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Market Wrap

The Waiting Game

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      02-27-2003           High     Low     Volume   Adv/Dcl
DJIA     7884.99 + 78.00  7924.62  7789.95 1.54 bln 2117/1050
NASDAQ   1323.94 + 20.30  1331.79  1305.56 1.23 bln 1933/1281
S&P 100   423.50 +  4.78   426.46   418.60   Totals 4050/2331
S&P 500   837.28 +  9.73   842.19   827.55 
W5000    7939.72 + 87.30  7979.11  7852.45
RUS 2000  361.43 +  3.46   362.35   357.97 
DJ TRANS 2040.41 +  0.70  2063.30  2026.63   
VIX        35.18 -  1.84    37.05    34.90   
VXN        46.16 -  0.81    48.72    46.00 
Total Volume 2,965B
Total UpVol  2,146B
Total DnVol    746M
52wk Highs  163
52wk Lows   199
TRIN       0.81
PUT/CALL   0.55


The Waiting Game
By Jim Brown

Thursday's have not been good for economic reports recently but today may have marked a change in that trend. However, the report attracting the most investor attention was the change in the terror alert status back to yellow from orange. That report overcame red in the housing sector and produced some green in the markets.

Dow Chart - Daily

Nasdaq Chart - Daily

Things started out bad before the first share traded with the Jobless Claims soaring to 417,000 with last weeks numbers revised upward to 406,000 an increase of +6,000. Continuing claims were revised up for the prior week by another +127,000. Now which number do you think the talking heads were hyping in the news? Surprise, "continuing claims fell this week by -45,000 which indicates Americans are finding work." No kidding. New claims were the highest in months and the four week moving average hit 400,000 but reporters went out of their way to misreport the event. In reality there were probably some new jobs created but the vast majority of declines in the continuing claims comes from people running out of time and losing benefits from being unemployed too long. The 3.37 million continuing claims understate the real unemployment with an additional 1.5 million workers dropping off the rolls in the last year due to expired benefits. IBM also announced another round of layoffs today in its global services division.

The Help Wanted Index rose one point to 40, the same level it has held for most of the last four months and indicates there is still no advertising for new employees. This was only marginally off the cyclical low of 39 last month. Layoffs are increasing and there are no new help wanted ads. Draw your own conclusion.

New Home Sales fell to an annual rate of 914,000 compared to already lowered estimates of 1,050,000. This was down from 1,077,000 in December. Analysts had already lowered their estimates due to the cold weather but the severity of the drop surprised everyone. One small problem with blaming the weather for the drop. The northeast, the region with the worst weather, posted the strongest gains while the Midwest and the South posted losses. Other commentators suggested there was a lack of inventory due to the bad weather and the strong sales in December. Wrong again! A quick check of the numbers showed that inventory levels surged to 4.5 months from 3.8 months in December. Prices paid for homes also fell which indicates stronger competition for the fewer buyers. Let's recap, higher jobless claims, no help wanted ads, a -15% drop in new home sales and a Consumer Confidence index at a 13 year low of 64. Yep, definitely a soft patch.

There was some good news. The Durable Goods Orders jumped a higher than expected +3.3% compared to estimates of +1.0%. Shipments rose +3.5%. Nondefense capital goods rose +2.1% and it was the second consecutive month over 2%. Computers rose +3.2% and are at the highest pace since June-2001. The bad news to this good news report was another drop in the backlog of orders which fell for the sixth consecutive month and 23 of the last 24 months. Inventories also continued to fall. My take on this is that retailers ordered just enough merchandise to fill obvious holes in their inventory from holiday sales but did not order in depth. Instead of a standard inventory level of a particular item at 20 units they may have only reordered 5-10 to keep stagnant inventory from going obsolete waiting for a recovery to appear.

The competing economic reports had the markets headed south at a high rate of speed until the news hit at 10:AM that the terrorist alert level had changed. That came just about the time the Dow broke 7800 again and lately any Dow level that begins with 77 tends to attract buyers. Those buyers ran the average up to resistance at 7925 but then the rumors started flying again.

French President Jacques Chirac said that using force against Iraq could not be ruled out. In the context he was speaking it was deemed a weakening of his stance against the US resolution and the war. Opposition to the French plan to stop the war is growing. Many leaders are questioning the repercussions of trying to face off with the US. They are afraid the US will turn a cold shoulder to France and claim the use of a French veto would be "a decision with great ramifications of great gravity". France has not used its veto against the US since 1956. Claude Goasguen, a senior French lawmaker, called a veto "unimaginable". "We are not going to break up the UN and Europe just to save a tyrant." France will not have to use its veto unless the US lines up the needed nine votes required to pass the resolution. Should that happen only Chirac can authorize a veto and it would be the equivalent of putting a gun to his own head claimed one lawmaker. France does several billion dollars of business with Iraq each year and once the US takes control they will not want to be at our mercy for future business deals. The market dropped on these comments since it appeared more likely that opposition to the resolution was getting weaker and war was imminent. Duh! Did somebody think we spent $3 billion to move 250,000 troops to the gulf just to make a show of force?

The consensus opinion tonight is that the US is going to war next week regardless of any resolution. This means countries are faced with voting with the US to maintain unity and peaceful relations while knowing a negative vote would not stop the war. Or standing on principal and knowing the US is going to war anyway and vote against them. Boy, that is a tough decision. Either way you cannot stop the war but with one option you can create a serious enemy by stabbing Uncle Moneybags in the back. Make no mistake. The US will make anyone who embarrasses them in public pay a heavy price in the future. Since the Arab nations have joined the team it is highly doubtful anybody else will end up sitting in the stands.

The sudden resumption of immediate war fears sent oil prices to $39.99 a barrel intraday. This is a huge number and represents fears that Iraq will blow up its wells. Since Saudi Arabia has already agreed to increase its output by any amount lost from Iraq there is no real risk. It is only perceived risk. There was talk of an oil boycott by Arab countries but now that they have joined the team that is far less likely. Talk of $80 oil "if" the war goes bad is similar to the $100 talk just before the 1991 war.

Saddam through a wrench in the war plans once again on Thursday. Just when the support seemed to be falling in line, Iraq said it had decided in "principle" to destroy the missiles. No details were given. If this decision is as conditional as the U2 over flights then I don't expect any explosions on Saturday. That is the day the UN inspectors have set as a deadline for the destruction. This decision helped reverse the market drop after the Chirac news.

It would be nice to have some fundamental stock news to move the market instead of competing rumors, half truths and misreported news events about Iraq. Unfortunately that news may be better left unreported. According to First Call 57% of the S&P-500 has warned for the first quarter and only 19% have raised guidance. If the markets did not have a war to worry about I think those kind of numbers would be very harmful to any rally hopes. It may be best that our attention is focused on Iraq and not the economy. I know the Durable Goods Orders was positive on the surface but the internals were still weak. Once the war is over fundamentals are what will provide the motive force.

The Dow appears locked in a range between 7950 and 7700 and is hell bent on testing each end of the range on a daily basis. The volume is not strong enough to push out of either side and the last two days that range has shrunk to 7800-7925. The Nasdaq is also hovering in the middle of its recent range between 1295-1330. It appears that anybody who wants to buy or sell before the war has done so already and everybody is simply waiting. I do not know what it would take to produce a major move. Short of a retirement announcement by Saddam there is little potential for positive movement. However, even an earnings warning by IBM, MMM and GE on the same day would have a tough time pushing the market lower. It is a tie with buyers and sellers appearing evenly matched around Dow 7900. Grab an easy chair, a good book on trading, a blanket and thermos of hot chocolate because we may be here awhile.

Enter Very Passively, Exit Very Aggressively!

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