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Market Wrap

It Is All About Iraq

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      02-11-2003           High     Low     Volume Advance/Decline
DJIA     7843.11 - 77.00  7985.52  7806.50 1.52 bln   1315/1899
NASDAQ   1295.51 -  1.17  1315.04  1385.77 1.27 bln   1503/1771
S&P 100   418.58 -  3.45   425.96   416.26   Totals   2818/3670
S&P 500   829.91 -  6.76   843.02   825.09 
W5000    7873.29 - 55.83  7992.37  7835.73
RUS 2000  359.95 -  2.14   363.58   357.96 
DJ TRANS 2128.07 - 16.67  2160.45  2121.59   
VIX        37.35 -  0.35    38.05    35.53   
VXN        46.90 -  0.41    47.58    46.07 
Total Volume 2,998M
Total UpVol  1,226M
Total DnVol  1,668M
52wk Highs  129
52wk Lows   266
TRIN       1.61
PUT/CALL    .87

It Is All About Iraq
By Jim Brown

That was the main message from Alan Greenspan today when he testified before congress in his regular semiannual meeting. At the same time Collin Powell was testifying that Bin Laden was alive and well and calling for renewed attacks on the US. Traders unsure which way to jump were more concerned with getting a desk near the fire escape than pushing the Dow back over 8000.

Dow Chart - 240 min

Nasdaq Chart - 60 min

The morning started off well despite some negative news. Goldman Sachs warned that IT spending for 2003 could fall as much as -10% compared with previous estimates of minor gains. Merrill Lynch warned that inadequate capital funding will persist and push the technology sector recovery into 2004 or even 2005. Both companies said sales and profit outlooks for 2003 were dismal. Despite the dismal forecasts Abbey Cohen, Goldmans chief investment officer, is still forecasting Dow 10800 for 2003. That would be a +36% gain. Despite these two independent studies the Nasdaq held the market up all day and finished down only -1.17 for the day.

QCOM shocked traders this morning with news that they would be paying a quarterly dividend of five cents and buy back $1 billion in stock. The tech company bounced on the news but investors are fickle and after gaining +1.25 at the open it sold off to flat by the close.

Instinet, INET, warned that lower trading volume was hurting them and other electronic exchanges. INET posted a loss of -$735 million for all of 2002. Even ESPD warned that the outlook for bond trading for 2003 was lower than expected. The ESPD warning was especially meaningful since bonds have been such a favorite investment vehicle recently. Times are tough all over and that should come as no surprise.

Of course the publisher of the worlds most successful books should not be in trouble, right? Not so it appears. Scholastic, SCHL, publisher of the Harry Potter series, warned that sales of its other products were slowing due to budget cutbacks and the weak economy. The last Potter book sold out in 48 hours and they plan on printing 6.8 million of the fifth book this year.

The Greenspan testimony drew traders attention for a couple hours and he did try to paint a balanced picture. His main message was that it is all about Iraq and once Iraq was over the economy was primed to recovery quickly. Imagine that! Even Alan was able to use the Iraq ate my economy excuse. In another comment that we will likely hear over and over he said "deficits do matter" and every democrat in the room was writing furiously I bet. Greenspan was attacked outright by one member and told he was the cause of the current economic slump due to his mismanagement of the rate cut policy and should quit.

Later in the day Collin Powell testified that Osama had released a new tape and quoted from a transcript. Arabic TV denied there was a tape and it appeared the US had intercepted it on the transmission to them. Later at 3:PM the tape was played on TV after the earlier denial was retracted. Don't you think it was nice of the local networks to play the tape for all those terrorists in the US waiting for the signal to attack? It has been proven in the past that major attacks have come within days/weeks of a tape release. Why give him a free communications outlet? At least make the bad guys struggle a little bit please! There was a lot of support Iraq appeals and suggested that suicide bombers attack the US if Iraq was attacked.

As if Greenspan and Bin Laden was not enough to confuse the issue, Russian prime minister Putin warned the US that a unilateral attack on Iraq would be a "grave error" and he also threatened to veto any UN resolution calling for force. Now that is a real problem. We have France and Germany already lined up against us but now Russia is "threatening" us. This does not look good for the offensive team. The market was poised to rebound from the day's lows when the Putin remarks were aired and that pushed it down once again.

After the bell AMAT announced earnings and missed the street estimates by two cents. They warned that new orders had fallen -35% and they were facing tough times ahead until capital spending returned. They said orders in the current quarter would be only slightly better than last and declined to give any estimates. AMAT had warned two weeks ago so the outcome was not a surprise. They still traded down in after hours.

Thursday Dell reports earnings and is widely expected to warn about the rest of the year. The Dell COO said they were seeing softer corporate spending and that would match the CSCO warning from last week. The Dell conference call will be well attended but unless they raise guidance I doubt it will be anything we have not already heard.

Don't look now but yesterday's bullishness evaporated and the outlook is not bright. Oil rose to $35.44 today as the Iraq problem becomes more complicated. Rising oil and political tension along with falling earnings and expectations is not a prime environment for stock market gains. I had been planning on leaving a futures buy order about +10 points above the daily trading range just in case Saddam decided to retire or had an accident. Instead I think we need to leave a sell order about ten points below the current range to protect against the coming attack. If the tape today was the "go" signal for whatever is in the works then our countdown clock is running.

There was considerable talk in the press about the real threats that prompted the increased threat level last week. Evidently there were multiple intercepts about a radiation bomb along with chemical/biological threats. Police in New York have been told to look for household items like fire extinguishers that could contain gas or chemicals. A suspicious man in a wetsuit and rubber boat was seen near the bay bridge in San Francisco this morning but got away clean after being spotted. The main thread through all the government press conferences was the potential for multiple concentrated attacks. This means that any event will likely be followed by other events and the market is not going to react well. Anyone that doubts we will have an attack at some point in the future is kidding themselves.

Airlines are struggling with rapidly rising oil prices. It appears jet fuel is in very short supply with the US burning huge amounts in preparation for the war. Not only are they storing it for war planes they are burning it with hundreds of commercial aircraft they have commandeered to shuttle troops from the US to the gulf. Those long flights are depleting the reserves which are planned to handle current airline schedules only. There are estimates of $40 oil by next week. Every $1 rise in oil is a $7 billion drain on the US consumer each month. Oil rose +.96 cents today alone. A prolonged war will consume even more and we could see Iraq's three million barrels dry up.

The Nasdaq somehow managed to close over 1295 yet again. This level has proven to be critical to the market's health. This is the sixth day the index has traded in this range. After the Dow's decent bounce yesterday and the intraday gains today it still managed to trade within 5 points of the lows for the year at 7806. The close at 7838 was the lowest close for the year. There is just a lot of uncertainty and fear hanging on the market and there are fewer buyers every day. Volume today was very anemic again and was the third consecutive day under three billion total shares traded. Some analysts claim low volume moves are not important but ships can still sink in a calm sea. This sea is far from calm and the current low volume may actually be the eye of the storm.

Enter Very Passively, Exit Very Aggressively!

Jim Brown


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