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Market Wrap

Consumers Moving to Sidelines?

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       8-28-2001          High      Low     Volume Advance/Decline
DJIA    10222.03 -160.32 10382.83 10214.34  .98 bln   1232/1868	
NASDAQ   1864.96 - 47.43  1916.28  1864.72 1.41 bln   1337/2303
S&P 100   594.13 - 10.09   604.59   593.95   Totals   2569/4171
S&P 500  1161.51 - 17.70  1179.68  1161.17             
RUS 2000  474.20 -  4.73   479.27   473.99
DJ TRANS 2831.13 -  0.78  2838.52  2807.81 
VIX        24.02 +  1.58    24.23    22.51 
VXN        48.74 +  1.52    49.46    47.79
Put/Call Ratio      0.88

While it is still too soon to draw any conclusions the Consumer Confidence numbers on Tuesday sent a chill through the markets and raised questions about the future of the economy. Depending on who you questioned the analysts expected a slight rise in the confidence numbers to between 116 and 118. Nobody really expected a drop for the second month in a row to a four month low. Surprise, Halloween came early. The drop was not dramatic but the tone of the release slammed the markets with a dose of reality. Could the GDP, which will be announced on Wednesday, also drop and possibly go negative? That was the real fear expressed by traders.

The drop in the consumer confidence was entirely in the current conditions index. The expectations for the future actually improved slightly showing that consumers are like investors, they always expect the best even when the worst is right in front of them. Plans for future purchases of appliances were flat but plans to buy automobiles dropped substantially. If auto sales really fall substantially then the GDP has no chance of remaining positive. Some analysts already expect the revised numbers on Wednesday to fall into negative territory for the first time since 1993. The challenge is still the consumer. Once the "official" recession gauge (GDP) goes negative and the hometown newspapers start hyping the "economy officially in recession" mantra then consumers will close those wallets and hunker down to weather the coming storm. This would be the kiss of death for the economy and more anemic rate cuts will not be able to jump start the economy or the markets. We would be faced with simply waiting for the recession flu to run its course. The U.S. economy is already being held hostage by the worsening global picture. The news from Japan just makes official what analysts have been saying for some time and other Asian/European economies are not far behind.

Stocks in the news included SunMicro which was cut by Goldman Sachs on views that their server oriented product mix would not be helped by any seasonal consumer PC buying. They cut estimates for 2002 to $.28 from $.37 cents. SUNW fell to a four month low at $13.56 and was a big factor in the Nasdaq drop. SUNW will make its fourth quarter update call on Wednesday. It will give a "state of the union" like market call and it is not expected to be positive. Being squeezed between 1.4 GHZ Intel desktops on the low end and giant IBM processors on the high end, SUNW may be forced to warn on Wednesday.

Gateway announced that they were going to implement a massive restructuring, take almost a $500 million charge and layoff 25% of their workforce. They also said they would close operations around the Pacific Rim and possibly Europe. They are getting killed in their global price war with Dell and by closing the Japan, Australia, Malaysia, New Zealand and Singapore operations they can reduce expenses and stay in the fight. The positive news was a forecast that unit sales would be up slightly in the 3Q and 4Q and the stock traded up slightly after the announcement. Computer sales fell in the second quarter for the first time since 1987. Prudential said prices for desktops fell by -3% last month and notebooks -5%. From all accounts it looks like the back to school bounce did not happen and PC makers may be pressured to warn again in September.

The Dell/Gateway price war is not the only nuclear exchange currently underway. Intel announced the first 2 GHZ processor and vowed to keep increasing the pace of improvements. AMD quickly fired back with a price cut of as much as 49% on their high end Athlon line. This follows a price cut last week of the older models in the Athlon line and the Duron line of chips by as much as 49%. The Intel news was good for Rambus as the new chips use Rambus technology. That news was short lived since Intel then announced that they would produce the 845 chip set in mid-September that would compete with Rambus. That new chip set will cut the price of the high end processors from $1500 to around $800. Did anybody think that Intel would never produce a compatible product eventually? I doubt any chip analyst ever thought Intel would stand on the sidelines and watch those dollars go into a different corporate pocket. Rambus better hurry and come up with a new product soon or get really accustomed to penny stock status.

Oracle fell to $14 after they announced that one of their three executive vice presidents, Edward Sanderson, was going to take a leave of absence for personal reasons. Rumors had driven the stock down on worries of a top level defection and the announcement failed to stop the drop. Oracle spokeswoman Jennifer Glass said, "nobody's resigned, nobody is planning to resign!" when pressured about the news.

There were no pockets of safety on Tuesday. Biotech, chips, drugs, chemicals, airlines, etc, all down. The advance decline line was negative by almost 2:1 most of the day and the VIX and put/call ratios rose. A little fear coming into the market? Could be or simply traders moving to the sidelines in advance of September. I would vote for simply fear and lack of interest. The volume was not bad but by all accounts it was simply a lazy day. Traders were not rushing to get out of positions. It was simply a lack of buyers that drove prices down. I hate it when TV analysts use those terms. "Just a lack of buyers" So, does that mean I did not lose money and the numbers are imaginary? Sorry, whatever the reason the money is still gone! That is why this is a good week to sit on the sidelines. The SUNW conference call at 4:30 Wednesday afternoon is sure to weigh on the markets and the GDP in the morning could be disastrous if is goes negative. However, we are going to recommend calls on Thursday to hopefully capture any post Labor day rally. Typically the first week in September is positive and then everything self destructs when the earnings warnings hit the fan. As investors we cannot predict market bottoms but we can prepare for the rebound rally. We should be preparing for a trading rally only as a way to keep sharp and stay tuned up. Better times are ahead but they may be farther ahead than we care to speculate.

The Nasdaq appears headed for a retest of last Wednesday's low of 1817. The Dow hit 10134 last Wednesday and could easily hit that number again this week. 28 of the 30 Dow stocks were negative on Tuesday. 10120 is the very low end of the recent trading range and any break under that would cause trading programs to be triggered both on the sell side and the buy side. The bears betting on a retest of the 9106 spring lows and the bulls betting that a Labor Day rebound would push the Dow back to the upper end of the range at 10500. The severity of the sell off on Tuesday would indicate no faith by the bulls and it will take some seriously positive news to power the markets forward. Should the GDP be higher than expected or SUNW brag about increasing orders then a Labor Day relief rally could start sooner. In my opinion it would only be a relief rally and would not last. In short, prepare to trade but not to invest unless your time horizon is measured in months instead of weeks.

Enter passively, exit aggressively!

Jim Brown

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