the entire shortened week, sandwiched between two holidays, sported
remarkably heavy volume. So, some heavy volume on the last trading day of
the year was not really a surprise. We would have preferred selling to
come on lighter volume, but the last-hour dumping of shares told us that
this was the final move to square up portfolios.
Then came the last fifteen minutes.
What happened in the last 15 minutes of the session confirmed, at least in
our minds, what we thought was last-minute position-squaring. Key stocks
that had just been sold hard were suddenly snapped up. CIEN, BRCD, SEBL,
PMCS, DELL, CSCO, EXTR, CHKP, SCMR, AMCC, BRCM and EXDS all jumped higher
on HUGE volume spikes. When we say huge, we mean huge. With a few
exceptions, no interval all session long on any of these stocks came close
to the buying volume exhibited in the last 5 to 10 minutes of trading
Friday. This type of mega-volume only comes from institutions moving back
into stocks that other institutions just got rid of. Where some were
squaring their books for the end of the year, others were ready to place
bets on these stocks heading forward. It could be that some wanted their
yearend books to reflect ownership of these stocks, but we believe most
were looking to own these stocks now, banking on a rally next week. We
are featuring many of these stocks for you in the reports this weekend.
We may have been reading the tea leaves wrong, but we were expecting what
we saw Friday, and as with many of the institutions, we were placing our
bets in that last 15 minutes as well.
THE ECONOMY
JPM says recession is coming.
The entire session had a dark cloud cast over it before the open when JPM
announced that it believed that the economy was going to experience a hard
landing, or to avoid the euphemisms of the current Fed, a recession in
2001. That was pretty sobering news, but something investors already had
in the backs of their minds. Now JPM did not say it was inevitable,
specifically stating that if the Fed acted quickly to reduce rates and did
so by at least 100 basis points in the first half of the year that a
recession could be avoided.
Maybe. We noted over two months ago that the Fed should be cutting rates,
and that if it waited until after the first of the year that the slowdown
would be so entrenched that rate cuts would be trying to reverse a
recession, not just revive a flagging economy. Realistically, the new
administration at best would be able to pass a tax relief package in 6
months, and that would be too late for the economy. It is thus up to the
Fed to loosen rates and pump up the money supply now. The tax relief will
then give incentive to put that money to work. Indeed, there is talk that
the tax cut package will be retroactive to January 1, 2001 in order to
pump up investment in a hurry.
Enough about a tax cut 'squandering' the surplus; the economy needs it.
There has been an overblown and emotion debate over the virtue of reducing
debt versus using surplus funds for a tax cut. Given the economic numbers
we see, there can now be no real serious debate about the best use of
those funds. More to the point, however, is this: the huge, huge point
that is overlooked (more to the point, flat out denied despite what
economic history shows us) is that a tax cut is not going to 'use up' the
surplus. History shows that a tax cut will ADD TO the surplus by creating
more economic activity and thus more taxable income and thus more surplus.
When marginal tax rates are reduce, economic output increases
asymmetrically, and tax revenues actually rise. If government does not
grow itself larger and fights the urge to spend more and more, surpluses
will grow. Thus, a tax cut does not physically give the money back to the
taxpayers, it simply prevents the government from taking more from us in
the future. That is made up, however, by the increases in tax revenue
based on the larger increase in economic output generated by the tax cut
and the incentives it offers.
This happened in 1960 under Kennedy. This happened in 1981 under Reagan:
marginal tax rates were reduced and incentives were given to businesses to
invest. Economic output jumped higher and tax revenues exploded. It is
popular to label this plan as 'the failed policies of the '80's,' saying
that it caused the deficits that came out of that decade. Nonsense. Tax
revenues were huge; the deficits were caused by the choices the government
made, namely spending the USSR into economic ruin. There was no failure
at all with the revenue model; government spending on the military
outpaced even the huge tax revenue gains. Ironically, when the USSR fell,
the economic and technological boom that started with the money invested
as a result of that tax cut continued on and gave us the surpluses we
enjoy today.
Government choices, or we should say the Fed's choices, have now slowed
that boom once again and threaten to derail it. With only about 8 years
left of the unique demographic known as the baby boomer generation that
has driven this boom, we need to do whatever is necessary to jumpstart
this economy once again and take advantage of those years to solidify our
technological leadership in the world. We won't have the massive numbers
of consumers here in the US in 10 years; the consumers will be found in
the exploding populations of Asia and South America. We need to have our
technological lead so we can be the supplier of technology to those
consumers. That is the only way we will be able to maintain our growth
and standard of living we have come to enjoy and rely upon. Talk to your
congressmen and senators; they have to know that we expect our leaders to
do what is right for the country and our future economic security, and
that means getting on board with a meaningful tax relief plan to get the
economy going again.
Help wanted index hits the skids.
Next week the employment report comes out with the unemployment rate,
non-farm payrolls, average hourly wages, and average workweek. The Fed
says it keeps a sharp eye on these numbers even though they, unlike
initial jobless claims, are lagging indicators. In any event, today saw a
sobering statistic that the help wanted index had fallen to levels not
seen since 1993. No one looking for employees out there. How can the Fed
be so worried about a statistic that lags the economy when known leading
indicators show that the employment sector has become quite soft?
Jobless claims were said to be lower, but the numbers were not real.
Thursday the government reported that first time jobless claims fell to
322,000 versus expectations of a 351,000 number. Sounds good. Problem:
government. Because of the holiday week, most states 'estimated' what the
claims would be based on the 'usual' holiday employment surge. Look for
major revisions to the numbers going forward, most likely higher.
Miscellaneous
Retailers saw a 31.4% surge in sales during the final week before
Christmas. That was a huge increase and helped give retailers what some
believe will be a 2.2% year over year gain for the month prior to
Christmas. That is great news opposed to what things were shaping up to
be, but the day after Christmas was a letdown. Moreover, most sales
coming that late were on heavily discounted items, and that won't do much
for the retailers' bottom line.
Another bankruptcy, this time LTV Corporation, was filed Friday. LTV was
lagging badly and it joins Montgomery Wards as the second major bankruptcy
of the week. Both of these companies were not strong to begin with, but
with a softening economy, there was no way they could make it.
THE MARKETS
The market action looked to some to be a continuation of what we have seen
before: a rally attempt for a week and then the sellers came back in.
That could be the case, but as we noted above, there were unusual moves
that are explained by the losses stocks have suffered and the close of the
year. Thursday we said that we felt there may be a pop next week with new
money being put to work and the belief that the Fed is going to have to
act to rescue the economy. Late Friday we saw institutions stepping back
in and driving stocks such as DELL, CSCO, BRCD, SEBL and CIEN higher. How
did we know it was institutional buying? The volumes were huge.
Individual investors cannot plunk that much money down to generate that
type of volume and that type of move. Further, individuals rarely rush
into the market during the last minutes of the trading session, unless
they are reading our reports. As we said Thursday, we feel this presages
a move to the upside next week.
Overall market stats:
VIX: 30.23; +0.06. Volatility was extremely mild given the losses
suffered Friday. It is holding above 30 which is generally believed to be
a high level. As noted earlier, this indicator gave us a reversal after
spiking to 36.75 intraday six sessions ago. We hope the steam has not
already run out of this move.
Put/Call ratio: 0.67; +0.07. A move up, but not much. The selling was
intense at times, but the fear did not spike. Holiday or just apathy? We
will know more next week.
NASDAQ: The selling we thought we would get was a bit more intense at
times, and we did get two rounds of it as we thought on Thursday. We did
not get any real rise in between the two selling legs. Instead, that had
to wait for the waning minutes of the session, but it did come, and it was
on big volume. To us, that was a good sign for next week. If institutions
were willing to step up right before the close today, we think we will see
more of this action next week.
We also saw advancing issues hang on ahead of declining issues despite the
selling. This shows us that the selling was not widespread. When the
Nasdaq rallied earlier in the week, the advance was broad. Friday the
Nasdaq 100 fell 122.92 points (-5%); again it was the big names in tech
land that were selling the hardest. Despite the selling Friday, there is
still life in the Nasdaq.
Stats: Down 87.24 points (-3.4%) to close at 2470.52.
Volume: 2.54 billion shares (+15.9%). Rising volume on selling, but as
discussed above, that was deceptive in our view. The big jump in volume
came in the last 30 minutes of the session with 500 million shares trading
hands. That was down and then up. Down volume was well ahead, 1.536
billion to 850 million on the upside.
A/D and Hi/Lo: Believe it or not, advancing issues held onto their lead
over decliners, 1.03 to 1. New highs fell to 135 (-31) and new lows rose
to 272 (-22).
The Nasdaq came back Friday to tap right at one of its down trendlines on
its low (2456.54). This down trendline connects the September high and
the mid-October high. This has acted as some support in the past, but the
Nasdaq has more down trendlines right now than you can shake a stick at.
It turned back at one Friday on its high (2577.02), but not the major one.
It has turned back at this trendline just to move right back over it.
Dow/NYSE: The Dow held up well all day before diving 130 points in the
last hour. It bounced 30 points, but what a dive. Not a lot of damage,
and as with the Nasdaq, we feel a lot of that selling was pre-holiday,
pre-end of year portfolio adjusting.
Stats: Down 80.77 points (-0.7%) to close at 10,787.99.
Volume: NYSE volume rose to 1.03 billion shares (+1.47%). Down volume
topped up volume 543 million to 443 million shares.
A/D and Hi/Lo: NYSE decliners edged advancers 1494 to 1461. Very close.
New highs came in at 319 (-64), but new lows fell as well to 40 (-13).
The Dow once again had a problem with the 10,900 level, hitting 10,917.68
on its high before rolling over and dropping down to potential support
right around 10,800. That level has at times acted as some resistance for
the Dow, and it should be somewhat sticky. It is still holding over the
200 day moving average (10,731.97) and remains in decent shape.
S&P 500: The big caps sagged with the other indexes, showing two down
legs, one early and one late. It was not only the big techs that hurt the
index, but just general selling on most fronts. That was a bit perplexing
as we saw even the market leaders of late getting sold as well. Taking
losses and profits? You usually wait to take profits until the next year.
Again the index was unable to break and hold over 1335. On the high it
hit 1340.10, but that was in the first 15 minutes. It tapped 1317.51 on
its low, but did manage to recover to close at its 10 day moving average.
Not an impressive day, but nothing Friday was impressive except for the
last 15 minutes.
THE COMING YEAR
Lots of damage to the Nasdaq last year. That alone takes some healing and
base building to overcome. A couple of attempts at base-building last
year have failed, and it is in a position to try again. Now it has a
rough earnings season ahead and a slow economy. Earnings for techs are
expected to rise just 4% in the first quarter if the status quo remains.
That will be tough to overcome. Still, we think the leaders in earnings
and revenues will turn in good numbers once again. That means JNPR, AMCC,
CIEN, GLW and those building out the internet. Huge demand for their
products. Whether numbers from these firms will be enough is hard to tell
right now.
But, there is an ace in the hole that can help, and that is the Fed. If
we see good earnings from those leaders, a fed rate cut could show
investors that leaders that could make money in a weakening economy will
do even better when the money starts to flow again. That is where the
future expectations come in; stocks rise on future expectations, not past
performance. We need to remember that even with all of the earnings
warnings this quarter there have been more positive pre-announcements.
That is partially to offset all of the negative sentiment out there, but
the fact is, if a company says it is going to make its numbers the odds
are it is going to do it. A quick Fed rate cut could get the ball
rolling.
The question is, for how long? That depends upon how the economy does and
how the companies respond. Bear markets typically end with a Fed rate
cut. But, it is not a shot to the moon. Investors have to also see the
improvement as the economy moves forward; in other words, there has to be
results. If we get a rate cut early this year, of course we expect a nice
move up on the news as the talk becomes fact. It will then take some heat
from the earnings. Our view is that may be the period where stocks form
handles to bases. If the Fed then comes through with another 25 basis
points at the end of January, that could send things really moving and
start breaking stocks out of bases. Bull runs don't only occur when
everything is roses. They occur when the conditions are right for good
economic expansion. That is why rate cuts usually end bear markets.
If the Fed starts cutting rates timely and we get moderation in energy
prices, we have the setting for a building economy as long as we have not
fallen too far already. If we have, while we might get a move up on the
initial rate cuts, if the economy does not perform, we could have problems
in the second half of the year. That is where the tax cut comes in; it
won't be possible for another 6 months even if it goes through without a
hitch. At that point, if it comes through and is retroactive, money will
start flowing immediately into the economy.
It is tough to recover from a 50%+ bear market. If the right moves are
made soon, we will make good money in those leadership areas from those
leadership companies. JNPR, AMCC, PMCS, VTSS, CIEN, GLW. They correct
big but then run big. It won't be buy and hold necessarily. We will have
to continue to play smart regardless of what happens, sticking to strict
loss cutting on new purchases and taking profits on options when a move
starts to wear thin. We may get another milk run, but that will be
punctuated by some sharp tests. The first could come after the initial
euphoria over the first rate cuts.
THIS WEEK
A short week, but lots of economic data ahead, including the NAPM on
Tuesday, early retail sales numbers on Thursday, and the unemployment
report on Friday. All could influence the Fed into a decision to cut
rates before the FOMC meeting at the end of the month. None of the
numbers are expected to be impressive, indeed they will continue to show
further slowing in the economy. The street is somewhat holding its
breath, somewhat anticipating a Fed rate cut. Some of the position taking
today at the close may have been in part based on the desire not to be out
of the action in the event a belated Christmas gift comes from the Fed
next week.
As we said above, we were placing bets on a move up early this week. On
Thursday night we opined that we may get a strong move higher early this
week when new money was put to work. We have been seeing some broad
buying already, and the late surge in some solid issues on Friday was
further indication that some serious money was being put to work. There
are many obstacles still ahead of the market as noted above, but it has to
start somewhere.
Monday is a tough read. On a strong gap higher we will do the usual and
wait for it to come back and rebound from either the open point or the
prior close and then take positions. We want to see the market turn on a
solid bounce, however. We don't want to get whipsawed in one of those
higher opens that leads to a fade. While we think the market is ready to
move with new money, it has not proved itself yet. No rally attempt since
the bear market onset has been successful, and this one sold back Friday
on higher volume. We think we know why, but we have to still be careful.
It is critical to maintain a very cautious approach. This market has not
proved itself. When in doubt, take money off the table. If this market
is going to rally for a more extended period, there will be more than one
chance to get in and make some money. Option plays are even more
critical; options are a wasting asset, and when we have a run that may be
stalling in a market such as this, we would rather take some profit and be
safe than lose a gain. |
