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Market Wrap

Spring Forward, Fall Backward

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      08-06-2002           High     Low     Volume Advance/Decline
DJIA     8274.09 +230.50  8418.15  8049.03 1.76 bln   2341/ 854
NASDAQ   1259.55 + 53.50  1279.57  1224.80 1.45 bln   2422/1042
S&P 100   431.17 + 12.61   439.84   418.56   Totals   4763/1896
S&P 500   859.57 + 24.97   874.44   834.60 
RUS 2000  380.79 + 13.87   380.79   367.12 
DJ TRANS 2235.50 +103.20  2256.69  2132.71   
VIX        45.73 -  3.58    47.29    44.09   
VXN        64.18 -  3.34    67.08    61.94
Total UpVol 2,948M
Total DnVol   481M
52wk Highs    58
52wk Lows    371
TRIN        0.61
PUT/CALL     .76

That may be the key phrase for adjusting changes in daylight savings time but it is also the key phrase for our current market movement. The -269 point loss on Monday was countered by a +230 point gain today. That may be quite a gain but well off the +374 point intraday high. The bounce came on strong short covering on the heels of a -700 point three day drop.

Chart of the Dow

Chart of the Nasdaq

No, stock fundamentals did not change. Corporate accountability issues did not disappear. Cash did not come roaring back into mutual funds. The bounce today came after a huge asset allocation program moved the markets overseas over night. A fund with a stated asset allocation of 70% stocks and 30% bonds for instance, may allow those ratios to slide with the market to 60/40 or even 55/45 before a program is launched to bring them back in line. If you have a fund with billions under management a 15% to 20% change is significant to the market.

When your downside ratio threshold is reached a buy program is triggered to sell bonds and buy stocks. This can equate to millions of shares in hundreds of stocks. This is what happened overnight in Germany. A fund was rumored to have increased their stock weighting by $5 billion to as much as $10 billion dollars. Germany (+8%), France, Sweden and the UK, were up strongly overnight. The U.S. dollar was also up strongly against 17 currencies in overnight trading. This was the only spark needed to cause some serious short covering but there was more!

Three brokers came out before the open with calls for the Fed to cut interest rates again and quickly. Goldman Sachs, Lehman and Deutsche Bank all said a rate cut was what was needed now to stave off a double dip. Lehman called for a 75 basis point cut by year end. They said it was needed to prevent investor confidence from the falling market to bleed over into consumer spending habits. They also said there was a coming crisis in the credit markets where companies can not borrow money due to very restrictive credit policies. Without loans there would be a continued restraint on capital spending and a slower recovery. This united plea to the Fed prompted shorts to reconsider their positions and attracted many buyers who feel another cut could energize the markets.

The Fed fund futures are pointing to an almost zero chance of a rate cut at next weeks meeting but nearly 82% for the September 24th meeting. Traders with an eye on next Tuesday's meeting and hearing the unified call for a cut may have thought a Fed reaction was imminent. Don't hold your breath. The Fed funds rate is 1.75% and the lowest in recent memory (40 years). By making the -75 point cut suggested it puts them very close to zero and for practical purposes below a zero effective rate. Essentially they have used up all their bullets with eleven rate cuts last year and they are very reluctant to pull the trigger on the last three in their clip. What if something really bad happened and they were out of ammo? That is going to be weighing on their minds going forward. Also, for those with a little longer memory, a few brokers calling for rate cuts has never prompted action before. The Fed tends to call their own shots and could actually lean away from a cut to avoid appearing to be influenced by outside sources. Many have said a cut now could have the opposite impact on the market and could be seen as a desperation act by the Fed.

The market mover after hours was of course Cisco. They announced earnings that beat the street by two cents at $.14 cents. They missed the revenue estimates of $4.9 billion with $4.8 billion. They attributed much of their gains to cost cutting not sales increases. They said major customers remained cautious but steady but the telecommunications market remained "challenged". They admitted being hit by a slowdown in their enterprise customer base but said the serious problems in telecommunications only impacted 20% of their income. They bumped their stock buyback to $8 billion before Sept-12th, 2003 in an effort to blunt investor criticism that they were hoarding $22 billion in cash. $8 billion in $12 stock may seem like a lot but it is less than one percent of the outstanding shares. Shares traded on both sides of positive after the close before moving higher. During the conference call it was announced that the CFO was going to retire as the rumors had suggested last week. He will not however leave until May-2003 and the current controller will replace him. The stock dropped on the news but almost immediately rebounded to session highs near $13.

John Chambers said in an interview that the gross margins were as high (67%) as anytime during the bubble years and this was a result of Cisco taking strong steps to cut back and prepare for the downturn early. I agree and I think he did a good job. They will be very profitable when the recovery appears. However, he also said he was more cautious about the future outlook than he had been in the past. Visibility was tightening and sales in other countries were slipping. He said it was a strong quarter for Cisco and they had done everything possible for this quarter but could not control the economy. (hinting of problems ahead) He said book-to-bill numbers for next quarter could fall below 1.0, and another hint. This means fewer new orders than orders shipped.

The Cisco news and related spin will be critical to the open on Wednesday. I think it was positive in a market expecting the worst. It is too early to predict the end result but the lack of a smoking accounting gun or a multipage dumping of balance sheet items should be positive.

The market needs some long-term positive. Another brokerage went public with its S&P predictions today. Julias Baer said the S&P would be fully valued at 700 and target 750 for the year end. That is an exciting projection considering the S&P closed today at 860.

Martha Stewart has refused to testify about her IMCL stock trades and congressional investigators have demanded her to turn over phone and email records by August 20th. "We are through asking nicely, clearly someone is lying to us and we are going to find them," the committee spokesman said. Merrill Lynch brokerage assistant Douglas Faneuil has testified that Martha's broker ordered him to call her and tell her to sell because the Waksal's were dumping their stock. This contradicts the previous stop loss story and puts Martha in jeopardy.

With the Sept-11th anniversary ahead of us the airlines are already making plans to deal with the lack of passenger traffic. Load factors are quoted to be in the 20% range for the week surrounding the 11th. Sprit Airlines announced today that all seats will be free on the 11th to any city they fly. Most other airlines have not announced specific promotions since having a 9/11 sale could be seen negatively. They are all going to fly drastically reduced schedules but cannot afford to just stay grounded. A minimum number of planes must keep circulating to meet contractual and operational requirements. The airlines are already losing money in record fashion and with loads shrinking daily the losses are going to get worse until this anniversary passes. The same thing is happening for hotels, rental cars, theme parks, cruises, etc. The economy is slowing down even more as the fear of an anniversary event grows. In my opinion this is THE EVENT that will cause the Fed to cut rates again. As August economic numbers are reported the Fed may take action to offset the economic impact of the anniversary.

The markets tomorrow are up for grabs. The gains today were due to an external event. Very rarely does any fund buy $5-$10 billion in stocks in a single day. As I stated last night the VIX and TRIN were very oversold and primed for a bounce. This buying spree exploded when it hit the oversold U.S. internals. Tonight the TRIN is only .61 and the VIX dropped to 45.73. The pressure has eased. The rate cut hype has faded and we are back to fundamentals again. The Cisco news, while they beat the street, was not overly outstanding. The futures were up +9 at one point and at 7:39 are now up only +1.00. I would love to see the rally continue tomorrow but there is significant resistance above us. The institutional market on close orders were strongly weighted to the sell side and that should tell us something. Continue to maintain tight stops whether you are long or short. Tomorrow could be another exciting day

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor

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