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Holding Pattern

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       WE 02-28        WE 02-21        WE 02-14        WE 02-07
DOW     7891.08 -127.03 8018.11 +109.31 7908.80 + 44.57 -189.58
Nasdaq  1337.54 - 11.48 1349.02 + 38.85 1310.17 + 27.70 - 38.44
S&P-100  425.36 -  4.51  429.87 +  7.30  422.57 +  3.78 - 13.78
S&P-500  841.15 -  7.02  848.17 + 13.28  834.89 +  5.20 - 26.01
W5000   7972.62 - 63.35 8035.97 +139.03 7896.94 + 23.52 -251.65
RUT      360.52 -  3.84  364.36 +  5.86  358.50 -  0.28 - 13.39
TRAN    2049.05 - 47.36 2096.41 -  6.19 2102.60 - 37.37 - 33.38
VIX       34.15 +  0.01   34.14 -  2.96   37.10 -  1.35 +  3.02
VXN       45.65 -  0.45   46.10 -  2.28   48.38 -  2.59 +  1.45
TRIN       0.84            0.97            0.58            1.57
Put/Call   0.59            0.85            0.97            0.94

Holding Pattern
By Jim Brown

Great economic news failed to rally the markets on Friday as everyone holds their breath for the next chapter in the made for TV mini series "Iraqnaphobia". Everyone is in a holding pattern waiting for the climax. Joe Millionaire and The Bachlorette may have garnered 65 million viewers in their final episodes but Iraqnaphobia has a worldwide audience in the billions. In the greatest puppet show on earth the UN security council is playing out their roles while their strings are being pulled from thousands of miles away.

Dow Chart - Daily

Nasdaq Chart - Daily

The economic story took a turn for the better Friday with the Q4 GDP revision coming in at +1.4% and significantly better than the +0.7% previously announced. This means the fourth quarter was better than expected and could have given us a stronger start on 2003. This took some of the pressure off the estimates for Q1 and suggests the Fed may be right about staying out of a recessionary second dip. The majority of the gains came from consumer spending and shows that despite the lackluster holiday sales the consumer was still alive and well.

Also adding to positive investor sentiment was the Chicago PMI which came in at 54.9 compared to estimates of 52.9. Production and new orders expanded slightly, very slightly but they are starting an upward trend by building on last months gains. Employment was still in negative territory but marginally better than January. Profits were down due to increased marketing expenses and strong competition for available demand. Still it was a positive report.

Consumer Sentiment fell again in February to 79.9 but it was better than expected. This is the lowest level since 1993. This nine-year low was based on higher gas prices, unemployment and market concerns. The nine-year low in the sentiment was still not as bad as the 64 in the confidence number earlier in the week. The markets traded up on the better than expected bad news. Hey, we will take what we can get!

We may wish we had some extra goodwill stored up on Monday when we get the ISM report along with the Personal Income/Spending report. The New York version of the ISM was released on Friday and it took a serious hit from January levels. After showing signs of a recovery in January the numbers dropped to just barely above the Jan-2002 levels when the city was still digging out from the 9/11 attack. The -3.1% drop in the index was led by current conditions which fell from 51.9 to 34.5 and non-manufacturing conditions which fell from 51.5 to 33.0. Finished goods fell to 37 from 50. This is not a positive sign and could be a leading indicator for the national ISM on Monday. The ISM will be followed on Wednesday by the Beige Book, Thursday the Factory Orders and Productivity and on Friday by the Nonfarm Payrolls.

ICI made it official this week. Equity mutual funds saw outflows of $466 million in January. This was the first time since 1990 that January had a negative cash flow. January is a strong retirement contribution month and normally sees inflows in the $7-$10 billion range. Several other fund flow companies had speculated on this over the last few weeks but ICI is the recognized authority. With brokers like Charles Schwab, Ameritrade, Goldman Sachs and Merrill Lynch laying off brokers in waves it does not take a call to Miss Cleo to know that trading volume has shrunk to very low levels. Many investors have simply given up on the market. This disgust also shows in the lack of conviction we have been seeing. Many will not be back when the market recovers because they have used the money for other investments like real estate.

The oil saga continues but the prices have started declining as reality begins to sink into traders. With Venezuela coming back online and Saudi Arabia agreeing to make up any post war shortfall the traders have lost the incentive to run up the prices. Shorts are loading up again after bailing out at rape and pillage prices this week. Once the capitulation at $39.99 a barrel was over the reality begin to appear. Consumers will not be seeing any real price relief for about a month as that high priced oil works its way through the system.

France was one of the biggest exporters of Iraq oil and part of their motivation, although they would never admit it, was the potential loss of oil and trade from Iraq. Russia, who announced on Friday that they WOULD veto any resolution that would lead to war is also a heavy trade partner with Saddam. There was a big photo session just last week with a bunch of Russian dignitaries hand shaking and backslapping with Saddam and his gang. It is nice to claim humanitarian reasons for antiwar vetoes but under the surface you are liable to find ulterior motives.

The semiconductor index set a new six-week high on Friday after Dan Niles made some positive comments about Intel. Niles said he expected Intel to affirm the LOWER end of their guidance at their mid quarter update on March 6th. He said he expects them to raise low end guidance from $6.5B to $6.7B while leaving the high end of the range at $7B. Intel jumped on the news despite his warning that revenue for the next quarter could see a -3% drop due to worse than expected seasonal factors from the soft economy. Niles based his positive comments on the widening spread between Intel and AMD in chip performance. He felt that the leading edge chips were so far in advance of AMD that Intel would not need to lower prices to compete and could gain higher margins on the newer products. He also mentioned the broadening Intel product line. This how the next bull market starts. One little comment at a time followed by new products, upgraded guidance and even an increase in profits. I can't wait.

The Dow posted its third losing month in a row and appears to have a total lack of direction. The index is stuck in a very narrow trading range growing narrower by the day. The 7900 level appears to be a very powerful price magnet and neither bulls or bears can move it off that number for more than brief periods. This is a true stalemate.

The Nasdaq has fared better with the semi stocks helping to hold it up as well as a variety of misc techs. MSFT is not one of them. MSFT is closing in on $23 again after their 2:1 split two weeks ago. Still the Nasdaq managed to tack on another +13 points on Friday and has been in a steady uptrend for a week. 1350 to 1360 will still be a problem and with the Intel update on Thursday it is not likely to move significantly over those levels soon. The bargain hunters are out but they are being very picky. Some of the Nasdaq gains on Friday were due to short covering as nobody wanted to be long over the weekend if a random war broke out somewhere.

I reported on Thursday that 57% of the S&P had warned about their 1Q outlook. There is a strong contingent of analysts that believe this is a severe overstatement out of performance fear. If company officers warn of possible shortfalls that never come to pass there is no harm done and no legal liability. With the economy cooling even further while everyone waits for the war to start, companies cannot predict any guidance due to limited visibility. To protect against disaster they are lowering guidance or canceling guidance completely. It does not mean the economy died. It only means they do not want to be optimistic in a cloudy environment.

This sets us up for some positive surprises eventually if the war is over quickly and business returns to normal. Of course the question remains "what is normal"? With the current mixed economic reports and 57% of companies warning, what will happen after the war. If we had a seven day war followed by a seven day rally then what? If we have a post war rally from 7900 to 8900 by the end of March then there is a substantial risk for negative earnings surprises. Earnings would not yet have the benefit of any post war improvement AND we would be entering into the worst six months of the year on a historical basis. Positive surprises could only come after the economy had some time to take action after the war. I have not changed my outlook for a post war rally. I am only cautioning against any irrational exuberance in the weeks following that rally.

If you still doubt there will be a war you would be surprised to hear that up to 20 B2 stealth bombers left Missouri on Friday for the gulf. These are the state of the art radar evading, very expensive aircraft. Each can carry 20 2,000-pound satellite guided bombs while entering and exiting undetected. It is interesting to note that they are going to be based somewhere near the gulf. In past conflicts they flew from Missouri to Kosovo and Afghanistan dropped their bombs and returned to Missouri without landing. That is one long ride. The Pentagon has already deployed the F117 fighter bombers and the B1 stealth bombers to the region over the last two weeks. One B2 can carry more precision guided ordnance than an entire squadron of F117s.

The carrier Nimitz and its battle group was ordered to the gulf today and will be leaving on Monday. The full complement of ships, planes, missiles and bombers ordered deployed on Friday cost well over $100 billion. Doesn't sound like President Bush is concerned about the UN resolution and it does not look like he plans on backing down.

Saddam is scheduled to "BEGIN" destroying missiles and components "IN PRINCIPLE" on Saturday under UN supervision. There are already cracks in the plans and I would not be surprised to hear that there is some delay over the weekend. Saturday was the deadline to have DESTROYED, past tense, the missiles. If Saddam delays then the US will be quick to point out that fact to all concerned. I would expect a highly visible destruction of several missiles with TV cameras rolling so Saddam can get maximum effect for the dollars lost. Getting past that initial group once the cameras stop rolling could be where the fun starts. In the end does it really matter? Not hardly. The US is coming and everything we are seeing now is just the pre-show.

Speaking of shows, we all participate in the biggest reality show of all every day. The "Who Wants to be a Millionaire" investment challenge. Lately it could have doubled as segments for "Fear Factor" with the extreme danger and high volatility. Those celebrity investors who have not used their "Get me Out of Here" card will end up as true "Survivors" when the series ends. However, I doubt there will be much of a market for reruns. Playboy asked the girls of Starbucks "Are You Hot" and announced they were going to do a series on the coffee kittens. Obviously this is a "Bare Market" in which many traders will be glad to invest.

Enter Passively, Exit aggressively!

Jim Brown

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