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Frustrated Fed Heads

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      09-24-2002           High     Low     Volume Advance/Decline
DJIA     7683.13 -189.00  7871.23  7666.00 1.99 bln    966/2238
NASDAQ   1182.28 -  2.70  1200.45  1169.04 1.64 bln   1240/2144
S&P 100   410.87 -  6.51   417.99   409.81   Totals   2206/4382 
S&P 500   819.27 - 14.43   833.70   817.38 
RUS 2000  356.58 -  2.10   360.43   355.09 
DJ TRANS 2097.17 - 37.40  2136.26  2246.87   
VIX        45.38 +  0.67    46.77    44.18   
VXN        59.40 -  0.45    62.01    58.25
Total Vol   3,872M
Total UpVol 1,217M
Total DnVol 2,525M
52wk Highs    81 
52wk Lows    916
TRIN        1.73
PUT/CALL    0.86

Frustrated Fed Heads
By Jim Brown

The Fed met, argued and dissented but left rates unchanged again. The markets anguished over their expected decision all day and after it was announced there was still confusion of what to do. Despite "risks weighted to the downside" the Fed said the economy was recovering slowly but they would continue to watch for further signs of weakening. Thanks guys, it is comforting to know you are in control. Or are you?

Dow Chart

Nasdaq Chart

The Fed took the unusual step of listing the names of the two dissenters in the announcement and many feel this was a weak attempt to suggest they could cut rates intra-meeting. There is no meeting in October and the next meeting is Nov 6th. The Fed still said its posture was accommodative and should be sufficient to foster an improving business climate. They did caution about Iraq and the possible impact to the economy. Governor Gramlich and President McTeer voted for a rate cut. The markets were not impressed and after several competing buy/sell programs the indexes headed to the lows of the day. Those lows for the Dow were back to October 1998 levels.

The stock news for today was so plentiful and so bad that I hardly know where to start. Cisco CEO John Chambers said last night that the economic recovery appeared to be receding and visibility by their major customers was becoming increasingly difficult. Translated that means fewer orders and more push outs.

Intel rose in early trading after Piper Jaffary and Salomon raised estimates for mother boards for September. Ashok Kumar now sees shipments up +13-14% vs prior estimates of +10%. He felt the risk of an Intel earnings miss had decreased. This powered the SOX all day and allowed it to close up +3.39. This was only a day after several brokers lowered their chip estimates for 2002 and 2003. Obviously there are several schools of thought on this topic. NVLS warned last night that orders could be -20% less than expected for the current quarter.

Lehman spoiled the pre Fed party early by missing earnings estimates of $.85 cents by -15 cents. Trading profits fell from $637 million to $234 million. They said the market conditions from last quarter were getting worse. Weyerhaeuser warned that economic conditions were going to cause it to miss earnings by -5 to -10 cents per share. ROH, a specialty chemical maker, warned that earnings would miss by four cents. Services company URS said the economic downturn had eroded city and state budgets and they would miss estimates by up to -13 cents. Whirlpool warned that they would miss estimates on supplier problems and the reduction of consumer spending on appliances. They said cars and houses were capturing all the excess money available. I have been saying that for weeks.

The two big caps I have been discussing, IBM and GE, were also in the news. JPM cut estimates on GE and said they expected them to warn that double digit earnings in 2003 was unlikely. GE closed the day down -.50 at $25.90. JPM cut GE estimates by six cents. Morgan Stanley warned that IBM had exposure to its pension plan and IBM would suffer earnings hits from higher contributions to bring the plan into compliance and lower income from investments. They also expect IBM's option expense to be 15% of 2001 earnings and growing. There is an increasing belief that IBM will warn within the next week and the stock fell below $60 on the news.

Consumer Confidence fell for the fourth straight month to 93.3 in September. Although the decline was less than expected the present situation component fell to 88.5 and the lowest level since 1994. All of this is relative since most of the survey was completed before the majority of the current market drop. The October survey is likely to be significantly lower and could be the impetus that will cause the Fed to act again. People planning to buy homes fell to 3.3% from 4.5% last month. Jobs are seen as increasingly hard to get and business conditions were seen as getting worse. Maybe the Fed did not see this survey before making their decision. Respondents planning on buying a car fell to the lowest level since June-2001. So much for zero financing.

The lack of car buying did not help retailers. The Chain Store sales index fell to 2.7 from 3.7 last week. This was the worst reading since April 2002. Were is not for the release of the Monsters Inc DVD/VHS movie the numbers would have been worse. Even the discount stores are seeing red. WMT, TGT and FD all warned on Monday that sales were under plan again.

Airlines continued to trend lower on multiple news events about the health of the industry. There were comments about two new bankruptcies on the horizon. Over 70,000 workers have been cut in the last 12 months. 265 planes have been grounded and according to the AMR CEO the industry has had to take on an additional $18 billion in debt to make ends meet. The market loss on airline stocks has caused a $12 billion deficit in airline pension plans alone. The push was on in Washington to borrow money but the representatives appeared ready to let some more companies fail to eliminate competition and pricing pressure for the survivors.

Oil rose to $31 a barrel and warnings were flying everywhere about the impact to the consumer and another reduction in retail sales with gas pumps sucking money out of wallets. Chalk up another negative for Consumer Confidence in October.

After the bell Micron posted horrible earnings. They missed estimates for a loss of -19 cents with a loss of -97 cents. They blamed slowing PC sales, increasing competition and falling prices for memory chips. They said chip prices had dropped -30% in the last quarter and they took a huge charge for inventory write down to current price levels.

TrimTabs.com warned that all signs pointed to a further market drop. They said August saw negative fund outflows and September would also. They track buybacks and takeovers and said buybacks were running $9 billion a week from June to August but had dropped to only $1 billion a week over the last four weeks. This drop in corporate buying indicates that less cash is coming to market, companies are not confident their stocks will not go lower and companies are not creating free cash at the same rate as they did last quarter. All very negative events for the market. They said the last time the market outflows were this bad was Oct-1988. That is a cheerful thought.

The Dow closed at a level not seen (on a closing basis) since Oct-1st 1998. Now under 7700 a drop to the July intraday lows of 7532 seems extremely likely. The Dow is on track to post its worst quarter EVER at -15.7% as of today's close. With all this negativity you would think the market internals would be off the scale. Sorry to disappoint you but with the Nasdaq trading in positive territory most of the day the oversold conditions are not serious. The sideways movement for the Dow/S&P today relieved the critical pressure points. The VIX closed up only slightly at 45 and the TRIN was only mildly oversold at 1.73. The Put/Call ratio was actually under 1.0 at .86 for the first time in several days.

The internals are not going to stop the drop. However, there are significant support levels below us. With the 7532 intraday July lows only -130 points away we could easily hit that on the open. There will probably be considerable program buying in anticipation of a double bottom in that area. Adding to the close support is the end of quarter window dressing possibilities for the end of the week. Monday is the last day of the quarter and I am torn on the likelihood of funds buying on Thursday or Monday to dress up their statements. This assumes they actually have money to spend. I doubt Friday would be a buying day with event risk over the weekend. This means Thursday could be light as well. Traders who have stock to sell know this pattern and could wait for Monday to dump their load.

This brings up the following scenario. With any negative news before the open we could see the bids pulled and the July lows hit in the morning. If double bottom buyers appear then end of quarter buyers may want to jump in as well to try and get stock cheap. This could give us an artificial lift through Monday but after that those same EOQ buyers become BOQ sellers and the October crash should begin. This is just a possible scenario. Another scenario making the rounds has a bump at the open on Wednesday and then a straight dive to levels significantly below 7500 by next week. About the only thing common in all the available outlooks is a belief that 7500 will not hold after Monday.

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Enter Very Passively, Exit Very Aggressively!

Jim Brown

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