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       WE 3-14         WE 03-07        WE 02-28        WE 02-21 
DOW     7859.71 +119.68 7740.03 -151.05 7891.08 -127.03 +109.31  
Nasdaq  1340.33 + 35.04 1305.29 - 32.25 1337.54 - 11.48 + 38.85 
S&P-100  424.07 +  3.95  420.12 -  5.24  425.36 -  4.51 +  7.30 
S&P-500  833.27 +  4.38  828.89 - 12.26  841.15 -  7.02 + 13.28 
W5000   7896.49 + 39.17 7857.32 -115.30 7972.62 - 63.35 +139.03 
RUT      354.39 +   .21  354.18 -  6.34  360.52 -  3.84 +  5.86 
TRAN    2027.09 - 15.39 2042.48 -  6.57 2049.05 - 47.36 -  6.19 
VIX       36.33 +  0.68   35.65 +  1.50   34.15 +  0.01 -  2.96 
VXN       45.80 -  0.59   46.39 +  0.74   45.65 -  0.45 -  2.28 
TRIN       1.11            1.29            0.84            0.97  
Put/Call   0.70            0.75            0.59            0.85  

By Jim Brown

The markets, UN and economy all ended with a stalemate on Friday. The UN is equally divided and hopelessly deadlocked on any new resolution and France called a late meeting of the five permanent members of the Security Council on Friday. They are trying to float a resolution banning the war but obviously the US would take pleasure in a veto of that measure. The economy showed mixed economics on Friday with minor gains but Consumer Sentiment fell to a decade low and stalemated that news. The markets rallied on top of the big Thursday gains but the sellers were waiting at key resistance points to provide a solid stop to the +500 point move. Stalemate all around.

Dow Chart - Daily

Nasdaq Chart - Daily

Wilshire 5000 - Daily

There was a flurry of economic reports on Friday with mixed results. The PPI rose +1.0% but the gains were mostly due to inflation from high oil prices. After stripping out energy prices the core rate actually dropped -0.5%. This is good news for the Fed and the consumer that overall inflation is still under control. However, core crude goods are up +14.5% compared to last year. Sounds like a contradiction of terms but most of the difference is in the oil prices.

Industrial Production rose only +0.1% and the lack of growth was attributed to lack of demand. With falling output it is very hard to increase production. The fact that any increase was seen should be encouraging. This little to no growth is preferable to negative growth.

Business Inventories rose +0.2% but this was near the consensus of +0.1% and was a non-event. Sales rose slightly to push the inventory-to-sales ratio to 1.36 and off record lows. Once demand does pick up the ramp into production to replenish inventories will be strong. The only question is when?

The most important report on Friday was the Michigan Consumer Sentiment which came in at 75.0 and a drop from 79.9 in February. This was the lowest level since October 1992. There is no good news in this release. Energy prices, war, terror alerts, the stock market and unemployment were given as reasons for the severe drop in sentiment. This drop is shown in falling retail sales, auto sales and cooling home sales despite record low mortgage rates. Pent up demand is almost nonexistent and even a resolution of the war may not increase spending. The expectations component fell to 67.2 and a nine year low. The sentiment is worse now than at any time after the 9/11 attack. This report continues to add to the prospect that a post war rally may be short and small with attention returning to economic fundamentals that are weakening on a daily basis.

As a result of the sagging sales and lack of demand GM and Ford announced manufacturing cuts to avoid stacking up unwanted inventory. Ford is cutting 2Q production -17% and GM -10%. Since automakers book profits when the cars roll off the assembly lines and not when they are sold the prospects for hitting earnings targets are slim. With a massive pension problem twice the size of the company GM does not have room to slow down.

Schwab joined the list of companies, which have stopped contributing to employee's 401Ks. They used to match 2:1 up to $5,000 a year and dollar for dollar over that. The company dropped the benefit to try and cut costs instead of cutting more employees. Ameritrade said today that February trading volume dropped -25% and warned that conditions could get worse. Between the two companies they have over 10 million accounts and both are in serious trouble. Some analysts are warning that there could be a roll up in the online broker community that would leave only a couple of survivors. The massive trade volumes that built these companies during the Internet bubble have dropped nearly 80% over the last three years. If we are doomed to another 2-3 years of a protracted bottom there is not sufficient investor interest in trading to feed all the Internet brokers. Many analysts think the majority of traders have gone bust or used the funds for other purposes after losing ground for three years and there will not be a material return of these investors even if the market rebounded.

The biggest benefit from a quick war to the economy should be the drop in oil prices. On Friday the prospect of the end of the diplomatic dance at the UN brought a drop in oil to an intraday low of $34. This is a far cry from the $39.99 it reached a few weeks back. The high gas/energy prices are a serious drain on not only consumer sentiment but on everything we touch. Costs and prices are rising daily as the previous high oil works its way through the product life cycle. Knocking oil back down to $25 a bbl would relieve hundreds of billions in excess costs out of the economy over the next twelve months. In four of the last five recessions high oil prices were a major component. If oil does not drop soon it may be five of the last six.

The cycle is complete again. In 2.5 days we have gone from very oversold with a TRIN over 6.0 to overbought and a dead stop at very strong resistance. Dow 7900/Nasdaq 1350 slammed shut like a vault door on Friday to put an end to hopes for a pre-war, pre-Fed rally. The prospects for a rate cut were dismissed almost unanimously as too little too late and insignificant compared to the world events currently shaping our markets. Disappointed investors took profits when the Dow was up +110 points today, a +515 point gain since the Wednesday low. There was little or no short covering going into the close as most had already been blown out during the rebound. The Nasdaq top at 1350 had been very strong resistance for several weeks and we could only manage +3 points over that level at the height of optimism Friday. The Nasdaq finished slightly negative.

The bullish case for Monday is a market view that the lack of a material sell off after the Dow +515 point gain is a positive sign of bullish sentiment that should produce a follow on rally on Monday with no adverse news events over the weekend. Personally I am surprised there was no material sell off but I think that it is due more to the potential for a positive surprise over the weekend versus a negative surprise. Short of a terrorist attack or a shooting down of a spy plane by North Korea there is not much else that can happen. Any Osama event or Saddam retirement, forced or otherwise, would be a major positive and could produce a strong gap open. For a bull to pin their hopes on a break of 7900/1350 resistance on a potential positive surprise could be foolish.

The bearish case for Monday would be a reentry of the shorts into the market. Those that closed positions for a profit on Wed/Thr probably used good judgment on Friday and stayed on the sidelines due to event risk over the weekend. The risk to a short from an Osama/Saddam event would be much higher than other negative events for a long. The normal pattern for the last several weeks was short covering on Friday and new shorting on Monday. That pattern was thrown off by the severe drop and sharp rebound this week. Monday is a new week and there should be plenty of negative news over the weekend. President Bush is meeting with Spain and Britain in the Azores over the weekend and the bet is that he will discuss the chances for a successful vote on Monday and without a majority will pull the resolution, tell them to get out of the way and go on TV Monday night with a declaration of war. This unilateral decision regardless of Britain and Spain along for the ride will not set well with the Europe/Asian markets and they should know the outcome on Sunday night. That means we could drop hard on Monday if the timetable for war is accelerated from April 1st. Remember the market discounts future events and once the outcome of the Azores summit is known on Sunday night it will be discounting quickly.

UN inspectors began leaving Iraq on Friday, which should be a clue as to the coming timetable. France and Germany warned all citizens to leave Iraq immediately. France called an emergency meeting of the five permanent members of the Security Council for Friday night at the French Embassy to try and block the war. According to multiple sources the battle readiness orders went out today to the troops to begin actual staging for the attack.

I think the outlook is clear. The clock is about the strike midnight on the UN diplomatic dance and all the fence sitters lobbying for concessions and payoffs in exchange for their vote will be left on the sidelines when the show starts. Hopefully they will be left on the sidelines when the contracts for reconstructing Iraq begin also. The show is about to start and the UN's role as the center stage in this drama will end. All of this grandstanding will be over and the fear of the unknown before it starts will impact the markets.

Iraq has moved artillery and rockets capable of shooting chemical and biological shells into the massed soldiers in Kuwait and are setting up their weapons. Obviously they will be the first Iraqi positions sacrificed by Saddam but the fear is that they will take a preemptive strike at us once the US issues the 48hr warning. All of these things are very negative to a fragile market.

I know as investors we have been preparing for this for weeks, seemingly months, but the time has finally come. With the temperature rising in Iraq and every day waiting is another day Saddam has to prepare the odds are the April 1st date proposed this week may be too late. B1 stealth bombers flew combat missions over Iraq for the first time on Friday and dropped significantly larger loads of bombs on targets than ever before in the pre-war. If Saddam decides the noose is closing he may try to shoot back at the Kuwait staging areas and that could be any day. If he knows we are coming and he is going to lose anyway then he has nothing to lose by starting the war. The fact that we could be a war on Tuesday will not be lost on the market on Monday. Of course as we have seen on a daily basis lately the situation can and does change daily. As investors we need to be aware of the options and be prepared for either market direction.

Enter Very Passively, Exit Very Aggressively!

Jim Brown


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