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Market Wrap

Thank You Intel, Maybe.

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        WE 9-06          WE 8-30          WE 8-23          WE 8-16        
DOW     8437.20 -236.30  8663.50 -209.46  8872.96 + 94.90  + 32.61 
Nasdaq  1295.30 - 19.76  1315.06 - 65.51  1380.57 + 19.56  + 54.89 
S&P-100  446.67 - 14.13   460.80 - 13.70   474.50 +  6.06  +  9.62 
S&P-500  893.92 - 22.16   916.08 - 24.78   940.86 + 12.09  + 20.13 
W5000   8481.20 -172.84  8654.04 -222.85  8876.89 +106.61  +198.41 
RUT      391.57 +   .61   390.96 -  9.17   400.13 +  4.16  +  7.52 
TRAN    2257.07 -  8.56  2265.63 -128.69  2394.32 + 54.92  +  7.52 
VIX       40.04 +  4.24    35.80 +  2.99    32.81 -  0.01  -  6.54 
VXN       56.54 +  1.56    54.98 +  7.36    47.62 -  3.03  -  8.05 
TRIN       0.93             1.20             2.87             1.52 
Put/Call   0.79             0.84             0.80             0.51  

The markets rallied on the better than expected Intel warning and the better than expected Jobs Report. Unfortunately both announcements may not have been what investors first thought. When the euphoria wears off on Monday we may be left with something that smells worse than week old Chinese take out.

The Intel news was better than expected and investors fearing the worst raced to cover at the open but after the initial spike and drop the markets failed to reach the days highs again until 3:15 and then only for a brief period. Still they ended the day solidly in the green but end the week in the red. Resistance held and there was no monster short covering rally like we saw with Cisco and Intel last quarter. In short the down trend is still intact.

The Intel news is questionable since they have not told the absolute truth about their financials in over four years. There is a constant shell game about productions rates, inventory levels, product mix, lack of visibility, etc. Analysts asking questions of the president on the conference call probably felt like they were interrogating Greenspan on monetary policy.

There were no straight answers and words were chosen carefully. Intel admits their quarter is very heavily loaded to the back end. Orders for the holidays come in September and Intel admits they may not come this year. In their highly technical analysis of their prospects they said any possibility of a 4Q seasonal sales increase was far from a sure bet. That is far from comforting. Numerous analysts cut their ratings on Intel and warned the stock could drop as low as $12 before becoming fairly valued. With earnings estimated to increase only +15% next year analysts claim it is still very overvalued. Some think Intel could drop to as low as $7. http://www.business2.com/articles/web/0,1653,43369,FF.html?nl=di_bl

Cypress Semi was rumored to have commented at the SG Cowen tech conference on Friday that the back to school sales that everyone has said were weak were actually nonexistent. They said it simply did not happen and that calls into question the coming holiday sales as well. If retail sales are so bad for low ticket items due to tight budgets then how bad are they going to be for big ticket items? I suggest that consumers are probably going to keep that Pentium-III around a little longer especially since prices on components are nearly free. You can upgrade memory for little more than the cost of a dinner at McDonalds for four. You can upgrade your hard drive to 40GB for the price of a dinner for two with drinks at Red lobster. Why spend $1,000 for a new box when less than $100 will do wonders? Do you need 1.2GHZ when 600 MHZ does fine?

The Jobs Report was also more smoke and mirrors. The headline number showed 39,000 new jobs being created in August. What the headline number did not show was that 22,000 were hired as airport security personnel and 34,000 were teachers going back to work. Neither of these events are going to be repeatable next month. Also there was a huge number of temporary jobs added that will be phased out over the next couple months. 41,000 jobs were government related. 69,000 jobs were cut in the manufacturing sector alone. A key point remained that 53.3% of companies cut workers during August. If the government hires workers it may have created job but it does nothing to add to the GDP. Nothing gets manufactured or sold and no equity is built by hiring a clerk or airport screener. Yes, we need these government posts but it will not keep us out of a recession. These facts were beginning to make the rounds by Friday afternoon and likely contributed to the lack of enough volume to hold the rally at its highs.

It was announced that over 100 US and British aircraft took part in the largest bombing raid in four year over Iraq. It was also the second one this week. While President Bush is claiming he will get permission from Congress and develop an allied coalition he is going out of his way to soften up defenses under the guise of policing the no-fly zones. The area they bombed today was the area where scud missiles could be fired at Israel. With reports coming in from the region of massive build ups of men, vehicles and supplies it appears to be a foregone conclusion that we are going to attack them. The reason we should be concerned is the continuing rumor that Saddam has issued the orders for a preemptive strike. This means his time is running short and anticipation is building. It was also revealed that he is supporting a large group of senior Al Queda in northern Iraq. There is also fear that he will use 9/11 as an attack date to attempt to gain favor from other Muslims who hail Osama as a hero.

In that same context German police arrested two people with Al Queda ties that were planning a 9/11 attack on an American base in Germany. They recovered 267 lbs of explosives and a large quantity of chemical weapons (type undisclosed). This should be a huge red flag. There is some strong sentiment that by attacking on 9/11 terrorists will build support among cells that have gone into hiding and put their plans on hold. By going on the offensive again, even if it is only a series of small attacks, they show that they have not gone away and can not be stopped. I doubt they will manage to mount any credible attacks but that cloud will loom over us until next Thursday.

Just in case you thought everything was better after that jobs report let me bring you back to earth. AMR announced after the bell that they would have to cut substantially more than the 7,000 already planned. CAT announced they would be laying off 470 workers and terminating 250 more due to slower truck sales. GE said it was sending out another 500 pink slips Friday and would cut more employees by year end. SUNW was rumored to be announcing another round of layoffs on Monday. TLAB cut 800 jobs yesterday. Nortel said it was cutting 7,000 more jobs and Lucent could be announcing another 5,000 cuts next week. I could go on but you get the picture.

Bill Gross made the news today with a Dow 5000 prediction of sorts. The entire article can be read at www.pimco.com but the bottom line was that stocks were still nearly twice as high historically as he thinks they should be. He is not the lone voice in the overvalued, still have farther to drop crowd but he is very well respected. He manages the biggest bond fund in the world. Critics say he had a vested interest in trashing stocks but his rationale was very interesting reading. Of course with bonds facing a multi year bear market ahead he is probably worried about withdrawals just like equity fund managers over the last two years.

Volume was very anemic on Friday with only 2.8 billion shares trading on all the markets. Up volume was better than 3:1 over down volume but was not strong enough to push the markets over the same resistance that has held all week. Since Tuesday's huge drop the markets have seen three days of triple digit swings but remained no higher than the intraday high on Tuesday. There may be a bid under the market but there is heavy supply above it. The averages are stuck between the 50% and 38% retracement levels and I would be surprised to see them break either until next Wednesday. Especially after the two people in Germany were arrested for plotting a 9/11 attack. The possibilities are just too strong that something major will happen and nobody wants to be caught holding if it does.

Contrary to all the bad news above I strongly believe we will see a monster relief rally on 9/12 assuming nothing happens. High priced stocks, weak economy and war fears will all be forgotten temporarily and I think we could easily see Dow 9000 again. The Commitment of Traders Report showed that the Commercials were very close to the most bullish position since Oct-2001. The $64,000 question is will it stick. Once overbought again those same economic fears will return along with earnings warnings in volume. Investors who bought the relief rally will be tested for conviction and there is still a large contingent that believe we will see new lows in October. One thing for sure, this wall of worry is approaching World Trade Center proportions

Enter Very Passively, Exit Very Aggressively!

Jim Brown

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