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Market Wrap

Traders Came Back in a Bad Mood

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      09-03-2002           High     Low     Volume Advance/Decline
DJIA     8308.05 -355.50  8659.27  8304.30 1,54 bln    742/2481
NASDAQ   1263.84 - 51.00  1302.67  1263.23 1,36 bln    847/2593
S&P 100   440.03 - 20.77   460.80   439.80   Totals   1589/5074
S&P 500   878.02 - 38.05   916.07   877.51 
RUS 2000  379.13 - 11.83   390.96   379.09 
DJ TRANS 2252.40 - 13.20  2308.28  2248.93   
VIX        43.86 +  8.06    44.13    39.16   
VXN        58.79 +  3.81    59.90    57.49
Total Vol   3,110M
Total UpVol   238M
Total DnVol 2,852M
52wk Highs    95
52wk Lows    283
TRIN        3.88
PUT/CALL    1.05

It appears that traders came back from vacation with a chip on their shoulder. That chip was Intel and numerous brokers took turns trying to knock it off. Add to the tech sector worries a blow to financials, some weaker than expected economic reports and a high profile bankruptcy and the end result was never in doubt.

Dow Chart

Nasdaq Chart

Lehman analyst Dan Niles took aim at Intel today saying he expected them to guide analysts to the lower end of its prior range. Lehman said they expected Intel to cut their 3Q earnings by several cents as a result of an extremely back end loaded quarter. This means they have not sold enough yet to make the numbers and they hope orders for the holiday will pull them out at the last minute. Lehman also said the product mix was almost all low end processors and unit growth was in the low single digit rates. Intel dropped nearly $1 in regular trading and was still dropping in after hours.

The bad news continued after the bell with a warning from Fairchild Semiconductor. They said slowing orders in computing and consumer sectors would slash their revenue to flat or down for the 3Q. They also said that the 4Q seasonal uptick was shaping up to be very modest with lower pricing the only thing helping to increase demand slightly. In English, you can sell anything if you sell it cheap enough but there is still a limit to how much product you can move if there is no demand. Fairchild sells a broad number of commodity style chips into many broad markets. If Fairchild is in trouble then everyone is in trouble. EMC announced after the bell that they still "hoped" to return to profitability in the 4Q but visibility in the IT market still remained "incredibly murky." The bottom line continues to be no orders for computers or anything related to the sector.

Citigroup took a serious hit with a -10% -3.36 drop today after Prudential cut the money center bank to a sell rating. The WSJ reported that the New York attorney general was looking into the activity of senior Salomon executives who handed out shares of hot IPO stocks like party favors. Analysts are worried there could be criminal charges, sanctions and multibillion dollar judgments. Other analysts are worried that the inquiry will spread out to other more active investment bankers and involve other institutions as well. This could cause shareholder suits, penalties and changes in the way this business is conducted.

There are 38,000 fewer trucks on the road tonight after Consolidated Freightways (CF) closed its doors today. Over 16,000 employees found out they were unemployed by a recorded phone call or over the companies website. Lots were padlocked as the company suddenly ceased operations. CF was the third largest less than full load shipper in the country. Yellow and Roadway are expected to profit from their demise.

That was not the only announcement of layoffs today. The WSJ reported that IBM was going to layoff another 4,000+ workers on top of the 15,000 already announced. Things not going well in the tech sector? Actually this was as a result of its merger with Price Waterhouse. BUT, according to the WSJ the companies were quoted as saying that the global demand for IT services was still declining with an upturn not expected until the second half of 2003 at the earliest. Surprise, surprise!

Economically speaking today was not a good day. The Challenger Report announced that job cuts rose to the highest level in the last six months in August. Job cuts rose to -118,067 and set the tone for the next three months, which are the worst months of the year for layoffs. This year is shaping up to be the second worst year since 1989. The number averaged 50,000 a month in the 1990s but has averaged 100,000 a month since early 2001 as the recession took hold. Weak profits are causing employers to cut back staff and close excess capacity. This problem is far from over and follows what I have been predicting for several months. This also sets up the Friday Jobs Report to be weak at best when you consider unemployment claims rose over 400,000 last week.

Even worse than the Challenger news was the Institute of Supply Management report for August, which came in lower than expected. The headline 50.5 number, only .5 above recession levels, was substantially below the 52.0 level expected. Even worse the new orders component fell to 49.7 and the order backlog to 45.0. Both recessionary levels. Inventories also rose from 41.8 to 45.2 and showed that demand is simply not keeping up with even the current weak supply levels. This all means that we may already be in the second dip despite what the Fed keeps telling us. Surprisingly inflation pressures are also beginning to build in the manufacturing sector. There just does not seem to be any good news to be found. With two months of almost zero growth and a deterioration of the internal components the chances of another Fed rate cut doubled to 36% intraday as evidenced by the futures. The problem across all sectors appears to be rising inventory and decreasing demand with retailers refusing to take more product than they feel they can sell and manufacturers being forced to shutdown production lines as finished goods stack up.

Last night the Japan market sank to an 18-year low at 9217. The consumer confidence in Italy sank to a three year low. Investors are pulling funds out of equities the world over as the global contagion from the US recession spreads. TrimTabs.com reported that money still flowed out of funds in the US in August at the rate of -$7.1 billion. Granted this was much slower than the July rate of -$52 billion but it still meant funds had net outflows and had to sell stocks to satisfy withdrawals. With the market starting September off with a bang you can bet that fund managers will be swamped with outflows again this week. With several other high profile economic reports leading up to the NonFarm Payrolls on Friday as well as the Intel mid-quarter update on Thursday, this week is not shaping up as a winner.

As evidenced by the Fairchild announcement tonight we are moving into the earnings warning season for the 3Q. There are just too many negatives and no positives as we go forward. Investors are just too skittish to hold stocks until after 9/11 and if the economic numbers do not improve they may not want to hold them after 9/11 either. This was a very bad day in the markets with decliners beating advancers better than 3:1 and down volume beating up volume by 12:1. The VIX spiked to close near 44 with a +8.06 gain for the day. The TRIN closed at 3.88 and the Put/Call ratio at 1.05. Given just those numbers most traders would think tomorrow would bring a huge rally. The problem remains, rally on what? We may be very oversold but remember we saw VIX readings over 50 in July and TRIN readings over 6.00. Things are bad but they can get worse. Use any rally as an entry point for new short positions until next week.

Enter Very Passively, Exit Very Aggressively!

Jim Brown

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