Option Investor
Market Wrap

A Pause to Refresh

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      06-04-2002           High     Low     Volume Advance/Decline
DJIA     9687.84 - 22.00  9739.41  9592.79 1.48 bln   1407/1768
NASDAQ   1578.12 + 15.60  1587.79  1548.31 1.61 bln   1575/1877
S&P 100   516.03 +  1.29   518.94   510.65   Totals   2982/3545
S&P 500  1040.69 +  0.01  1046.06  1030.52             
RUS 2000  473.76 -  0.63   475.11   467.11
DJ TRANS 2663.50 - 26.30  2691.43  2638.42
VIX        26.94 +  1.24    27.93    25.94
VXN        49.66 +  2.01    50.12    47.91
TRIN        1.32 
PUT/CALL     .87

War worries, tax evasion, front running, layoffs, profit warnings and even an attack by Greenspan could not make a big dent in the indexes today. Does this mean the worst is over? Has the retail investor suddenly had enough and decided that the bad news is already priced into the market? While that may be too bullish an assessment there were many positive points to be derived from today's market action.

We started the day with an overhang from the FLEX warning after the company said they would miss estimates for at least two quarters. They said they would miss estimates by as much as -50%. Since Flextronics makes equipment for companies like Cisco the warning had a deeper meaning than just one company's problem. If the manufacturers, FLEX, PLXS, SANM, JBL and SLR are suffering from lack of orders then the companies that use them are suffering also. The networking sector (NWX.X) hit a new low on the news. Still the Nasdaq held up very well under the pressure.

HPQ held its first analyst meeting and Fiorina reiterated the plan to cut 15,000 employees and targeted a $3 billion savings through 2004. Fiorina said she would cut costs as well by consolidating contracts for outsourcing their manufacturing. Yet, another hit for FLEX and the sector mentioned above. She said they would save as much as $800 million in the move. While the HPQ CEO said there was no signs of a recovery in IT spending this quarter she was confident that a backlog of pent-up demand was building. Once managers could see profits improving they would not hesitate to place those orders, she said.

Bristol Meyers got the call they wish they could have ignored today. Twenty-nine states sued BMY over delaying generic competitors for its Taxol cancer drug. BMY had reserved $125 million for the upcoming litigation expense but some analysts estimate the problem could run into billions. The revenue on Taxol was $1.5 billion and depending on tactics employed to delay they could be found liable for treble damages. This is even more troubling for them since they are under suit for the same thing on BusPar. This pattern of tactics will be especially damming if proven.

Layoffs are continuing in corporate America. IBM cut another -1500 jobs and announced a sale of its disk drive business to Hitachi for $2 billion. IBM will take a charge of up to $2.5 billion for the sale and the restructuring of the workforce. IBM said after the bell that the workforce reduction effort was complete. IBM gained +1.20 on a down day and was up slightly after the close.

Corning said it began cutting jobs as announced in April. They will eliminate -1500 jobs this week and -4000 jobs before the plan is complete. They said this would enable them to return to profitability by 2003. They said they will provide further details in July.

Knight Trading got hammered for the second day in a row but for a different reason. Yesterday's trading glitch loss was almost completely eliminated by Monday's close but the stock opened back down at $4.00 today after the SEC announced they were under investigation for front running. The accusation said employees processing orders would place orders for their own account before entering large customer orders that would likely move the stock price. Once the price jumped the employees would close the trade pocketing the difference. With NITE handling 11% of the market volume this could have amounted to significant gains. Oops!

The Tyco CEO was formerly arraigned today on a dozen felony counts of evading sales taxes on $13 million of purchased art. $100 million a year in compensation and you can't afford the sales tax? While many people can relate to bending the rules on a personal basis they do not want those rules bent corporately. This called into question not only the accounting practices but the business practices of Tyco under Kozlowski. Ironically, had he only shipped the art to his New Hampshire home for a few months as he stated on the exemption forms and then transferred it back to his $18 million New York residence he might have avoided the tax legally. That was an expensive decision by a high income CEO.

India and Pakistan are still facing an imminent war. Contrary to rumors during the day about various statements and peace agreements they are still facing each other with guns drawn. The Pakistan leader would not make an unconditional statement about not using his nuclear weapons in case of war. After saying something like "you don't have them if you don't plan on using them" the markets sold off again on his comments. A small country carrying a big stick and begging for recognition among major powers. Just my impression.

AOL please return Holly's calls. Lehman analyst Holly Becker downgraded AOL today after lowering her outlook for the company. She said online advertising slump may last longer than expected and that risk remains for timing a potential turnaround. AOL fell -.89 to close at $17.20.

Greenspaned again. His appearance before an International Meeting of Central Bankers prompted a discussion of the U.S. economy. His statements sent the markets into a spiral once again when he said the giant first quarter bounce in GDP was a one shot affair from a rebuilding of depleted inventory. He said the economy was in a soft spot now after the rapid growth of the 1Q but that the economy was growing, just growing slowly. Investors wanted to hear bullish comments, not qualified boiler plate about a slower than expected expansion. I will bet he is really fun at parties!

Pessimism and skepticism is rampant. Phillip Ruffat, SVP at Mizuho Securities said, "It's like the perfect storm for stocks. You have fraud, deceit in accounting, high valuations and the visibility of a brick." He left out war and broker scams but pretty much hit the nail on the head. What is wrong with this picture? The markets finished flat to up. Surprise! Yes, the Dow lost -22 points but it finished +86 points off the low. The Dow tested support at 9600 dating back to January and that support held. The Nasdaq also held 1550 and rallied to close with a gain despite a severe warning from FLEX. Numerous market analysts, when queried about a bottom, have said when bad news no longer has any impact and volume increases. Sounds almost like today. The bears tried to take it down but like that coiled spring it refused to stay and in the case of the Nasdaq even rallied.

While I am not claiming the beginning of the next bull market I did issue a signal to go long on the Market Monitor at 1:06 with the Dow at 9606. With strong support at 9600 and strong economic news the market may simply have run out of stock to sell. This may only be a temporary situation but the oversold conditions are strong. The VIX hit 27.94 intraday. The VXN hit 50.12 which correlates with the May-7th low and the Jan-30th and Feb-8th Dow lows in the 9600 range. Nothing is ever certain but the stars are lining up for a rally tonight. One day or multiple days are unknown. Keep those stops tight and don't let the bears bite!

Enter Very Passively, Exit Aggressively!

Jim Brown

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