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Market Wrap

That Makes Four in a Row!

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        WE 9-20          WE 9-13          WE 9-06          WE 8-30 
DOW     7986.02 -326.67  8312.69 -124.51  8437.20 -236.30  -209.46 
Nasdaq  1221.08 - 70.28  1291.36 -  3.94  1295.30 - 19.76  - 65.51 
S&P-100  423.90 - 20.34   444.24 -  2.43   446.67 - 14.13  - 13.70 
S&P-500  845.39 - 44.41   889.80 -  4.12   893.92 - 22.16  - 24.78 
W5000   8023.17 -417.71  8440.88 - 40.32  8481.20 -172.84  -222.85 
RUT      367.28 - 22.70   389.98 - 40.32   391.57 +   .61  -  9.17 
TRAN    2184.02 - 62.85  2246.87 - 10.20  2257.07 -  8.56  -128.69 
VIX       44.55 +  5.24    39.31 -   .73    40.04 +  4.24  +  2.99 
VXN       59.08 +  3.23    55.85 -   .69    56.54 +  1.56  +  7.36 
TRIN       0.86             1.53             0.93             1.20 
Put/Call   1.16             0.89             0.79             0.84 

That Makes Four in a Row!
By Jim Brown

The markets have now posted four losing weeks in a row and the odds are really good they will stretch it to five. The triple witching options expiration week expired peacefully with all the major indexes posting minimal gains on Friday but down for the week. Earnings warnings are accelerating and the biggest week is still ahead.

Dow Chart

Nasdaq Chart

Nasdaq Weekly Chart

Nasdaq Monthly Chart

With no economic reports at the open the markets were left to trade on stock news and that news was led by Duke Energy, which warned before the bell for 2002 and said 2003 would be flat as well. Bowater, a large newspaper and paper products company, warned that they would miss earnings because of the weak economy. The reason? Fewer job ads and fewer merchandise ads in newspapers and magazines had cut the consumption of paper drastically. There is a real indicator! Knight Ridder (Nyse:KRI) warned on the same lines that classified and general advertising had continued to decline into September.

The Nasdaq closed with a +4 gain on Friday thanks to QCOM and the biotech sector. Software and chips tried their best to derail the gains. SEBL dropped -8% after bear Stearns warned that they were having trouble closing big deals this quarter. SABA dropped -11% on inline earnings despite affirming estimates.

Chip stocks just can't get a break. TXN was cut to "inline" by Salomon Smith Barney citing slowing chip unit growth, continued weak PC demand and an anticipated peak in wireless components coming in the 4Q. They cut the price target to $15 from $30. Micron dropped nearly -10% after Bear Stearns cut estimates on the company through 2004 on weak PC demand and pricing pressure on DRAM chips. UTEK fell after warning that revenue for the 3Q could drop as much as 50% from the 2Q. They credited this to the lack of a recovery in chips and slowing order rates along with push outs and outright cancellations. Still the SOX only lost -3.59 and is fighting to hold the 250 level. A couple analysts are predicting 200 as the index low.

The only big chip winner Friday was Triquint Semi (TQNT). The company said it would lose less than previously expected and it forecast revenues to be up in the 4Q to a possible profit. TQNT is a broad based chip maker for everything from wireless phones to aerospace and defense.

CIEN announced they were going to layoff another -450 employees due to the continued weakness in the telecom and networking sector. They said the layoffs would result in $50 million in yearly cost savings. That is over $110K per employee. That is some serious bucks!

The warning season has hit full speed and next week will be very busy for the confessors. So far this quarter there have been 457 negative warnings, 209 positive announcements and 208 inline affirmations. According to First Call the pace of warnings is worse than both the 1Q and the 2Q and we still have three weeks to go.

Dow components have been doing their share to maintain the warning rate. To date MCD, HON, JPM, INTC, HD, DIS have already warned if my memory is correct. EK affirmed current estimates but talked down future expectations. CAT is rumored to be going to warn and PG raised guidance. This is not meant to be a comprehensive list of all the Dow 30 but it is the ones I remember off the top of my head. Notably absent from the list are IBM and GE. We have been speculating on an IBM warning for some time and with the magnitude of the EDS warnings it is almost unthinkable that IBM will not warn.

That leaves us with GE, yes GE! Last quarter GE was rushing to affirm about twice a week. Every time somebody even close to their sectors would warn, GE would make an announcement and affirm their outlook of 17% growth for the year and defend their stock. Well, things have changed. Times are tougher and Dow components are dropping like flies around them and their stock is at $26. There have been cuts in estimates by several high profile analysts due to the weakness in the power and airline sectors but no response from GE. There have been several news articles about increased pension fund liabilities but no word from GE. One analyst said the reduced pension fund income could knock three cents off of GE earnings. GE is notorious for taking costs out of their balance sheets to enable them to make estimates. With the increased scrutiny over financials and accounting rules it is doubtful they can be as free with their reporting this time. I am not predicting a warning from GE but the fact that they did not affirm during the problems with Honeywell makes investors nervous. With their stock price hitting a low of $26.02 on Friday, -$7 off its August highs, it is obvious there is serious concern. Put a warning from GE and IBM in the same week and we could see a really ugly market.

Another Dow component, Citigroup, just continues to be pressured. The stock broke under $27 on Friday on worries that their legal problems and loan liabilities were growing. One Prudential analyst estimated they had a $10 billion liability in the Enron, Global Crossing, Worldcom problems. With Jack Grubman close to turning states evidence against Salomon Smith Barney and civil liability and even criminal cases on the horizon it does not look good for Citigroup.

All of these problems paint a picture for the Dow that is far from rosy. The failure to close the week over 8000 was a technical failure for the Dow. Now only 450 points away from the July lows there is a good possibility that those lows will not hold. This is a scary prospect for most traders. Just like the 8062 level was supposed to hold for the Dow in July and didn't, the 7532 July lows may not hold in October. If we do break that level then it is not a successful retest but just a new low in a longer term pattern.

The Nasdaq is on the verge of breaking critical lows as well. 1216 has held for two days now but worries in the tech sector are far from over. That critical level is Nasdaq 1200. Once that level is broken there are several trains of thought that sees it going to sub 1000. We are getting almost daily chip warnings and downgrades and over valued comments. The PC sector is dying without the back-to-school sales and we are only 30 days away from the holiday surge being over for the PC manufacturers. The chips are made, boxed and awaiting orders for holiday inventory. With consumers buying houses and cars there is not a lot of money left for computers.

Next week we have a full calendar of economics reports next week and Tuesday is the Fed meeting to determine changes in the monetary policy. I see only the slimmest chance of a rate cut on Tuesday. If they were going to do it this would be the meeting since there is not another meeting before the November elections. The Fed funds futures have spiked from 8% to something in the 30% range but the indicators are not there to support a cut. The Fed always telegraphs their intentions to change rates so the bond markets do not get wiped out by unexpected events. The only comments we have had lately have been that the Fed was going to stand pat while the economy recovered slowly. There have been no comments about the Fed needing to take action. The Fed is stuck on this one. If they cut then they are admitting the economy is slipping into danger and the markets may crash. If they don't cut then the markets will realize there is no additional help on the horizon and will sell off as well. The Fed likely sees the coming market weakness and is still unwilling to use one of their remaining bullets. They need to save them in case there is another terrorist event or the economy really starts to decelerate. Still there are some respected analysts calling for a cut on Tuesday. It would be a surprise and could give the market a bounce, but only a bounce.

This sets up a couple of rocky weeks ahead of us. We have an almost 100% chance of a retest of the July 7532 low and the Nasdaq falling below 1200. However, even at these levels analysts are still calling stocks overvalued. We are on track to attack Iraq in the next couple of months and Brazil is going to elect an anti IMF candidate. Japan held a bond auction on Friday and nobody came. For the first time since auctions began in 1988 Japan could not sell all the bonds it needed to fund its programs. This is in an economy that has a negative interest rate and a stock market at a 19 year low. Analysts said the auction failed because investors don't feel Japan has the resolve to correct its currently spiraling economy. The U.S. may be one big economic island but these types of problems will continue to weigh on our markets.

We closed under Dow 8000 for the week. Many investors with day jobs will open the paper this weekend and see the number for the Dow starting with 7 and think, damn, I should have taken my money out when it bounced to 9000 and now it is 7000 again. (obviously it is not 7000 but the impression is what counts). The decision will be made to remove the rest of their shattered account from harms way and wait for better times. Funds will get those dreaded withdrawal calls on Monday and the rest is history. OIN readers know better than to withdraw money now and are looking forward to the coming buying opportunity. Unfortunately the herd is not that smart and will be looking to exit at the bottom. I had several readers tell me this week they were transferring more money into their trading account to be ready. Obviously our readers are smarter than the herd. (shameless plug) Buckle your seatbelts and watch out for sudden drops ahead.

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor

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