Storm clouds blew over not only the east coast but also over the NYSE and in both cases left behind far less devastation than had been expected. Richard Grasso was asked to resign by the same board that thought he was worth $139 million and the exchange is going back to business as usual with hopes that the furor has passed. Isabel blew ashore with winds of 65-100 mph but mainly produced only heavy rains and minor flooding and some random damage. By this time next week Grasso and Isabel will be regulated to the back pages and the small print of the daily papers. The fallout from the Grasso event will be another month of sound bites for television reporters. Isabel is at least expected to add between $5 to $10 billion to the 3Q GDP.
What a day! The markets celebrated a massive drop in Jobless Claims to less than 400,000 for the first time in three weeks. Well, maybe not a massive drop at 399,000 but the market did react like it was 349,000. Nobody seemed to care that the numbers from last week rose to 428,000 with a +6,000 upward revision. The headline number began with a 3 and that was all that mattered. The four-week average rose to 410,750 and a two month high and the continuing claims rose to 3.68 million and the highest level since June. The recent pattern of upward revisions to past weeks would indicate that the 399K will really be 400+ by this time next week. Two thirds of workers without jobs have now exhausted all of their benefits and are no longer counted in the 3.68 million base. This puts the real unemployed number somewhere close to ten million.
The Conference Board's Leading Indicators rose +0.4% for Aug and inline with estimates but less than the +0.6% from July. This was the fourth consecutive monthly increase in the indicators but it is well off the May highs at +1.1%. Three of the four coincident components rose but the one that fell was the employment component. Conditions are improving but the rate of increase is very slow.
The Philadelphia Fed Survey was the most negative report of the day and fell to 14.6 from 22.1 in August. This is a survey of conditions in the Philadelphia Fed district and this was a serious headline drop. However, there were some positives hidden in the internals. The New Orders component rose to 19.3 from 14.6 and order backlogs rose to 6.5 from 1.1. The New Orders component hit a new four-year high. While the estimate miss on the headline number and the drop from last month appeared negative the internals painted a different picture of strength still slowly building in the manufacturing sector.
The only other release for the day was the FOMC minutes for the August meeting. The highlights were a clear desire to keep rates low for a much longer time than was customary, fear of potential deflation and concern over job losses. The meeting itself was uneventful and the topic of most concern was the sharp rise in rates since the June meeting. There were minor reports of small increases in various economic sectors and the committee still thought the recovery was proceeding, just very slowly. The confidence level was beginning to build without any apparent summer lag. The committee met again on Sept-15th to review their methods of communication of their policy to consumers. This was after several board members had made statements about a kindler gentler Fed with posted targets and actions when those targets were hit. The committee met and decided to make no changes to the current policy dissemination method. The "keep us in the dark" and "talk up the markets" method is going to continue.
On the stock side of the news GE said orders in its plastics division fell -5% in August. The plastics division contributes about 10% to GE earnings. This is seen as a short cycle indicator of future economic activity. This comes on the heels of warnings by DD, NYT, JBX, KROL, TKR, ENTG, JILL and several others that would seem to indicate that things were not going well. Appearances can be deceiving as there were quite a few inline guidance updates and even some raised guidance and earnings beats from companies like NKE, SLR, COMS, RHAT, CAMD, JBL and CNF. BSC was the winner today with a whopper of an earnings win with earnings of $2.30 compared to analysts estimates of only $1.65. They said trading profits in bonds and their fixed income business was the reason. Several brokers have mentioned that trading volumes have been rising over the last three weeks but volume on the exchanges has not been showing any big gains until today.
Another indication that things may not be as rosy as investors think was the Semiconductor Book-to-Bill report late Wednesday. The BTB number fell to 0.91 for August a drop from the previously reported 0.97 in July. Unfortunately the July number was also revised down to 0.90. Bookings fell to only $721 million and the lowest bookings since Jan-2002. While the book-to-bill is not as low as it was in that period at 0.81 it is because the billings have fallen significantly as well. When both numbers fall in tandem the BTB remains stable. Just looking at the BTB gives a false indication of the actual strength of the sector. The bookings number is the critical number as it is a precursor to what companies are going to bill 3-6 months from now. What does an 21-month low say about the strength in the semiconductor sector? I would think it meant the tech recovery was losing strength. It appears conventional wisdom does not work in this sector because the $SOX closed up for the day as investors bought semi stocks. That takes a lot of faith at this point in the face of the facts. Or, maybe most investors really do not understand the BTB and heard the sound bites that the BTB "ROSE" to 0.91 from last month's 0.90. I gave you the actual numbers, you be the judge.
SUNW added to the coming jobless claims with news that they were cutting another 1080 workers amid a protracted slowdown in server sales. The move was an additional effort to return to profitability. They also cut prices on their servers and launched an aggressive advertising campaign promoting servers at 50% less than a comparable Dell product. This push is in addition to a software announcement that took aim at Windows as a replacement product. The software is priced as low as $50 a year and will be updated quarterly for life for no additional charge. The software will run on any computer capable of running Windows-2000 and is compatible with programs like Microsoft Office. While it sounds good on the surface SUNW will have to perform and on a wide scale before Microsoft will begin to get worried. SUNW was up nearly +4% today and MSFT finished down with the Nasdaq up +26. Does that tell you anything? There may not be a rush into the SUNW product but cautious investors are looking ahead.
The hurricane on Wall Street has passed and Richard Grasso has gone home to count his money. It is still not clear but evidently the board asked for his resignation and he complied. That would guarantee his salary for the remainder of his term as a termination payment. This would amount to about $9 mil more. Speculation is rampant on whether he can rescind his cancellation of the $48 million in additional compensation that he said he would forgo a couple weeks ago. As an ex-employee he might not be so favorable about that concession. Either way they do not have Grasso to kick around any more and the hunt is on to find a replacement. NYSE board member Carl McCall said the co-chief operating officers would continue to run the exchange on a day to day basis. McCall is the acting lead director at the present time. He, as well as many others, have already turned down Grasso's job. Evidently nobody wants to take the hot seat for what is expected to be significantly less money.
AOL Time Warner, excuse me, Time Warner voted to drop AOL from its name and change its stock symbol back to TWX. Investors wish it was that easy to erase the pain and frustration from the failed AOL merger which cost investors billions. Just changing the name will not help anyone but at least it will prevent the name AOL from popping up in every news article and stock report going forward. Out of sight, out of mind is what the board is hoping for. Guess we will not have AOL to kick around either. Now if we can just get them to quit filtering our newsletters as spam we would be ok.
Tomorrow is a quadruple witching Friday and several analysts were attributing today's gains to short covering in front of those expirations. The max-pain point for the S&P was 985 and it closed at 1040. There was definitely some pain for many with that big a miss. The same level for the DJX was 91.00 and 32.00 for the QQQ. The max-pain point is the level where the most options expire worthless and insure the most profit for those that sold them. If the gains today were really from short covering then there is little to continue the bounce come Tuesday. Friday could see some follow through and Monday is settlement day. After that we will be left to our own to determine direction based on things like earning and book-to-bill numbers. Until then those traders that sold covered calls on their stocks expecting a typical September decline are faced with buying additional shares to cover the calls or buying the calls back at much higher prices. Those that sold the calls naked and are flat the stock are in serious trouble. Who would have thought that the markets would be at 52-week highs on an expiration Friday in September when they sold those calls last month? If options expiration was behind the move then Friday will have to do without help from the S&P and DJX options which ceased trading on Thursday. With the short interest on the QQQ near all time highs at 287 million shares short there is still plenty of ammo left.
Regardless of the reason for the strong gains on Thursday all the indexes closed at new yearly highs. The Wilshire 5000 closed above 10,000 at 10,076 and the Dow is not far behind. The morning started off with a short dip before being pushed higher by no less than five strong buy programs. Each program brought another round of short covering and buying by bulls chasing the indexes higher. The Dow broke over 9600 and closed right at decent resistance at 9660. The Nasdaq closed well over 1900 resistance and is staring resistance at 1915, 1935 and eventually 2000 right in the face. Just imagine how strong it would have been if the semi bookings had actually risen!
I am not going to try and justify the bounce today or predict the outcome for tomorrow. As an expiration Friday it could be wild or mild and volume could be strong or gone. The volume today was over two billion on the Nasdaq and 1.9 billion on the NYSE. This is very strong volume for an up move in September. The internals were equally strong with 813 new 52-week highs and only 20 new lows. Advancing volume was 3:1 over declining volume. Once the smoke cleared the reality of how strong it really was hit me. The gradual rise during the day was deceiving. +60 points of the Dow gain was due to the first buy program in the first 45 min of trading. That propelled the Dow to resistance at 9600 where is languished for an hour before another buy program popped it to 9635. It trended down from there for two hours and suckered the shorts back into the market just as another buy program hit at 1:30. The Dow traded in a narrow 20-point range for the rest of the afternoon and right at 9650 resistance. It sounds like it struggled higher and as I lived it I felt like it was struggling. Looking back after the close produced one of those moments felt by traders many times when they realize the trend they were fighting all day never faltered and the pauses and dips were only head fakes.
Friday is a tossup. When a market closes at new highs the obvious thought is a follow through the next morning after the European and Asian markets rise on our gains. Add in the expiration pressures and we could see additional volatility. We just do not know which way those remaining pressures will push us. With the indexes so far above the max-pain points you would think the pressure would be up. The futures are flat in the overnight session and giving us no clue. Whichever way you feel led to trade tomorrow please be careful. I am marking next Tuesday on my calendar as the make or break day. Settlement Mondays are generally volatile but don't produce big moves. That makes Tuesday the one to watch. Now if we can just get some follow through on Friday we will be well positioned for a really big move next week.
Enter Very Passively, Exit Very Aggressively!