Option Investor
Market Wrap

That Was Not Fun!

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       9-17-2001           High     Low     Volume Advance/Decline
DJIA     8920.70 -684.81  9580.32  8883.40  2.6 bln    471/2820
NASDAQ   1579.55 -115.75  1629.10  1579.28  2.3 bln    795/3174
S&P 100   529.10 - 29.48   558.58   527.83   Totals   1266/5994
S&P 500  1038.77 - 53.77  1092.54  1037.46
RUS 2000  417.67 - 23.06   440.73   417.67
DJ TRANS 2271.68 -404.81  2675.47  2267.01
VIX        44.77 + 10.17    47.70    39.76
VXN        73.26 +  9.42    99.32    70.96
TRIN        0.98 
Put/Call Ratio      1.14

The market dropped as expected but the "patriotic bounce" failed to appear. Yes, there was a rally off the early lows but as new warnings were announced the weak rebound gave way to new waves of selling. The volume on the NYSE was a record 2.5 billion shares and all but 333 million shares of that was down volume. The fact that the patched together NYSE could manage this much volume on the first day back in business was a tribute to the hard work that everyone has done over the last week.

The Federal Reserve cut the discount rate by 50 basis points before the open which was quickly followed by the ECB, Sweden and Switzerland. There are strong indications included in language from the Fed that hints they will cut again if needed by October 2nd. Today's cut was already factored into the markets and marks the 8th cut in this series. They have also been injecting liquidity into the markets on a daily basis for the entire week.

The airlines qualified as the most sold sector today and will probably qualify on Tuesday as well. With the government bail out package still unapproved the haircut on their stocks was severe. Led by Continental which lost -19.58 to $20 or half its value, all the carriers suffered heavy losses. AMR -15.78, UAL -13.32, U -6.05, SKYW -12.50. The carriers are slashing routes, planes and employees to cope with the -50% drop in passenger traffic. USAir said after the bell that they would cut up to 25% of their capacity and lay off 11,000 workers to meet the changing times. Continental said they would end service to ten cities completely and reduce service to many others. Delta is cutting capacity by 20%. Continental said it would miss $70 million in financing payments and start a ten day grace period today before going into official default. They are also laying off 12,000 workers. Boeing fell -7.68 to $35.80 on expected order cancellations and loss of future maintenance revenues. Several carriers have announced an accelerated phase out of older planes. In all, the airline sector lost -$12.5 billion in market cap on Monday alone. Based on the already announced airline layoffs if the trend continues over 100,000 workers could lose their jobs.

The number of companies announcing stock buybacks increased to over forty as the relaxed SEC rules made it attractive for companies to try and put a floor under their stocks. Companies that announced included AKAM, SANM, SEBL, SBUX, CSCO, GE, BEAS, VRTY, VIGN, PEP, PFE. How much it helped them today may never be known but a few of those companies held their losses to under one dollar.

The -684 point Dow drop was the biggest point loss ever but at only -7% it was not even close to the -22.6% drop in October 1987. The next largest point drop was -617 on April 14th 2000. The Nasdaq drop pushed the index to the lowest close since October 1998. The S&P-500 also posted the lowest close since October 1998. The Nasdaq and the S&P closed right at the lows of the day indicating that the selling may not be over.

After the bell American Express warned that they would miss earnings and take a charge for moving 5,000 workers to new locations due to the damaged buildings. Oracle also warned that revenue would miss estimates. United Technology warned during the day that they would miss estimates due to the attack. This is just the tip of the iceberg and we can expect a flood of these warnings in the coming weeks. Auto sales reportedly dropped almost -40% in the last week and this could be repeated in all retail sectors. When things change and war begins people tend to hoard cash. At this period in the economy any hoarding of cash is exactly the worst thing that could happen.

These warnings will not be cured by another rate cut. Hitting key levels on the Dow, Nasdaq, S&P may provide temporary rebound rallies but the only stocks trying to shake off the illness are drugs, defense and stocks with high yields like Phillip Morris. Lower interest rates make money market funds less desirable and stocks with high dividends and even minor gains can beat those rates substantially.

The good news? Historically, after major crisis events, the markets tend to rebound strongly and display the strong V chart that investors love. The bad news? It may not happen anytime soon. The problem is the success of the currently unknown military response. If the "war" is seen as dragging out for years and involve troops on the ground and more strikes by the terrorists, then consumers will run for cover. Investors will move to cash and wait. Both of these options will not provide a quick rally.

The economy was under attack well before the WTC event and that event has likely pushed us not just into a recession but deep into a recession. Entire sectors have been eliminated from the GDP, the unemployment rolls are soaring and consumer confidence is diving. For those who don't play puts you should seriously reconsider this option. We dropped many "politically incorrect" put plays on Sunday which were already highly profitable before the attack. Several of the ones we kept are also highly profitable like GMST and QCOM. Call players should reconsider this strategy until the markets find a bottom. Expect an oversold bounce as early as Tuesday but be very skeptical of its staying power.

Definitely, enter passively, exit aggressively!

Jim Brown

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