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Market Wrap

Clinton impeachment, Brazil votes, Asian earnings warnings, Deja Vu ??

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        12-08-98         High     Low     Volume   Advances Decline
DOW     9027.98 - 42.49 9088.75  8946.63  727,630k  1,253   1,780
Nasdaq  2034.75 -  5.89 2060.98  2018.15  920,606k  1,734   2,404
S&P-100  584.11 -  2.05  590.21   579.46   Totals   2,987   4,184
S&P-500 1181.38 -  6.32 1193.53  1172.78            41.7%   58.3%
$RUT     401.48 +   .31  404.05   400.28
$TRAN   3105.45 - 10.38 3166.17  3084.69 
VIX       24.82 +   .99   26.02    22.93 
Put/Call Ratio      .51

Clinton impeachment, Brazil votes, Asian earnings warnings, Deja Vu ??

What does this headline remind you of? I will give you a hint, October.

The week that started out as a slow news week with nothing to move the market is shaping up as a disaster about to happen.

Out of left field the ho-hum impeachment proceedings have suddenly accelerated into almost a sure vote to call for impeachment for Clinton. Instead of dropping the case for lack of interest or moving for censure and fine, all of a sudden there is a building of strong support for passing the resolution. If you blinked you missed it. From the back pages of the newspaper to the lead story on all the news stations overnight. Now investors are starting to worry that it might actually come true. Some analysts say a vote for impeachment will cause a serious sell off in the market. -1000 points or more has been mentioned on CNBC several times. Just when we thought it was almost over. We now get to suffer through the definition of "is" and whether "alone" means "in the same room alone" or in the "same geographic area alone." I am serious! This is a real point of contention. Clinton swore he was not alone with Monica because there was probably other people in the white house somewhere when he was hiding with Monica in the study. The hostility and evasiveness of his answers to the committee have angered them and created a united front that is intent on persecuting him publicly. They claim his nonrepentence, disdain for the process and failure to take them and his plight serious is evidence of his continued abuse of power and attempt to obstruct justice. Whether you agree with the committee, the process or not, the fact remains that we are now starting to see the impact of the process in the market.

Secondly, Brazil votes again tomorrow on new reforms to conform to the terms of the IMF loan agreement. The vote is not expected to pass! The Brazil stock market was down over 4% in late afternoon trading. Failure of the vote will result in the reforms being put off until January and the Brazil economy put on hold along with hopes for an end to the Latin American economic blight that is dragging on our economy and market. Without an end to this process we are doomed to more volatility as investors move out of stocks with heavy exposure. JPM, MER, AXP, TBH were all punished today as the leading edge of the Latin American flu.

Thirdly, Union Carbide prewarned that earnings would be lower due to the continuing Asian problem. Proctor & Gamble suffered today as well when analysts warned clients that earnings for PG would suffer due to drops in commodity prices such as paper towels and slow sales in Asia. We are not out of the Asian woods yet!

Fourth, the "D" word is starting to pop up again. Deflation as a fact of life appears to be with us and growing. $.69 per gallon gas is now available in many cities. The price of oil is down -40% for the year and still dropping. Analysts expect single digit per barrel prices soon. Faced with shrinking oil prices and continuing income requirements the world oil producing countries will have to pump more oil to cover their expenses. More oil = cheaper prices = more oil. A never ending circle. Cheaper prices mean less spendable income for many countries and the trickle down impacts the base consumer, the citizens of the global economy.

The only bright side to this picture is new hope that the Fed will again cut rates on Dec 21st. While this had almost been completely written off as impossible there is now a glimmer of new hope. If the Fed does act again the end of year and new year buying spree would be incredible.

Enough gloom and doom. The semiconductor group received another upgrade today by Morgan Stanley. They claim the chip makers are on the leading edge of another boom cycle cause by the global demand for PC equipment. This new growth cycle could run another 6-12 months. The raised earnings estimates on almost every chip maker.

IBM and AT&T struck a deal made in heaven today. IBM sold for $5 billion in cash their communication network to AT&T. Both got the best end of the deal. AT&T got a huge boost in revenue, $2.5 bil per year, and over 2000 new points of presence around the world. IBM got cash for which it "has no current plans on use." Give me a break! If you knew for sometime you were going to have $5 bil in new money, would you not have plans for it the second it hit your bank account? My wife would! You can bet IBM will apply some of the new cash to yet another stock buyback. Can you say IBM $180 soon? This should also bring closer that next split!

Ralph Acomporaspan was on CNBC again today with yet another range of predictions. The high side for 1999 was 11,500 !! The low side was 7800. A 3700 point range !! It will be hard to miss this one! His forecast was "stuck in a trading range." A 35% trading range is a little vague Ralph, can you be more specific? He did express concern about the Y2K impact next year but the closing comment was "stocks are very attractive right now." I salute Mark Haines on CNBC for nailing him on the flip flop in August. He pressed him hard on how he could be on national TV on August 3rd forecasting Dow 10,000 and on August 4th be on TV again forecasting 7,400. Ralph's answer, the Dow dropped -90 points the afternoon of the 3rd and made him rethink his target. If 90 points was traumatic for Ralph then, I am surprised he has any hair left after the following quarter of +/- 100-200 point days.

There are some analysts calling for a tech sell off any day. They point to the +45% gains the Nasdaq has made since the low on Oct 8th as too far too fast. Come on guys, the Nasdaq was down -5.86 today. Wasn't that enough profit taking for you? Seriously we do have some incredible gains. MSFT +47%, INTC +57%, CSCO +75%, YHOO +86%, AMZN +130%, EBAY +523%. As long as the Internet adds 60,000 users per day then tech stocks will continue to soar.

If you tried to trade MSFT or CPQ options today you were probably frustrated about the slow on non-existent executions. The Pacific Exchange in San Francisco suffered a major power outage today. Traders were trading by cell phone in trading areas lit only by the glow of monitors powered by generators. The exchange finally closed for trading and transferred some operations to their LA operations center. I tried to buy MSFT DEC-130 options at 3:20PM at market and the buy expired unfilled. MSFT did trade up over $132 in after hours trading. (yes I am in the market again)

I am organizing a birthday party tomorrow. At noon wherever you are quit work and go to lunch to celebrate the birthday of the computer mouse. 30 years ago Wednesday the mouse was born. Nobody paid any attention until 1984 when it went public on the Apple computer 16 years later. Where would we be today without the mouse?

The January effect may be moving into December as stocks are showing signs of year end tax selling to make room for the new picks and the influx of IRA and 401k money in January. By dumping losers now they raise cash and give you tax benefits to offset the winners. Flush with cash January becomes a shopping spree from which we all profit.

FYI - 46% of the NYSE stocks are still over 20% below their recent highs. We are still in a blue chip only rally and may stay there until January.

The S&P Futures are down -3.00 at 7:30. Japan opened down and the comeback rally for the Dow at the end of the day today may be short lived. We did bounce from a -120 back to only -45 at the close but there was no conviction. Volume was good but the advance/decline ratios were still not good.

I continue to urge caution about starting new plays until we see what happens in Brazil on Wednesday. We are still listing new call plays but assume you understand the risk of being long in a news driven market.

Good Luck

Jim Brown

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