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Headache?

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      09-26-2002           High     Low     Volume Advance/Decline
DJIA     7997.12 +155.30  8012.42  7844.62 1.90 bln   2311/ 892
NASDAQ   1221.61 -  0.68  1239.62  1206.91 1.62 bln   1813/1500
S&P 100   428.51 +  6.83   430.75   422.54   Totals   4124/2392
S&P 500   854.94 + 15.28   856.60   841.26 
RUS 2000  370.48 +  5.55   370.83   365.14 
DJ TRANS 2269.42 +102.34  2269.42  2167.41   
VIX        40.12 -  2.29    41.73    39.87   
VXN        59.09 +  2.40    59.75    56.64 
Total Vol   3,753M
Total UpVol 1,890M
Total DnVol 1,832M
52wk Highs   97
52wk Lows   385
TRIN        1.06
PUT/CALL    0.77

Headache?
By Jim Brown

If you are a bull you should have a headache from bouncing off 8000 several times. The Dow tried hard to make it two in a row and succeeded. The Nasdaq did not go along for the ride and finished negative for the day. This divergence was due to more negative remarks on the tech sector conflicting with positive economic reports.

Dow Chart

Nasdaq Chart

The day started out with a better than expected Jobless Claims report with only 406,000 new claims compared with estimates of 425,000. However the prior week was revised up again to 430,000 from 424,000. This was the fifth week over 400K. This pause in the rise encouraged traders but I believe it is only temporary. The continuing claims numbers rose again and when matched with the Help Wanted Index today they should continue to rise. The Index fell to .41 and its lowest reading in decades. Layoffs may be slowing but nobody is hiring. This means the Oct Jobs Report next week could be very bad. With job ads the lowest since the 1960s the outlook for continued consumer spending is negative.

Durable Goods Orders came in much better than expected with a decline of only -0.6% instead of -2.6% as expected. This number is highly volatile and the loss evens out the +8.6, -4.5 numbers for the last two months. This encouraged the markets on the surface but because of the volatility there will need to be confirmation next month.

The best news for the day was the New Home Sales, which soared to record highs at an annualized 996,000 pace. Sales in August were up +1.9%. However, like most government numbers recently, the past monthly records for May, June and July were all revised downward again. Reports from readers from different areas of the country indicate that builders are pulling out all the stops to blowout new houses quickly and reduce inventory levels. Builders are scared that interest rates will turn up once the stock market turns up and they do not want to be caught with a lot of inventory. California is the only area that has reported a continued demand for new homes and only those well under $1 million. With winter coming and inventory being rushed to completion the numbers in November will be significantly less. Also, remember that many houses are sold before they are built and/or completed. That means many of the sales could have been contracted months ago. Also, with the rate of foreclosures at a 30 year high there are a lot more "distressed" houses on the market. This will also lower the number of new houses sold.

Friday will be another opportunity for economics to move the markets. The Q2 GDP will be announced at 8:30 but this is not expected to be a big miss. The estimates are for +1.1% growth. This is a historical look back at the Q2 timeframe and not relative to the current situation. The final Consumer Sentiment for September will also be announced. This is the second look at these numbers and there is not likely to be a big drop below the previously announced 86.2%. Neither of these reports are expected to be surprises and that makes them dangerous. If we get a surprise then the market should react accordingly.

The earnings picture today was mixed. GE led the parade by affirming estimates for the eighth time this year. Shorts covered and the Dow headed for 8000. During the conference call the CFO admitted that the improvement in short cycles businesses had stalled and the plastics business was suffering. Also, they were losing money in GE Equity and their reinsurance group GE RE. The $350 million loss would be made up by a one time gain of $300 million from the sale of another unit. Making up a three cent shortfall in operations with a one time gain is not something that encourages traders. This was the same as a three cent warning and the stock tanked. They declined to give guidance for 2003 because the economic conditions were much tougher than they expected and they wanted to wait until early December before changing estimates. This was not accepted well by the market. GE fell from $28 to below $26 in after hours. GE Capital said it was going to file to sell $50 billion in bonds and estimated that would get them through the first half of 2003.

Phillip Morris chose the news of a favorable court ruling and +1.26 gain in the stock to announce a serious earnings warning after the close. The company said 2002 earnings would now be in the range of +3% to +5% growth vs the +8% expected. They also said it would carry over into 2003 earnings as well. Lower volumes and higher costs were given as the reasons. The stock dropped to $37.75 in after hours, a -$5 drop from the close. MO is a Dow component.

Another Dow component, SBC announced after the close that they were going to cut another 11,000 jobs with the majority in the 4Q. They said they were slashing capex spending for 2003 to only $5 billion from the 2002 rate of $8 billion. SBC has lost three million retail access lines so far in 2002 and revenue dropped -$1 billion in the first half. The company said it would take major charges against earnings in both the 3Q and 4Q. This capex news will hit the already dying network sector with another round of estimate cuts.

RBAK warned earlier in the day that it was experiencing an unusually difficult quarter and would post almost double the loss that analysts were expecting. Nortel also warned again that it would miss estimates for the 3Q. LU, CIEN and TLAB have also warned recently.

After the bell COGN beat estimates by a penny and affirmed guidance that was roughly inline with estimates. MANU also beat by a penny but announced that its president was leaving and they would be cutting -10% more jobs. LBRT announced earnings that fell in the midrange of their previous warning. They said they cut another 110 jobs and warned that earnings for the next quarter would be well below estimates. They said the market had fallen off much more quickly than anticipated during the quarter. SLR announced a loss that was inline with estimates but said they were taking -$2.6 billion in charges. They lowered guidance for this quarter to as much as a -3 cent loss and lower from estimates of a penny loss by analysts. They said they were experiencing a difficult market for all types of electronics. No kidding?

The positive economic reports helped the Dow move back to the 8000 level but window dressing and short covering failed to hold above it. This is critical for maintaining any rally. While I expect the Dow to start off in the cellar tomorrow there is a strong possibility that we could see a rebound before the day is out. The problem is the generally low prices of stocks. Many funds have fixed asset allocation values and with the monster bond run of late there could be some asset allocation moves necessary before the end of the month. This means they have to sell bonds and buy stocks to bring the ratios back into balance. How much this may impact the markets is hard to tell. Most of the buying/shifting could already be over since very few funds shift money on Fridays and Monday exposes their plans to more event risk. Better to bite the bullet this week and get it out of the way. The strong volume the last two days would bear out this premise.

This is setting Friday up as an explosive day. A downdraft at the open based on problems with GE, MO and SBC followed by any early morning moves by institutions squaring the quarter books. The morning volume is going to be heavy and the market direction by days end will be anybody's guess.

Enter Very Passively, Exit Very Aggressively!

Jim Brown

Check out the Traders Corner "Charting Gaps" by
Leigh Stevens in tonight's newsletter.
http://www.OptionInvestor.com/indexes/traderscorner.asp

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