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Market Wrap

Hamburger Anyone?

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      06-25-2002           High     Low     Volume Advance/Decline
DJIA     9126.82 -155.00  9413.08  9111.25 1.46 bln   1304/1693
NASDAQ   1423.99 - 36.40  1475.58  1419.25 1.86 bln   1341/2136
S&P 100   483.42 -  9.62   499.78   482.07   Totals   2645/3829
S&P 500   976.14 - 16.58  1005.88   974.21             
RUS 2000  452.45 -  6.64   463.13   451.16
DJ TRANS 2627.92 -111.70  2740.06  2615.41
VIX        31.47 +  1.60    31.64    28.65
VXN        59.88 +  1.23    60.28    58.34
TRIN        1.19
PUT/CALL    0.76

Not steaks, chops, prime rib or roasts. Hamburger, ground into unrecognizable lumps by the markets. The bounce last week kept the bulls alive for several days. The bounce yesterday was like opening the door to the feed lot gate and leaving a trail of corn right into the slaughterhouse door. Bulls marveled at their luck and rushed to gobble up the free food right up until the lights went out. After spending the first three trading hours trying to break resistance the bulls finally gave up and the recent pattern repeated itself with a dive into the close.

Chart of NYSE/NASDAQ up/down volume

Chart of the Dow

Chart of the Nasdaq

The day started out well with the Existing Home Sales coming in at 5.75 million. This was below last months rate but better than the consensus of 5.60 million. The housing market is still alive and well and continuing to feed off lower interest rates. Consumer Confidence came in at 106.4 which was the lowest level in three months but still above consensus estimates of 105.5. These numbers should have reassured investors that the economy is still on the recovery road but the bearish sentiment was just too strong to overcome.

Bearish signs still abound and you know the old saying, "Things in motion tend to stay in motion" and that is still true today. Starting the day was news that UAL had asked the government for $1.8 billion in loan assistance. This makes them the biggest carrier to ask for assistance as a result of the 9/11 disaster. The company has lost more than $2 billion since the attack. US Airways was sued by FLY, an airplane leasing company, for not making payments on planes and refusing to return them. S&P cut its debt rating to "selective default" after the company said it was attempting to negotiate with creditors and alter contracts. U said it might have to file bankruptcy if it could not win concessions from employees and creditors.

Adding to the transport sector woes was a guidance statement from FDX which was substantially less than current analyst estimates. There was a heated feud on CNBC after the network called the guidance a warning. The CEO claimed it was just guidance and not a warning since they had never issued guidance about this quarter. CNBC claimed that since it was less than the consensus, which was clearly known by the company in advance, that it was a warning that they would not meet estimates. Whichever term you wish to use it prompted investors to knock a whopping -$8.02 off the stock to close at $48.11. With these significant hits to the transportation index, a -111 loss to 2628, the Dow had no chance.

Despite the positive guidance from Dupont and good news from Boeing the Dow gave back nearly all of the Monday bounce. Dupont said they would beat analyst's estimates by as much as 20% due to higher than expected sales. Considering the drought in the manufacturing and chemical sectors this was a breath of fresh air. However, DD was only able to hold on to $.13 cents of gains for the day.

Boeing said orders for planes was running ahead of schedule and narrow body planes were in demand from lower cost carriers. BA also managed to hold on to $.13 cents of gains at the close. Boeing has an ace in the hole and it is expected to announce a whopping $90 billion in orders from the government for a fleet of tanker aircraft to replace the aging 707 style currently in force. The current tanker fleet is more than 35 years old and those are hard years. The current worry is that fatigue is setting in and very soon those planes will start falling out of the sky. Not only would that be an expensive crash but if it happens while a dozen or so Stealth fighters or F18s are showing up with empty tanks then it would be even worse. Boeing has offered to lease the planes, newer 767 models, to the government in light of the current funding problems. This would be a win/win deal for Boeing. Still, it only gained 13 cents. Along the same lines Northrop (NOC) said it was days away from a $17 billion contract to modernize the coast guard. Over 100 new boats, 35 new planes, etc. Looks like a good time to be in the defense business.

The clone wars coming to your PC soon. No, not the movie but if you are AMZN it is still the attack of the clone. Buy.com announced a plan to sell books for 10% less than the AMZN prices. The price war began heating up after AMZN announced free shipping on orders of $49 or more. Buy.com then announced free shipping on all orders with only a weight limit exclusion. Amazon has cut prices four times in the last eleven months. Most analysts believe the cheap books are loss leaders to get AMZN customers to visit the website and hope they buy more expensive products. AMZN dropped -2.17 or 12.5% on the news.

Another price war is heating up in the PC sector. HPQ announced a new line of inexpensive printers. They claim to have spent more than $1 billion and three years to design and produce more than 50 new printing systems. Since the majority of profit is in the ink cartridges it is imperative to get consumers to use your products. The printer sale is once only but they sell expensive ink cartridges for years to come. Lexmark may be the big loser since a reinvented HPQ could grab serious market share. LXK dropped -3.33 on the news.

News after the bell was enormous. 3Com beat the street by six cents and PALM earnings were inline with estimates. Micron missed estimates and guided lower saying inventory levels were growing in light of slowing PC sales. This news should send the SOX even lower on Wednesday. However this was insignificant compared to the blockbuster below.

In a story broken after the close by CNBC it appears WCOM has committed massive corporate fraud by intentionally overstating its income by as much as $3.6 billion over the last five quarters. The CFO was dismissed, creditors have been notified and bankruptcy appears imminent. The company accounted for normal costs as capital expenditures in order to falsify earnings and stay within their debt requirements. This means the $29 billion in public debt will likely be defaulted and investors will take a beating. This Enron type accounting scandal is likely to send the markets to new lows as investors already fed up with the markets problems throw in the towel. S&P futures are down -14.50 as I write this. The auditing firm during this period - Arthur Anderson.

As a setup day for tomorrow's disaster today was no slouch. Down volume on the Nasdaq beat up volume by 1.548 billion to 283 million. This was a better than 5:1 margin. The NYSE did not fare much better with a 3:1 ratio. Volume was only moderate at 1.46 B for the NYSE and 1.86 B for the Nasdaq. Certainly not capitulation numbers. The WCOM disaster today brings up the very real possibility that Wednesday could be that capitulation day everybody has been wanting. With the major indexes closing just above the Monday lows and except for the Dow, just above the 9/11 lows, any serious drop tomorrow could trigger all sorts of selling. Margin calls are already rising and a monster down day could flush out all those still holding on margin. Foreigners still long the U.S. markets despite the declining dollar could decide the corporate accountability does not measure up to the risk and pull their money for safer investments. The dollar set new lows today against the Euro and that was before the WCOM news. The markets are facing a crisis of confidence. Confidence that earnings will improve. Confidence that those earnings will be reported truthfully. Confidence that the recovery is really underway. Confidence that stocks will ever come back from these lows. Confidence that investors will live long enough to see these events come to pass.

I have no confidence crisis. I am confident the market will tank at the open. I am confident that there will be huge moves in the indexes. I am confident that aggressive investors will make huge sums from those moves. Our only task is deciding how to get in front of those moves at the right time and with the right amount of capital. If you follow the Market Monitor during the day you know we will be doing our best to make this happen. I am excited! This could be THE event that that culminates the bottoming process. If not then S&P 500 may not refer to the index but the level at which that index trades!

Enter Very Passively, Exit Aggressively!

Jim Brown

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