If you have work then you are better off than the 8,508,000 currently unemployed. The markets did not take well to Friday's economic numbers and without the "timely" resignation of O'Neil and Lindsey the trading outcome could have been much different.
Dow Chart - Daily
Nasdaq Chart - Daily
The big economic news on Friday was the jobs report and it was news the markets could have done without. The unemployment rose to 6.0% matching the high from April and the highest number in years. Jobs fell by -40,000 in November and was well below the consensus estimate for a gain of +28,000. This was the biggest drop in jobs since February. Manufacturers continued to cut employees and the retail sector lost -39,000 jobs. If the consumer is still buying then why would retail cut jobs just before the holiday season? Inquiring minds want to know! The numbers for Sept/Oct were revised up by +10,000 on better data but the total drop in private payrolls for the last three months was fixed at -103,000. If the recovery is really under way then it is being supported by fewer workers and we are far from a major improvement. With job losses declining in the supposedly strong seasonal period this does not bode well for the economy.
The rising unemployment is also being felt in the consumer credit numbers. The October consumer credit came in at an increase of only +$1.4 billion instead of the +$8.5 billion expected. Come on guys, some of your wives are not contributing to the recovery. Give them back the credit cards! (grin) The numbers for Aug/Sept were also revised down considerably. The October number was the low for the year and well under the cycle peak in May. Considering the number of new auto loans undertaken in the last 90 days this means the retail consumer was positively hoarding money. Analysts claim that the mortgage refinancing boom has put money into consumer pockets and reduced the need to press the plastic into use. The trouble with this theory is that the cash is not flowing into the retail sector. If cash is available then consumers are stashing it for a rainy/snowy day.
In a startling coincidence the resignation of O'Neil and Lindsey occurred on the same morning that very negative "economic" reports are announced and one day before the Iraq papers go public. What a stroke of luck for the markets! (grin) The administration instantly distracted the public from a possible market meltdown and a potential main event on the Iraqi front. The resignations had been rumored for several months and several analysts were on record as saying they had probably been in the hopper for several weeks in anticipation of a bad news event. Another report had VP Cheney delivering the bad news to O'Neil in his office yesterday and offering to let him resign. Whatever story you believe there is the problem of no immediate successor for either position. Had this been in the works for weeks you would have expected the administration to have a replacement ready. There are so many possible conspiracy theories as to why now that it is impossible to decide who is right. I sometimes think the simplest answer is the right answer. Bad economic news and potentially bad war news along with the start of the 2004 campaign required strong action to assure the public that the administration was in control and felt their pain. I would expect a flood of tax cut measures immediately to continue the distraction process and try to pump up consumer confidence. O'Neil was against further tax cuts. One of the front-runners for O'Neil's position is Charles Schwab.
Next week we have a Fed meeting on the calendar on Tuesday but traders will be free to ignore it. They already said they were not going to cut again and the Fed funds futures are only showing a 10% chance of a hike. Now that would be a real surprise! With no change in posture expected the governors could go in the front, close the doors and go right out the back for a day of shopping and nobody would know. Put out a press release at 2:15 for no change, risks balanced and recovery under way. The next meeting is two days on Jan 28/29 and the rate hike rumors could be running rampant by then.
After two moderately positive mid quarter updates by AMD and INTC the tech sector failed to follow through on Friday. There was news from IDC that the disk storage market had fallen on hard times and global demand was down -3% in the 3Q. IDC also said PC "shipments" would grow only +8% in 2003 and most of that would occur in the third or fourth quarter. Gateway computer instructed employees to take a mandatory five extra days off later this month. HPQ has instructed contract workers to take an additional 20 days off in December. This continued cost cutting shows that things are not picking up quickly in the PC sector. IBM was an exception and said they were not requiring anyone to take off. The IBM spokesman said "I guess we're busy." It was not exactly a strong vote of confidence. Dell Computer was initially included in the time off announcement but Dow Jones later printed a retraction.
Dan Niles went on record as saying investors with a long time horizon should be aggressive about buying chip stocks on any pullback. QCOM, the leading maker of mobile phone chips, raised their forecast for chip shipments in the near term. They said demand in China and India as well as the U.S. was strong. The news reflected the strong demand for their CDMA technology. They said "aggressive holiday pricing" was behind the demand in the states. Even with the AMD, Intel and QCOM news the semiconductor index finished with a fractional loss. The Semiconductor Equipment and Materials International group said sales of equipment to make chips would fall by -30% this year. They had previously expected a -19% decline in their latest forecast. The said the non-existence of an upturn had soured their outlook. For 2003 the group is now expecting only a +15% increase to $21.8 billion instead of their earlier estimate of $29.4 billion. The $21.8 billion only represents a +$3 billion increase and they expect that gain to come late in the year. FLEX said it was closing circuit board fabrication facilities in California and Sweden to cut costs and reduce excess capacity. Niles says buy aggressively on dips but only if you have a long time horizon. The long awaited upgrade cycle will come eventually, maybe not until 2004 but it will come.
Rumors were circulating that Gateway CEO Ted Wait had made the discouraging comments on Thursday in an effort to drive down the stock so the company could be taken back private. With a high in 1999 near $85 the company is trading near $3.50 now. Surely Ted has an extra billion laying around which with 324 million shares outstanding is what it would take to buy it back. That of course assumes he wants it back. With Dell and HPQ eating their lunch and the company having to resort to selling flat screen televisions to make a living he may be ready to bail instead. Kent Barton suggested on the Market Monitor on Friday that a better deal would be for Wal-Mart to buy them. WMT has said it wants to get into the computer business and what better way than to buy one already in production and put the WMT marketing power behind an established brand. An extra billion to WMT is pocket change which they could easily recover in the first year on marketing power alone. Talk about putting a crimp in the Dell/HPQ momentum. Way to think out of the box Kent!
I received numerous emails on my retail comments on Tuesday. Far too many to answer individually. The vast majority were in agreement that keeping your eyes open to the world around you was a prudent task for an investor. Numerous emails recounted books by Peter Lynch on investing as well as nuggets from Warren Buffet, John Dessauer and others who make it a practice to be alert to trends before they make it into the news sources. I also got quite a few from readers recounting their mall trips of late. Only a couple reported packed malls. Dozens reported scarce shoppers carrying no packages and no lines at the registers. With only two weeks left before Christmas any buying frenzy will have to appear very soon. WMT, TGT and Sears were the stores of choice and most high end stores were mentioned as vacant. I would urge readers to continue to send me your observations and let's see if the "official" results match our unofficial poll by educated investors.
Next week should be interesting. The economic schedule is very light until Thursday and the FOMC meeting on Tuesday is a non-event. The challenge will continue to be earnings warnings as we move full speed into the 4Q cycle. The break in the eight week winning streak for the Dow was no big deal and it was due for a breather. If we only have a one week drop after eight weeks of gains we would all be excited. The Dow dropped to support at 8500 on the jobs news and rocketed back +140 points. While this was pleasing to watch it did not really have enough power to convince traders that it would stick. Overhead resistance at Dow 8700 and 8800 should keep a lid on any rebound and strong support at 8350 should prevent any serious drop, this time.
The consensus of opinion is that we could get an oversold bounce on Monday to something in the Dow 8800 range and then another bout of selling. The strong gains from the last eight weeks may not have been digested with only one week of profit taking. If we do roll over again then the key level is 8350. If that holds then the Santa Claus rally could begin. If it fails Santa could be delivering lumps of coal to all the bullish investors. Dan Niles may be suggesting aggressive buying and the coming tax changes may be very bullish but there is still a minefield to cross in our immediate future.
Enter Very Passively, Exit Very Aggressively!
"It is not the return on my investment that I am concerned about; it is the return of my investment." - Will Rogers