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Market Wrap

Chalk Up Another For The Bears!

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       7-10-2001          High      Low     Volume Advance/Decline
DJIA    10173.08 -123.76 10335.63 10162.71 1.24 bln   1223/1861	
NASDAQ   1963.00 - 63.92  2045.12  1960.15 1.62 bln   1370/2364
S&P 100   608.43 -  9.50   620.96   607.59   Totals   2593/4225
S&P 500  1180.93 - 12.26  1203.43  1179.93             
RUS 2000  478.12 -  7.84   487.38   477.50 
DJ TRANS 2775.98 +   .98  2789.17  2764.15 
VIX        26.53 +  1.98    26.70    24.31 
Put/Call Ratio      0.94

This was not a day we wanted to ponder. The continued flurry of warnings from giants like Corning and Compaq as well as worry over south of the border currency problems pushed the major averages below recent support levels. Not just "support" levels but significant "psychological support levels" as in Nasdaq-2000. The S&P-500 finally also gave up in its battle to hang on to the 1200 level and started another drop.

Corning turned up the heat on the networking and telecom sectors again with another warning including layoffs and a $5.1 billion charge. The optical company said that without the $5 billion charge it would have been slightly ahead of analyst estimates. Since 2000 sales (not profits) were only $7 billion, I would hope it was at least close. Corning has refused to release further guidance due to the "abrupt" slowdown in their business. Currently analysts estimate that the backbone build out has been so over done that it is operating at only 2-3% of capacity. The problem appears to be what is called the "last mile" in Internet delivery. Until broadband providers are able to provide connectivity to the retail consumer in volume any further growth in backbone infrastructure is doubtful at best. This of course hit all the gang led by drops in JNPR -2.88 and CSCO -1.05 to $16.20.

After the bell Compaq warned that revenue would slide to $8.4 billion but earnings would hit estimates at four cents due to aggressive cost cutting and further layoffs. They said business was worsening in Europe and further aggressive cuts would be necessary to maintain profitability. They have already cut 3500 jobs and now say the total could reach 8500. They said they were suffering from an industry wide slowdown and "fierce" price competition. The current four cent estimate is down from their five cent estimate in April and far less than the seventeen cents analysts had previously estimated.

Even the biotech sector lived up to the "tech" portion of their name with multiple news challenges. Guidant (Nyse:GDT) had a device for treating congestive heart failure denied by the FDA and it fell over $5 on the news. Medtronic (Nyse:MDT) which also has a like device in for approval, gained +1.45. Genentech, Xolair and Novartis hit a wall when the FDA requested more information on the asthma drug they are developing. The group said they were considering different scenarios for resubmitting Xolair data to the FDA with "conservative" estimates for resubmissions in 2002 to 2003. That is an eternity in investor terms and Nyse:NVS lost -1.27 but that was tame compared to the -11.16 for Nasdaq:TNOX and -8.29 for Nyse:DNA.

DoubleClick announced earnings after the bell that were disappointing but inline with analyst estimates. They said they would continue "manage" costs and would not rule out further job cuts. The kiss of death were comments that they saw no catalyst for growth until mid-2002 or later. YHOO which announces this week also fell in after hours as investors feared the worst from their advertising business.

IBM continued to fall as analysts argue about whether they will miss estimates. This helped put pressure on the Dow along with MMM which lost -3.29. The Compaq warning and emphasis on the worsening European economy could put more pressure on IBM which does substantial business in Europe and will be faced with currency challenges as well. Offsetting some of the IBM weakness was AT&T which gained +1.94 on the Comcast offer for its cable unit. AT&T said it was unlikely to accept the current offer which led to a round of guesses about who may step up to the table to start a bidding war.

Retailers continued to warn with FTUS, LIN and GADZ adding to the Federated warning from last week. This is particularly disturbing to investors since it shows that the consumer is slowing their spending. The weak economy is finally filtering down to the real spenders and something the Fed is very concerned about.

Merrill Lynch went on record today saying their analysts could not own the same stocks they were recommending. What is this? Morals? You mean they can't buy just before they recommend it or short it just before they cut estimates? While it is encouraging I think it would be better if they made them buy 10,000 shares of every stock they recommend but just make them wait five days after the recommendation to buy. Then prevent them from selling until five days after they drop the stock. If analysts HAD to own the stock under these guidelines they might think twice before riding a stock down from $250 to $2.50 before dropping coverage. They would probably reconsider before "risking" their own money.

Remember Brazil in 1999? Russia's 1998 default on its debt? The fall of Thailand's currency? Professional traders do! I had a small fortune in Telebras call options when the last Brazilian currency crisis knocked our markets for a loss. History lessons last a long time when they involve large real losses. Argentina is poised to repeat the problems of several years ago and investors want nothing to do with it. Greenspan and company took the role of the world bank when those prior problems arose. Should Argentina collapse now the Fed does not have much room to move. The problem is Argentina's massive dollar denominated debt and their refusal to implement reforms. They continue to borrow to maintain the current standard of living. They had to borrow $1.1 billion at 14% this week to avoid defaulting on some older debt. Their cash flow is not sufficient to maintain their debt load and a crash is almost a certainty. Traders do not want to be caught holding when the balloon bursts. This takes money out of the stock market in uncertain times and puts it into the bond market. This outflow of cash, when stocks need every penny just to stay even, is a continuing problem. With Argentina carrying over $140 billion in dollar denominated debt the stronger the dollar becomes the harder it is to make ends meet. Who cares about foreign debt? Remember the hedge fund run by Nobel Prize recipients? Foreign bonds took them out and the Fed had to step in and rescue not only them but many say the world economy because of their highly leveraged positions. Grossly over leveraged hedge funds should be a thing of the past but professional investors with long historical memories want to be safe not sorry. There is considerable worry that the Argentine government could devalue its currency as soon as this coming weekend. They have less cash than they need to survive for another month and without a currency event or a new loan guarantee they will self destruct.

Japan is set to release their current account status on Wednesday and this report could show the severity of the slowdown in the Asian markets. Should this report be much weaker than expected the Asian markets could sell off and dictate our open as well.

The oversold relief rally came right on cue yesterday and the markets initially ignored the Corning warning at the open on Tuesday. Reality raised its ugly head in late morning and one by one the leaders were beaten into negative territory on fears of the global slowdown. Earnings have not taken center stage yet and without positive results there was nothing to encourage investors to come back from vacation. The volume was building all day and the NYSE managed a healthy 1.2 billion shares, not heavy but healthy. The Nasdaq still lacked confirmation with only 1.6 billion shares but the down volume accelerated once the 2000 level was broken. The Dow posted the lowest close since April 15th and the 27th triple digit loss for the year. The Russell-2000 got slammed with almost an -8 point loss to 478. The VIX soared to 26.50 and the put/call ratio jumped to .94 which would normally be seen as nearing a strong buy signal at 1.0.

Because the wildcard here is the Argentine currency problem the normal market indicators are less reliable. Normal trigger points will be ignored as long as there is a time bomb ticking in South America. Based on this worry it is not likely that a major rally will begin anytime soon.

The futures are actually up on the Compaq news and probably a little short covering. Earnings announcements will begin in earnest on Wednesday and traders will be praying for some daylight to appear. With the Nasdaq below 2000, S&P below 1200 and the Dow nearing 10000, there is a desire to buy but not a conviction. Investors for decades have followed the Fed to higher profits after a series of rate cuts. This creates the desire to buy but with no hint of recovery yet, the fears of recession and devaluation are overriding that desire. The Nasdaq is still oversold and traders in denial of the break under 2000 could provide a sentiment bounce. Wait for confirmation with volume before joining the party.

Enter passively, exit aggressively!

Jim Brown
Editor

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