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Market Wrap

Fed Surprised by Weakness!

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       8-23-2001          High      Low     Volume Advance/Decline
DJIA    10229.15 - 47.75 10286.79 10213.52 1.03 bln   1345/1744	
NASDAQ   1842.97 - 17.84  1883.48  1842.51 1.30 bln   1303/2348
S&P 100   592.93 -  1.75   596.81   592.67   Totals   2648/4090
S&P 500  1162.09 -  3.22  1169.86  1160.96             
RUS 2000  473.42 -  3.76   479.82   473.39 
DJ TRANS 2797.01 -  4.91  2806.30  2794.09 
VIX        24.92 -   .17    25.91    24.64 
VXN        49.26 -  1.83    54.16    48.40
Put/Call Ratio      0.64

The FOMC minutes for the June meeting were released today and it showed that the Fed committee was still optimistic about a recovery and surprised by the continued drop in corporate profits and spending. Obviously behind the curve again! Despite the surprise it was a 9-1 vote to cut 25 points. Despite the increasing weakness in the economy they were struggling with possibly ending the rate cuts. While everyone thought a "no cut" stance at this weeks meeting could have sent a positive message to the stock market, the fact that the economy was continuing to fall long after the Fed expected it to recover, changed that feeling to worry that they may stop too soon. The markets took the minutes badly among with comments from the Dallas Fed president and sold off after the 2:PM release.

To go along with the negative minutes the Dallas Fed president said he expected unemployment to rise over 4.5% soon. The Philadelphia Fed survey today predicted a 4.9% jobless rate for all of 2002. Sound like a recovery to you? The jobless claims this morning rose by 8000 to 393,000 and while well below the 449,000 high in July they are still trending up. This would support the forecast of rising unemployment for the rest of the year.

Basically, trading followed the same pattern we have seen for the last two weeks. Light volume and selling into the close on lack of interest and random earnings warnings. The biggest news item to impact the Dow was a -$2.71 drop in MRK after reports said their Vioxx drug could cause heart complications. Merck issued a press release standing behind their product. Over 40 million prescriptions have been written for this product.

Japan continued to be a dark cloud on the horizon with analysts fearing the fourth recession in the last ten years. The Nikkei closed at a low not seen since 1984. Numbers leaked from a key economic report showed a -1.9% drop in exports in the 2nd quarter due to slowing demand for Japanese products. Japan, Brazil, Argentina, who is next in the global hit parade? So far no country has gone off the deep end and another $8 billion for Argentina may keep them floating for another week or two. Now they are just storm clouds on the horizon but distant storms have a habit of arriving unexpectedly in the middle of the night with disastrous results.

Unexpected results were what we got from Lucent today. Holding their first real analyst meeting in two years they laid out their plans to bring them back to profitability by 2003 with 35% margins. Analysts were impressed and Lucent rallied to a slight gain before the end of day market sell off. Several analysts raised their ratings on Lucent and started calling it the best bargain in the market. Strong words for a stock that was bleeding money and market share. I am an optimist and I believe them. I have paid a lot more for options with close expirations than the $6.65 for a share of Lucent stock today with no expiration. Sounds like a deal if they can pull it off.

Sometimes good things come in twos and it appears CSCO jumped into the Lucent limelight after the close. They announced a restructuring from three divisions, ISP, enterprise and commercial, into eleven groups to more specifically address the concerns of each subgroup. Management was shuffled and all the obligatory forward looking statements were uttered. The good news, spoken by John Chambers, was that sales for the 3Q were inline with previous estimates and it appeared that business was stabilizing. This was the key sentence. The restructuring was immediately ignored with everyone focusing on the "stabilizing" comment. After hours trading was brisk in not only CSCO which gained over $1.00 but in the entire sector as well as suppliers to the sector. JNPR, CIEN, AMCC, PMCS even NT were gaining ground.

Microsoft gained ground after the close as well after Nintendo said they were delaying the release of their GameCube console for two weeks. They claimed the delay would increase the number of available units to 700,000 on the Nov-18th launch. This means the Microsoft Xbox will beat Nintendo to retailers shelves and give customers the first look at their higher priced product. Microsoft also invited reporters to a Windows XP event on Friday morning and it is expected to deliver the final version of XP to computer makers on Friday. This is an important milestone for Microsoft in trying to beat the Justice Dept and the courts with an already released product. Kodak has already complained that XP sends users to Microsoft's digital photo service and is anti-competitive. The race is on!

The only economic reports on tap for Friday are the Durable Goods Orders and New Home Sales. Neither are likely to be market movers. What may move the market will be the Microsoft and Cisco news. Both are up significantly in after hours and in the case of CSCO the sector and supplying sectors are also gaining. Friday has been short covering day as traders are not eager to carry profits over the weekend. I would look for a pop at the open but it will be very interesting to see if it will hold. Traders have been selling every bounce with one week to go in August and the lightest trading week of all. Resistance on the Nasdaq should be in the 1900 range and around 10300 on the Dow. The markets are still very oversold and any serious short covering could drive prices up quickly on low volume. We got the trading rally on Wednesday as expected and the sell off again on Thursday as expected. I would like to call a bottom here but I can't yet. There is a lot more hope now than earlier in the week but we need to see if that hope translates into buyers. Institutional buyers are likely to want to wait until after Labor Day in hopes of getting a better price or seeing if the bullish sentiment will hold. They also will not want to be holding over the holiday weekend if they can help it. Be patient, our time will come.

Enter passively, exit aggressively!

Jim Brown

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