Option Investor
Market Wrap

Okay, Now What?

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      08-13-2002           High     Low     Volume Advance/Decline
DJIA     8482.46 -206.40  8745.52  8473.32 1.52 bln   1014/2184
NASDAQ   1269.28 - 37.60  1324.43  1268.99 1.45 bln   1101/2294
S&P 100   445.30 - 10.85   460.13   444.89   Totals   2115/4478
S&P 500   884.21 - 19.59   911.71   883.62 
RUS 2000  377.76 - 10.80   389.57   377.75 
DJ TRANS 2264.23 - 44.40  2326.27  2261.59   
VIX        39.80 -  0.66    41.35    37.94   
VXN        57.68 +  1.39    58.61    54.72
Total UpVol   464M
Total DnVol 2,757M
52wk Highs    65
52wk Lows    353
TRIN        2.06
PUT/CALL     .71

The Fed has come and gone leaving disaster in their wake and the corporate certification day has arrived. 344 companies due tomorrow have not yet certified their statements and traders left with an empty feeling from the Fed are now wondering if there is another shoe about to drop.

Chart of the Dow

Chart of the Nasdaq

Today was ugly. It was like watching a train wreck in slow motion. Standing on a mountain top (OIN) you see the washed out bridge ahead (Fed announcement) of the speeding train (the bullish market bounce). You grab the person next to you and point, shout, wave and scream but the market keeps moving toward the abyss, ignoring your warnings. Sure enough the Fed does not cut, just like OIN predicted, and the market plunges off the cliff. Surprise, surprise! The media is all-aghast over the unexplained drop and spends hours of valuable air time trying to explain it away. Why, traders got what they wanted, right? Wrong!

Traders were jerked out of their dismal outlook back on August 6th when three brokers went public on the same day with a call for the Fed to cut rates by as much as 50 basis points at this meeting. Here Alan, here boy, cut rates, cut rates, nice Alan. Anybody with half a brain knows Alan Greenspan is nobody's lap dog and several people have said he would go against anyone to prove it.

Still the markets rallied out of the depths of despair and analysts were calling market bottoms at record rates. Suddenly this week many were retracting those bottom calls and warning of new weakness ahead. Bulls ignored them and rallied the markets right back to resistance again while waiting for Alan's blessing. The blessing turned into a curse and shorts popped champagne and piled back into the markets in droves. The problem it appears is that according to the Fed the "risks to the economy remain weighted to weakness due to weakness in the financial markets and fears over corporate governance." Yes, the Fed feels the economy could be headed back into a second recession but did nothing about it. Ouch!

The Fed did adopt an easing bias but in the carefully worded Fed speak but the key words were missing. Those words were "closely monitor economic and financial conditions". These words are required to indicate they are considering or open to an inter-meeting rate cut. Also, wording of the statement contained the kiss of death clause. "The current accommodative stance of monetary policy, coupled with still-robust underlying growth in productivity, ""should"" be sufficient to foster an improving business climate over time." In English, "we already cut eleven times and we are not cutting again anytime soon." Put that in your rally and smoke it. Yes, Alan, thank you sir.

There is no doubt the Fed is worried. Not about the current conditions but about the possibility of more severe problems in the future. They know Brazil is going to meltdown eventually. They probably know more about which companies are really in financial trouble than anyone. They know there could be another terrorist attack at any time. They know they are at risk of a war with Iraq soon. They have to keep their remaining options open and conserve as much ammo as possible. They tried to throw a bone to the markets in the bias change but traders had already blown their rate cut hopes out of proportion. This chapter of the Fed story is now complete and there has already been a reduction in the odds of a rate cut in September according to the futures. Bond traders see the writing on the wall and are already moving to erase that option.

Stock traders are sitting around tonight wondering what hit them. We wanted a cut, the brokers said so! We got a bias change, which the media said we wanted but it was really a warning in disguise. Now what?

Earnings and guidance is what really matters in the end and AMAT joined the ranks of beat and warn tonight. They beat the street by two cents but then lowered industry projections only three months after raising them. "It is now apparent that the economic environment from last quarter has moderated" said their CFO. Customers are becoming more cautious and we now expect overall capital expenditures to decline by -25% instead of the -20% we first projected. Orders are expected to decline -5% to -15% sequentially. AMAT traded down in after hours.

An even more telling piece of evidence for the current economic decline was the announcement by IBM that they were laying off -15,613 workers due to over capacity and lack of sales. This news came from an SEC filing made public today. IBM tried to defer criticism saying they had mentioned previously in the 2Q they were going to layoff these people. Kings X! They refused to give any details in their past comments. There is a difference in saying we will cut some workers and we will cut 15,613 workers! Add this to the 7,000 workers American Airlines is laying off and they will create their own wave of unemployment.

Goldman Sachs and CSFB both went on record today as saying IT spending estimates for 2003 were too high. Goldman said software would probably not grow more than +3% to +5%. CSFB said 2002 estimates were now for zero growth in the chip sector and the 12% growth estimates for 2003 were too high. Finally somebody is catching on to the facts.

With 344 companies still uncertified with a deadline of tomorrow there is a good chance there will be some more surprises. There were three today. Suddenly IPG, CBUK and ADRX "found" some accounting irregularities today, one day before certification, and have asked for extensions. How many more we will have tomorrow is anybody's guess. IPG "found" $68.5 million in missed costs and is going to restate earnings all the way back to 1997. Seems they "overlooked" these expenses and accidentally overstated earnings but they have taken steps to prevent it from happening again.

Without beating a dead horse, the economy still has challenges ahead. Rate cut hopes are dead and we are left to focus on stock news during the two worst months of the year. The bulls are not dead and they will probably try to buy this dip but the underlying bid from the last week was pulled this afternoon. Without that bid the next week will be significantly different. I am not predicting a crash or rally but the volatility will definitely be back. 466 of the 500 stocks in the S&P have posted earnings for last quarter which leaves us with very little positive motivation. Dell will be the big earnings news this week when they post on Thursday after the close. They have already pre- announced so there should be no surprises. The only worry is their guidance going forward.

The rest of this week could be very choppy as bulls and bears battle for control. I would be really cautious about opening any large positions unless you are very confident of the prevailing trend.

Enter Very Passively, Exit Very Aggressively!

Jim Brown

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