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Market Wrap

Competition Terminated

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      08-07-2003           High     Low     Volume Advance/Decline
DJIA     9126.45 + 64.70  9135.00  9031.14 1.59 bln   1968/1224
NASDAQ   1652.18 -  0.50  1658.43  1641.74 1.60 bln   1470/1697
S&P 100   491.76 +  3.63   492.20   486.45   Totals   3438/2921
S&P 500   974.12 +  7.04   974.89   963.82 
W5000    9362.38 + 54.90  9365.90  9276.22
RUS 2000  453.77 -  0.14   454.22   449.97 
DJ TRANS 2550.77 + 17.00  2551.68  2529.73   
VIX        21.89 -  1.41    23.57    21.73   
VXN        34.02 -  0.40    35.83    33.98 
Total Volume 3,406M
Total UpVol  1,714M
Total DnVol  1,638M
52wk Highs  164
52wk Lows    59
TRIN       1.12
NAZTRIN    1.39
PUT/CALL   1.02

Competition Terminated
By Jim Brown
Click here to email Jim

Arnold announced his candidacy for governor of California and previously announced candidates began dropping out in droves. Traders not in California could have cared less. The media panic and rush to document every word and deed done by the Running Man drowned out some pretty positive market news. The intraday market action was positively dead and the major markets traded well below their recent volumes. Yawn.

Dow Chart - Daily

Nasdaq Chart - Daily

S&P Chart - Daily

Wilshire 5000 Chart - Daily

The morning started off well with Chain Store Sales for July soaring +4.3%, well over expectations. The good news was across the board with several major retailers raising guidance for the quarter. This was the strongest advance in 13 months. The good news was due to sales from heavy discounting, the first wave of tax rebate checks and warmer weather after a soggy May/June. Department stores posted their first gain in same store sales since November 2001. The hot weather prompted strong sales of seasonal summer products with July being the 12th warmest on record. WMT, FD, BBY, ANN and GPS all raised earnings guidance on the better than expected news. July is the month that all retailers try to dump the summer merchandise in preparation for the shift to fall and back to school specials. It appears the hot weather produced more sales than the tax checks since the first wave began delivering on July-25th and would have had limited impact at the register. This sets up August as a banner month with all reports that back to school sales have started off with a bang.

Adding to the premarket excitement was another drop in Jobless Claims to 390,000 and the third consecutive week under 400K. This was the last week of adjustment to offset expected auto maker retooling layoffs. Next week we are on our own again and with the +72,000 spike in continuing claims it is evident that getting a job is still tough and getting tougher. Also, in two weeks the summer vacation season will be over and many more unemployed workers will get back the business of finding a job. Temp workers will find themselves unemployed again with the vacationing full timers back at work. The key week in my opinion is the week ending September 12th. The first full, post summer week should be a key indicator for the real health of the job market.

Hurting the job market was the surging Productivity, which came in today at +5.7% and well over estimates of +4.6%. The big gains came from a sharp drop in hours worked and higher output. This gain was more than twice the +2.1% in the first quarter. Overall hours worked dropped -2.7% but manufacturing hours worked dropped -6.1%. This huge drop in hours skewed the headline number and while some traders took it as a positive others did not. The reason hours worked dropped so significantly is due to continued layoffs and less product demand. Employers continue to be pressed to reduce costs and much of those costs savings come from layoffs. Manufacturing output declined despite the gain in the headline numbers. It will be interesting to see what revisions are made to this productivity number next month.

Wholesale Inventories remained flat in June after two months of declines. The only real rise in the components was a rise in automobile inventories. That could be disturbing as it indicates sales are slowing as the model year comes to a close. Sales for all products did rise but not enough to make a material change in the numbers.

Consumer Credit shocked analysts by dropping -$400 million when they had expected a gain of +$6-$7 billion. Suddenly consumers are not pulling that plastic out to pay for purchases. Considering the sharp rise in retail sales this number poses some confusion to analysts. It is unlikely the consumer suddenly decided to pay cash just when interest rates were putting a stop to the refinancing bonanza. It is also possible this drop could be in response to the record number of refinancings over the last two months and the resulting payoff of high interest credit cards with the proceeds. This number tends to be very volatile and is subject to monthly revisions. The market reacted calmly to the announcement due to the confusion numbers.

Other than Arnold the big news of the day was the last auction of treasury notes which went as expected. This was a relief for the markets which were afraid the demand for bonds had dried up. The bid-to-cover for the 10-year notes came in at 2.0 which means there were bids for twice as many bonds as there were bonds offered. The price went at 4.36% yield and only .01% less than the market rate just before the auction. Once it was completed the bond markets flip flopped on both sides of the price and yields finished negative for the day at 4.22% as traders decided maybe the worst was over and bought bonds. As I sat and pondered this today it occurred to me that much of the panic in the bond market could have been caused by the 26 primary dealers who took down the majority of the $60 billion in notes this week. If you knew that you were going to have to eat $60 billion of product six weeks in advance it would certainly behoove you to drive that price as far from the record highs as possible. You are not going to make a lot of money buying $60 billion in bonds at 45 year highs. Could they really drive bonds down to where they could afford to absorb that much inventory? Absolutely. If the major dealers simply withdrew their bids then the weight of the market would do the rest. It happens in the market every day. Once the panic begins all they have to do is watch and continue to lowball the bids to make sure it does not recover.

Meanwhile the rest of the consumer market has seen a record rise in rates over the last six weeks as a result. Prior to June 30th there was only one 25-point move in interest rates in a single day over the last three years. There was eight of those moves in the last three weeks. This is unprecedented and a 100-year storm in the bond market according to Franklin Raines, CEO of Fannie Mae. 30-year mortgage rates rose to 6.34% today after hitting 5.25% six weeks ago. Fannie Mae came under attack today with a news article claiming FNM had suffered huge losses due to the bond crash because they had taken undue interest risks. The stock opened down sharply but recovered intraday after FNM denied the allegations. FNM sold $2 billion in 3-year notes on Thursday. Do you think they could be plugging holes in their cash flow from the 100-year storm? Earnings for the major financial stocks for the 3Q are going to be real exciting as we see who took a hit and who didn't.

The markets wandered higher after an early morning dip or maybe I should say the Dow wandered higher. The Nasdaq was weak all day and spent only a brief period in positive territory. The markets expected a positive conclusion to the three day bond auction but were nervous before the results were announced at 1:PM. The fear was a weak auction which would indicate more bond sales and higher rates ahead. When the auction was over the indexes breathed a sigh of relief and rallied to resistance only to be knocked back by selling once again. As we approached the Consumer Credit at 3:PM the bears managed to push the Dow back below 9100 for the last time. Seven times the Dow crossed 9100 today before finally ending at 9126.

The Nasdaq managed to get back to flat at the close but techs are still suffering from the Cisco hangover. The Nasdaq is well under 1700 at 1653 and down more than 100 points from the 1757 high last Thursday. Earnings after the close today did little to provide hope for tomorrow despite some decent results. The results from PIXR and NVDA were mixed with PIXR soaring on the Finding Nemo film and NVDA warning on flat margins and increasing expenses. With PIXR seen as a cyclical event and one not likely to be repeated next quarter the futures were trading down slightly in after hours.

All in all for the first week in August the markets have held up extremely well. The Dow refuses to break 9000 and 9100 has turned into the mother of all price magnets. As long as this trend holds the end of quarter rebound could start from a nice comfortable level. Should the trend fail and the Dow break 9000 it could get ugly fast. Traders are always encouraged when volume accompanies an up move. That was not the case today. It was simply a matter of the path of least resistance and a little short covering after the bond auction failed to tank the market. Volume on the NYSE was only 1.3 billion and 1.6 billion for the Nasdaq.

Dow downtrend chart - 30 min

The markets closed at serious resistance and it might be difficult to move up in the morning without some help from Asia and Europe. The Dow has strong resistance at 9130 and closed at 9126. The Nasdaq has strong resistance at 1650 and it closed just over that level at 1653. The S&P has strong resistance at 975 and it closed at 974.30. All of these indexes are poised to either explode or implode at the open. There are no economic reports on Friday and the markets will be left to find their own level. Considering how they have ignored good news lately they may be better off on their own. We have retraced +89 Dow points of the -149 lost on Tuesday and the oversold conditions have eased considerably. However, we are still down -235 points from last Thursday's high of 9361. The two-week trend is still down until we move back above 9200. Friday may not hold the answer to the mystery as volume should be the lightest of the summer with no catalyst to spark a move. Could be a good day for Saddam to surrender.

Enter Very Passively, Exit Very Aggressively!

Jim Brown


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