The Big Picture | October 2003

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Kudlow & Cramer tonite

Friday, October 31, 2003 | 02:49 PM

I just got tagged for a last minute fill in on Kudlow & Cramer tonite -- CNBC at 8pm and 11pm.

I'm on with the very Bullish Jason Trennert of ISI -- guess that makes me the Bear . . .

GDP Follow up

Friday, October 31, 2003 | 11:30 AM

in Finance

"Almost any tax cut or spending increase would succeed in boosting a sluggish economy if the Federal Reserve Board follows an accommodative monetary policy. . . . The key question is, therefore, not whether the proposals provide any short-term stimulus, but whether they are the most effective way to provide stimulus." -William Gale, Brookings Institution

Yesterday's GDP number makes it clear that massive stimulus will generate consumer spending, durable goods sales, and even some capex spending. This activity is good for the overall economy.

The issue which I find so fascinating is whether that temporary blip can become a permanent and sustainable growth path. In my opinion, the jury remains out:

A small number of forecasters remain concerned that the economy will slip into a torpor again next year. They say that household spending on long-lasting expensive items, known as durable goods, will weaken as interest rates rise and that companies, still suffering from their binge in the late 90's, will not continue to invest in new factories and equipment at a healthy pace.

20 years GDP, by President, quarterly

Source: NYT

The big economic issues going forward:

1) Jobs: Still the largest problem afflicting the economy: "After falling by 2.8 million jobs since early 2001, employment rose during September for the first time in eight months, but the increase was not large enough to keep pace with the growth of the population." The NYT notes:

"In part, the economies of the United States and other important countries have simply grown too slowly and unevenly for employers to commit themselves to hiring new workers. But companies have also used new technologies and business strategies to become more efficient, able to make more goods with fewer hands."

2) Consumer Spending: refinancings, tax cuts (including $400 one-time rebate checks to millions of families with children) and hourly wage increases rose faster than inflation. Household purchases of durable goods, like cars, which continue to be heavily discounted, rose at an annual rate of 26.9 percent in the quarter. (The negative was that hours worked fell, while health care costs continue to soar.

3) Business Capex Spending: improved suggesting execs are becoming more confident about economic imoprovement. They are replacing older computers and other machines. Corporate spending on equipment and software increased 15.4 percent this Q, the biggest jump since 2000.

Source:
Economy Records Speediest Growth Since the Mid-80's
By DAVID LEONHARDT, N.Y. Times, October 31, 2003
http://www.nytimes.com/2003/10/31/business/31ECON.html

Mutual Fund Year End

Friday, October 31, 2003 | 10:06 AM

in Finance

This is the last day of the year for Mutuals Funds, so a little tape painting wouldn't be a surprise. Todd Harrison of minyanville.com notes:

Since 1996, when the Nazz futures started trading, the NASDAQ has opened higher and closed higher each year on the last day of October. The largest intrady decline was -.81%, the average gain was 3.5%. Obviously, past performance is no guarantee of future results but this data is starting to get louder in trading circles (courtesy: www.tradeplotter.com)

When Does This Market Peak?

Thursday, October 30, 2003 | 11:57 AM

in Finance

October! What other month has given market watchers more drama, more excitement, more tumult? Since October began, its given us an Advance/Decline Breadth Thrust, suggesting the Market will be at least 10% higher 6 months hence; Two weeks later, it gave us a VIX “complacency” signal, which suggested an imminent short term correction.

These two signals – one short term, one intermediate term – were followed by today’s stupendous 7.2% GDP number. That 20 year high reading is obviously not a sustainable rate of growth. Much of the gains have come from military spending in Iraq (defense sector), tax rebates (retail), home building (housing sector), and technology.

Historically, the Presidential election cycle has provided good guidance as to the lows and highs of market rallies. The period leading up to the mid-term election often marks a market low; Similarly, market peaks often happen in years when there is a Presidential election (see chart nearby).

If today's action continues to disappoint – despite the upside surprise in GDP – expect to hear ALOT of technical chatter about the inability of the indices to push through resistance despite the better than expected GDP number. That resistance is starting to look more and more like the market’s nemesis for the rest of this year: On the SPX, sellers appear every time we approach the 1050-54; The NDX top shows similar resistance at the 1960-67 level; Dow Industrials resistance is at 9850 level.

One often hears technical analysis denigrated as a self-fulfilling prophecy. In the present case, that critique could very well be right. Everyone is looking at the same line in the sand, and it is more likely than not to be attacked and defended with great vigor. The resistance numbers mentioned above are potentially the 2003 highs; Even if those levels are breached, unless it is on a very strong volume thrust, we suspect new highs may be short lived.

After this morning’s initial bout of panicky short covering, it appears to us as if the profit takers are starting to take over. If the indices cannot make hay while that GDP sun is shining, than most of the economic recovery has likely been priced already into the markets.

With the Nasdaq now up nearly 45% for the year, we are looking for a bit of digestion at least a few weeks – possibly until Q1 2004. If you are long, it is advisable to tighten your stops. The trend remains upwards, but let the market take you out of positions, rather than “guessing” the top. If you missed this rally, we expect there will be better entry points ahead. Be patient, and pick your spots.

Chart of the Week: Stock Market During Presidential Election Years

Thursday, October 30, 2003 | 11:55 AM

in Finance

Historically, the Presidential election cycle has provided good guidance as to the lows and highs of market rallies.

Stock Market During Presidential Election Years

Source: Pinnacle Data, Chart of the Day

As we mentioned in September 2002, the period leading up to the mid-term election is often the low market point in a President’s term; Similarly, market peaks often happen in years when there is a Presidential election.

Random Items:
AOL's Happy Secret

What You Don't Know About Dell

Bad News Not Cause of Bear Market

Mergers and the supersizing of business

Inflation Hits China Amid Surging Demand

Europe Is Shooting Itself in the Foot

Quote: "October. This is one of the peculiarly dangerous months to speculate in stocks in. The others are July, January, September, April, November, May, March, June, December, August, and February.”
-Mark Twain

Economists Weigh In On Sizzling GDP Report

Thursday, October 30, 2003 | 11:48 AM

in Finance | Media

WSJ has a nice round up of quotes re: this mornings GDP number -- general expectations were for GDP break 6% in the Q3, but the 7.2% rate reported Thursday was out of the ballpark:

"There is no way to make this [GDP] number bad, even if you want to."
-- Steven Poser, president of Poser Global Market Strategies

"This is a gangbuster number. Everything came together for the economy in the third quarter. … The key challenge now is jobs."
-- Mark Zandi, chief economist at Economy.com

"To date, strong growth has not added many new jobs. We may be on the verge of change. Businesses are adding new equipment, indicating expectations for production gains in the US. … So far, productivity gains have managed to fill the gap on weak employment trends, but 6%-7% productivity gains are not viable longer-term."
-- Stephen Gallagher, U.S. chief economist at Société Générale Group

"I'm floored. This really tells us that all the pieces are now falling into place." The GDP report made "the equity market a little nervous -- nervous that the 'considerable period' [the Fed said rates would remain low] is going to be shorter than expected."
-- Anthony Chan, chief economist at Banc One Investment Advisors

"This report provides further confirmation that the real recovery has begun. The economy was firing on all cylinders from the demand side in the third quarter. Importantly, business-equipment spending continues to strengthen while the strength of nominal GDP growth and productivity gains points to even stronger gains in corporate profits. We see growth remaining significantly above trend in the fourth quarter and we continue to believe that the Fed can raise rates at the March 2004 FOMC meeting."
-- John Ryding, chief market economist at Bear Stearns

"The key takeaway from the GDP report is that a sustainable demand-led expansion is taking hold. Another key point is that there was an enormous increase in productivity last quarter, that drove a strong rise in corporate profits."
-- Dana Johnson, head of research at Banc One Capital Markets

"Consumer and capital spending growth were basically as expected in the quarter. The biggest upside surprise was a larger-than-expected narrowing of the net export deficit, which was the product of a 9.3% rate of gain in exports and a scant 0.1% increase in imports. … Looking ahead, it is probable that consumer-spending growth is going to cool off as the benefits of tax refunds and mortgage refinancings fade. … However, capital spending growth is likely to remain firm on the back of much improved corporate profits and stronger domestic output. Most important from the short-term standpoint, however, will be a need to boost inventories in order to replenish depleted stocks and to satisfy final demand."
-- Joshua Shapiro, chief U.S. economist, MFR Inc

Nasdaq 40% rise tend to lead to 4 month consolidations

Wednesday, October 29, 2003 | 11:28 AM

in Finance

Interesting chart study done by Gary B. Smith on RealMoney.com yesterday; This is consistent with my own expectations of the market starting to get a bit toppy:

10 Year Nasdaq Chart (Weekly)

Source: RealMoney.com

Of course, the caveat is that the prior 3 examples from the '90s were in the middle of an 18 year Bull market; The most recent move may be via a cyclical Bull run in the middle of a cyclical bear market.

I'm going to try and get a study I've been working on -- looking at the long Bull/Bear cycles over the past 100 years (should be up tomorrow).

"Neil Cavuto's Your World" Appearence

Tuesday, October 28, 2003 | 06:33 PM

in Media

Apologies for forgetting to post this prior: A quick programming note: I appeared on "Neil Cavuto's Your World," on the Fox cable network, 10/28 at between 4:20 and 5:00 pm today. The subject matter was the Fed Meeting, last week's pull back, the outlook going forward, and the "Curse of Dow 10,000."

Fox is an interesting channel, and has been generating tremendous ratings. They were surprisingly tolerant of a less-than-totally-Bullish perspective.

I did manage to squeak out a notice to the Big Picture email list; If you want to be added to the list (for either 2 market commentaries a week, or for special notifications only), just email me at britholtz-at-maximgrp-dot-com (put in the subject line:

"subscribe market commentary,"
or
"subscribe special notifications only."

Of course, E-mail addresses will never be shared with anyone else.

Follow up:
Your World w/Neil Cavuto, October 28, 2003

Healthcare costs hurting workers

Tuesday, October 28, 2003 | 07:00 AM

in Finance

Here's the flip side of yesterday's wage chart:

Workers' share of health care costs are rising much faster than their wage increases; In 1998 Employees' spent a little over $1,000 on health care: 9.6% of their salary on "out of pocket" expenses, while health care payroll deductions were 15.7% of their salary. Projected for 2004, those percentages are up sgnificantly - 12.8% and 19.5% respectively. That's a 160% increase to $2,600 from net salary:

HealthCAREPinch.chart.jpg Chart courtesy N.Y. Times

Thus, any potential widespread economic gains from hourly wage improvements are more than offset by these expenses. Here's a brief excerpt:

"As health care costs head into a fourth consecutive year of double-digit increases, employers are shifting a growing share of the burden onto people who make the heaviest use of medical services.

The trend — evident as companies begin informing workers of their benefit choices for the coming year — takes the form of fast-rising co-payments and deductibles, higher payroll deductions to cover spouses and children and new kinds of health plans that give workers a fixed sum to spend.

On average, the annual out-of-pocket costs for employees of large companies have more than doubled since 1998, to $2,126 this year, according to Hewitt Associates, a benefits consulting firm. Hewitt is expecting a 22 percent jump next year, to $2,595.

Costs are up sharply, too, for workers who pay a monthly insurance premium but rarely see a doctor. However, employers have sought to temper those increases, so healthy workers are not tempted to drop their coverage, experts say.

Employers still pay the bulk of their workers' health care bills, but their contribution has slipped over the last five years, to 70 percent of total health care costs from 75 percent, according to Hewitt's latest survey of 300 employers with 5,000 or more workers, released last week.

Source:
Workers Feel Pinch of Rising Health Costs
By MILT FREUDENHEIM, October 22, 2003
http://www.nytimes.com/2003/10/22/business/22CARE.html

Gains in Wages Expected to Give Economy a Lift

Monday, October 27, 2003 | 04:30 PM

in Finance

The New York Times front page article today -- "Gains in Wages Expected to Give Economy a Lift" -- details the surprising rise in national wages. The caveat -- and doesn't every statistic lately seem to have a caveat? -- is the decrease in hours worked:

Source: NY Times

Excerpt:

"If employment does not begin growing at a healthy pace soon, the wage increases will probably not last, many economists say. Changes in pay often lag other parts of the economy.

The recent wage increases appear to grow out of both the sharp recent increases in the nation's productivity and the relative strength of the labor market, compared with its condition in the aftermath of other recessions.

With the jobless rate at 6.1 percent last month, compared with a peak of almost 11 percent during the 80's, companies also have less bargaining power than they had during other periods of slow economic growth. A survey of employers by Watson Wyatt, a consulting firm, found that they plan to pay average salary increases of 3.4 percent next year, up from 3.2 percent this year."

Source:
Gains in Wages Expected to Give Economy a Lift
By DAVID LEONHARDT and EDMUND L. ANDREWS: October 27, 2003
http://www.nytimes.com/2003/10/27/business/27WAGE.html

Is an Economic Recovery Already Priced In?

Monday, October 27, 2003 | 02:24 PM

in Finance

More than half the companies in the S&P500 have reported earnings so far, and but for a few notable exceptions, earnings have been better than expected. This week will see about half as many earnings conference calls and by the time Friday rolls around, 82% of the S&P500 will have reported Q3 earnings, and expectations for next year.

The negative to neutral reaction to positive earnings suggests to us that the markets have nearly priced in all of the 3rd quarter’s sizzling 6% GDP. Prior to last week’s drop, Bullish sentiment had gotten extreme. That sent several technical indicators -- most notably the VIX - into the danger zone.

Away from the earnings parade, the economic news is somewhat mixed. Several data points present a muddled picture of the economy: Wages (higher), Capacity Utilization (still low), and Money Supply (formerly rising, now falling). An analysis of of each follow:

The stubborn unemployment/jobless rate continues to remain the anathema of the recovery. At this stage of the recovery, these should be dramatically improving (they’re not). The silver lining is the increase in wages paid, although total hours worked have eased. The sharp rise in productivity, combined with a desire by companies to hold onto their best employees is, in our opinion, what is most likely behind this statistical improvement.

Wage increases typically work their way into the broader economy through increased consumer spending; If this trend stays positive, we may have a surprisingly good retail holiday season. (Now if only consumers would become less reliant on debt to support their “sport shopping” habits).

A worrisome divergence of Capacity Utilization and Earnings continues to spread (see chart nearby). Low utilization rates and healthy profit increases suggests that end user demand remains somewhat anemic, which is consistent with the cost-cutting and layoff based profitability (versus top line growth) of many tech and manufacturing companies today.

Finally, we note the danger that the healthy increases we have seen in Money Supply may be tailing off. Recent data shows that the Fed’s increase in Money Supply has ceased growing at the marked rate it saw earlier this year. In recent weeks it has reversed course and has actually started to decline. This is potentially worrisome, as M2 is the fuel consumed by the market and burned during rallies. Choking off that fuel could potentially curtail the rally’s ascent.

Chart of the Week: Capacity Utilization

Monday, October 27, 2003 | 12:00 PM

in Finance

S&P 500 earnings (blue line) have been rising despite the continued decrease in capacity utilization (gold line).

Earnings vs. Capacity Utilization

Source: Chart of the Day

This excess capacity is the hangover from the massive over-investment in tech and telecom during the 90s bubble.

Random Notes
Gains in Wages Expected to Give Economy a Lift

Can U.S. growth last?

Despite Profit Improvements, U.S. Stocks May Underwhelm

The end of the Oil Age

The China bubble

0 for 2 on Treasury chiefs

Quote of the Day:
“The world economy is volatile enough without a loose cannon at the U.S. Treasury." -Paul Erdman

MIT's legal alternative to file-swapping

Monday, October 27, 2003 | 06:54 AM

in Music | Web/Tech

Here's a clever way around the file sharing conundrum: Essentially a streaming audio over cable (similar to a Satellite Radio, only analog), collaboratively programmed from a list of 3500 albums suggested by MIT undergrads:

MIT students develop alternative to file-swapping
Monday October 27, 12:00 am ET
By Justin Pope, AP Business Writer, Associated Press

EXCERPT: CAMBRIDGE, Mass. (AP) -- Keith Winstein and Josh Mandel may soon be the most popular guys on campus. They say they've discovered a way to give their fellow students at MIT and elsewhere dorm-room access to a huge music library without having to worry about getting slapped with a lawsuit from the recording industry.

On Monday, the pair planned to debut a system they've built that lets MIT students listen for free to 3,500 CDs over the school's cable television network. They say it's completely kosher under copyright law. The students will share the software with other schools, who they say could operate their own networks for just a few thousand dollars per year. They call that a small price to pay for heading off lawsuits like those the recording industry filed against hundreds of alleged illegal file-swappers.

Here's the catch: The system is operated over the Internet but the music is pumped through MIT's cable television network. That makes it an analog transmission, as opposed to a digital one, in which a file is reproduced exactly. The downside is the sound quality: better than FM radio, but not as good as a CD. But the upside is that because the copy isn't exact, the licensing hurdles are lower. The idea piggybacks on two things: the broad, cheap licenses given to many universities to "perform" analog music, and the same rules that require radio stations to pay songwriters, but not record companies, to broadcast songs.

It also can broadcast any CD -- even ones by popular artists like Madonna and the Beatles who have resisted making their songs available even to legal digital download services.

"I think it's fascinating. As a copyright lawyer, I think they've managed to thread the needle," said Fred Von Lohmann, a lawyer for the San Francisco-based Electronic Frontier Foundation. "They've basically managed to cut the record labels out of the equation altogether" . . .

Sources:
The rest of this article is here:

MIT students develop alternative to file-swapping
http://biz.yahoo.com/ap/031027/na_fin_us_file_swapping_alternative_2.html

New tune on digital music
http://www.siliconvalley.com/mld/siliconvalley/7113917.htm

With Cable TV at M.I.T., Who Needs Napster?
http://www.nytimes.com/2003/10/27/technology/27mit.html

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Bush's Reagan Moment?

Sunday, October 26, 2003 | 11:45 PM

in Media | Politics

"Senator, I served with ~~Jack Kennedy~~ Ronald Reagan. I knew Ronald Reagan. Ronald Reagan was a friend of mine. Senator, you're no Ronald Reagan."

Of all the astounding claims made by the present administration -- and from the economy to the war in Iraq, there have been plenty -- the one I find utterly incomprehensible is the frequent comparison to Ronald Reagan. Its hard to imagine two Presidents less alike in American history than Reagan and Bush.

But that doesn't seem to dissuade Peter J. Wallison (President Reagan’s counsel in 1986-87). In an op-ed in today’s NYT -- “Bush's Reagan Moment” -- Wallison attempts to draw on that same iconography:
"As the election approaches, Mr. Bush will face enormous pressure to alter his policies — particularly to retreat from his tax cuts, scale back our commitments in Iraq and make foreign-policy concessions to our allies. But changing directions out of political expediency would be a grave mistake. And if he needs a model, there is none more apt than the man to whom he is often likened: Ronald Reagan.

Early in his first term, Mr. Reagan faced very similar pressures: his economic program was not yet producing the promised results, and his foreign policy — in that case, his confrontational approach to the Soviet Union — was criticized by the Democrats and the press and opposed by most Europeans and their governments."

In his attempt to provide spiritual guidance to the President, Wallison turns a blind eye to the astounding economic differences between the problems Bush is grappling with and those Reagan faced. The failure to recognize those divergences may very well be the epitaph this Administration writes for itself.

Reagan came into office in the 8th inning of a 15 year bear market. Interests rates were high, Oil prices were up, economic and capital investments were down. The economy had been through not one but several recessions in the preceding decade. Everyone hated the stock market.

When Reagan was sworn into office in 1981, the top income tax bracket was 70%; Capital Gains taxes were similarly high, and the off-shoring of the country’s manufacturing base was already in full swing. The S&P500 was no higher than it was in 1968. The country was suffering from high interest rates and low economic growth -- economic stagflation. And the stock market had been in the tank for years. The Dow had been unable to stay over 1,000 in 1980 -- despite 5 previous attempts dating back to the 1965:

Dow Jones Industrials, 1969-1982, (weekly chart)

15 year chart shows no stock market progress; The Dow was unable to get past 1000

Reagan’s team crafted an economic plan to specifically attack those issues: they made a huge cut in the top tax bracket to encourage more saving and investing. They hacked at the capital gains tax to encourage people putting money into the stock market. It also didn’t hurt that Reagan had Paul Volcker as Fed Reserve Chair. Volcker is widely credited with ending the spiral of inflation in the 1980's.

Reagan also avoided “incremental” policies. For good or ill, he made sweeping changes in all his policy initiatives. The top tax bracket rate was nearly cut in half.

In many ways, the economic problems Bush faced were the polar opposites of Reagan’s:

President Bush came into office facing very different economic (as well as foreign policy) climate. The market had just ended an 18 year Bull run -- the longest in history. A massive VC over-investment bubble had just popped. Excess capacity existed in many technology and manufacturing industries. And too many people had recklessly plowed cash into the market just before the debacle was in full swing.

Dow Jones Industrials, 1982-2000, (monthly chart)

A very different picture: The market had just completed an 18 year Bull move, and was on the verge of collapsing

Here’s the great irony of the story: Bush had brought with him many of Reagan’s team. Despite facing glaringly different problems -- could those 2 charts be any more different? -- the former Reagan crowd trotted out the same old play book: they cut the top tax bracket -- only it was an incremental decrease from 38% to 35%; Despite coming off the biggest investment bubble the world has ever seen, they saw fit to cut the capital gains tax rate from 20% to 15%. It was almost as if their attitudes were “Hey it worked before, so it should work again.”

Given his unwillingness to acknowledge economic reality, its of little surprise that Peter Wallison ignores the rest of the real world:
In many ways, President Bush is in better shape than Ronald Reagan was. While his popularity has sagged, it is still much higher than the 35 percent approval rate Mr. Reagan had in January 1983. Today's Republicans, if not the Democrats or the press, understand that deficits are not necessarily harmful, and that tax cuts stimulate the economy. His staff is cohesive and behind him, certainly in public and likely also in private. And while Mr. Bush has plenty of domestic and foreign critics of the Iraq campaign, unlike Ronald Reagan, he is not being accused of risking World War III.

The source of Reagan’s popularity was his personal charisma, vision and charm; Bush’s poll numbers only shot up after the September 11 terrorist attacks; As typically occurs, Bush’s numbers also rose when just before our troops engaged in military actions in Afghanistan and Iraq, before settling back towards the baseline.

Certainly, tax cuts stimulate the economy, but some do so more than others. The focus on the top bracket puts more money into the hands of the savings and investing class -- not the spending classes.

His staff is cohesive? What about all the recent leaks, the animosity between the White House and the CIA, and the power struggle between the State Department and the Pentagon? Anyone who believes that hasn’t been paying much attention lately; The person who wrote it is delusional -- or a liar.

And yes, the President has been “accused of risking World War III.

Unlike the Reagan moment mentioned, its late, not early in the President’s first term. Much of the impact of his tax programs have long been felt by the economy. While the Hoover comparison’s don’t ring true to my economic analysis, the Reagan comparos are just as untrue.

This is not George W. Bush's Reagan moment; Indeed, it looks more and more like his “George H.W. Bush” moment . . .

Sources:
Bush's Reagan Moment
http://www.nytimes.com/2003/10/26/opinion/26WALL.html
By PETER J. WALLISON
October 26, 2003

Tax Policy, Economic Growth and American Families
http://www.house.gov/jec/growth/taxpol/taxpol.htm
Joint Economic Committees of Congress
July 20, 1995

Policymakers Face Economic Challenge:Can They Learn?
by Andrew E. Busch, September 2001
John M. Ashbrook Center for Public Affairs
http://www.ashbrook.org/publicat/oped/busch/01/economy.html

Bush Tax Cuts versus Reagan Tax Cuts
http://www.ombwatch.org/article/articleview/1755/1/186/
August 25, 2003 Vol.4 No.1
OMB Watch

Sunday, October 26, 2003 | 11:45 PM | Permalink | Comments (2) | TrackBack (4)
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Snow Job

Saturday, October 25, 2003 | 06:57 AM

in Finance | Media

Interesting observation's about Bush's 2nd Secretary of the Treasury:
"I don't know how George W. goes about picking his secretaries of the Treasury, but I do know that he has come up with two duds in a row. The new one, John Snow, is even worse the first one, whose name I have already forgotten.

Here we have the secretary of the Treasury of the United States who is going to have to borrow a half-trillion dollars a year to cover this nation's deficit, plus a whole lot more to refinance the enormous debt that's outstanding, telling us he will be "frustrated and concerned if long-term interest rates do not rise."

This is a guy who should be fired right away, before he does even greater harm to the standing of the United States as the financial powerhouse that the world looks to for economic leadership. This nation's reputation has already suffered enough as a result of the growing fiasco of our occupation of Iraq . . . The world economy is volatile enough without a loose cannon at the U.S. Treasury."

-Paul Erdman, "Snow job: Bush's second Treasury chief also a dud"
CBS.MarketWatch.com: 6:36 PM ET Oct. 22, 2003

See also
Snow faces peril in currency report"

Saturday, October 25, 2003 | 06:57 AM | Permalink | Comments (0) | TrackBack (1)
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3 Peaks and a Domed House ?

Friday, October 24, 2003 | 06:05 PM

in Finance

I use a variety of methodologies in my work. Charts are absolutely one of the essential tools I use. However, the way I apply of technical analysis may be different than the work of pure technicians out there. I use charts primarily to tell me, in order of importance, 3 things:
- Is the stock/sector/index/market in an up trend or a down trend?
- Where is the nearest resistance or support level?
- Are there any reliable patterns suggesting an imminent reversal (or continuation) pattern?

You'll note pattern recognition was last. I have found pattern recognition is a complex art, prone to human errors in interpretation. I use it, but sparingly so. The information imparted by trend and resistance/support analysis is very quick and reliable when compared with pattern analysis. (Perhaps that just means Im a lousy technician).

Regardless, there are occasions when the patterns are ominously clear. One such instance has arisen that warrants my sharing it with you: George Lindsays Three Peaks and the Domed House (TP&tDH). The parallels between the present market's progression and Lindsays ideal formation are startling.

If youve been reading this site for a while, you know that I track Contrary Indicators closely; that I have been (mostly) Bullish for the past six months, but increasingly uncomfortable with that posture; that we advocated a rotation out of tech early October; that I am far less sanguine about the economic recovery than most of my peers; that last Wednesday (10/15), I interpreted the VIX as signalling an imminent correction which appears to be in full swing now.

Against that backdrop, I was somewhat stunned when someone showed Ned Davis Research's interpretation of Three Peaks and the Domed House. (See chart below). NDR is a highly respected independent research house; Davis himself has had many terrific calls over the past few years. (He also has the cleanest stock market data in existence).

I have no idea what the track record of 3 Peaks and a Domed House is (though Lindsay has a stellar reputation); I saw how parallel the charts appeared, noted that hardly anyone else (other than Ned Davis) was talking about them, and posted this.

Source: Ned Davis Research

It is only with great trepidation that I show Lindsay's Idealized pattern. It is scary. Ive also seen parallel presentations of the same form in the period leading up to March 2000 (we know how that turned out). I have no experience with either the application or interpretation of TP&tDH. I present here to provoke your thought processes a bit. I have also included several reference links on the pattern and on Lindsay himself (below).

If you care to do additional research on this pattern, here's a few links to start you off:

Reference to George Lindsay:

Essential Technical Analysis
(click the link Search inside this book; Go to the search box and type "George Lindsay")
http://www.amazon.com/exec/obidos/ASIN/047115279X/thebigpictu09 20/103-3937756-4643047

Reference to Three Peaks and the Domed House:

Sand Spring Advisors
Three Peaks and the Domed House - Revisited, January 14, 2000
http://www.sandspring.com/articles/tp.html

Bonds & Gold
http://www.nqoos.com/3peaks_Lindsay.htm

SPX Daily
http://www.nqoos.com/3peaks_Discovery.htm

DJIA (Crosscurrents)
(go 2/3rds of the way down or search for the word "Domed")
http://www.cross-currents.net/archives/oct01.htm

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Second Half Recovery

Friday, October 24, 2003 | 09:57 AM

in Finance

A very funny economic related 404 message regarding Second Half Recovery.

Hat tip to Trader Mike

Friday, October 24, 2003 | 09:57 AM | Permalink | Comments (0) | TrackBack (0)
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VIX follow up II

Thursday, October 23, 2003 | 03:29 PM

in Finance

This is a more formal follow up to the VIX piece from last week:
Since our VIX discussion last week, market complacency has led to an aggressive sell off. The volatility index has become the subject of several articles, and remains a misunderstood signal. Accordingly, we thought it would be appropriate to clarify a few ideas on the VIX:

1) The VIX is an oscillator, and most of the time, reflects “ordinary” investor sentiment. But when the VIX moves to an extreme reading, that signals acute investor sentiment that is of most value to traders: Intense VIX readings often foretell short-term market reversals.

To better understand the VIX, think of stock options as “insurance.” Greater fear levels make options cost more. “When stocks are in an up trend, many investors do not fear risk and are willing to sell options,” recklessly taking on more market risk. As more options get sold as stocks rise, the lower option prices go – hence, lowering the VIX.

2) History shows that when volatility spikes to high levels, it is a reliable predictor of a rally. While the converse is true – drops to low levels often precede sell offs – it is a more difficult signal to discern. VIX complacency readings are not as extreme as VIX panic spikes. The VIX cannot go below 0, and the VIX upside is theoretically unlimited. The 1987 crash sent the VIX to over 160. It is easier to separate high VIX readings from market “noise” than low VIX readings.

3) Static VIX numbers are meaningless. Since it is an oscillator, the moves to extremes are what are significant to traders. VIX trading ranges differ from era to era. It is of little value to compare the low from the present range to the low from the previous range. Indeed, in the 90s, the VIX spent most of its time in the low single digits and mid teens. A spike to 21 turned out to be a buy signal then.

4) The CBOE changed their VIX computation last month. The new VIX is a measure of volatility of the S&P500, while the old VIX (renamed VXO) measures the volatility of the OEX 100. Either way, when looking at a chart of either VXO or VIX, you are looking a consistent data set for that index.

5) Comparing the VIX to the VXO is a meaningless exercise of Apples vs. Oranges. VIX and the VXO charts appear nearly identical, and the trading rule holds true for each – at extreme levels, it suggests an imminent market reversal.

Regardless of the math, reading VIX signals is as much art as science. Despite that challenge, VIX lows have had a strongly correlated predictive value which was the reason we were willing to go out on a limb and make a market call when the VIX hit 3 year lows last week.

Thursday, October 23, 2003 | 03:29 PM | Permalink | Comments (0) | TrackBack (0)
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Random Items

Thursday, October 23, 2003 | 03:20 PM

in Finance

CEO De-Richment

You Get What You Pay for in Treasury Secretaries

Unintended Consequences of the Sarbanes-Oxley

Why Are There Fewer TV Viewers?

Generic/OEM manufacturers adopt branding strategies

Tokyo stocks plunge 5%

Quote: "It is a mistake to suppose that men succeed through success; they much oftener succeed through failures. Precept, study, advice, and example could never have taught them so well as failure has done."
-Samuel Smiles

Thursday, October 23, 2003 | 03:20 PM | Permalink | Comments (0) | TrackBack (0)
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Earnings misses give cheerleaders pause

Thursday, October 23, 2003 | 11:30 AM

in Finance | Media

Its dumbfounding to watch a bunch of last week's cheerleaders do a 180 degree spin and lament the recent earnings misses. While reports have been coming in about 6% better than expected, there have been enough significant misses to make the rah rah crowd nervous:
"Lots of misses. More than we should be having. Raytheon (RTN) misses -- huge! Royal Dutch (RD) misses huge! Leapfrog (LF) shouldn't matter, but it was a gigantic miss. Blockbuster (BBI) and Brinker (EAT) were huge misses. SBC Communications (SBC) was just awful. AT&T (T) was amazing given how horrible the revenue was.

Merck (MRK) truly did stink -- I mean, out loud. KLA-Tencor (KLAC). . . Last week I was thrilled with the earnings picture until IBM (IBM:NYSE - commentary - research). This week it's just the opposite. It is awful. You can't ignore it, and you can't pretend it's not happening."

Huge Earnings Misses Hit Wall Street
-James J. Cramer, 10/23/2003 10:54 AM EDT

I think it behooves investors to look closely at their holdings; Are your recent gains stimulus/liquidity induced, or are they driven by organic gains the broader economy? The answer to that question may very well be the answer to your buy, sell or hold concerns.

Thursday, October 23, 2003 | 11:30 AM | Permalink | Comments (0) | TrackBack (0)
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VIX follow up

Wednesday, October 22, 2003 | 11:14 AM

in Finance | Media

Since our VIX piece last week, several commentators have discussed the volatility index. I wanted to clarify some of the errors, myths and misunderstandings that are generally out there:
1) The VIX is an oscillator, moving between extremes within a trading range. At both extremes, it often foretells short-term market reversals. I’ve found the spikes to highs to be a more reliable predictor of a rally than a drop to a low (VIX spikes upwards tend to be to more extreme, and is easier to separate from the noise). Still, the VIX lows have had predictive value.

2) The VIX trading range differs from era to era. Thus, it is of no value to compare the low from the present range to the low from the previous one. Indeed, in the 90s, the VIX spent most of its time spike in the low single digits and mid teens. A spike to 21 turned out to be a buy signal then.

3) Although the CBOE changed their VIX computation, the data on any chart is still consistent. This only means you must choose: you can look at the new VIX, which reflects volatility on the S&P500, or the old VIX -- renamed VXO, which is the volatility of the OEX 100. Regardless of which volatility index you choose, when looking at a chart of either the VXO or the VIX, you are looking a consistent data set for that index.

4) I do not know how to compare the VIX with the VXO; It’s really an Apples to Oranges comparisons. A chart of either one is consistent with itself. If you layover the VIX and the VXO on the same chart, they appear to be nearly identical. Regardless, the same trading rule holds true for either index – at significant extreme readings, it suggests an imminent reversal. Again, the spikes are what matters.

5) Static numbers are meaningless. Since the VIX/VXO is an oscillator, what’s important is a move to either extreme.

"Systems & Forecast's" Marvin Appel wrote a good description of why a drop in the VIX often foretells a reversal:
To understand why VIX reflects investor confidence, it's helpful to think of stock options as insurance. The more volatile the market is expected to be, the greater the potential value of option insurance, so the higher the cost of options (all else being equal). Low readings of VIX imply investor complacency, and high readings imply anxiety. When stocks are in an uptrend, many investors do not fear risk and are willing to sell options. (An investor who sells an option is in essence taking money to bear market risk.) The greater supply of option sellers when stocks are rising will tend to drive down option prices (lower VIX).

-Marvin Appel, Systems & Forecasts
"Reading the 'VIX: How to navigate a complacent market"
2:24 PM ET Oct. 20, 2003

Here's Appel's chart of the VIX versus the SPX:

The bottom line: This is a worthwhile indicator than can be used by either traders or investors to faciliate their posture. As we discussed in our analysis of Contrary Indicators, these signals are ideally used in conjunction with other signals or factors. The more evidence (i.e., signals) that line up, the greater confidence I have in making a market call. Its a matter of conviction.

References:
Reading the 'VIX' : How to navigate a complacent market
http://cbs.marketwatch.com/news/story.asp?guid=%7BF7EE003B%2D1510%2D4DE1%2DB16E%2D7FD2022A5C0B%7D&siteid=mktw

Are advisers spooking themselves?
http://cbs.marketwatch.com/news/story.asp?siteid=mktw&dist=mktwmore&guid=%7BB4600687%2DE7EE%2D48D6%2DBC24%2D12FBB2078B90%7D

Wednesday, October 22, 2003 | 11:14 AM | Permalink | Comments (0) | TrackBack (0)
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Is iTunes Link Maker Patentable?

Tuesday, October 21, 2003 | 11:47 PM

in Web/Tech

Here's a thought: If Amazon's One Click purchase system is patentable -- and lets not kid ourselves, its nothing more than a browser cookie -- then shouldn't Apple's iTunes Link Maker be even more patentable?

This is more than a simple web interface -- it's a method of automatically generating the code"to create deep links to any music on the iTunes Music Store. Any user who copy-and-pastes that code into their own web page can drive traffic to any specific song, album or band on iTunes. Pretyy snazzy!

I've never seen that trick before -- one click takes you to a specific song in an on-line music store, ready for listening or purchase. I'm not in favor of most of these stupid business model patents, but this one looks possible . . . I'll have to do a patent search in the office tomorrow to see if Apple filed (unless someone else beats me to it).

One last thought on the iTunes Deep Song Link: Whenever I post, I now have a compulsion to point to whatever song happens to be playing at that instant; At the moment, its The Push Star's "Drunk Is Better Than Dead."

Tuesday, October 21, 2003 | 11:47 PM | Permalink | Comments (1) | TrackBack (0)
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Nano tech

Tuesday, October 21, 2003 | 06:00 PM

in Science

Way cool overview on NanoTechnology over at C/N