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Market Wrap

Trouble Brewing in Paradise

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       1-10-2002           High     Low     Volume Advance/Decline
DJIA    10067.86 - 26.23 10101.77 10032.23  1.2 bln   1559/1589
NASDAQ   2047.24 +  2.35  2055.89  2026.05  1.7 bln   1834/1826
S&P 100   590.56 +   .94   592.58   587.01   Totals   3393/3415
S&P 500  1156.55 +  1.41  1159.93  1150.85
RUS 2000  495.31 +  0.57   495.51   493.45
DJ TRANS 2764.78 - 10.37  2782.70  2750.71
VIX        23.13 -  0.22    24.42    22.98
VXN        48.66 +  0.31    50.17    48.29
TRIN        1.30
Put/Call Ratio       .58

Trouble Brewing in Paradise

Are those storm clouds on the horizon? Did the forecast just change from blue skies and sunshine to lightning and hail? Those investors with rosy outlooks are suddenly wondering what happened in paradise. The Dow closed down for the fourth day in a row and is threatening 10,000 again. The Nasdaq gave back fifty points from yesterday's high and came to a dead stop on recent support at 2040. It appears the three month rally on the expectations of a first half 2002 economic rebound slowed as expectations were pushed into the second half. It has now screeched to a halt after several high profile comments about the recovery slipping into 2003. The fading recovery date has caused stock prices and investor confidence to fade in return.

The wheels started coming off the Dow and tech stocks in general today as rumors persisted that IBM may guide estimates lower. IBM declined comment but the stock price dropped from yesterday's 52-week high of $126.39 to close at $122 today. IBM releases earnings on January 17th. Currency problems are starting to return to haunt multinational corporations as rumors from Japan and reality from Argentina continues to strike home.

The devaluation in Argentina has already started to be reported in expected earnings. GM which upped estimates today for 2002 said they would be higher except for a ten to twenty cent per share impact from Argentina. Not only did Argentina devalue its currency but it has now turned all accounts of $10,000 or more and savings of $3,000 or more into certificates of deposit which cannot be withdrawn for at least one year. Argentina foreign exchange trading has been halted for three weeks and the halt ends tomorrow. It may take several days for the real global impact to be known since the exchange markets are used to having the Peso pegged to the dollar. Without that peg it is unknown how low the Peso will fall. The black market is already trading Pesos at 1.7 to the dollar, much higher than the official 1.4 devaluation.

While global worries increase the retailers at home are trying to present an upbeat picture. Wal-Mart said same store sales were up +8% more than expected. Target, The Limited, Sears, TJX and even the Gap reported stronger than expected December sales. The Gap said they were going to lose less than expected. The Gap was the only retailer that made profit statements but the fear remains that these better than expected December sales numbers may have come at the expense of profits.

Mixed messages from the tech sector continues to confuse investors and throw doubt on the recovery progress. If you remember Cisco, the biggest tech to make forward looking statements, recently said that visibility going forward was still very limited. This was a very cautionary comment from Chambers who has taken every opportunity to promote Cisco when possible. Reading between the lines there could be a storm cloud in their future. After the close today two chip stocks announced earnings with mixed results. Rambus beat the streets lowered estimates by two cents but said DRAM prices were still eroding in the 4Q. This is contrary to pervious statements by analysts that DRAM prices were stabilizing. Which is it? It apparently did not matter because RMBS traded up in after hours even after another chip stock, CREE, missed estimates by a penny and whined about continued weak demand. Still the news from Rambus is not likely to energize the chip sector which appears to be weakening with the SOX posting the lowest close in the last six days of trading.

Economically the news was good today. Jobless claims fell a more than expected -56,000 to 395,000 for the week ended Jan-5th. The reporting period could have thrown off the counts since many seasonal workers may not have gotten back into the jobless line in the three days after the New Years holiday. A rise in the maximum weekly benefit in California to $330 from $230 beginning this week could drive the numbers higher. California, as the largest state economy, will impact the national numbers if there is a rush to collect the higher benefits instead of working a lower paying job. The Wholesale Trade numbers for November were flat after a two month slide but inventory levels continued to fall with the second largest monthly decline in a year. This is very bullish even though the inventory-to-sales ratios fell as well. The lower inventory levels make it more difficult to achieve high sales ratios. The lower the inventory levels the stronger the rebound will be when it comes because of the broader component requirements.

While GM was raising estimates today Ford was rumored to be announcing a major restructuring on Friday. This restructuring will involve massive layoffs and shrinkage of their capacity. Rumors were to expect 20,000 job cuts on Friday. Without the GM announcement today the Ford news would have been very detrimental to the markets. By itself the Ford news would not support the rebounding economy theme but with the GM announcement it will be taken as a symptom of internal corporate problems at specific to Ford.

Earnings turn into a flood next week but the event is not drawing a flood of cash. The January liquidity rally is turning into a cash drain instead. On Tuesday there was a -$7.4 billion outflow of cash from equity funds. This is huge considering this is normally a time of cash inflows instead of outflows. TrimTabs.com estimated that there were -$4.8 billion in redemptions in the first week of January. This has never happened since they have been keeping records. There was also a record $3.5 billion in new offerings in the first week of January. On Wednesday there was a slight negative outflow of liquidity as well. Another measure of investor sentiment is the Ameritrade Index. This shows the top ten daily buys and sells of Ameritrade customers and this index has shown that retail investors have been net sellers for the last three weeks. http://www.ameritradeindex.com/learn_more.html It was also interesting that Enron was number six on the top ten sellers list and number seven on the top ten buyers list. It appears that there are still believers out there even as the negative news intensifies.

Where do we go from here? The Nasdaq has support at 2020 and the Dow around 10,000. This is not far from where the indexes closed today. If they can hold those levels on Friday morning then we may see a gain for the day. Should those levels fail we could be in for some rough sledding. The earnings pre-announcements have been more positive than negative but without some actual positive earnings guidance the markets will die. It is one thing to not warn that business is getting worse when everyone expects it to be worse. It is another thing to not say something positive when everyone has already discounted the recovery. I said earlier in the week that a failure to make any progress this week would cause the hedge funds that normally buy stock in December, hoping to sell into the January rally, to switch sides and dump their stock and go short again. I think part of the Wednesday drop was that selling. The big gap open gave them a chance to unload and many of them did once the roll over came. Advancers/decliners were dead even today despite what the averages said. There is no conviction on either side of the ledger and the first group to reach a consensus will dictate market direction. At this point it will take much more effort to move the markets up than down. The huge gains since September will require strong conviction in order to build on those gains. There was a gentle surge of buying today in the defensive issues like drugs which could indicate a softening in tech hopes going forward. All these things add up to increased concern and we should be really cautious about opening new long positions. All the majors failed to hold over my bullish entry points from Tuesday, 10200, 2075, 1175 respectively. My bearish support levels of 10000, 2020, 1140 are still below us and I would still buy a bounce from those levels BUT ONLY AS A TRADING BUY. Trust me, you will not lose money by watching and waiting. If a real rally breaks out there will be plenty of upside left for everyone.

Enter very passively, exit aggressively!

Jim Brown

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