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Market Wrap

Japan, Asia, Russia, Brazil. Who is next??

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        1-14-98         High     Low     Volume   Advances Decline
DOW     9120.93 -228.63 9359.08  9087.72  797,953k    880   2,145
Nasdaq  2276.82 - 39.99 2338.29  2276.36 1015,400k  1,898   2,175 
S&P-100  600.85 - 11.98  614.39   599.06   Totals   2,778   4,320
S&P-500 1212.19 - 22.21 1236.81  1209.48            39.1%   60.9%
$RUT     420.10 -  4.76  426.99   420.10
$TRAN   3080.28 - 89.14 3180.96  3077.42
VIX       34.74 +  3.48   36.79    31.33
Put/Call Ratio      .70

Japan, Asia, Russia, Brazil. Who is next??

Another day, another excuse for profit taking. The market sold off again with the Brazilian flu along with a dose of impeachment blues.

The market started down early and showed little interest in turning around. The rumors from Brazil were all negative. Coupled with the resignation of yet another government official the rumor that the Central Bank was set to let the Real float knocked the Brazil market for another -10% loss. Floating the Real, the Brazilian currency, would be a drastic devaluation since the currency would then be free to find its own level.

Floating could start the domino theory fall of all the surrounding Latin American countries that depend on Brazil for trade. Chile and Argentina would be the first to go. If South America were to devalue as a group then the countries who export to South America would be put on a diet. The U.S., depending on who you talk to and what area they reference, exports to South America account for between 17-25% of our total. Companies like Colgate derive 40% of their revenue from Latin countries.

If the feared event happened then the results would be drastic. The companies who derive a large percentage of their business from there would suffer huge earnings shortfalls. Layoffs could occur, plant closings, etc. That would be the extreme but it is possible. Possible but not probable. There are many things that can and will happen before we get to that point. Rest assured that every Fed head in the world is concerned about the Brazil problem. The IMF will be very interested in preventing this scenario. Cardosa is very interested. Power and pressure are being brought to bear. The Brazil Central Bank issued a strongly worded press release stating they would use every means at their disposal to prevent floating the Real. They said they would use their $50 bln in reserves to protect the Real. This was only minimally comforting to the market this afternoon. Memories of many other countries last minute claims to the same intent, and then immediate devaluation, are fresh. Russia was the latest. While analysts feel there could be serious impacts from a possible worst case, they also feel that the market has now discounted the most likely scenario which is months of protracted, painful, negotiations ending in an agreement of some sort to yet another bail out. No harm, no foul. Just uncertainty.

Meanwhile the market has now "corrected" five percent off its record high of just last week. My how short our memory can be. 9643, only five trading days ago. Champagne was already being ordered for the Dow 10,000 celebration. Should we cancel the order? Not hardly.

As I have said many times the market cycles. Remember last week when I kept warning you about an impending bout of profit taking. Its' here and I don't think it is over. Fear of darkness is only beaten out by one other thing. Fear of a long holiday weekend. Yep, closed Monday for MLK day. I have already had one of my brokers call me to ask if I want some currency positions left open over the long weekend. Seems the currency market closes at 1:PM on Friday. Now if you were a country that needed to manipulate some currency to benefit your country, a U.S. holiday would be the perfect time. Don't laugh. Japan does it all the time. The same thing on a smaller scale can happen to stock profits held over a holiday. Events happen, mass exodus at Tuesday's open. Remember Wednesday morning?

You may think I have put on a fur coat. Far be it from the truth. I am long several hundred contracts of tech stocks and I am looking for a recovery soon. Again, being long does not make me right, just very interested in the outcome.

I have not elaborated on the market impact from the impeachment trial and won't because I don't think there is any impact. As I have said before, the chances of a guilty vote are about zero and the market knows this.

If you watched any market TV today then you know the Internet stocks are finally starting to weave. They are getting beat from all sides. Brokers are cutting the ratings on the high flyers left and right. Funny how the smell of blood brings out the crowd. Nobody would cut them last week when they were adding $20 a day. It is dogpile time now. To add insult to injury the online brokers are now starting to prevent customers from actually buying the stocks. I am not kidding. Some have taken them off the margin list. If you want to buy you have to pay cash, 100%. Others will not let you buy them online. You have to call a broker and wait on the line while they verify your eligibility to purchase high risk investments! Others refuse to execute the trades at all. You might hurt yourself. Does it strike you strange that Internet brokers will not let you buy Internet stocks??? What ever happened to the concept of "it is your money not theirs." In the face of this conspiracy to protect you from yourself the Internets are losing ground quickly. Except AOL. AOL has somehow avoided the label of "overpriced" and actually garnered several honorable mentions from analysts downgrading other Internet stocks. Guess where Internet money will go now?

For you technicians out there the pendulum has swung from overbought to oversold in a very short period of time. The Dow is now down -522 points in the last five days. Both the Dow and the Nasdaq have corrected about 5%. Just as the sharp run up last week was begging for a dip, this sharp dip is now begging for a rally. The big drop today was on the lightest Dow volume in over a week. Not as much conviction today just a lack of buyers. This was also the third triple digit loss in a row. As I mentioned earlier I think the odds for a down day Friday are still pretty good. The wild card again is the options expiration which normally provides an upward bias. I can't build a case for a strong move upward because of Brazil and the holiday but I can see a strong Tuesday coming as long as Brazil does not meltdown over the weekend. Earnings will be on us in earnest next week with MSFT, LU, SUNW announcing along with dozens of others. I think the focus on Brazil will have dimmed and the anticipation of upside surprises will take center stage.

At 8:30 ET S&P futures are flat but trending down.

Good Luck

Jim Brown

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