Option Investor
Market Wrap


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      06-10-2002          High     Low     Volume Advance/Decline
DJIA     9645.40 + 55.73  9718.09  9562.54  1.22 bln   1657/1562
NASDAQ   1530.69 -  4.79  1551.80  1526.96  1.51 bln   1573/1885
S&P 100   509.03 +  1.71   513.10   505.63   Totals    3230/3447
S&P 500  1030.74 +  3.21  1038.18  1025.45             
RUS 2000  469.29 -  1.22   473.50   468.60
DJ TRANS 2721.12 + 34.46  2735.67  2685.21
VIX        26.15 -  0.50   27.06     25.47
VXN        52.54 +  0.30   53.09     51.46
TRIN        1.00
PUT/CALL    0.77

By Buzz Lynn
Click here to email Buzz

"Dirty Bomb to be unleashed on U.S. soil! Markets tank!". Furthermore, "We arrested the terrorists responsible. Markets recover and move higher into the day". So how much headline risk can we stand? If we trade for a living, it's classified as "risk" only if we're on the wrong side of the trade. For the nimble, it's called opportunity. And for everybody else? Noise.

I could go on for a good filibuster's worth about the current sad state of the markets, the U.S. and world economies. Veteran readers would accuse me of being a broken record though, so I'll spare us all the agony of another tirade. Let me just leave it at this: Instead of thinking it's going to rain, I'm building an ark. But you already knew that

However, for those just joining us who doubt the need for an umbrella, let alone an ark, I want to share some truly great research I picked up over the weekend. Maybe I should save this for another column, but I won't. It was a piece of material I received from John Mauldin, another smart and grizzled veteran of Wall Street. I found the content really interesting since this relates to truly smart money at work. Anyway, Mauldin's research is first rate and best of all, it's free. I don't understand why it's free, but I'm not one to look a gift horse in the mouth. Anyway, here's Mauldin weighing in a Warren Buffet move.

Mauldin leads in by noting with regard to the false premise that companies know best how to invest earnings. Consequently dividends rate way down in the pecking order of importance to management. How did he reach that conclusion? In his own words: The answer is, "that companies are not very good at investing capital. If a company pays out most of its earning in dividends, it only gets to fund its very best ideas. Evidently, when it can fund its 10 best ideas, or pay rich multiples to purchase other companies (as Cisco, Tyco and WorldCom did), then many of those ideas do not work, and result in losses. It says something about the arrogance of today's CEO's when they think their 10th best idea is better than their shareholders first best idea."

ZING! Reminds me of the late 1980's when in the frenzy to break up companies, whose sum of parts were worth more than the whole, one corporate raider (Jacobs, Pickens, Ichan, can't remember now) remarked that, "Isn't it funny that that this company is worth less with management than are it's assets without management?" In other words, management was a detriment to shareholder returns. Hmmm. . .history repeats. Anyway, continuing with Mauldin. . .

"Unless you are involved in the arcane trivia of the markets, you may not have noticed that Warren Buffett just sold a remarkable piece of paper. Dennis Gartman (of the exceptionally well-written Gartman Letter) tells us: "It is a convertible debt issue, carrying a 3% coupon, with an attached warrant that will allow the buyer to "call" from Berkshire shares at approximately 12.5$ above the level that Berkshire "A" shares sold at two weeks ago. In order to keep the warrant alive, however, the buyer will pay to Berkshire an annual fee of 3.75%. In other words, Berkshire has sold debt with an annual negative interest rate of .75%...retaining the right to sell shares at a substantive premium to today's price! We can only recall the Swiss government having been able to make such a grand debt issue, doing so back sometime in the late 70's or early 80's to the best of our knowledge, when money was flowing to Switzerland as a safe haven and the Swiss tried to stem that tide by offering a negative coupon."

"Think about that. Supposedly sane institutional investors are going to pay Buffett for the right to take their money. Berkshire is such a proxy for the stock market that you have to be a major bull to enter into such a transaction.

I for one cannot figure out why anyone in their right mind would do this. There are certain rules in life: you don't play poker with guys called Blackie, you don't shoot pool with fat guys called Slim, and you don't take the opposite bet against Buffett.

Berkshire has all the money it needs. Why would Buffet risk serious dilution of his shares by selling these relatively cheap options if he really thought his stock was going to rise? I think he decided to take advantage of a few optimists and add to his bank account. He has got to be chuckling to himself late at night over this one.

The obvious implication is that he thinks we are in for a prolonged bear market."

Amen. Read more of John Mauldin's stuff free at www.2000wave.com. It would be worth it even if you had pay for it.

Anyway, so many newsy items today that had nothing to do with the markets' moves - Imclone insider trading, Tyco's legal counsel ousted (who issued his own press report noting that the company is in complete disarray), Celebrex is no more helpful than Ibuprofen, and the XAU (gold and silver index) fell under its 50-dma.

Nothing here suggests a "return to normalcy" - that of a perpetually charging bull - is about to happen. A 55-point gain on the Dow does not make a pivotal day, especially given the fall from resistance intraday. Also true for those indexes that actually went negative today. So forget fundamentals for a minute, which stink. The future is in the charts.

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

Let's keep this short. Weekly still sliding; daily with shallow stochastic gains, big resistance at the 9887 (200-dma) and 10,069 (50-dma) if it should be so luck as to get there. 60-min is rolling over without even hitting the upper channel. Of course, I guess I could change the line to fit the tops, but the end result would be the same. No case for the bulls here with a very meek 1.2 bln shares trades with advancers fractionally outpacing decliners. The "gain" means little more than a marker of time.

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

Same story, only worse for the bulls and good for the bears here. Weekly showing some candle support about 100 points down at 1400. Daily chart candles are following the downward slope established in January. Support has become resistance and the oversold stochastic has fallen and can't get up. That doesn't mean it won't succeed in sucking in a few diehard bulls on the next daily stochastic bounce. Trading resistance at 1550 with the 60-min chart suggesting a negative day in store. All that said, once the 60-min stochastic cycles up again, it might be time for the market to suck in the bulls like canal water, as mentioned above. 200 and 50-dma's will keep a lid on the bullish action. A meager 1.5 bln shares traded with decliners outpacing advancers roughly 6:5.

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

Pretty weak here too with the weekly stochastic in decline lending a direction to the big picture. Sub 1000 is a real possibility. The daily too is stochastically weak with resistance coming in today at previous support. Adding insult to injury, the 60-min stochastic is rolling over too at resistance formed by a declining trendline. That isn't a perfect correlation, but it's close and follows a familiar downward pattern.

VIX and VXN? Does it matter? Pretty mixed anyway at 26.15. The VXN however has launched upward indicating higher than usual option premiums. Time to sell time premium? Maybe, but still climbing - very unstable indicating that investors are no longer sure of direction.

One note to make for the broad market is the close of the Russell 2000 under its 200-dma for the third day in a row. Should the $RUT break under 457, that would be a "lights out" for the broader markets. Watch that for clues. Not looking real strong right now. Dow Transports on the other hand are higher than they were last Monday indicating that the Dow may find some strength in the next few days (but don't bet the farm expecting the take to fund retirement).

For tomorrow? No a clear signal except to say that the weak daily, and the rolling 60-min oscillators across the major indexes points to further weakness. This is the kind of market that has me on edge. It keeps faking us into thinking a bullish trading turn is a hand then disappoints. The only word I think of here is erosion and/or rangebound with a bearish bias. Bears have this market by the throat, but are not intent on killing it yet. Only when nobody want to own stock, the last vestiges of speculation have been wrung out, when stocks again represent fractional ownership of a going concern designed to produce a cash on cash return for the owner (as opposed to speculative pieces of paper), and when price to book values fall under 1, that will be the time for the long haul - say 7-10 years (but I hope not).

See you at the bell.

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