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Market Wrap

Enron Gases Market But Portfolio Dressing Prevails

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       11-29-2001           High     Low    Volume Advance/Decline
DJIA     9829.42 +117.56  9829.42  9691.39  1.3 bln   1961/1155
NASDAQ   1933.25 + 45.28  2933.46  2889.29  1.9 bln   2271/1394
S&P 100   585.28 +  6.36   585.39   577.13   Totals   4232/2549
S&P 500  1140.20 + 11.68  1140.40  1125.51
RUS 2000  463.33 +  9.63   463.33   453.70
DJ TRANS 2485.60 + 27.65  2489.20  2459.56
VIX        26.26 -  1.49    28.56    25.89
VXN        48.95 -  3.26    53.27    48.95
TRIN        1.29
Put/Call Ratio       .78

The markets rallied off support and posted strong gains going into the close. While the move was welcomed it may not be as strong underneath as it appeared on the surface. After trading in a tight range between 9700-9760 for most of the day the Dow caught fire shortly after 3:PM when several Dow stocks exploded. The Nasdaq reacted as well but with less velocity. The reason could have been a press release quoting Bush as saying the Taliban had been destroyed OR end of month portfolio dressing by fund managers. Which do you think was more likely?

The Enron news continued to weigh on the markets to the extent that companies were issuing press releases disclaiming any exposure to avoid being sold. Everyone appeared susceptible to damage from Enron self destructing. Fund managers were denying investments, large retirement accounts like company 401K programs were pleading not guilty and other energy companies were going out of their way to be positive. Williams went so far as to say they would meet or exceed ALL previously announced profit targets. Pretty aggressive comments by the Williams CEO.

The Enron story has been beaten to death so I will try to cut my comments short. The bottom line remains "the fat lady is singing." Enron bonds were cut to junk status, the stock was dropped from the S&P and will be cut from the Dow Utilities Index as well. In slightly more than 27 days it could be delisted from the NYSE and become another footnote in financial history. An expensive footnote after falling from $65 billion in market cap to $265 million in a very short period of time. That market cap drop equates directly with the drop in asset value on millions of stockholders statements and represents a significant loss of net worth for retiring baby boomers.

The worry that the Enron disaster, widely speculated to be in the $1 trillion range earlier in the week, was the major blow to the stock market. How many banks would lose how much money because of loans to Enron? How many energy companies would lose because of defaulted contracts in an Enron bankruptcy? How many bond holders would be left holding worthless paper? Would energy prices rise or fall from the debacle? Would any mutual funds go under from speculating in an Enron comeback? You can see why investors were running for cover and the safety of cash.

Helping bring the averages back from the brink of disaster were stocks like DELL, PALM, VTSS, BRCD, A, SAP, XLNX, CNXT, HAND and SEBL which all affirmed earnings and their outlook going forward. Surprise - surprise! Intel said they could not keep up with demand for the P4 going into Asia and said they were comfortable with their estimates. Techs surprising to the upside, what a change in direction. Unfortunately the Nasdaq rebound may be short lived due to a warning after the close by Novellus. They affirmed estimates but sad they were less optimistic about a 2Q upturn. Orders were not coming in as expected for their chip making equipment and they felt the upturn would take longer than previously expected. Chip stocks were down in after hours but not significantly.

Helping power the rebound was news that Durable Goods orders exploded in October with a +12.8% gain. This was the largest gain since May and the first time in five months that the number was positive. The huge number was helped by a large number of aircraft and defense orders as well as computers. Semiconductors still showed a -17% loss for the month but that is widely expected to change in the November number. Excluding aircraft orders the gain was still over +5%. Inventories also continued to shrink. New home sales also rose to an annualized rate of 880,000 from 850,000 for October but inventory remained steady at a 4.3 month excess supply. The lower interest rates have help this indicator as well as existing home sales but with mortgage rates rising back over 7% the pace of sales could slow.

Jobless claims rose again by +54,000 as more previously announced layoffs continued to be enacted. This was the highest level in four weeks but the key number is in the continuing claims. Those rose to 4,018,000 and a new high for the current cycle and indicate that the current jobless market is still deteriorating. The Help Wanted Index fell drastically to 46 from 52 in September. This is the lowest reading since 1982 and indicates that employers are simply not hiring and not advertising job openings. Some analysts are expecting a 6.3% unemployment rate in 2002 and this is leading us in that direction. Until help wanted ads increase the economy is still moving down.

More importantly to us was the -$6 billion outflow in equity funds for the week ended on Wednesday. This was punctuated by the big -160 point Dow drop in Wednesday. The drop by the Dow at the open today to 9691 represented the flushing of that cash out of the system and panic selling after the drop. The Enron factor also influenced the cash drain with almost one billion shares trading in the last week. This cash outflow countered a rally in the bond market today. With bonds and stocks both up strongly something has to give soon.

The 3:PM rally in stocks was questionable. The rally came immediately after a comment by Bush that the Taliban had been destroyed. While it was not a proclamation that the war had ended it appeared to spark the markets. Several Dow stocks soared to strong gains including IBM +2.28, MSFT +2.04, MO +2.05, UTX +2.41, HWP +1.23, MRK +1.50, PG +1.44. Several of those had been lethargic until the 3:PM starters gun. Was it the Bush statement or blue chip portfolio dressing. I think the latter since the Bush statement is nothing new. If it was dressing then it is not a keeper rally. When the Dow broke below 9800 on Wednesday I turned bearish on the markets. The Nasdaq is back in neutral territory at 1933 and right at resistance again. The Dow just nudged over my 9800 threshold level but I am not convinced. I will trade any continued bounce above these levels but the time has come to be more cautious.

This is typically a bullish week which has gone contrary to the trend. We had many companies preannounce positive results this week but as we saw from Novellus tonight, next week may be much different. Earnings warnings will begin for the 4Q and year-end tax selling will begin. We need to keep an eye on the bond market as a leading indicator of market direction. If bonds continue to rally on Friday then next week could be ugly. The net outflow of cash from funds could be for holiday presents or it could just be investors moving to the sidelines because of the possible rocky December ahead of us. There was news tonight that the 800K of cars sold in the last two months at bargain rates would impact substantially cars sold over the next three months. (Duh!) Anyone who was even remotely in the market was enticed to buy and nobody with credit or money is left to visit the dealerships. This will impact the auto sector significantly.

Another possible problem for the markets is the possible @Home shutdown. With 3.7 million high bandwidth subscribers possibly being cut off as of Friday the Internet sector will suffer. These surfers are the cream of the crop which buys Amazon products, bids on Ebay auctions, Priceline tickets, etc. If the judge shuts them down there could be ripples throughout the Internet. Yahoo page views will suffer along with advertising revenue and so on. Also on Friday we will get the PMI numbers and another look at the 3Q GDP. If the GDP shows a significant decline the markets could react negatively. It may add fuel to another Fed rate cut on the 11th or reduce chances of that cut.

To put it in a nutshell, there are a lot of factors that will be impacting the markets over the next week and most of them are leaning to the bad side. We need to trade anything over 9800/1925/1150 on the major indexes but stay flat or short below that. One analyst phrased it this way, "the patient (economy) is still in the hospital recovering from the wreck but is doing better. Investors are acting like he is leading a marathon instead. When will reality appear?" Interesting concept and some of that reality may appear next week. Be very cautious about opening new positions on Friday.

Take profits on weakness and wait patiently!

Jim Brown
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