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Market Wrap

A Miracle Recovery

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      02-13-2003           High     Low     Volume   Adv/Dcl
DJIA     7749.87 -  8.30  7781.89  7628.99 1.76 bln 1309/1925
NASDAQ   1277.44 -  1.50  1281.32  1261.79 1.31 bln 1325/1951
S&P 100   414.04 +  0.43   416.13   407.79   Totals 2634/3876
S&P 500   817.37 -  1.31   821.25   806.29 
W5000    7752.06 - 20.30  7780.44  7657.63
RUS 2000  354.77 -  0.61   355.40   351.78 
DJ TRANS 2073.48 - 27.20  2106.08  2054.59   
VIX        38.45 -  0.65    40.68    37.73   
VXN        50.97 +  3.54    52.23    49.94 
Total Volume 3,287B
Total UpVol  1,197B
Total DnVol  1,936M
52wk Highs   91
52wk Lows   457
TRIN       1.34
PUT/CALL   1.18

A Miracle Recovery
By Jim Brown

What may have seemed a miracle to some was actually a freak combination of circumstances. The Dow pulled back from a -130 drop to 7628 on a combination of rumors, reporting errors and a repeat of old news. The sparks from the news found explosive tender from extreme oversold conditions.

Dow Chart - 240 min

Nasdaq Chart - 120 min

The most watched economic report for today, Jobless Claims, showed a slight decrease for the current week to 377,000 but last week was revised up to 395,000. The four-week moving average which is supposed to smooth these bumps rose to 389,000. The continuing claims fell to 3.31 million. This is due to the expiration of benefits for people out of work for an extended period. Over one million people have dropped off the roles because their benefits have expired.

The Retail Sales report for all of January posted a -0.9% drop and much deeper than expected. The culprit was the bottom falling out of auto sales. The Auto component fell -7.5% as incentives and low interest are no longer attracting buyers. Without autos consumer sales actually rose +1.1% and was very bullish. Traders saw the numbers and ran for cover regardless of the bullish internals. If the period covered was last week I would say it was duct tape, plastic, batteries and bottled water but instead it was January. With all the stocking up on food supplies and hardware for a potential terrorist attack the odds are good the next weekly numbers will be much higher than expected. Most attribute the surge in January buying by consumers to a record number of gift cards sold in December. Consumers normally spend more than the amount of the gift card once in the store and that could account for the bounce.

Friday we will get the Michigan Consumer Sentiment again and estimates are for 82.4. Business Inventories are expected to be flat at +0.2% and Industrial Production up slightly at +0.3%. These are not the biggest problems for Friday. The showdown at the UN corral is going to be on the top of the list of potential market movers. It appears the UN inspectors will bring a mixed message to the UN with the IAEA head saying that inspections should continue for months and there is no reason to rush into war. Hans Blix is reportedly going to say that IRAQ cooperation has improved very slightly but not enough to justify a continued effort. The Blix scavenger hunt turned up some missile that had greater the range than allowed by the UN mandate but I think everyone is splitting hairs over it. The difference between 150 and 180 kilometers is not material since the main reason for the rule was to prevent him from hitting major cities of his neighbors. Kuwait is the only country at risk from the current missile and it would be at risk from a 150K model as well. Later today it was reported that the "unconditional" approval to allow U2 spy planes to fly over Iraq was not unconditional after all and Blix is going to tell the UN that Iraq has backed out of the agreement.

After the bell today Dell Computer announced record earnings and did not lower guidance as many had expected. Dell is firing on all cylinders and is stealing market share from everybody. Corporate sales up +20%, consumer sales up +38% and overseas server sales up +47%. They said earnings would be flat for the 1Q but for Dell that represents a victory in the beleaguered PC sector. While everyone else is losing ground Dell is seizing it. The only problem with the report was the analysis that Dell still sees no expansion in capital spending and its record profits came from stringent cost controls and taking market share from others. Dell was up in after hours but Nasdaq futures were down on the lack of overall improvement in the tech sector. I have not seen a Gateway commercial in weeks and I saw three within two hours of the Dell announcement. Clever marketing on the part of Gateway but it remains to be seen if it will help.

INTU also announced strong earnings on better than expected sales of its tax software and lower than expected acquisition expenses. They beat the street by +4 cents and raised estimates going forward. Unfortunately this is a company specific event as well and does not reflect on the software sector as a whole.

AMZN finally broke support at $21 and dropped -5% on problems in Internet retailing. The current move underway to collect sales taxes on all Internet sales will remove one more reason for shopping at Amazon. States are mobilizing to force everyone to collect based on a simplified taxing plan and all the big retailers are falling in line. They are agreeing to begin collecting sales tax in the future in return for forgiveness of taxes not collected in the past. States are using the club of retroactive liability to enforce future collection. AMZN had almost $4 billion in sales in 2002, $12 billion over the last five years. Depending on the average tax rate across the states they could have as much as a $1 billion tax liability. The future is clear. Agree to collect and remit taxes peacefully or go to court and end up paying $1 billion plus court costs and penalties and still end up having to collect taxes in the future. Not much of a decision process in my opinion. Now, add an average of 7% to every product sold and suddenly AMZN has a much harder path to continued profitability. Many of the other major retailers have already agreed to the tentative plan and the Internet coalition has already begun to fracture.

Okay, so what happened this afternoon? We were slowly bleeding points and about to break 7600 when an explosion occurred. Not a bomb but the force of impact was the same. The Dow gained +152 points in about 55 minutes. It appears there was a freak combination of unrelated events that shocked shorts into frantic covering. First Medicare chief Thomas Scully told a congressional panel that JNJ's Cypher stent is likely to win FDA approval within the month. Dow component JNJ suddenly spiked almost +3 points in just minutes even though the potential approval had been widely reported over the last 30 days.

Secondly and about the same time, reporters misread a press release by UPS about electing HD CFO Carol Tome to the UPS Board. The release said UPS was raising its dividend to 21 cents from 19 cents. Instead it was reported that HD was increasing its dividend to 21 cents a quarter. Dow component HD's stock at $20 rocketed on the news. The report was later retracted.

Third there was a rumor that a very high up Iraqi military officer with complete knowledge of where the weapons were hidden, had defected and the UN was racing to get him out of the area. Also, bogus but it had about the same impact as a Saddam retirement announcement. Shorts caught off guard by the sudden spike were scrambling to cover without knowing why. The initial thought process is "no news, must be a buy program, it will pass." When it does not pass they end up behind the curve and chasing prices upward. Look at an intraday chart and you will see the perfect picture of a short squeeze. Futures have sold off after the close now that these news items have filtered out to the public.

After the bell it was announced that the FBI was aware of as many as 300 Al Qeada operatives/sympathizers currently in the US and they had specific and credible evidence that 12 of these were planning the current attacks. The FBI is supposed to be pulling out all the stops to find these people before they can pull off the attack but despite eyewitness reports they have been unable to do so. There is evidently strong evidence that they have multiple targets and they are dispersed across the country. The report said new operatives had been infiltrated into the country for this operation. While I believe some of this is true I have to believe that this could be a strong over reaction by the press to limited "hearsay" information. You would think if the FBI had names they would be broadcasting these names and any pictures every 15 min.

Tomorrow is likely to resemble a fast game of pin the tale on the donkey. Up, down or sideways and probably all in a hurry once the 10:AM update is over. It is the smoking gun question all over again. Traders will probably end up feeling like they have been blindfolded and spun in a circle. Trying to predict the market reaction to the UN inspector update is tougher than nailing Jell-O to the ceiling.

We tried to come up with a scenario given the information at hand and then extrapolate it onto the market. It is impossible. The US is going to war whether they have a new resolution or a UN mandate or even a coalition of the willing. I think that means it wants a very negative report by inspectors and that is not what is reported to be coming. A soft report that leaves the door open to a couple more months of inspections will force a confrontation between the US, the UN and several past allies. It will mean more uncertainty for the markets and more anti American feelings worldwide. That means more money withdrawn from the market and more pressure on the dollar. It MAY also mean a delay in the start of the war and a delay in getting over this market hump.

We reached my two month target of 7700 on the Dow and the next material support is the 78% retracement level at 7592. We came within 36 points of hitting that level today. The Nasdaq bounced off support at 1266 but after cracking the 1295-1300 level it is in trouble. I don't think the UN meeting on Friday is the end of this process and that leaves more uncertainty ahead. Keep those fears under control. You have a 1 in 500 chance of dying by cancer and a 1 in 56 million chance of dying in a biological attack. I am more afraid of another short squeeze while I am in the bathroom and not at my PC than I am being killed by a terrorist. Of course while I am writing this two police helicopters have been circling over the mall in the next block for about the last 45 min. Must be jaywalkers. (grin)

My problem is this. Will traders remain short over the 3-day weekend in anticipation of an event or will they cover for safety. Will longs go flat for safety or take out insurance in the form of puts or short futures? The weekend has risk for both sides. Longs fear an attack. Shorts fear no attack and a limit up gap open on Tuesday. Personally I think the longs have the most to fear. A devastating attack could knock hundreds of points off the indexes at the open. No attack would be bullish but the overall conditions of war, terrorists and earnings still remain. We could get a small bounce but should not get a monster. That analysis is worthless if a presidential vacancy in Iraq appears. Using this analysis I would assume longs, if there are any left, would exit before lunch tomorrow depending on the UN report and reaction. Exiting would produce selling. Buying insurance by shorting futures would produce selling. Buying insurance with puts would raise the VIX and Put/Call Ratio and show additional fear and promote selling. Traders expecting the worst over the weekend would short or buy puts and that should produce selling. The wild card is no attack by noon, a report that puts the war off 3-4 months and longs would buy the dip. How you approach this is up to you. I am going into the weekend

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor

 
 



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