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Market Wrap

Buyers Strike

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       WE 12-15        WE 12-06        WE 11-29        WE 11-22 
DOW     8433.85 -211.92 8645.77 -250.32 8896.09 + 91.25 +226.75 
Nasdaq  1362.42 - 60.02 1422.44 - 56.30 1478.74 + 10.05 + 57.60 
S&P-100  451.81 - 12.61  464.42 - 14.43  478.85 +  3.82 + 11.31 
W5000   8426.26 -202.90 8629.16 -217.52 8846.68 + 63.55 +199.08 
S&P-500  889.48 - 22.75  912.23 - 24.08  936.31 +  5.76 + 20.72 
RUT      387.98 -  8.74  396.72 -  9.64  406.36 +  6.36 + 14.08 
TRAN    2318.47 - 70.34 2388.81 + 28.19 2360.62 + 46.64 - 19.12 
VIX       32.12 -  0.56   32.68 +  1.60   31.08 +  4.35 -  4.10 
VXN       50.92 -  1.36   52.28 +  2.80   49.48 +  2.00 -  3.19 
TRIN       1.34            1.11            1.04            1.05 
Put/Call   0.87            0.91            0.62            0.70 

Buyers Strike
By Jim Brown

Worries over global problems weighed on the markets on Friday and lack of volume suggested more of a buyers strike than a rush to sell. A continued sell off in overseas markets and a weak dollar combined to knock the markets back to near key support levels at Friday's open.

Dow Chart - Daily

Nasdaq Chart - Daily

The morning began with several shocks. The PPI fell by -0.4% when analysts had expected it to be flat. This was the largest drop since May and indicates that inflation is nowhere in sight. Also deflationary pressures appear to be abating as well. Core intermediate and crude prices are rising slightly. Unless the core prices begin to fall it indicates manufacturing is holding steady. The current glut in global capacity is slowly being absorbed into the outlook for 2003. Business inventories also rose slightly for the sixth consecutive month but not enough to change the current trend. The +0.2% growth was slightly less than the growth in sales at +0.4% and left the inventory-to-sales ratio at 1.36. Most of the gain was due to a buildup in retail inventories for the holidays. The low I-T-S ratio will help produce a stronger rebound when the recovery eventually occurs. There will be a rush to restock once demand exceeds the current maintenance levels.

The University of Michigan Consumer Sentiment bounced +2.8 points to 87.0 in early December and while more than expected it did not paint a picture of a bullish consumer hitting the malls. This was the second monthly gain from the October low of 80.6 but the rate of increase is less than exciting. The gains in the market from the October lows have been evaporating and with them the bounce in bullish sentiment. With unemployment rising and credit becoming harder to get the lower interest rates are becoming less of a stimulus for the economy and for consumers. This bounce is another step in the right direction but at a snail's pace compared to what economists would like to see.

Global problems included a -192 point slide in Tokyo adding to the eight day drop so far in December. Continued rumblings about Iraq continue to point to an imminent war. One source said only 300 pages of the 12,000 page disclosure was new with the rest being left over from the last inspection effort. According to the U.S. there are massive omissions and according to inspectors most of the Iraq scientists are missing. Traders know where this is headed.

In South America the riots in Venezuela are increasing and oil output is on the verge of a complete stoppage. President Bush called on Hugo Chavez to hold early elections to resolve the current civil problems. Since elections are likely to replace Chavez I would not hold my breath for that to happen soon. Oil futures closed near $28 and a two month high. If a civil war breaks out in Venezuela there are fears that unrest could spread to other neighboring countries with additional financial risk to U.S. companies.

The holiday shopping season is running into further snags as shoppers accelerate their last minute buying. There are reports of lack of inventory on store shelves and selection deteriorating. It appears many retailers were not very confident about ordering for this holiday season and were worried about getting stuck with excess inventory. They ordered less and are now suffering from lack of sales. While this is a problem for shoppers it is going to be a bigger problem for retailers when profits come in below estimates. One spot check on Amazon showed a drought in popcorn poppers with only three models in inventory on Friday, down from a dozen models just a week before.

On the flip side are the retailers that did order too much and are now frantically trying to blow out slow inventory at fire sale prices well before the last minute. Omaha Steaks for instance sent out a mass email Friday offering their popular $52.95 top sirloin package at 50% off and get 12 quarter pound burgers free. A visit to the webpage for this offer showed many other 50% off products. This may have been their planned strategy from the start to capture last minute shoppers but a quick walk through the malls shows the same markdowns. I strolled through a Kohl's on Wednesday night and carts of marked down merchandise filled the isles. This was good since a quick count showed less than 40 customers in the entire store. There were no customers in line and three checkers sitting idly by waiting for someone to help.

These two paragraphs may seem like a conflict of events but I think it shows the hit or miss buying patterns of consumers this holiday. The high demand items are quickly disappearing due to low inventory levels while the mass merchandise categories are not seeing mass buying. Wal-Mart, with full parking lots, hit a new two-month low on Friday while Sears is actually showing strength. I attribute this strength to the Lands End business Sears acquired and which appears to be performing well online this season. Reports from UPS drivers claim Lands End packages are running a close second to Amazon in numbers. I suggested Sears as an investment buy in the Market Monitor earlier this week.

Another challenge for this holiday season was a profit warning from TSG on Friday. Sabre Holdings, TSG, includes Travelocity.com and they are a major booker of holiday travel. They said demand continued to be weak and they were cutting the 4Q and full year estimates. They said dropping capacity and lack of travelers would continue to haunt the industry well into 2003. The fear of another terrorist attack as well as lack of business travel is making the travel business very difficult. In the same sector the UAL bankruptcy is sending ripples through the economy in ways many had not expected. Since most planes are purchased by investors and corporations and then leased to the airlines the bankruptcy allows UAL to cancel those leases. UAL has already cancelled over 100 planes and considering the depressed airline sector those planes are now worth far less to investors than they were just a year ago. Several companies have already warned that earnings will be impacted by lack of revenue from prior leases. Some companies with heavy exposure to airline leases include GE, BA, F, MO and DIS. Those companies must now remarket or resell the planes in an economy where parking spaces for out of service aircraft is already at a premium. Not only can they not resell them but there is no place to park them while trying. If UAL can lower costs by dumping hundreds of plane and gate contracts then others may have to file to achieve the same benefits. This chain reaction could reach all the way to American Airlines. US Air has already rejected 75 leases and has permission to abandon another 125. This gives you some indications of how serious the UAL lease abandonment could be.

The chip sector took another hit on Friday as Intel and AMD were rated at "underweight" by JPM. They said the company is under pressure from slowing growth of PC sales. They said slowing growth and over capacity remains a problem and the estimated 2003 growth of only +2% to +4% is still questionable. Adding to the chip slump was a warning from CRUS that revenue would be down due to both lower sales and cancelled orders. Cirrus makes chips for consumer electronics gear like audio and video products. They said a wide range of manufacturers had cancelled orders for chips to make these products. ZRAN, another maker of these chips fell as well.

It has been a rough two years for chipmakers and the Nasdaq-100 rebalancing on Monday Dec-23rd proves it. These 15 companies will be dropped from the Nasdaq. AMCC, ATML, CHTR, CNXT, IDTI, PMCS, VTSS, ABGX, ADRX, CYTC, IMCL, ITWO, PDLI, RATL, SEPR. Half of them are chip stocks. All of them are previous high flyers and sold for many times their current values. While I am at it the 15 stocks being added to the Nasdaq-100 are: EXPD, ROST, XRAY, LAMR, WFMI, FHCC, PETM, PIXR, FAST, APCC, CHRW, PTEN, GNTX, HSIC and RYAAY. The Nasdaq-100 is supposed to represent the 100 largest non-financial stocks on the Nasdaq stock market. The rebalancing occurs in December each year and is timed to coincide with the triple witch expiration Friday.

Got your smallpox vaccination yet? Of course you don't but the airwaves have been full of the news that we could be at risk from terrorists using the disease sometime in the future. Considering the risk from actually receiving the vaccination the government is taking the threat seriously. Still the market appears to have already contracted it just from the repeated mention in the news. You can say what you want about earnings, oil and riots but when you start adding in news about bio-terrorism and rogue nations trying to acquire nuclear weapons somebody is bound to start thinking about investing for safety. That appears to be what is happening. Gold is hitting new five-year highs, treasuries are up, utilities are up and money market funds saw an influx of $10 billion in new cash last week. The Fed is watching this economic plight and trying to float the markets on an ocean of cash. M2, the indicator of the nations money supply soared by +$142 billion last week. Interest rates are low and can't get much lower but the Fed is determined to keep this boat afloat if it has to buy new presses to print money faster. Inflation may not be a problem now but stick around a couple years.

The long-term fundamentals, say for December 2003, are excellent but the outlook for the next 60 days is still rocky. By most estimates there is between $6 and $7.5 trillion in idle cash waiting on the sidelines earning minimal interest. This money will eventually find its way into the markets. There are tax cuts on the horizon and the Fed is hooked on speed. Bears have a very limited life expectancy at this point.

Last Sunday I said I expected a small bounce and then another dip with 8350 as eventual support before the holidays. The bounce was weak and the dip did not quite reach 8350. Monday's open could finish that dip. Despite all the negative views I expressed above I think most of them are already priced into the market. We know we are going to attack Iraq next year. We know there will be a recovery in the PC sector eventually. Remember the much-anticipated second half recovery of 2002? Well that has now slipped slightly, by about twelve months. This lack of recovery means the markets rallied off the October lows a little prematurely and we have to tread water until the recovery catches up with the markets. We can still have a holiday rally but there are still some challenges ahead.

If we are going to see Santa then we should see a change in the markets early in the week. I would not be surprised to see one last attempt to test solid support at 8350-8400 on Monday and then sideways to up from there. The 50 and 100 DMA are at 8408 and should blunt any drop attempt. I would be a buyer of the market at Dow 8425 with a stop loss at 8250. This would be to capture any end of year rally and I would sell on weakness after Dec-26th. Think of it as returning unwanted presents to spend the money on sale items later.

The long awaited end of year renewal special begins this weekend and there is wealth of bonuses for readers who elect to lock in their subscription at the current rate. We will be raising the rates on Feb-1st so don't delay.

Enter Very Passively, Exit Very Aggressively!

Jim Brown

"I'd be a bum on the street with a tin cup if the markets were always efficient." - Warren Buffett

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