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      08-27-2002           High     Low     Volume Advance/Decline
DJIA     8824.41 - 94.60  9017.02  8782.03 1,48 bln   1276/1909
NASDAQ   1347.78 - 44.00  1396.40  1346.21 1,45 bln   1096/2303
S&P 100   471.15 -  6.44   482.13   468.56   Totals   2372/4212
S&P 500   934.82 - 13.13   955.82   930.36 
RUS 2000  397.45 - 10.28   408.88   397.45 
DJ TRANS 2383.36 - 41.20  2446.83  2378.11   
VIX        32.73 +  0.44    33.35    31.58   
VXN        50.01 +  1.59    51.50    50.65
Total Vol   3,127M
Total UpVol   840M
Total DnVol 2,258M
52wk Highs    91
52wk Lows    133
TRIN        1.57
PUT/CALL     .84

The bipolar markets reacted to economic news with triple digit swings in both directions. The August slide was postponed until afternoon despite several strong selling attempts. The bulls are fighting for every point and every support level becomes a new battleground. Despite the Intel bombshell the markets reacted well and with no major economic reports on Wednesday it will be interesting to see which way the tide will turn.

Dow Chart

Nasdaq Chart

The morning began with Intel CEO Craig Barrett, speaking at a tech conference in Malaysia, saying that Intel only sees modest growth in the third quarter. Barrett said not to count on the typical fourth quarter rebound because companies were still not spending money on computer equipment. The 4Q is typically the best quarter for tech sales. He went even farther to describe the slowdown in the US economy, the European continent and Asia. He seemed to be building a case for a future announcement. Intel will host its mid quarter update conference call next Thursday. This could have been a preliminary warning that they are going to lower guidance at that meeting. MSFT and IBM closed down on the news but the HPQ earnings tonight were also a negative factor.

HPQ announced earnings in line with estimates after the close but the CFO said in the conference call that the slowdown in the last quarter was worse than expected. He said everyone in his industry were now seeing "new" signs of weakness. He also said they were seeing some risks around the world other than just in the US. They missed the revenue numbers slightly and they affirmed estimates for the current quarter. This ought to be good for at least one earnings warning going forward. If you are seeing new weakness AND global risks, then affirming estimates based on the expected year end rebound might seem to some like a contradiction of terms. I think it was more politically correct to affirm now in your first high profile combined earnings report and then guide down later. You warn now and your $14 stock becomes $10. Warn later after a post 9/11 rally and maybe your $18 stock becomes only $14 again. Who knows, maybe the recovery will suddenly appear and you will not have to warn as much. HPQ profit margins come in at -4.6% meaning they sold their products for 4.6% less than the cost. No problem, they will make it up in volume!

The good news today came from the Durable Goods report. The headline number came in at +8.7% growth for August. This was the largest number since October 2001. Analysts had only expected +1.5% and suddenly all the bad news for the last three weeks was forgotten. Forgotten also was the volatility of this number. Last September the number dropped to over -6%, followed by +9% in October and followed by a -6% again in November. Average those numbers together and you get a modest +1% gain for three months. Average today's +8.7 over the last three months and you get a very tame +1.4% growth. Last month was revised down to a -4.5% drop. What this shows is the volatility of the numbers and that they cannot be relied upon as a single month indicator. Many analysts thought last months loss would be recovered this month and it appears the pendulum swung too far again. Next month I would expect another negative number to bring everything back to the +1% growth again. For instance it showed that computers had increased +14% from last months -10% drop. Obviously the computer manufacturers and chip makers have not seen this renewed buying so the number to me is very doubtful.

The negative economic news came from Consumer Confidence which fell to a nine month low at 93.5. When you consider the stock market was in rally mode most of August you cannot blame the falling confidence on stocks. The present situations and future expectations components both fell for the third month in a row. More consumers said they were planning on buying a house or major appliance but fewer said they were going to buy a car. Compared to the headline numbers only 22% of consumers felt businesses would be better off six months from now. This is a very bearish scenario. The market sold off on the news and ignored the Durable Goods until a couple buy programs bounced it off support around 11:00.

Retail stores took another hit after posting another week of less than expected sales. Targets were lowered for this and the fourth quarter based on fewer shopping days, no tax rebate and the 9/11 anniversary, which is expected to keep consumers at home watching TV. The back to school buying wave has not appeared and the consumer has cut back on apparel spending. The consumer appears to be conserving cash and putting off purchases not necessary. Merrill Lynch cut its forecasts on 17 retailers including TGT, WSM, JWN, BJ, TLB, LTD and ANN. Some analysts think the extremely low interest rates are causing consumers to buy houses and cars and saving for those down payments are causing a shrinkage of discretionary spending. Restaurants are also showing a decline in attendance. I can attest to this. I took my daughter to an expensive Chinese restaurant last night and we were one of only TWO tables of customers in the entire building during the entire meal. Yes, there was a football game on but when I questioned the management they said business had been dropping for two months.

On another side note, one of my sons works for a nursery service that deals in landscaping in Denver. Last year the owner told me he kept two crews busy full time, 12 hrs a day, seven days a week. He could bid anything he wanted and had to turn down business even at rape and pillage prices. This year he can't keep two people busy and has no jobs at all this week. Why? He said home owners have no money. He still bids the jobs but when they see how much it costs the common refrain is "I will have to wait for the market to go back up." Definitely a sign of the times when people cannot afford to have their bushes and trees trimmed because of the market crash.

Another Fed member, William Poole, the St Louis Fed President, said that although continued economic weakness would keep the rates low he felt the next move would be a hike in rates. He said the markets would keep the rates low without additional cutting by the Fed. He saw the economy recovering slowly and in a manner that would not cause Greenspan to waste his remaining bullets. The Fed funds futures dropped to only a 14% chance that there would be a cut by October. This was down from 30% last week. This should not be positive for the markets even though it means the economy is long term positive. The congressional budget office lowered their estimates for the GDP to only +2.2% for this year and to only +3.0% next year.

Citigroup announced today that their investment banking arm, Salomon Smith Barney, did give large allotments of hard to get IPO shares to Worldcom officers. Jack Grubman was copied on the emails that outlined how many shares each got. This brought up further accusations that he had something to do with the allocations and that they were used as bribes for lucrative contracts. Still C only dropped -.20 for the day.

Corporate earnings estimates are dropping like a rock with the average for the 3Q now only +11.4%, down from 16.6% just last month. Fourth quarter earnings are now estimated at +22.8% and down from 27.6% last month. It is finally sinking in that the economy is not recovering at the rate analysts had expected and the continued earnings decline will eventually result in further stock declines. These earnings reductions result in negative pressure on prices. If a stock trades at a PE of 50 that means the stock price equals 50 x earnings. If earnings are reduced by -5% a quarter then the stock price goes to 50 x reduced earnings or the PE escalates to a new level like 55 or 60. Granted these are estimates of future growth but many stocks are valued on 50 X 2003 earnings or even 2004 earnings today. Cut earnings -5% every quarter and suddenly 2003 earnings are much lower and along with it the stock price.

Wednesday is a pivotal day. Don't you just love it when a writer says that? Not another pivotal day! Can't we just go back to normal? I would love to but normal is so long ago and so boring most traders today would give up in disgust. There are no major economic reports on Wednesday. We will be free to trade on stock news and the HPQ earnings report. Remember the one with "seeing new signs of weakness ahead"? The markets closed right on critical numbers. 8000 for the Dow, 930 for the S&P and 1350 for the Nasdaq. These are "make" or "break" numbers and I am betting on break! Should the Dow fail to hold 8750 the next real support is 8400. Could we hit that tomorrow? I doubt it but this is the dog days of August. There has been a bullish bid under the market and unless this bid is pulled we are probably doomed to another day of program trading pong which ends up on the downside. Breaking critical levels like 8750 could accelerate those programs to the sell side.

Enter Very Passively, Exit Very Aggressively!

Jim Brown

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