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Market Wrap

Will The Next Enron Please Stand Up

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         WE 2-1          WE 1-25          WE 1-18          WE 1-11
DOW     9907.26 + 67.18  9840.08 + 68.23  9771.85 -215.68  -272.21
Nasdaq  1911.24 - 26.46  1937.70 +  7.36  1930.34 - 92.12  - 36.92
S&P-100  569.35 -  5.79   575.14 -   .10   575.24 -  8.96  - 14.41
S&P-500 1122.20 - 11.08  1133.28 +  5.70  1127.58 - 18.02  - 26.91
W5000  10490.17 - 86.35 10576.52 + 67.16 10509.36 -188.86  -234.10
RUT      480.04 +   .69   479.35 +  4.98   474.37 - 15.57  -  9.36
TRAN    2759.33 - 20.59  2779.92 +112.67  2667.25 - 39.52  -123.43
VIX       22.87 +   .94    21.93 -  2.41    24.34 +   .36  +  1.96
VXN       43.08 -  2.59    45.67 -  3.22    48.89 +   .52  +  1.51
TRIN       1.44              .82             1.13             1.44  
TICK       +652             +885             +522             +290 
Put/Call    .67              .68              .85              .68  

The markets treaded water all day on Friday after receiving mixed economic news. More accounting rumors made the rounds as investors, who were afraid lightning was going to strike their stock next, took money off the table. Resistance held but so did the major averages with only a minor dip after the two big days of gains last week. Investors should be grateful that Friday was such a lazy day after a week of extreme volatility.

Leading the news on Friday was the conflicting numbers on the Jobs Report. The economy lost more than 89,000 jobs in January but the unemployment rate FELL to 5.6%. Payrolls declined in every sector except Retail. The drop in unemployment while jobs are still being lost was credited with a drop in the labor force from people deciding to quick looking for work due to the frustration of not finding a job and from those who have exhausted their benefits and have dropped off the unemployment rolls. The median duration of unemployment grew to 8.8 weeks indicating that finding jobs is becoming increasingly difficult. Despite a warm January even the construction sector lost -54,000 jobs indicating home sales may be slowing as well as commercial construction. Average hours worked, which is an indicator of production, fell to 148.1 in January, which would mean GDP was still declining.

Contradicting the negative job news was a rise in the NAPM numbers, now called the ISM Index, to 49.9 and only .2 below a technical expansion in manufacturing. The index has risen for three months from a low of 39.5 in October. While it is the 18th straight month of contraction it does appear the bottom may be behind us. New orders fell slightly but the backlog of orders grew substantially from 39.5 to 44.5. The headline number was the highest value since the decline began in August 2000. It is possible that the ISM will show growth in the February number but the percentage of change is very small which does not portray a rapid recovery.

The Consumer Confidence numbers increased again to 94.2 from 88.8 in December. The large gain was totally due to the expectations portion of the index which jumped from 82.3 in Dec to 91.7 in Jan. This is the highest level for the headline number since last January and up significantly from its low of 81.8 in September. This post attack high indicates the consumer is positive things will get better even thought the current conditions have only changed slightly. Analysts still fear that rising debt loads and continued high unemployment will delay any consumer powered recovery. They feel any recovery will not be accompanied by a burst of spending as consumer demand is still very weak.

Waste Management (WMI) was the disaster of the day and dropped -13% after warning that it would miss estimates on lower revenue. Just too many people shredding and burning those documents instead of trashing them I guess! The CEO said the economic downturn had cut their volume and most of their current business was in the low margin services. They also said they would take a charge related to the Enron bankruptcy. Does this hit home to anyone? If trash haulers were impacted by Enron who else might be sitting on losses that they have yet to disclose?

Worldcom (WCOM) headed south again, closing at $9.61 on volume of 75 million shares. The WSJ reported on Friday that CEO Ebbers could be forced to sell some of the 27 million shares he owns to repay $183 million in loans from Bank of America. According to SEC documents the loan is due and payable on the first business day after WCOM closes under $10, which would have been Friday. Considering the history of margin calls Ebbers has seen, analysts think he may capitulate and sell the shares to liquidate the debt thereby putting further pressure on the stock. However considering that WCOM traded in the $50-$60 range over the last two years it is entirely possible Ebbers is significantly underwater on his margin and even selling all of them ($250 million worth) may not clear his total debt. The BofA loan is only one of his problems. The WCOM board bailed him out last time with a loan to cover the margin call. Investors are also concerned that should he sell then his interest in the company would wane leading into further problems. Today was the first time since 1995 that WCOM closed under $10. The bankruptcy of MCLD and GX along with numerous other smaller players is weighing heavily on the WCOM business.

TMPW, the Monster.com parent, demanded an apology and a correction from Forbes after an article critical of their accounting practices was printed. The company said it corrected the information in the article before publication but was ignored. Evidently the author had already decided that an "accounting practices" article was needed to bolster readership and did not want the facts to get in the way. Maybe the author should consider a career change to Barrons.

Many bears have suggested that Cisco is the next house of cards to collapse due to funny accounting practices. While I would doubt it, there was an interesting comment from Chambers on Friday. He was doing an interview on CNBC and Ron Insana asked him point blank if he would like to take the opportunity to tell investors once and for all that there was no funny numbers in Cisco financials. Chambers, very smoothly, ducked the question completely with "Ron, that is a loaded question." "I think investors should look at CASH FLOW as the real health of the company...." and he proceeded to brag about $1 billion of free cash per quarter and $20 billion in the bank, BUT he would not answer the question. You would think that with rumors flying about their accounting he would take the opportunity to say something credible about their "practices" and not try to shift the focus to a different topic. There was a hundred comments he could have made about conforming to GAAP or being conservative in accounting for acquisitions, etc. He didn't! I am not trying to claim any wrongdoing but I was surprised by the clear misdirection. Hiding something John?

Speaking of hiding something Enron ex CEO Ken Lay is scheduled to testify on Monday and word is that he will not take the fifth. While I doubt he will disclose many details on the 4,300 partnerships that so skillfully hid income and losses from auditors he is going to be the center of investor attention. The betting line assumes he will claim ignorance of the problems because his employees did not tell him about them. As one of the highest paid CEOs in corporate America he would be better off claiming stupidity. If he turns his employees against him they are liable to turn on him with a vengeance and disclose far more recollections than he would like. Either way the circus, excuse me, testimony should be interesting.

The economic calendar is slim next week, which will leave market direction to focus on earnings and recovery hopes. While most major earnings are over there are still several hundred announcements next week. Most of these are second and third level companies which do not generally have the breadth and depth of the majors to withstand the recent economic drop. While a GE or United Technology or Procter & Gamble have a wide range of products and sectors many of the current announcers have only one. This could lead to a rash of earnings misses and more market depression. The exception to this scenario is the CSCO earnings on Wednesday. If they give decent guidance it could be positive for the beleaguered networking sector. However, Chambers passed up a chance to do this in the CNBC interview. He said visibility was still very limited, there was no recovery in progress but no further drop either. In short he did not have anything concrete to say while trying to remain neutral. This does not bode well for the guidance since he does not pass up a chance to say good things if they are applicable.

I think the markets performance on Friday was very good considering the flood of conflicting reports and political events. Next week however is when the rubber meets the road. The Dow closes exactly on resistance at 9900 again with a minimal -12 point loss. Considering the nearly +400 point rebound from Wednesday's lows that was a good performance. While the Dow managed to post a higher high than the prior week the Nasdaq was not so lucky. In a four day period 24th-29th the Nasdaq managed to touch 1959 three times but was only able to hit 1942 on Thursday at the peak of the rebound. This was the same story with the S&P. The broader market Wilshire-5000 index also failed to hit the last weeks highs. The Dow was the only index able to post a new relative high.

This is not a good sign for next week. The Nasdaq bigcaps generally look weak with SUNW setting a new three month low of $10. Dell is threatening to break support at $26, MSFT is struggling to stay above $62, QCOM is heading for $40 and WCOM could hit $9 again if Ebbers is forced to sell. The problem as I see it is the cash outflow from funds and the lack of excitement on behalf of the retail investor. The bottom may be behind us and the recovery underway but it is riding on the back of a tortoise and not a hare. As investors we have been conditioned to want immediate improvement, instant gratification and quick profits. Those profits have been fleeting unless you happen to be standing on the right side of the street when the direction changed. I doubt the roller coaster markets are over and next week could be a repeat. While Friday may have been encouraging we need to keep our emotions in check until a new direction appears.

The Nasdaq is the key for me. If it moves up from here the other indexes will follow. I would want a close over 1960 on strong volume for confirmation before going long. Should it roll over from here in front of the CSCO earnings then I would go flat or short below 1900. The Dow advance will not get far if the Nasdaq continues to bleed and with 27% of the S&P represented by tech stocks that index will follow the Nasdaq as well. Investors will also be watching the Enron testimony and waiting for the next cockroach to appear. That will continue to weigh on the markets just like the fear of a terrorist attack on the Superbowl was an unspoken selling pressure on Friday. Should both events proceed without a problem, bullish sentiment could return quickly.

Enter Very Passively, Exit Aggressively!

Jim Brown
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