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Market Wrap

Just Like We Scripted It!

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       11-1-2001            High     Low    Volume Advance/Decline
DJIA     9263.90 +188.76  9284.45  9014.46  1.3 bln   2223/ 880
NASDAQ   1746.30 + 56.10  1746.65  1683.99  1.7 bln   2060/1477
S&P 100   558.24 + 13.81   559.15   542.09   Totals   4283/2357
S&P 500  1084.10 + 24.32  1085.61  1054.31
RUS 2000  434.88 +  6.71   434.88   424.84
DJ TRANS 2232.98 + 37.14  2242.96  2179.83
VIX        34.18 -  1.19    36.97    33.83
VXN        61.18 -  1.17    63.13    60.92
TRIN        0.88
Put/Call Ratio       .64

Despite some of the worst economic news in a decade the markets rallied off support as investors bought the dip. Surprised? I wasn't since it was exactly like I suggested on Tuesday. Well, almost exactly! I was expecting the Dow to at least touch 9000 before institutions came off the sidelines with cash but I will take the 9014 low on Thursday as "close enough" and chalk it up to eager traders trying to beat their competitors to the punch.

The +249 point bounce from support at the 9000 level was very encouraging considering the magnitude of the dreary economic news. Let's recap the weeks news. The GDP surprised analysts with only a -0.4% drop which was the worst in a decade but much better than most analysts predicted. On Tuesday the Consumer Confidence number fell to 85.5 and its lowest reading since 1994. On Wednesday the PMI numbers fell again to 46.2% in October, up from the years low but still contracting. Today the NAPM fell to 39.8 which was much worse than the 44.5 analysts expected. This was the lowest level since 1991 and indicates that the slight recovery that may have started in September was stopped cold on 9/11. The jobless claims fell slightly to 499,000 but continuing claims rose again indicating that no jobs are available for newly unemployed. Personal Income was flat but spending dropped -1.8%, the biggest drop in 14 years.

By all measures of conventional wisdom you would think the market should be testing 7000 instead of 9000. Of course informed investors know the answer, the bad news has already been priced in and the economy is not as bad off as commentators would have us believe. Any real investor has heard the gloom and doom for a year now and the post attack drop was the exclamation point at the end of that bear market. Markets crash in advance of a recession and rally out of them. The Sept-21st low took all the remaining weak investors out of the market and the retest of 9000 today was the signal for institutions to get back into stocks.

There was also a glimmer of light at the end of the tech tunnel as several companies made positive statements about their orders. In the pitch black cellar we have been living in, any light was a ray of hope to investors. SUNW said they had $6 billion in cash, no debt and that orders were tracking higher this quarter than last. Even though the comments were surrounded by the obligatory "visibility unclear" statements that was pretty bullish talk. Intel also held an analyst meeting to announce the P4 to be the best selling brand and a 3-GHZ model in the future along with dozens of new initiatives. They spoke at another tech conference this week and made it clear the war is on and they intend to win it on all fronts. They cut prices another -29% as they aggressively attempt to reclaim AMD market share. Competition has always fired up investors and the race to the recovery is on.

The chip sector rose on the Intel comments as well as news that KLAC affirmed their guidance. The SOX has rebounded from the two day sell off on Monday/Tuesday right back to within 12 points of the resistance I spoke about on Sunday at 490-500. This time the chip stocks look stronger and ready to rumble so it will be interesting to see if a breakout is in our future.

A rally in software stocks was led by good news in the Microsoft case. There appears to be a deal in the works that could amount to only a serious slap on the wrist for Microsoft and the stock was up +3.69 on the news. As a Dow and Nasdaq component MSFT was instrumental in the majority of the gains on both indexes. Gains beget gains and while a nearly $4 jump in MSFT may be the major percentage of the indexes gains it helped fuel investor excitement and drag other stocks along for the ride as well. Friday was the deadline for a settlement in the case and that was obviously a major factor in the announcement. After the close it was announced that the Justice Dept had requested a delay which could cause some volatility on Friday.

Another headline that rallied investor confidence was the auto sales news. Ford saw a +34% in October sales, GM +31% and Chrysler +5%. These sales were off the charts and could propel last month into the record books as the biggest month ever. These sales were due to the zero percent financing and major advertising efforts to force buyers off the couch and into showrooms in the wake of the attack. While the efforts were wildly successful they could actually cause trouble in the coming months. Those who were interested in a new car or even on the fence were rushed into the sales cycle and the remaining available buyers are drying up. With layoffs increasing and unemployment rising it is likely that the next two months will see money spent on reduced holiday shopping instead of new cars. By harvesting these buyers early the future crop is likely to be scarce. Also, free financing amounts to an additional $2500 cost on every car and profit margins are likely to shrink substantially. While the headline news was good for the markets today it was a one time event and should not provide any long lasting momentum.

All eyes are now on the Employment Report on Friday. By all accounts it will be the worst report in a decade with a loss of -325,000 jobs and a jump in unemployment to 5.2%. In the two weeks following the attack there were over 1000 mass layoffs announced and this was in addition to the already swelling unemployment rolls. While the news is expected to be grim the whisper numbers are much worse, -500,000 jobs and 5.5% unemployment. With everyone expecting gloom and doom again we have yet another opportunity for a good news event and market reaction. The bad news is priced in already and short of a million job loss or 6% unemployment the markets should not react negatively. Should is the key word!

The economy is in the tank but the fix is in! The Fed is meeting again next week and there is about a 60% chance that they will cut yet another 50 basis points based on the dreary news this week. There are stimulus programs in the wings and the government is going to be spending billions fighting the war on the home front and reshaping the way we live. The economy is setup to recover from here, not fall further. Institutional investors know this and the markets should reflect this in November.

Friday should be interesting. Reported terrorist threats against bridges in California have now been called "not credible" and similar to bogus threats in several other states. Even when thought credible the futures failed to react negatively. Investors are becoming calloused to the constant bombardment of negative news and the lack of any follow up attack. While I personally think that without an attack we could see the markets move higher we need to trade what we see not what we believe. I see bears on CNBC constantly that think the S&P will see 700-800 and the Nasdaq 1200. They are entitled to their opinion and can certainly spend their money how they want. Actually I hope they all short every rally between here and Dow-15,000. That just supplies another round of short covering panic when investors ignore bad news.

How much more bad news can we get? SUNW is not going to be declaring bankruptcy. Microsoft is not going to self-destruct regardless of how long the Justice Dept delays the case. IBM is not going to cancel their share buybacks. They could even be considered a split candidate. (remember, stock splits?) INTC, DELL, ORCL, JNPR, CSCO, SUNW and QCOM are not going to be making any new lows anytime soon. The economy is about as bad as it can get and with the Fed funds rate projected at 2% by early 2002 it will be hard pressed to not rally. Investors are much more astute than the average couch potato. They recognize this as the time to buy. Terrorists are running out of targets due to increased security, awareness and a shortage of gang members not already arrested as a result of the 9/11 sweep. Short of a major new attack by terrorists, investors will likely be happily pursuing their fall investment plans beginning next week. Friday is a toss up but shorts are definitely scared and bulls are ready to rumble. What if the Employment Report is better than expected? Can you say "curbs in"?

Enter passively, exit aggressively!

Jim Brown
Editor

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