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Market Wrap

Expansion Well Underway!

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      03-07-2002           High     Low     Volume Advance/Decline
DJIA    10525.37 - 48.92 10606.88 10468.64 1.51 bln   1597/1564
NASDAQ   1881.63 -  8.77  1910.70  1865.06 1.86 bln   1875/1666
S&P 100   586.88 -  3.33   592.73   582.76   Totals   3472/3227
S&P 500  1157.54 -  5.23  1167.94  1150.69             
RUS 2000  494.92 +  0.12   497.29   493.64
DJ TRANS 3020.27 +  5.74  3042.46  3016.13
VIX        21.88 -  0.16    22.78    21.88
VXN        43.76 +  1.03    44.73    43.21 
TRIN        1.19 
PUT/CALL    0.65

Expansion Well Underway!

Greenspan took center stage again today and was actually bullish in his assessment of the current economic environment. He said the recession was over and the economic expansion was "well" underway. However he stressed that since the recession was shallow and brief the recovery would not be as strong as most had hoped. Investors were cheered by the positive comments but reacted swiftly to the negative implications. The prospect of rapidly rising interest rates hit the bond market like a bunker buster and the ten year bond lost well over a full point. Yields rocketed as money roared away from its prior safe haven.

The markets rallied slightly on the initial Greenspan comments but profit taking in defensive issues and rotation out of sectors seen as safe havens produced nearly a -100 point Dow drop at mid-day. Investors expecting better times ahead bought the dip and while they were not able to push the markets back into positive territory it was a noble effort.

Had it not been for IBM and its -$2.60 loss and the -1.38 drop in Boeing the results would have been much different. IBM broke below support at $105 on new rumors of accounting problems. IBM will file its 10K with the SEC on Monday and it has promised to disclose many of its questionable accounting practices in that document. Investors not wanting to be surprised started bailing in advance when the rumors resurfaced. Boeing was dropped for a loss after South African Airways announced it was going to buy 41 Airbus planes instead of Boeing equipment. He who laughs last however will be Boeing which announced after the bell a $5 billion defense contract to develop a new defense system. Boeing said the contract could be worth much more in the following years if the system proved to be a success. Look for a nice pop in BA tomorrow.

Speaking of accounting problems, Arthur Anderson lost another big name as Delta Airlines severed ties with the accounting firm after 53 years of associations. DAL joined MRK, Suntrust Banks, Freddie Mac and about three dozen other public companies, which have fired the company over the last several weeks. This is just a few of the 2311 public clients at AA but the big names and big money flight is expected to accelerate. Several analysts are now speculating that the trend will be fatal. Others claim it may be way too early to jump to that conclusion since AA has over 100,000 clients worldwide. Three other big clients, Georgia Pacific, FedEx and the Southern Baptist Convention have already solicited bids from other firms in a move that could oust AA as well.

Leading the list of big losers on Thursday was Sepracor (SEPR) which dropped -27.63 to $19.60. The company said the FDA had issued a "not approvable" letter after safety tests on its allergy drug Soltara. SEPR issued a statement saying it had used the drug as a significant part of its revenue projection for 2002 and would have to restate their guidance. From the hit the stock took you would have thought they filed bankruptcy.

Would the last one out please turn off the lights. CURE, which manages wound centers for hospitals, announced that the CEO had resigned and two other executives would also resign. The CAO and an EVP elected to walk with the CEO after a fight with the chairman over his selling of the stock. The company said it was unfortunate but that the executives would be replaced and they anticipated no impact to operations or guidance. They expect earnings of $.80 for 2002 compared to a loss of -2.54 in 2001. The stock fell to a low of $7.37 intraday from a high near $20 on Monday. Eric had profiled CURE in the Wednesday watch list as a possible short play if it broke $16 based on volume analysis. Had you taken that trade when it broke at 9:40 this morning you would have been a happy camper!

The tech sector traded sideways on Thursday due to profit taking and worries over the INTC and SUNW mid-quarter updates due after the bell. Intel narrowed its guidance with a slight bias to the upside. Previously it had estimated $6.4-$7 billion in revenue and they narrowed that to $6.6-$6.9 billion. Positively they expect the gross margins to be slightly higher. They said the microprocessor business continues to follow seasonal patterns but the communication business remains weak. Andy Grove said there was no evidence of any recovery in the that sector. They expect processor sales to be a little better than normal due to strong follow through in 4Q PC sales. After an initial drop on the announcement INTC rallied to about where it closed the regular trading day.

SUNW also announced that they were on track to meet estimates and they were making good progress on returning to profitability. The CFO said orders were good but just slightly behind schedule. He estimated that many would come in too late in the quarter to be turned around and be recognized in revenue. SUNW jumped slightly in after hours trading. I like SUNW and I am thinking the time may be right to grab a few lottery leaps on the next dip like the $10-Jan-2004 for $2.90. That gives them plenty of time to make a recovery. Just an opinion.

The retailers were mixed after huge differences were announced in same store sales. Stores with huge increases included WMT +10.3%, KSS +14.4%, TGT +8.5%, JCP +12.5%, PIR +17.2%. Losers included GPS -17%, FD -2.8%, MAY -2.7%, TLB -17.7%. The biggest loser in stock price was Talbots with nearly a $4 drop. The biggest winner was ANN which soared +2.05 after posting earnings which nearly doubled the same period last year.

We are firmly entrenched in the 2Q earnings warnings season and that is good news for the markets. It is good news because the warnings have been fairly minimal. There has not been a rush to say anything bad which leads traders to the conclusion that there could be positive earnings surprises in our future. Many analysts actually expect a wave of positive surprises as major corporations file their 10Ks next week, as I mentioned about IBM above. If the trend is to "over disclose" current accounting practices and there are no nasty surprises then it could be construed as another positive event for the markets. Conversely if the disclosure by these companies paint a picture that includes things investors don't like then we could see a negative wave develop. One thing for sure, investing is never dull. Just when you thought the markets were destined for stardom again there is another accounting cloud on the horizon.

Retail investors began applauding the recent rally by throwing money last week. TrimTabs.com said equity funds received $3.2 billion in new cash for the week ended on Wednesday. Traders are buying the dips and bears are selling the rallies but volatility is basically flat. There is a war underway and the battle lines are narrowing. The Dow has tested 10600, four of the last four days and fallen back. However each pullback has produced a higher low. The Nasdaq has closed over 1875 for two days now and was looking good until the INTC/SUNW announcements after the bell. Our fate rests on how investors interpret those updates. Futures are down slightly at 7:PM but it is still too early to make a call on that basis. The bottom line is a need to remain positive until the markets tell us otherwise. That would be a drop below 1850 on the Nasdaq and 10425 on the Dow. The S&P is looking very good as long as it stays above 1145. It is only -18 points below a retest of its breakout level at 1175. Despite a down day the advance/declines ratios were still positive on decent volume and that is a good sign. The February Jobs Report is due tomorrow and a positive number could be very bullish. If we get a repeat of last Friday the bulls will be firmly in control come Monday so keep your fingers crossed! Enter very passively, exit aggressively!

Jim Brown

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