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Market Wrap

Mad Dow Disease

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      05-20-2003           High     Low     Volume Advance/Decline
DJIA     8491.36 -  2.00  8550.26  8416.72 1.84 bln   1786/1416
NASDAQ   1491.09 -  1.70  1505.18  1480.13 1.66 bln   1557/1682
S&P 100   463.58 -  0.47   466.31   459.55   Totals   3343/3098
S&P 500   919.73 -  1.04   925.34   912.05 
W5000    8772.96 -  9.90  8827.64  8704.68
RUS 2000  409.03 +  0.71   411.36   406.19 
DJ TRANS 2365.28 +  4.30  2379.11  2345.82   
VIX        23.37 +  0.33    25.08    22.37   
VXN        32.22 +  1.12    32.36    31.06 
Total Volume 3,924M
Total UpVol  1,798M
Total DnVol  2,078M
52wk Highs  405
52wk Lows    35
TRIN       1.51
PUT/CALL   1.00

Mad Dow Disease
By Jim Brown
Click here to email Jim

The Dow reacted to the news events today by trading in a 133 point range but ended up almost exactly where it started. The Dow suffered from attack by mad cows, orange alerts, terrorist bankers and rich investors. Without economic events to attract attention the Dow is free to shift focus hourly as news events take precedence.

Dow Chart - Daily

Nasdaq Chart - daily

Wilshire 5000 - Daily

Economically there was little to produce direction with only the weekly Chain Store Sales report on the calendar today. Sales fell -0.1% last week making three losses in the last four weeks. The minor drop was not material and was quickly overshadowed by earnings from Home Depot which beat the street by two cents. It was not all positive because same store sales only rose by +0.1% compared to prior estimates of +2%-4%. Nordstrom also reported earnings that beat the street by 8 cents but it was two cents less than last year on 10% less revenue.

The real problems causing the Dow to swoon included an interview with George Soros who said he was now shorting the dollar. His comments sent the dollar to fresh four year lows despite many jokes about his late entry into the market. Soros said he had to listen to the Secretary of the Treasury and take action based on his comments. He was referring to Snow's comments over the weekend. He also went on record as criticizing the U.S. use of excessive powers in Iraq. He said his Open Society Institute would setup a special unit called Iraqi Revenue Watch to monitor the use of Iraqi oil funds. Should we add him to the known terrorist list?

Another problem was the reporting of Mad Cow disease in Canada. The real problem was not that it had been found but that so much time had passed since the incident. The cow was tested and killed in January but the news did not go public until today. The concern was the potential for other cattle, which had not been diagnosed to have already made it though the food chain. Also, they have been unable to determine how the disease was passed. Mad cow is not passed from cow to cow. In Europe the disease was passed by using contaminated food made from bone meal and other parts from other animals already slaughtered. The U.S. meat sellers like Tyson (TSN) and Smithfield Foods (SFD) and restaurants like MCD, WEN, OSI fell on the news. McDonalds was quick to point out that no Canadian beef was imported for use in U.S. stores. All U.S. stores use only local beef. The Canadian beef is used in Canadian stores and only comes from federally inspected sources. Outback Steakhouses said they only use USDA top choice or prime Midwestern grain fed beef. They still dropped -1.16. The problem is not in the danger but in the perception of danger. Beef is already depressed from health concerns and from diet trends that changed when the last round of Mad Cow hit Europe. Beef consumption fell -25% during the last scare. The U.S. has temporarily banned all beef imports from Canada.

After denying that they were going to change the terrorist alert level early this morning the Homeland Defense dept reneged and raised it to orange late in the afternoon. There were multiple sources of what are called specific and credible references that Al Queda could be planning a Memorial Day attack in the U.S. and elsewhere. The U.S. closed embassies in various countries where the risk is highest. New arrests were made and according to news reports suspects already in custody said the planned attacks were already underway. We know from the last time the "perps" confessed they later confessed to making it up. The administration is faced with a losing situation. They have to assume they are true and raise the alert level or be skewered on their own sword if they ignored the intelligence and something actually happened. The markets did not like the news and sold off strongly on the reversed position and the assumption there was new evidence. Once the news filtered through the floor the consensus was a case of too much caution and the markets recovered to flat. After the close it was learned that the New York National Guard was being called up and California law enforcement was going on 12hr shifts.

In the "I am so rich I don't need $300 million" department Warren Buffet attacked on the dividend tax cut as "Voodoo Economics" reviving a term from a past Bush campaign. He said he would rather see everyone get a $1000 tax rebate to put money in the hands of the lowest tax payers. Evidently those who are funding new business and buying equipment do not need any breaks. Warren said a $1 billion dividend to Berkshire shareholders would net him $310 million and he thought his secretary needed a $1000 rebate more than he needed the dividend. Say what? That is not an exact quote but sums up the meaning. These comments just added fuel to the fire that will continue to slow the process of getting the tax cut passed. Of course spending is flying unhindered through the same group of lawmakers. Warren, if you have so much maybe you should consider donating your $310 million to a needy bunch of option investors. I would gladly handle the distribution for you since your secretary is already overworked and under privileged. No, you cannot target individuals inside the U.S. with cruise missiles just in case anybody in the White House was leaning in that direction.

Dow components MRK and JNJ continued to drop on yesterday's drug news until late afternoon. It appeared that a buy program hit them around 3:48 and helped the Dow return to near zero at the close. The $DRG.x index recovered slightly but still finished negative for the day.

After the close HPQ announced earnings that beat the street by two cents and affirmed estimates for the year. The stock traded up +1.29 in after hours. HPQ said sales in servers and printers rose slightly but personal computers fell during the quarter. Carly Fiorina said the computer business remained a two horse race between them and Dell. She said demand was muted with laptops doing better than desktops. They said technology spending still looked challenging for the near term and the SARS impact was still unknown.

Traders should be encouraged that there was no follow through to Monday's drop. The dip to 8500 finally came but the dip buyers did not appear in volume. This could have been due to the lack of economic news and the confusion over the dollar from Monday. Bonds are still going up and traders were hesitant to jump back into the market. Today they tried to buy the open but the flurry of random news events kept blunting every attempt. The combination of Mad Cow and Orange Alert finally broke support to push the Dow to near 8400 but that was too much temptation to resist and the bargain hunters started shopping. Unfortunately they were unable to rally it back over 8500 which could now be resistance again. The Nasdaq failed to hold 1500 and was less successful in returning to that level with HPQ scheduled to announce earnings.

There are still signs of selling with a net outflow of funds last week and several different surveys showing that insiders are dumping stocks. Once survey said four times more insider transactions were sells and another said up to ten times the insider transaction volume was from sellers than buyers. The indexes should open up tomorrow on the HPQ news with HPQ, a Dow component, up +1.29 in after hours. However the futures are not showing that tonight. The cautious comments about muted demand and challenging conditions may be contagious.

Tomorrow we have no material economic reports but Greenspan will be speaking before the joint Economic Committee right after the market opens. The trading from today is not going to inspire anyone to rush out and go on a buying spree. The mad cow news may impact negatively in Europe/Asia after their recent and costly scare where 41 people died from the disease. Those markets could set the tone for our open and any Greenspan comments about deflation could add to that tone. We know he will try to spin any comments we can actually understand so I would be surprised at any negative consequences. What could happen would be more comments about the Fed being on guard and ready to act aggressively to combat deflation. If that action is deemed to include support of bond prices then we could see yet another round of bond buying.

The dip to near 8400, nearly -300 points below Friday's close and the lower end of the 8200-9000 range I suggested in Sunday's market wrap does not change my market view. I am still seeing that as the trading range for the near future. I am surprised the 8500 level was not bought strongly but I am not concerned about it. After a huge rally from mid March we were due not for a single day but for multiple days of profit taking. Dow 8500 may be the focal point for some time with movement both above and below. There was significant buying support in the 8425 range (S&P 920) but it did not chase the price once it started to bounce. It simply faded as we moved up. This tells me they are content to wait for another dip and do not feel the need to chase the train. The VIX rose to 25.08 intraday on the terrorist news but quickly returned to its downward slide. With news the governing force this week I would not be surprised to see an increased level of volatility as profits are shaken out.

We need to find the level where bulls are comfortable holding for the summer and I do not think we are there yet. The 38% Fib level does not come into play until just over 8200. This gives us plenty of room to trade without endangering the overall up trend. I still believe that bonds will not continue to soar to higher levels forever despite a new 45-year low for yields today. We will eventually see a huge asset allocation shift once stocks appear a better investment than a 3.37% treasury. This event may not occur until the economic news for May begins to flow next week. Positive economic news would be confirmation that the bond highs had been reached and the shift could begin. Investors wanting to beat the rush could begin moving assets at any time. The Greenspan speech could be a pivotal point for the week if investors get that warm and fuzzy feeling from the two dollar words. We will give you a play by play in the monitor as it occurs.

Enter Very Passively, Exit Very Aggressively!

Jim Brown
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