Option Investor
Market Wrap

Markets Holding Their Breath!

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       10-9-2001           High     Low     Volume Advance/Decline
DJIA     9052.44 - 15.50  9086.97  9004.14  1.1 bln   1488/1595
NASDAQ   1570.19 - 35.76  1607.20  1565.97  1.5 bln   1422/2094
S&P 100   541.84 -  3.04   545.44   540.30   Totals   2910/3688
S&P 500  1056.75 -  5.69  1063.37  1053.83
RUS 2000  408.68 -  3.50   412.27   407.87
DJ TRANS 2128.67 - 54.57  2185.91  2128.67
VIX        36.06 +   .15    36.62    35.57
VXN        66.26 +   .13    67.20    65.86
TRIN        1.18
Put/Call Ratio       .97

Traders spent another day watching TV instead of the stock market and the averages reflected investor apathy. The mood of the average consumer/investor/citizen is "what's next?" America has leveled anything of military significance in Afghanistan and Osama has yet to launch another threatened strike. Everyone knows it is coming but just not when or where. The mentality of America is slowly withdrawing inwardly as the constant bombardment of negative news makes even opening the mail a greater risk than usual. The markets are actually holding up rather well given the scenario above.

The main reason the markets lost so much ground today was Microsoft not Bin Laden. The Supreme Court said they would not hear the case and left it in the hands of the appeals court. This puts even more pressure on Microsoft to settle and possibly take more of a beating than was previously acceptable to Microsoft management. This also gives the Justice Dept a stronger position and bolstered their confidence in getting their pound of flesh from the software giant. (If you are in the editors play for the last two weeks, did you buy that Put on Monday like I suggested?) Had it not been for MSFT the Dow would have finished in positive territory. MSFT delayed until next year the deadline for the new licensing scheme for their software which created doubts that maybe even Microsoft was under some revenue pressure as a result of the attack.

While talking about news events regarding Dow components, Intel also made the news with a class action suit being filed by an institutional investor. The investor took exception with bullish statements about demand, improved manufacturing processes and new products in the summer of 2000. The stock fell from $75 to $35 in the three months following those statements. They eventually cancelled some of the products mentioned due to technical problems and lack of market demand. Intel disagreed strongly with the claims and vowed to aggressively defend itself in the suit. Intel lost -$.79 for the day.

The brokerage sector bucked the trend today after a news report that said they would lose $200 million for the quarter compared with an expected $1.2 billion profit for the group. LEH, MWD, MER and BSC all closed strongly positive despite the report from the Securities Industry Association which also said the sector began to rebound from the attack losses almost immediately.

One sector that did not rebound from a verbal bashing was the networking sector. JP Morgan cut estimates on Cisco and others based on falling capital spending. They feel the spending will continue to decline in 2001 and also drop another -20% in 2002. The semiconductor sector also drew its share of detractors after gaining +17% over the prior three trading sessions. Merrill Lynch. ABN-Amro and CSFB made some cautious comments about the sector. CSFB said Intel would barely meet estimates or come in just below them thanks to some "frantic scrambling". ABN-Amro changed their weighting to "underweight" claiming that investors have already priced in too much growth. After the recent gains the sector was due for profit taking regardless of the news.

In the too little too late department an institutional investor tried to sell twenty-nine million shares of Global Crossing at the close. The stock had already fallen -47% for the day from $.73 to $.38. That position fell from $21 million at the open to $11 million at the close but that pales in comparison from the $58 million value the prior week or the $290 million from July. Just suppose you owned it in January for $750 million or even the $290 million in July, what would you gain from blowing it out at $11 million at the close today? Commissions, management fees? While I have no opinion on the survival prospects on Global Crossing, I do think the investors in that fund should worry about the survival prospects for their management. We have all (if we are honest) closed positions in expiration week on options for an eighth or less that we paid substantially more for weeks earlier. We made the mistake "with our own money" of failing to set stop losses and closing those positions. We all make bad bets and then try to rationalize the poor results but we expect better from people who manage money professionally. Whoever was trying to sell at the close was in plenty of company since 141 million shares of GX traded for the day. Creating the rush for the exits was a downgrade of their debt, a reshuffle of their management and being dropped from the S&P-500. Just proves that when you are on the wrong side of a trade everything seems to go against you. We all know this feeling!

Say goodbye to the second half recovery, at least for 2001. The 2H recovery is officially dead. In a subtle sleight of hand the new target for the recovery is now 2H of 2002. Several companies led by Cisco and Dell have now said that summer of 2002 could be the earliest a recovery would appear. Analysts are now anticipating the worst fourth quarter earnings in a decade and there are no signs of any improvement. This is of course not "new news" but the numbers of analysts that are now verbalizing what they knew behind closed doors is increasing. Consumer confidence is eroding daily as the continued threats from the terrorists are discussed over and over on TV. The Bin Laden spokesman today that warned of a "storm of airplanes" in the future and the continued call for a holy war against the U.S. along with the growing anti-American demonstrations are causing second thoughts by Americans. "What if?" is the topic of conversation at the dinner table instead of the normal family chatter. This is not conducive to a bullish market.

However, the markets once again held above support at 9000 and 1550. Those levels are critical to any future market direction. The Dow tested 9000 twice at 10:30 and 4:30 and rallied slightly into the close. The Nasdaq however closed only four points above the low of the day and but was heavily influenced by the MSFT news. I know you hear constantly that this or that level is critical to future market direction until you are totally confused. This one is really critical. If these levels fail then the odds are very good we will see a retest of the September lows. The market has shown very good relative strength the last four days. After the big rebound we could have easily sold off substantially again but didn't. The markets are simply stuck in the quicksand of indecision and uncertainty. While stocks are cheap there is no rush to buy. Which sector will get hit with the next terrorist attack? Nobody knows. When will it occur? Nobody knows. Buyers from last week have disappeared and internals have turned negative although on low volume.

We are in a news driven environment rather than an economically driven environment. This may change as earnings announcements increase in intensity. There are well over 100 companies announcing this week but next week there are two to three times that many and most of the big guns. If the unthinkable happens and companies start giving positive guidance then we could move up again. The possibility for negative news is greater but much of that is already priced into the market. The best thing that could happen to us is nothing. If a week of two goes buy without an attack on U.S. soil then Americans will start ignoring the daily threats as harmless. Just another Saddam Hussein with a big mouth and no way to back up his claims. There have been 618 individuals arrested in the U.S. for suspected terrorist involvement and over 200 more on the wanted list. The rapid mobilization of our defensive and protective resources may have crippled prior plans for follow up attacks. Every day that passes puts us closer to each terrorist still on the ground in the U.S. The high profile "bombing war" in Afghanistan is over. The war that is visible to Americans on nightly TV will decrease as the job falls to special forces troops on the ground moving under the cover of night. Once the 24hr intravenous news feed goes back to regular programming the "threat" will also move back into our subconscious. We have been bombing Iraq almost weekly since 1998 and nobody has paid any attention. Until the Afghan war fades from view you know what to do. Go flat or short under 9000/1550 and go long on any rebound from under those levels.

Definitely, enter passively, exit aggressively!

Jim Brown

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