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Market Wrap

One Million Layoffs?

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       9-20-2001           High     Low     Volume Advance/Decline
DJIA     8376.21 -382.92  8748.82  8375.72  1.9 bln    548/2637
NASDAQ   1470.93 - 56.87  1513.24  1467.10  2.0 bln    938/2906
S&P 100   501.02 - 17.83   518.85   500.95   Totals   1486/5543
S&P 500   984.54 - 31.56  1016.10   984.49
RUS 2000  387.65 - 15.55   403.20   386.68
DJ TRANS 2033.86 -132.00  2165.62  2026.95
VIX        49.04 +  5.80    49.04    45.76
VXN        82.49 +  5.56    82.49    76.73
TRIN        1.17 
Put/Call Ratio       .97

One Million Layoffs?

Grab the Maalox, it is not over yet. The flood of bad news that we were expecting is starting to accelerate. Job losses are mounting with huge numbers from airlines, 20K each from AMR and UAL and 30,000 from Boeing. Hotels, autos, retail, home builders, banks, it appears there is no safe haven. Economic analysts on Wednesday night estimated the over one million workers would lose their jobs as a direct result of the attack. Ordinarily this would not have been as critical but many sectors were only hanging on by a thread due to the economy and that was before the WTC.

There was a flurry of bad news on almost every front on Thursday. The news that 135 million shares in Disney had to be sold to cover a $2 billion margin call by the Sid Bass family rocked the markets. If billionaires were liquidating to cover margin calls then how were the average retail investors covering their bets? Tracking margin calls is spotty at best but several brokers did admit that they were considerably higher than usual. With each leg down the average retail investor averages down by buying more stock at the lower prices. If done on Margin the trap is severe. Each share increment becomes its own margin drain and the investor finds himself locked into the trade because of a lack of cash to bail out. Eventually he loses the majority of his investment. This eventual flushing of margin investors typically signals a bottom in the market once all the stock ends up back in institutional hands. Over $1 trillion in investor wealth has evaporated from the markets in the last four days and with the accelerated drop on Thursday it could have serious margin call implications for Friday's trading.

The Disney sale emphasizes that big money is not always right and when they make the same mistakes it is just more expensive. Actually the news from TrimTabs.com regarding fund flows for this week was not as bearish as I expected. For the three days ending Wednesday there was a $9 billion outflow from stock funds. Despite what the talking heads on stock TV have been saying about no real redemptions it appears the opposite is true. That number was for only three days and represents $3 billion per day. That is not as big as some expected but still huge. Funds were also selling for their own accounts. There was seven times the normal volume of asset rotation from stocks to bonds on Monday than normal. Tuesday was flat but Wednesday saw double the normal volume. The flight to safety has begun in earnest. The shorter end of the spectrum, two years, appears to be the preferred bet. Just get them out of harms way until the global events are more clear and any 2002 recovery is underway.

The signs of falling consumer confidence were obvious. New mortgages fell -11% and refinancings fell -13% in the last week. This in spite of the continued drop in the interest rates. Analysts were downgrading hotels, entertainment companies, casinos and consumer products companies almost hourly. Eastman Kodak warned that film sales had already fallen. Boeing said it would probably make -20% fewer planes for at least the next three years. United Technology said their exposure to the airlines would substantially impact earnings. They lost almost -$7 on the news. They said they had been notified by their insurers for the airplanes they lease to domestic carriers that they were going to cancel the coverage. UTX said that if the insurance was cancelled they would tell the airlines not to fly the planes. The tip of the iceberg is growing as the ramifications of the attack are felt through the supporting economy. Insurers are afraid that they will be at risk for catastrophe claims now that the world has changed as we know it. Does insurance for skyscrapers now go up? Can they even get insurance? Nobody knows.

The airlines appear to be ground zero for the economic impact and the $20-$30 billion they asked for is not likely to occur. The government offered $5 billion. The government realizes that the sector was under pressure from unrestrained growth and was very saturated before the attack. They do not want to go on the hook for bad business decisions over the last ten years. Paul O'Neil said in testimony today that once the security problems had been cured and travel recovered over the next year or two that "truly viable carriers would have no trouble raising capital in the normal equity markets." What this means is they fully expect a number of carriers to go out of business, soon, and they are going to let it happen.

In the same testimony Greenspan stunned the markets with negative comments. He urged the government to think twice before suggesting economic initiatives including tax incentives. He said it was much more important to be right about direction and method instead of quick. Thanks, Alan! He continually stressed that a wait and see posture was best which threw doubt about another aggressive rate cut at the October meeting. While the attack on the WTC may have been the Pearl Harbor event in the new war on terrorism the result from the disaster could easily be a trillion dollar impact to the GDP and the economy. A trillion dollars! That conjures up visions of surpluses turning into deficits and tax increases instead of tax cuts. How quickly things change and this is why the markets are in full flight. The economic outlook is not cloudy any more. It is ugly.

One of the bright spots in the business world is the upsurge in cell phone sales. From all accounts there has been a run on phones as families decide they want to be in contact with each other in troubled times. Analysts say the burst of activity has caused them to rethink total market penetration. With stories of victims calling from the WTC to say goodbye or from blocks away to say I am safe, families are rethinking the advantages of pocket communications. Nokia is the obvious beneficiary of this change in mindset.

Switching from one disaster to another for a moment the Nimba virus has literally shutdown some Internet operations and many businesses over the last three days. This virus is much more malicious than any prior variant and much more aggressive. Virus checking programs are racing to keep up with the mutations. We were hit with it on Tuesday night and even with virus programs it literally wiped out almost a dozen computers before it was stopped. Our web hosting company had to shut down FTP to and from their center to prevent massive failures. According to an alert I saw this morning over 20 million computers have been infected already. I spent a good day and a half reevaluating the different virus programs available and attempting to find the best method for cleaning up the problem and preventing the next new attack. Everyone may believe all virus programs are alike. I found out through research that this is far from the truth. We had been using McAfee but I now believe the Norton/Symantec product to be better for a large network. The bottom line to this paragraph is you need to have a program and price is not important. It needs to be kept current with at least daily virus file updates.

After spending literally five plus hours on hold to the various virus firms I did some research on their stocks. McAfee (NETA) and Symantec (SYMC) are both in the tank despite the outbreak of the worst virus ever. These attacks are only going to grow in intensity and frequency and once the terrorists figure out that they can cause trouble without becoming a human sacrifice I believe they will attempt this as well. One sleeper company that is going to benefit from the increased web buying of these programs is DigitalRiver.com. They do order fulfillment and billing for Symantec through most of their distributors. Buy through OfficeMax.com, DownloadWarehouse.com or others and DigitalRiver will complete the transaction. Personally, after spending almost five hours in their hold queue in five different phone calls about broken download links, script failures, billing problems, etc, I think it should be aggressively shorted due to poor operations. However, they are reaping a commission on every sale from dozens of retail chains and they will eventually profit significantly from the trend. Just shows that if you are in the right place at the right time you can make a profit without being good at what you do. My money is still on SYMC in the long term.

Ugly is the only thing I can say about the markets. The short covering rally on Wednesday afternoon was brief but strong as news reports were initially misunderstood that we had launched strikes against Afghanistan. Shorts were afraid of the patriotic bounce potential and took some profits. Once the news was reported completely the shorts piled on again. The global warnings about the economic impact overnight simply drove futures down and Thursday never had a chance. What we are facing is not only an economic crisis but a crisis of confidence. Fortress America has been seen by global investors as vulnerable and at high risk. World markets are tanking, led by Japan and global investors are pulling money out of U.S. stocks to cover losses at home. While U.S. stocks are normally seen as only one level of quality below U.S. bonds that view is changing. Massive drops in many sectors including some Dow components have sent a sell signal to global investors. Hedge funds, smelling easy money, are aggressively shorting the major stocks and are accelerating the decline.

Bush will attempt to rally the country in a joint address to Congress and the American people tonight. It will be a must win speech. Bush will try to be the cheerleader for democracy and freedom and the American way of life. Leading analysts are saying that the battle could last years, 5-10 years by some accounts. Does the American public have the stomach for a ten year war? One with no visible targets other than Bin Laden? I think yes but they need to have their hand held and be reassured. If the speech comes off well then we could see a patriotic bounce at the open tomorrow. That bounce could create another short covering rally but I strongly doubt anybody wants to go into the weekend long. Anything could happen over the weekend with another terrorist attack, warnings from the Taliban, more corporate warnings or even a bankruptcy of the first airline. The possibility for positive news rests on a military strike and any strike by us could prompt a retaliatory strike by those terrorists still in the United States. Bin Laden is not stupid. He knew there would be repercussions from the attack and could easily have setup the retaliation well in advance so he could be seen as a hero when bombs start falling on his people.

The Dow is down -1229 points for the week. The Nasdaq -225. It is the longest losing streak for the Dow, seven days, since 1989 and can get longer. The Nasdaq is struggling to hold 1475 which is support from Oct-1998 and should that fail some analysts think 1200 is possible. 7500 is now the bearish target for the Dow in some circles. The VIX at 49 is at levels not seen since October 1998 "BUT" the conditions are not even close to the same. The Nasdaq VXN at 82.49 is off the scale. Add these to the put/call ratio at 1.27 and technically everything is a screaming oversold buy. However, technicals do not work in a news driven environment. What they do tell us is that when sentiment changes there is going to be one heck of a rebound rally. When that will occur is anybody's guess. The negative sentiment is so bad that we are close to the "all bad news is factored in" level. Margin selling for the next three days will still dampen any bargain hunting and with global funds moving out of stocks the odds of any major market improvements are slim. The wave of "attack related" earnings warnings is picking up with PALM, EMC, DIS, AMAT, etc continuing after the bell. Even MSFT is under attack with the DOJ saying they will focus on features in XP as evidence that MSFT had not changed its ways. XP will be allowed to ship as is but the question now is "who wants it?" Let MSFT make a serious "attack profit warning" and traders will want to move to Afghanistan to escape the carnage in the markets. Bottom line for Friday, it depends on the speech and traders desire to hold over the weekend. I would not bet heavily on a positive close.

Definitely, enter passively, exit aggressively!

Jim Brown

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