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Stable and Bullish

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        WE 4-04         WE 3-28         WE 3-21         WE 3-14 
DOW     8277.15 +131.38 8145.77 -375.85 8521.62 +661.91 +119.68 
Nasdaq  1383.51 + 13.99 1369.52 - 51.65 1421.17 + 80.84 + 35.04 
S&P-100  446.69 +  8.75  437.94 - 18.43  456.37 + 32.30 +  3.95 
S&P-500  878.85 + 15.37  863.48 - 32.41  895.89 + 62.62 +  4.38 
W5000   8319.97 +134.60 8185.39 -277.93 8463.32 +566.83 + 39.17 
RUT      373.28 +  4.58  368.70 -  7.53  376.23 + 21.84 +   .21 
TRAN    2188.67 + 25.47 2163.20 -100.29 2263.49 +236.40 - 15.39 
VIX       32.80 +  0.62   32.18 -  1.44   33.62 -  2.71 +  0.68 
VXN       42.85 -  0.24   43.09 -  2.69   45.78 -  0.02 -  0.59 
TRIN       1.00            1.43            0.59            1.11     
Put/Call   0.76            1.31            0.63            0.70     

Stable and Bullish
By Jim Brown
Click here to email Jim

Despite really bad economic news, dozens of tech warnings, more threats of unconventional attacks by Iraq and a couple of Saddam videos showing him to be alive and touring bomb damage in Baghdad the markets held their ground and the Dow closed positive. A pretty bullish performance in my opinion.

Dow Chart - Daily

Dow Chart - 60 min

Nasdaq Chart - Daily

Nasdaq Chart - 60 min

The two major events for Friday were the Nonfarm Payrolls and the capture of the Baghdad airport. The combination of the good news and bad news combined to produce a stalemate in the markets. The Jobs Report showed a loss of -108,000 jobs for March and a downward revision for February to -357,000. While the number of jobs lost was four times the consensus estimate of -25,000 it was still under the whisper number of -250,000. That made the bad news less bad than expected even with the additional -49,000 job revision for February. The -463,000 jobs lost in the last two months is one of the biggest losses in any two month period since 1982. Every time this has happened the Fed cut rates in response.

This jobs number was not a real surprise since we have had seven straight weeks of Jobless Claims over 400K. Another factor confusing the report was the additional call up of 60,000 reservists. If those were employed in the workforce then hiring replacements would have increased the jobs number. Since not all reservists were replaced we cannot derive a one to one ratio but there was a positive impact by this process. Since these jobs are temporary jobs until the reserves return it is only a temporary bump. There have been 210,000 reserves called up though mid-March. If 150,000 were replaced on a temporary basis then the jobs numbers would have been 150,000 lower over the last two months without the war.

Another anomaly in the report was the drop of -34,000 local government employees. This was generally in public school staff. Analysts think this is a symptom of the state budget problems and the attempt to lower overhead. These workers will not be hired back for some time as it is not a demand problem as in business. State and local governments will have to wait until additional funds in the form of taxes become available. Until companies experience higher demand, create more products, make a profit and then pay taxes the positions will remain unfilled. Companies are not expected to add employees until the second wave of demand appears. They will want to make sure the demand is stable before incurring additional employee expenses. The jobless rate is expected to decline until mid-2004 and the unemployment rate to rise to 6.2% by year end.

The other market mover Friday was the capture of the Baghdad airport. This caused a significant spike in futures overnight and kept a bid under the market all day. The impression that the war could be over in days is making long term buyers bullish. This is remarkable stability in the face of other war news on Friday. There were numerous reports of chemical/biological weapons or traces of them being found in several locations in Iraq. More Iraqi soldiers were found near Baghdad with gas masks and the Iraqi Minister vowed to attack the coalition with unconventional weapons as early as Friday night. His claims were later qualified to not mean chemical weapons but suicide bombers and other means. The biggest jolt to the market was two videos of Saddam, which most analysts quickly agreed were recent and proof that he was alive and well.

The SARS epidemic continued to gain speed with the W.H.O. adding Singapore, Taiwan and Vietnam to it list of places to avoid. This follows the Hong Kong warning earlier in the week. Flights out of these areas are packed and travelers are heavily screened for any illness. President Bush signed an executive order allowing quarantine of infected persons. Cancellation of business and recreational travel to the affected areas as well as business closures and fear of crowds has already cost a full point of GDP to the Hong Kong economy. Asia was not financially well when it started and as long as the disease keeps spreading their economy will only get worse. The US depends on Asia for not only manufacturing of everything from clothes to computers but as consumers of our goods as well.

Despite all the external influences the market held up remarkably well. This was even more remarkable in the face of the flood of earnings warnings for the week. There were 15 earnings warnings in the software sector alone. SEBL followed PSFT and others in the confessional after the close and echoed the comments from all who went before. They all said large orders had been postponed with many customers canceling them entirely. The software sector is becoming the leading indicator for the tech sector for this cycle and the weakness is expected to be repeated in chips and computers over the coming weeks. All companies complained that uncertainty about the war and the post war conditions was weighing on the economy. There is a key phrase there.

The key phrase is "post war" conditions. There are starting to be concerns that the post war conditions may actually be worse than the pre war conditions. There have been several comments in the last couple days that companies have actually been reluctant to layoff employees despite shrinking earnings because of the expected post war pop. Everyone has been talking about the post war pop for so long that it has taken on a life of its own. Many are now beginning to question what will cause a post war pop. It is becoming clear that if the actual pop is the expectation bubble bursting and nothing else then conditions could go from bad to worse very quickly.

The current economic conditions and the frequent White House visits by Alan Greenspan over the last couple weeks would point to some kind of effort underway or to be announced to increase the Fed's market stimulus. This is likely to be in addition to a rate cut. There is a 69% chance of a 25 point cut by the May-6th FOMC meeting. After the very negative Jobs Report there is a small chance of an intermeeting rate cut on Monday. Some feel that if the Fed does decide to cut they could take an aggressive stance and skip to a 50 point cut instead. Most analysts do not feel this is a likely possibility. A more likely path would be a drastic boost in money supply to the point where excess liquidity would eventually float the economy. Thus the multiple visits to see the President over the last couple weeks to discuss strategy. The potential for escalating Fed action has not been lost on the markets and that is another reason for the underlying bid.

Despite the underlying bid on Friday the markets will have an entirely new set of problems next week. According to the government the most dangerous phase of the war is still ahead. The lightning strike from the border to Baghdad was accomplished by running past all the major towns and leaving Iraqi soldiers intact in those towns. The intention was to allow following troops to break off and undertake the very slow and dangerous process of clearing the towns. Basra is a prime example. It has been surrounded by 35,000 coalition troops for two weeks and we still do not control it. We are not going to control Baghdad anytime soon. There are multiple divisions racing to catch up with the advance party to reinforce them and their 4x5 mile outpost at the airport. Iraq is also pulling in all forces including 8,000 10-15 year old kids called the Saddam Cubs to fight the coalition. The positive war results held the market up on Friday just like the prior Friday. Without any new success over the weekend we could see a repeat of the last two Mondays.

The beginning of the week will be devoid of any material economic reports. Wholesale Inventories on Tuesday is the only significant report in the first three days. Thursday we will get Jobless Claims and Import/Export Prices and Friday the PPI, Retail Sales and Michigan Sentiment. It is not a particularly exciting economic week. Earnings will begin to pick up speed with Thursday being the first high volume day. Despite the potential for negative surprises it is fairly obvious that investors have already discounted the event. They are ignoring economics and fundamentals for the pre war quarter as past history. Need proof? The Nasdaq only lost -13 points on Friday after 15 software warnings, five chip sector warnings and multiple warnings and downgrades in the biotech sector. In normal times we would be down triple digits on the Nasdaq for the week. Couple that with the ISM and Jobs data and it would have been a massive drop. All the indexes finished up for the week instead.

The Dow closed just under 8300 and up +131 points for the week. We had a perfect retracement of the March rally of 50%. With the rebound on Wednesday we have now retraced 61% of the drop. In English that means the pressure is on the bulls to hold the ground captured on Wednesday. The Dow needs to break and hold 8330 to keep the rally alive. The Nasdaq is under a little more pressure due to the warnings mentioned above. It tested 1400 again on Friday and fell back to initial support at 1380. The next support levels would be 1365 and 1340. The Nasdaq needs to break 1400 again to attract needed volume to maintain the rally. The markets are completely news driven at this point and trying to attach too much importance to economics is a waste of time. We are on auto pilot waiting for the war to end. The only pattern that may be tradable is the Monday drop. The last two Mondays posted triple digit drops when there was no weekend surrender. Nobody knows if that scenario will continue but the only guarantee is that war news will continue to be the only motive force.

Enter Very Passively, Exit Very Aggressively!

Jim Brown


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