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Market Wrap

Carpe' Dementia

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      06-03-2002          High     Low     Volume Advance/Decline
DJIA     9709.79 -215.46  9986.49  9704.18  1.31 bln    877/2344
NASDAQ   1562.56 - 53.17  1621.50  1561.17  1.62 bln    896/2583
S&P 100   514.74 - 14.46   531.45   514.08   Totals    1773/4932
S&P 500  1040.68 - 26.46  1070.74  11039.90             
RUS 2000  474.39 - 13.08   487.59   474.23
DJ TRANS 2689.83 - 59.43  2749.19  2689.54
VIX        25.28 +  2.48   25.35     22.51
VXN        47.71 +  1.76   47.71     45.85
TRIN        2.69
PUT/CALL    0.93

Carpe' Dementia
By Buzz Lynn
Click here to email Buzz

Seize the Dennis - Koslowski, that is. Seems the board of Tyco (TYC) booted Mr. Kozlowski over the weekend for a supposed simmering pot of tax evasion. That was the headline.

Rant on:

I obviously don't know the full scope of the insider knowledge that led to the firing. But as news trickled out later in the day, I discovered this: Mr. K is being hounded by the state of New York for Sales Tax evasion related to the purchase of some expensive art. Perhaps an on-line auction purchase? Maybe that will stick and maybe it won't. But two things stick out to me here that really ignite my rockets, both of them tax related.

First, avoiding sales tax is not a sin. Furthermore I have a chip on my shoulder against states that would actively send agents across state lines to New Jersey to photograph New York license plates in New Jersey shopping malls with the idea of tracking down the vehicle owners in an attempt to shake down the sales tax that "WOULD HAVE OTHERWISE BEEN DUE IN NEW YORK". Think I'm kidding? New York made this a practice as recently as five years ago and may, although I am unaware if the practice has been stopped, still be hounding New York residence for sales tax on purchases made in New Jersey. Kozlowski is a high-profile target with plenty of $$$ to pay if he loses this battle. Plus, it will have bigger implications for New York residents shopping out of state.

Second, that charge was that the art purchases were made through a series of family trusts. The misuse of trusts for the purpose of tax evasion is not a good thing. If Kozlowski has instead misused his trusts to EVADE taxes (rather than avoid), you can bet that the US government through the Justice Department, IRS, and Congressional hearing will give trusts a full proctologic exam in coming months as details of the art transactions come to light. That spells bad news and potential regulation and legislation of all trusts, most of which are supposed to theoretically impenetrable in court, unlike a corporation where the corporate veil is easily pierced to expose the individual to liability despite the intent of a protective entity.

The idea is that as a Trustee of a trust, you have a fiduciary responsibility to act in the best interest of the trust. To date, that means keeping your mouth shut about what assets the trust owns and how those assets are managed. It's a great shield for frivolous lawsuits and asset protection. But high profile investigations into misuse may open up other trust users to incredible scrutiny. To those who use them, better get your ducks in a row, as trusts may come under increasing attack. You've been warned.

Hopefully, individual members of Congress will remember what has covered their personal assets through the years. Politicians don't use too many corporations in estate planning because trusts are safer from attack. They use them for good reason. That will be the only thing that prevents severe scrutiny.

Now I ask those who baled out of TYC today in panic mode, what does personal sales tax avoidance through trusts have to do with TYC's stock price? Nothing. But that's the nature of a bear market. TYC's board apparently didn't want TYC to painted with the "tax evasion" brush. I can't blame them given the current state of distrust from investors toward management. Sad but true, tax evasion was a scapegoat for a jittery board with Kozlowski creating a potential investor confidence liability. The Enron debacle may have turned out differently if the board had given top management brass the boot instead of letting them steer the ship aground.

Rant off.

Had enough? Sorry there's more, but I'll keep it to bullet points.

El Paso Energy's treasurer committed suicide over the weekend, which caused investors to send EP's stock price into a nosedive in anticipation that EP would suffer the same as ENE.

Williams Companies (WMB) got tarred and feathered in the same group as the New York Times ran an article over the weekend alleging from a former employee that WMB participated in energy price manipulation during California's blackouts last year.

I might add that John Templeton, an outstanding 80+ yr. old student of value who sold his mutual fund empire to Franklin a few years back, reveals in his interview with Maria tonight on CNBC that the U.S. equity market is overvalued by approximately double, that he sees no decent values anywhere in the world, and that we would be better off in bonds in stable economies. He omitted the United States, but specifically mentioned Canada, New Zealand, and Australia as such a place. Why? I have a hunch, but perhaps I'm wrong

For readers who live in these parts of the world, I'd be curious to know and would be glad to share the answers with all in the next column, are your countries' currencies backed by a gold standard? Enquiring minds want to know! Thanks in advance for any who respond.

Let's get on with the charts since they tell the real story. Let me remind our faithful readers that this is a bear market. There usually are few big crashes. Instead, the process is a slow bleed with a series of lower highs and lower lows. A friend sends me snippets of Richard Russell, a grizzled market veteran and publisher of the Dow Theory Letters. I like this explanation of his that I received last Friday:

"A bull market wants to advance while taking the fewest investors along with it. To do that the bull includes many frightening sinking spells, reactions, scary intervening declines, and periodic scary news. Since most investors are focused on the daily and even the secondary movements, the main or primary trend tends to be obscured.

By the same token, the bear wants to take stocks down while keeping the largest number of investors along for the downside ride. To do this the bear inserts many rallies, one-day upward explosions, and occasional powerful secondary (upward) corrections -- with frequent portions of hope."

The latter, hope-raising uptick is what happened last Friday. Obviously today was back to reality.

Dow Industrial chart - INDU (weekly/daily/60):

I won't spend much time on these because we all get the picture. 9800 support as broken and the next stop looks to be at current levels around 9700. But as the weekly chart suggests, 9500 is possible. 60-min chart however should get us a technical bounce for call traders gone nuts - gunslingers only.

NASDAQ chart - COMPX (weekly/daily/60):

Once the S&P went south, NASDAQ followed to close at its lowest level this year. No surprise given the profitless, and overvalued state of tech stocks. However, the index is at current support on a daily and 60-min chart, which could yield a technical bounce from oversold. Long term, NASDAQ is the bears' lair, but I'd be looking for a bounce here - again, gunslingers only.

S&P 500 chart - SPX (weekly/daily/60):

What traders saw in the magic of 1042 I'll never know. Looks like support at 1050 was a key level to me. At 1040, the SPX is in no- man's land waiting for the winds to carry it compliantly in any direction of its choice. Support is gone with next level under 1000. I hate to sound like a pessimist, so let me add that it's ripe for a technical bounce (broken record: gunslingers only), but the primary trend is down.

Volume is anemic compared to yesteryear. U.S. buyers are on strike and rightfully question why they should cast more money at what is proving to be a losing proposition. Not to be out done, foreign money is also questioning why it should remain in our markets with such lackluster performance, not to mention the specter of fiat money printed at a reckless pace on these shores. To keep dollars patriated, the Fed's most likely course of action is to raise rates, which would make dollars look good in terms of return compared to other currencies. The other edge of the sword is that higher rates would cost business immeasurable increases in debt repayment thus depressing profits further. To the Fed: pick your poison. To investors: don't drink hemlock.

VIX, VXN, who cares? It's topping out at resistance of roughly 26 currently and is due to fall back if oscillators hold their pattern.

Oh yeah, almost forgot to mention. . .car sales are down, but construction actually rose compared a fractional anticipated loss. Mixed picture here, but I tend to take government statistics with a grain of salt since the government practically invented and legitimized off balance sheet and pro-forma numbers. In short, I don't' trust them.

What for tomorrow? Not much to read into or interpret. Perhaps a technical bounce from the oversold stochastic indicators on the daily and shorter time frame charts. But the weekly down-turned stochastic coupled with a support break on the SPX does not change my generally bearish outlook for now. Gunsling for small profits with risk capital only on bullish moves if you must. But the long-term trend I with the bears and like will be, albeit with bullish headfakes from time to time, over the next few years. I'll be viewing bounces as just another opportunity to go short and profit in much the same way as we used to view dips a buying opportunity.

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