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Airline stocks get bounce

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Airline stocks were hammered yesterday as the group as a whole lost nearly $10 billion in market capitalization. Bulls in the group will anxiously be awaiting word from Congress about the possibility of a bail out or some type of industry relief after recent attacks in the U.S.

The AMEX Airline Index (XAL.X) currently leads sector gainers with a 4% gain to 72.70. Stocks that make up the XAL.X are AK, AWA, AMR, CAL, DAL, KLM, NWAC, LUV, UAL and U. Below is a list of airline stocks (sorted by shares traded).

Airline Stocks - Sorted by current volume

One of today's "new call plays" on OptionInvestor.com is shares of AMR Corporation (NYSE:AMR). After opening at $18.78, the stock has been able to hold the bulk of current sessions gains. Personally, I'd be buying some time to give the trade time to work and enter the trade with the original thought that the option could go to "zero." The reason I would enter with this thought process is that it will keep me from overbuying and have me just doing some "toe dipping" in what looks to be a very oversold sector and stock. Calls highlighted were OCT-$25 (AMRJE), NOV-20 (AMRKD) and JAN-25 (AMRAE).

30-year YIELD on the move

We're seeing a decent round of selling in the 30-year bond today ($TYX.X) and it's time for traders to perhaps get caught up with what traders/investors might want to look for in coming sessions. Here is a recap of my market wrap on premierinvestor.net from yesterday regarding bonds, currencies and gold (the commodity). Today's action is viewed as positive as we see selling in the long end, but the US$ is holding ground against foreign currencies (specifically the Swiss Franc, sf01z).

End of Day Commentary for 09/17/01

The U.S. Treasury Bond market once again becomes a key indicator for traders and investors to be following. Perhaps this market, more than any other in the world will give future hint of what to expect going forward.

Today's actions by the Fed and its 50-basis point interest rate cut is designed to stimulate economic activity as the Fed eases monetary policy, but it is also designed to perhaps make Treasury bonds less attractive going forward. "Less attractive" as it relates to upside profit potential, but not necessarily as it relates to the MARKET'S perception of risk.

I've said before that the bond market by itself is not necessarily an indication going forward of how stocks will perform. Traders that understand that the 30-year YIELD is the "riskiest" part of the treasury market may begin making some assumptions going forward. One assumption by recent activity after the WTC and Pentagon bombings is that there is confidence longer-term (we didn't see YIELDS rise precipitously, which would have been indication of selling in this bond) when the 30-year bond market began trading again last week. Today's action was rather tightly bound in the 30-year, giving hint that a lot of traders have yet to make a market moving decision as it relates to money invested here.

I'd suggest that traders try and think of the 30-year as "the riskiest" of the treasury bonds. As the maturities shorten (10- year $TNX.X and 5-year $FVX.X) we get closer to the "less risky." Once you've got that mindset, then we start getting a better picture of how the MARKET perceives things. As we do this, we'll want to watch other sectors that are sensitive to interest rates and the economy to begin making a more prudent "market call." Let's face it. Recent activities have perhaps created a "new ballgame" and market environment that hasn't been seen for some time.

The 30-year YIELD ($TYX.X) finished today's trading with a YIELD of 5.407%. Some stock investors can take this as a partial positive that this YIELD has not violated is YIELD lows set back in March of 5.217%, but there are other factors/influences that traders need to be monitoring going forward. I'd argue that a massive selling of these bonds (higher YIELD) would have indicated a lack of "trust" by the MARKET that the U.S. would be able to make its debt payments. My thought are this. If the riskiest bond remains relatively unchanged, then the MARKET at this point is thinking rational and isn't worried at this point regarding the foundation of the underlying U.S. Government. As long as that is intact, then there's always hope for the companies that reside on its shores and who's earnings are reported in U.S. dollars. This is very basic, but the foundation from which we build going forward.

30-year Treasury Bond YIELD - Weekly interval

If we look at the 30-year YIELD by itself, it sure doesn't look as if the MARKET is showing any type of dramatic worry longer- term regarding the U.S. Governments ability to pay the stated rate of interest on bonds previously issued with a 30-year maturity. Let's look at two reasons different scenarios for why this bond YIELD currently just sits here and hasn't made that much of a move

Good Scenario: As mentioned. Under current market conditions and events, I would view the 30-year action as positive. The MARKET hasn't pulled the plug on this bond (sold it) and the MARKET has scrambled to gobble it up either (buy it). In essence, there is very little taking place in the past couple of trading sessions and the market appears to be acting rational. Eventually some type of trend will become more evident and there will be other sectors we will monitor to begin building some type of analysis.

Bad Scenario: We must now monitor direction in this bond. I chose the 30-year ($TYX.X) only because it is perceived as the "riskiest" YIELD to be buying. What we will want to monitor is its direction and then other groups of stocks that are interest rate and economic sensitive like banks, retailers and some of the deep cyclicals. Once we get a directional move from the 30-year, we will immediately begin monitoring the 10-year YIELD ($TYX.X) and 5-year YIELD ($FVX.X). As we get closer to maturity we can better understand what the market is saying about the bond MARKET as it relates to RISK in the bond market.

The "Bad Scenario" could come in one of two forms. One bad scenario would be that we see a rush of buying in these bonds as investors feel "this is the only investment I'm comfortable with!" The other "Bad Scenario" is that we see a rush of selling in these bonds as market participants begin hording precious metals or simply running to cash. This will be easily identifiable should it occur as depicted by supply/demand. Should other sectors we feel need to be acting strong, not show price appreciation, then we'll know that something "bad" is happening.

Commodities:

In last Friday's sector profile, we talked about gold stocks and the commodity itself. We discussed how the "true hedge" was perhaps not found in gold stocks, but the commodity. Based on past history dating back to the Persian Gulf War, we made note of the decline in gold stocks, even though the commodity itself moved higher during that time period. Perhaps today's action in the October 2001 Gold contract and 5.37% gain gives hint that some short-term players were active here. I believe a trader/investor MUST monitor the gold commodity, and then begin weighing its action against that found in the bond market. I believe we would NOT want to see this commodity continue to make to much of a move above the $320 level. I would note too, the bullish price objective for the October Gold contract is $291. Today's close at $290.30 is very close to a level that may have originally been "foreseen" by the market. I'm not saying that the MARKET foresaw recent events here in the U.S. However, if the MARKET believes there is little further reason to "hoard" the commodity, then those that bought lower, may well be sellers based on the knee-jerk reaction higher. The Gold/Silver Index (XAU.X) of stock gained 2.5% today. This looks very similar to past history for the moment (1 day into trading) and now we begin monitoring things here as it relates to Friday's commentary on the sector.

Currencies

We've also talked about currency as it relates to the US$ versus other major currencies. This relationship should also be monitored closely from here on out. With the Fed aggressively cutting rates in the United States (to improve liquidity and stimulate the economic environment) US investors need to monitor the strength of their dollar vs. other major currencies. We've discussed how a weaker US dollar may benefit some companies based here in the US that sell their products overseas, but we also need to understand what a weaker dollar may be saying about investor's "faith" in the greenback. Will it continue to be one of the stronger currencies that investors around the world would want to hold?

Many market participants view Switzerland and its government perhaps more "neutral" than any government when it comes to certain types of politics (this point can be argued, but its a general belief). We've all heard about "Swiss Bank Accounts" that some investors hold where their assets are less likely to be seized by a government. Some traders and investors monitor the US$ vs. Swiss Franc to get a feel for market psychology toward the US greenback. As you can see from the chart that follows, last Tuesday's events had the September Swiss Franc futures contract (sf01u) jumping in strength vs. the US$. As markets in the United States were halted for trading, perhaps that "uncertainty" had the Swiss Franc contract gaining further strength.

US$ vs. Swiss Franc (Sept. 2001 contract)

Back in July, the Swiss Franc began gaining strength vs. the US$, perhaps due to the uncertainty of the US economy (break of downward red trend). Investors/trader will note the sharp increase in value of the Swiss Franc vs. the US% when it jumped to $0.625 (taking $0.625 to buy 1 Franc). At the end of that day's trading, the contract settled at $0.60, but when markets in the US remained halted, the Franc gained further (uncertainty in US markets?).

My current analysis here is much like that of the commodity in gold. I wouldn't want to see much of a move higher in this currency as it relates to world confidence in the US$. This currency relationship will be worth monitoring to help us get a grip on market psychology as it relates to confidence in the US currency.

Other currencies

We discuss the Swiss Franc above mostly because of its governmental "neutrality" over history toward asset flows in times of uncertainty. The thinking here is that any "belief" of any type of ongoing concern might be shown here. Imagine if you will that you are a billionaire, have more money/assets than you know what to do with, but think there is some type of risk and want to move some assets toward Switzerland and its historic "neutrality." To do this, you would have to convert your asset into Swiss Franc if you wanted to "benefit" from that neutrality.

Summary of today's events

Suffice it to say, that many chalkboards have been partially wiped clean as recent events here in the U.S. have many investors reviewing their game plans and previous investment strategies. No, they haven't been entirely wiped clean, but some damage control and contingency plans have most likely been put into place.

It was obvious that airline stocks were going to get hit to the downside today, but nobody knew for certain how much. The AMEX Airline Index (XAL.X) closed down 40% to 69.81 and finished at its session low. Some reality checks came when Continental Airlines (NYSE:CAL) said it would not pay current debt interest payments. Many believe that this is posturing by Continental's management as it awaits Congress' announcement regarding on any type of industry "bail out" news. We've said before that "the market hates uncertainty" and there are plenty of uncertainties in the group that will not be answered for some time.

Perhaps today's announcement from Continental is little different than some insurance companies saying that they may not pay some insurance claims immediately, as they await some type of ruling as it relates to "acts of war" regarding insurance policy clauses. The S&P Insurance Index (IUX.X) fell 4.84% to 653.

Right now, it is probably these two groups that face the most uncertainty going forward. Both could be affected by government rulings in each of their industries. This is why I feel it is important to once again take some time and get subscribers "up to speed" on what I feel are some of the basic building blocks of the Treasury bond market and currency markets. For many financial markets, these two items become the foundation for what many stock prices and markets are built upon.

Without a strong foundation, then stock markets will become vulnerable. Right now, it becomes important for subscribers to have a strong foundation of how we monitor the foundation. We need to be aware of certain "cracks" that may develop. Right now, I'd say there are a few cracks (as it relates to a weakening US$). Today was basically the first day of a relatively "wiped clean" chalk board and it will take several days, if not weeks or months to begin getting a clearer picture of where things are headed.

The investor looking to "play it safe" in stocks is trying to come up with investment ideas that are somewhat removed from things. Some ideas I had this morning in shares of Campbell Soup (NYSE:CPB) and Office Depot (NYSE:ODP) were just a couple of stocks that came to the top of my mind from past commentary.

Of course, "playing it safe" has done little to create wealth in our country. I remember excerpts from several of Bill Gates' writings regarding the formation and concept of Microsoft (NASDAQ:MSFT). There were several times of uncertainty and risks that he and his then private investors took before success was eventually found. Each decision was based on risk/reward, with a timeframe in mind. Each move/decision was strategic and not decided on a whim. Each decision was monitored closely and success or failure was measured.

Today was the first day that investors/trader were able to trade after a four session halt. There were some that needed to sell some stocks (sell risk) as it related to their strategies and account management. We knew this going into the trading session.

Hopefully we've armed traders with some knowledge on how to hedge risk going forward should things begin to unfold unfavorably. Any trader that is hedging a position would rather lose money on the hedge than lose money on the underlying investment.

We need to understand that there was undoubtedly a lot of hedging taking place today as traders got some positions squared up. For some market participants to not do so could have been damaging to their accounts longer-term. As traders and investors we can now begin to better comprehend many things that took place today.

All in all, I don't think there were many broader-market surprises. Many market analysts expected declines of 8-10% for the major indices. Many were "relieved" that the markets didn't drop more than they did. Some were "disappointed" that the markets didn't finish the later hours of trading stronger. I think both camps are willing to call today's trading a tie.

As it relates to a recent article regarding stop-market and stop- limit orders, today's session made some sense. I think there were many that lifted their stop market orders, digested things and when some of the broader markets did regain some earlier losses found at the open of trading, some hedge strategies or selling into what recovery there was then took place.

If trading and investing truly is an "endgame," then I do believe that cooler heads prevailed today and the market acted very rational given recent events.

Jeff Bailey

Inflation Remains Tame

The Labor Department reported that the Consumer Price Index rose an expected 0.1% in August. Higher food and healthcare prices were offset by declines in energy, transportation and tobacco prices. The low risk of inflation has allowed the Fed to be aggressive with short-term interest rates.

Inventory levels also appear to be coming under control. Business inventories fell 0.4% in July and sales rose 0.4%, dropping the inventory to sales ratio to 1.42. Further inventory cuts are likely in the coming months to deal with tepid demand.

Shares of Amgen (AMGN) are up 2.30% after the company received approval for its drug Aranesp. The drug is used in treating anemia associated with chronic kidney failure and chemotherapy.

Amgen might need to start working on a drug that controls fat levels. Pizza chain Papa John's (PZZA) reported a 0.5% increase in same store sales, and expects Q3 earnings to be in the middle to upper range of forecasts.

Ebay (EBAY) and Advance PCS (ADVP) also confirmed guidance for the current quarter.

Transportation company J.B. Hunt (JBHT) warned that third quarter earnings will miss Wall Street's expectations. Due to lower freight demand and higher costs, the company will now post a loss of 5 cents per share instead of a previously expected profit of 26 cents per share.

Earnings for Footwear manufacturer Stride Rite (SRR) will fall 5 cents short of forecasts due to a weak retail environment and inventory write offs.

Double Click (DCLK) and Borland Software (BORL) have both announced plans to initiate a stock buyback plan.

General Mills Daily Chart

General Mills' stock is up 36 cents after the cereal maker posted better than expected earnings. The company also expects double- digit earnings per share growth in 2002.

Yesterday the stock lost 69 cents, but was able to hold above the four-month up trend and 50-day moving average. Today the stock is back above resistance at $45.21, and slowly moving towards a new 52-week high at $46.35.

Jeffrey Canavan
Assistant Analyst
www.premierinvestor.net

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