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Market Wrap

Another Day, Another Drop

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      10-03-2002           High     Low     Volume Advance/Decline
DJIA     7717.61 - 38.00  7913.47  7693.33 1.92 bln   1327/1834
NASDAQ   1165.56 - 21.70  1197.96  1164.51 1.60 bln   1375/1922
S&P 100   412.27 -  3.66   423.47   411.10   Totals   2702/3756 
S&P 500   818.95 -  8.96   840.02   817.25 
RUS 2000  356.85 -  3.37   364.08   356.49 
DJ TRANS 2183.78 + 48.60  2197.13  2135.35   
VIX        44.96 +  1.60    45.74    42.88   
VXN        58.21 +  0.06    59.68    56.67
Total Vol   3,717M
Total UpVol 1,081M
Total DnVol 2,522M
52wk Highs   104
52wk Lows    640
TRIN        1.28
PUT/CALL    1.04

Another Day, Another Drop
By Jim Brown

The markets opened with good news for a change with Dow component DuPont raising guidance from 24 cents to 35 cents a share for the 3Q. The markets opened positive and held it for almost ten minutes. Fear of the ISM numbers due out at 10:00 sent the bulls quickly into hiding.

Dow Chart

Nasdaq Chart

The lack of solid excitement about the DD numbers was due to most of the gains coming from cost cutting and a favorable tax rate change. Not, a rush of new sales. Dow Chemical lower estimates on Wednesday due to higher feedstock costs.

The negative numbers did not last long with the announcement of the ISM non-manufacturing numbers and Factory Orders at 10:00. The ISM numbers came in at 53.9, which is significantly more than the expected 51.2. New orders were up as well at 52.3. The majority of the gains were due to exports which rocketed from 46.0 in August to 57.5 in September. While analysts initially thought this was an indicator of increasing global demand I view this as skewed by news of the current dock strike. Orders were accelerated to get in ahead of the strike and avoid the current stoppage. The inventory component fell again to 44.5% from 46.0 in August, which indicates companies are still lowering inventory to combat slowing sales. After three months of declines the positive headline number encouraged traders but one gain is not a trend.

Factory Orders came in unchanged when the estimates were for a drop of -1.2%. This number is very volatile and readers should remember my comments from last month. In June the orders fell -2.50% and in July it jumped back in the other direction with a +4.40 gain. It is not surprising to see a flat month to equalize those pervious excesses. Internally new orders for computer equipment fell -4.37% and communications equipment fell -3.95%. That is not the killer. Orders for industrial machinery fell -14.48%. Definitely not the positive event the headline number appeared to be. That is if you consider a flat headline number as positive!

The jobless claims came in higher than expected at 417,000 and +5,000 more than last week. The prior week was revised up +6,000 as well. The four week average rose to 423,000 and the highest level since May-4th. Continuing claims rose to 3,681,000 and the highest since June-15th. This does not create any positive excitement for the Jobs Report on Friday. With every week in September higher than expected and then revised upward the following week there is a good chance the jobs number could be negative. With unemployment continuing to rise the outlook is for an economy that is falling back into recession. The nonfarm payrolls tomorrow are only expected to be in the +18,000 range so there is not a lot of room for error. One wonders if the constant upward revisions of jobless claims might be forewarning a downward revision of the nonfarm payrolls from last month.

Another economic problem that could have already pushed us over the cliff is the dock lock on the west coast. Dozens of news stories are hitting the wires about plant closings and temporary layoffs from a shortage of parts. Trains are not taking any more shipments to the west coast because there is no place to park the trailers/containers. Product is beginning to back up at those manufacturers still able to make goods but now they have no place to put them. For companies that have several semi or boxcar loads of goods a day there are only so many days you can stack stuff before you have to quit making it for lack of space. Produce is rotting on the docks. Several automobile plants have shut down due to lack of parts. Some lines cost $10,000 a minute to stop. Depending on who you listen to there are estimates of as many as 200 container ships stacked up off the coast of California.

If the lockout was solved today it would take weeks if not a month to get them all unloaded and there are more on the way. The news keeps talking about a $1 billion hit to the economy every day the lockout continues. There are estimates of that rising to as much as $5 billion a day if the lockout continues another week. That is based on more shutdowns, layoffs, delays, lack of merchandise and the length of time it will take to get everything flowing again. The "just in time" delivery systems that companies have been moving to over the years does not perform well in situations like this. Just getting a few containers off a few ships will not solve the problems. For many manufacturing plants they depend on numerous parts from manufacturers all over the world. Just getting one ship unloaded may only supply a couple of the needed parts. Until all the parts get up to speed and inventories replenished, complete production cannot resume in many instances.

In my opinion there is no doubt left that the country will fall back into a double dip recession based on this problem alone. If the quarterly GDP growth from Q1 to Q2 was only $29 billion and this quarter was not expected to be that strong then a two week hit of $15 billion or so (probably a low estimate) would put us very close to recession levels. Add to this problem the dead stop in the economy that is already being reported for Aug/Sept and the only light I see in the tunnel is the train.

There are companies benefiting from the lockout. FDX, UPS, YELL, ROAD are all moving up strongly based on the anticipation of increased freight traffic and air shipments. With companies sending truckloads of product to any port not on the west coast the truckers are doing well. The air shipments in and out of the U.S. by UPS and FDX they are about to break out to new highs. The trouble in chasing these stocks is that once the lockout is over the shipments will quit. It is not lasting business. It costs 15 times as much to airfreight as ship by sea.

After the close today EMC said it would lay off another 1,350 employees or 7% of its work force. This was in response to claims that the technology spending slump shows no signs of abating. EMC said it would post a bigger loss than expected and no longer expected to turn a profit in the second half of 2002. Joe Tucci, president of EMC, said "the IT spending environment continues to be brutal and even got worse as the quarter ended." While EMC does not have far to fall at $5.00 the "brutal" and "was getting even worse as the quarter ended" comments should spell doom for the other tech stocks that have back end loaded quarters. IBM, INTC, ORCL, BRCD, QLGC, etc, should all suffer tomorrow. With an increasing number of warnings that the spending strike was getting worse in September there is a very good chance that there will be some more high profile warnings in the wings and some misses for companies that failed to warn. With earnings starting in earnest next week the outlook is grim.

Other news after the close included a warning from LH of lower earings. IWOV guided lower and DV cut estimates due to the "technology recession". FDRY, RIMM, CYTC, FMKT and DCTM affirmed estimates. AA had its credit cut to A from A+ by S&P in advance of its earnings before the open tomorrow. Makes you want to rush out and buy calls on AA tonight. (grin) SBUX said its same store sales grew +9% in September.

Like I mentioned earlier the nonfarm payrolls tomorrow will be the key. AA may miss earnings but they are not a high profile tech stock and could be ignored. The jobs are the key. With the Dow closing only +16 points from where it started the week and after a 500 point swing there is no clear direction for Friday. There is no massive short attack but buyers have been soundly pushed back on every rally attempt.

My gut feel is that we would be a lot lower tonight if the $600 million accidental short by Bear Stearns on Wednesday at the close had not occurred. They claimed last night that they had hedged all of it in the 20 min after it was discovered just before the close. What did you expect them to say. Oh my God! We are SHORT $600 million of S&P stocks and we don't know what to do. Can you say open season on Bear Stearns? We would have had a +300 point gap open as everyone tried to get in front of them with an order. They had to say "no problem, we got it covered." Want to bet they were not buying stock like crazy in small lots all day long? I would bet my lunch money that was the bottom under the market today. Sure, they were short and a falling market would have helped them get out alive but nobody can guarantee a falling market and a $622 million short can turn into a major loss in only a few minutes of a short squeeze. I would bet they pulled the trigger on several million shares in a knee jerk reaction to the better than expected ISM and Factory Order numbers. But, this is all just supposition on my part.

Friday is another day. With the EMC warning and no overly positive news on the nonfarm payrolls I would still think the overall trend is still down. Do you think anybody really wants to be long on Monday with a possible warning before the bell by IBM or another big tech company hit by "brutal" drops in IT spending in September? IBM last warned on Monday, April 7th, before the bell. Will history repeat itself? Just my opinion!

We are adding something new tonight. Alan Hewko, a prior futures trader for a private hedge fund, is going to start a section on futures. For the next week or so he is going to do a nightly futures wrap for those traders who dabble in the futures markets. If there is enough interest in the section we will continue it and maybe even add intraday futures trading signals to the website. Read his wrap tonight and if you would like us to continue it send us an email with your comments to the address on the wrap.

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor

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