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Market Wrap

Old Problems Produce New Lows

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      01-30-2003           High     Low     Volume   Adv/Dcl
DJIA     7945.13 -165.60  8141.09  7938.62 1.78 bln 1064/2162
NASDAQ   1322.36 - 35.70  1360.55  1322.36 1.40 bln 1060/2257
S&P 100   426.71 - 10.83   426.71   426.26   Totals 2124/4419
S&P 500   844.62 - 19.74   865.48   843.74 
W5000    8021.22 -173.00  8204.16  8014.72
RUS 2000  367.62 -  7.22   375.80   367.59 
DJ TRANS 2128.64 - 34.70  2175.19  2126.40   
VIX        36.37 +  1.15    36.55    34.75   
VXN        46.22 +  2.58    46.26    43.96 
Total Volume 3,401B
Total UpVol    647B
Total DnVol  2,723M
52wk Highs  133
52wk Lows   171
TRIN       1.72
PUT/CALL    .87

Old Problems Produce New Lows
By Jim Brown

The numbers came in slightly better than expected by most but the negative sentiment remained. The fourth quarter GDP did not dip into negative territory but it was still anemic. The Fed expressed worry about the economy and unemployment continues to rise. These factors and war worries pushed the Dow to a new low for the year.

Dow Chart - Daily

Nasdaq Chart - Daily

Economically investors should have been relieved. The GDP came in at +0.7% for the fourth quarter when many analysts had been quoting whisper numbers in negative territory. We are far from out of the woods but that is one more quarter temporarily behind us with a plus sign in front of it. That is of course it is not revised downward when the real component numbers become available. The internals showed slower inventory buildup and weaker exports. Computer purchases continue to rise slowly along with business investment. There are two more revisions to this number over the next two months and there is still danger it could slip into negative territory.

Jobless Claims rose again to 397,000 and very near the 400K threshold. This was an increase of +14,000 and +10,000 over the consensus estimates. Claims over 350,000 a week indicate a shrinking labor market. Increasing the evidence for a shrinking workforce was the drop in the Help Wanted Index to a new cyclical low of 39. It was 47 during the recession just a year ago. According to Economy.com the index peaked at 93 in the late 90s boom. There has been a -58% drop in job advertising volume in this down cycle. This compares to a drop of only -44% and -54% in the prior two economic cycles. Employers are not hiring and are continuing to trim their workforce.

The weakness in the job markets pushed the Employment Cost Index to the slowest growth in five years at +0.7% for the fourth quarter. With a surplus of unemployed there is no need to offer premium wages with lots of costly benefits. The drop would have been much deeper had it not been for the +6% growth in benefit expenses for existing employees. The construction industry showed the biggest increases as they scramble for workers to complete houses before rates begin rising again. With falling real wages and continued competition for available jobs the consumer is going to be hard pressed to hold up the economy with future spending.

For the fifth consecutive month the Chicago Fed National Activity Index came in below zero. The -0.5 number and the -0.6 3-month average shows the economy has stalled and there is no recovery in process. July was the only month in 2002 not negative but the drop in activity has been sharp and serious since. The normally robust December period was only fractionally better than November's -0.55. This report raises the very clear specter of a double dip recession already in progress.

The minutes for the December FOMC meeting were released and showed that the Fed heads were encouraged by the lack of a further drop in the economy and the then current rebound in the stock market. They felt the market was confirmation that a recovery was underway despite the lack of economic confirmation. They were worried about the rising unemployment and lack of business investment. Their forecast for the near future showed minimal expectations for growth. They felt the rising geopolitical tensions as well as persisting concerns about consumer spending would continue to hold the economy back. Despite the -50 point cut in November the committee remained open to the potential need for future cuts. The number of negative factors "when measured against the stock market rebound" appeared to be balanced. They kept that public view at the January meeting despite the loss of the markets gains. Makes you wonder what was offsetting the risks this time? With Consumer Confidence at its lowest level since 1993 the Feds may be the only ones seeing balanced risks.

AOL, you've got mail! Hate mail and lots of it. Don't look now but the monster may also have escaped from the lock box. With AOL posting a -$99 billion loss for 2002 there are many stockholders on the warpath. About to lead the attack is Ted Turner who is stepping down from his post as Vice Chairman in May. With over 100 million shares of AOL stock Turner is not going to be a friend to the company. At $12 that 100M shares is worth a whole lot less than it was at $95 in Dec-2000. As an unrelated party to AOL, Turner would be free to sell his shares OR more importantly lead a shareholder revolt to break up the company with Turner ending up with the prized pieces. Granted this is a broad leap of faith but Turner is reportedly extremely hostile about his -$8 billion drop in net worth. I can see where that could produce a vengeance motive. AOL stock dropped on the news from $14 to $12. The -$99 billion loss and negative guidance may have influenced investors as well. (grin)

The oil strike in Venezuela may be almost over. Reports from the area claim strikers are going back to work and banks and retail stores are opening again. Employees need the wages to live and the riots were losing intensity. Oil production is back to about 1/3 of prior levels and growing. Fear of the war is still holding up the prices at $33.85 today but once the war begins it should fall.

Oil is not the only commodity soaring with Platinum hitting a 17 year high at $647.80. The comments about hydrogen cars in the Fate of the Union speech has prompted a run on the metal and on fuel cell makers. Test vehicles have been the rage on news shows since Tuesday night.

Too bad computer chips were not mentioned. AMAT announced tonight that they were laying off an additional 165 workers in response to the weakest industry conditions on record. The company is also planning on shutting down temporarily for a week or two to cut costs during this rough stretch. This is bound to add to weakness in semiconductors tomorrow after they had a rough Thursday finishing at 273.62 and a three month low.

Disney announced earnings that beat the street but said they were not going to give guidance for the 2Q. They did say they expected to see +25% growth for all of 2003. ADBE also affirmed company estimates for the current quarter. There was some disagreement among analysts that the companies guidance was less than the consensus but they affirmed a broad range that did encompass the consensus estimate.

Tomorrow is packed full of economic reports including Chicago PMI, NAPM-NY, Personal Income/Spending and the University of Michigan Consumer Sentiment. This is the second reading of the sentiment and it could have been impacted by the falling market over the last two weeks. The first take was Jan-17th and the current market drop began on the 15th. The war of words over Iraq has heated up since the 17th and tens of thousands of more troops have been called up. 83.9 is the consensus forecast for tomorrow. The NAPM-NY dropped from 56.2 to 41.4 in December due mainly to layoffs in the financial sector. With cuts continuing and waves of lowered guidance it could be worse tomorrow. This is a regional report but because it reflects the market conditions I listed it.

The market is in trouble. After two days of gains it gave them all back and closed at a new low for the year. With one day left in January it is not likely we will finish with a gain for the year. This January barometer will predict another down year. Whether the year will be down or not the technicals for the market are terrible. The S&P failed to hold or reach yesterday's bear trap high of 868 and closed at a new low for the year. The bullish sentiment on the Nasdaq that helped hold up the other indexes earlier in the week has also disappeared. The Nasdaq also closed at a new low for the year. The Dow at 7944 is not far from my initial target of 7700 that I predicted two months ago.

The date is set, February-14th. That is the new drop-dead date for Iraq to come clean with inspectors. It is the date that the inspectors will again report to the UN and it is the date that is making the rounds as the day before the start of the war. Over the last two months I have suggested Feb-15th as the earliest the war could start due to the Muslim holy days. It is amazing now that the US has suddenly picked that date as critical. Do they think we are all sheep? I think it will take another week for them to get all the troops in place but the window of opportunity is closing and they could go anytime after the 14th to prevent a continued increase in antiwar sentiment that could hinder their coalition.

That window of opportunity means we could be looking at three more weeks like this week. There is going to be another UN meeting on Wednesday where Powell will spill the beans about some secret intelligence which is supposed to swing dissenters back to the US side. That should mean continued weakness in the short term but that weakness could be simply high volatility. I have been a bear for the last two months in predicting 7700 but I would be surprised if we went much lower than that. That is just an opinion and 7700 was my minimum target. The October lows of 7197 could still be retested if economic news does not improve quickly. Either way the next three weeks should be rocky and then we could see a nice bounce once the war begins. Anticipation of that historical bounce when the shooting starts should slow any serious declines as traders start bottom fishing in advance. Still three weeks is a lifetime in the markets and nothing should be considered certain.

Enter Very Passively, Exit Very Aggressively!

Jim Brown


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