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Market Wrap

Drop in Dollar Dominos

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     09-22-2003            High     Low     Volume Advance/Decline
DJIA     9535.41 -109.41  9641.87  9501.72 1.52 bln    787/2026
NASDAQ   1847.62 - 31.08  1881.42  1866.88 1.69 bln   1050/2050
S&P 100   513.31 -  7.31   520.62   510.95   Totals   1837/4076
S&P 500  1022.82 - 13.48  1036.30  1018.30
RUS 2000  513.65 -  6.55   520.20   511.65
DJ TRANS 2779.18 - 15.53  2792.96  2757.67
VIX        19.65 +  0.58    23.90    19.03
VXN        27.94 -  1.80    28.39    27.52
Total Volume 3,636M
Total UpVol    771M
Total DnVol  2,788M
52wk Highs     468
52wk Lows       17
TRIN          1.59
PUT/CALL      0.75

Drop in Dollar Dominos
By James Brown

A drop in the U.S. dollar cascaded across the global market place after the G7 finance ministers released a statement supporting flexible exchange rates. The U.S. dollar fell to three-year low against the Japanese yen and a fresh two-month low against the Euro. World indices responded negatively to the news as anyone who exported to the U.S. suddenly found their products more expensive. American indices, which had been near new one-year highs, suffered losses as investors used the G7 news as an excuse to take profits.

The G7 summit included finance ministers from the U.S., Japan, Germany, Italy, Britain, France and Canada. The meeting was held in Dubai, United Arab Emirates and together the seven expressed their unhappiness with countries or markets that tried to manipulate their currency to the favor of exporters. Okay, it was probably just six expressing their concerns and Japan told them what they wanted to hear. While no one country was named specifically, the message was clearly focused on Japan and China who have been devaluing their currencies to keep them weak against the US dollar and thus keep their exports competitive in the U.S. market place.

The Bank of Japan is famous for selling yen and/or buying dollars to keep their currency weak. This year economists estimate the BoJ has already sold somewhere near $100 billion (more than $11 trillion yen) through the month of September to keep their exports competitive and the yen weak. Unfortunately for Japanese businesses the reaction to the G7 statements was rapid. The yen rose to a high of 111.39 against the dollar from Friday's 114. Japan, the second biggest economy on the planet, has been trying to pull out of a 12-year slump and the rising yen is not going to help. The NIKKEI 225 average, which hit a fresh 15-month high last week, dropped more than 460 points or 4.2% to 10,475 as investors sold Japanese stocks on fears the stronger yen would slash corporate profits. It was the largest one-day loss for the NIKKEI in two years. To put it in perspective, it's been estimated that Toyota Motor Corp (NYSE:TM) losses 20 billion yen in operating profits for every 1 yen in decline against the dollar.

Concerns over Japan's traditional currency plays were also felt here at home in the bond markets. Japan is the largest foreign holder of U.S. Treasuries and demand for U.S. notes should slacken if Japan is going to let the yen float. The weakness in the dollar also compounded the threat to U.S. equities. As the dollar weakens the value of U.S. investments held by foreigners also slips. We've had an incredible run up this year and further weakness on the horizon for the dollar could spark international fund managers to lock in some profits in their U.S. investments. This could be a new headwind for stocks as speculation is already suggesting the dollar might fall to 103 against the yen while the euro could climb to $1.30 by the end of 2004.

Following the drop in the Japanese markets, the Hang Seng lost 95 points to 10,873. The British FTSE 100 dropped 28.8 to 4,228 and the German DAX 30 plummeted 3.4% to 3,456. The Dow Jones Industrials fell 109 to 9535. The NASDAQ Composite lost 31 (1.6%) to 1874 and the S&P 500 index fell 1.3% to 1022. The broadest market index, the Wilshire 5000 lost 126 points, falling back below the 10K mark to 9927. The selling was very wide spread with only two major sector indices in the green. Closing positive was the XNG natural gas index, up 1/3 of a point to 195 and the XAU gold and silver index, up 1.3% to 96.93. The strength in the XAU was powered by a $5 jump in December gold futures to $388 as some investors sought safety in the shiny metal against the slipping U.S. greenback.

As would be expected market internals were horrible. Declining stocks beat advancing issues 20 to 7 on the NYSE and 2 to 1 on the NASDAQ. Down volume swamped up volume by 4 to 1 on the NYSE and 3.6 to 1 on the NASDAQ. Normally when the markets decline the VIX or volatility index advances. That's exactly what happened today with a 3 percent jump in the VIX to 19.65. However, what makes today's move significant is that today is the first day of trading for the "new" VIX based on option prices in the S&P 500 index instead of the S&P 100 index. Those traders who would like to continue to follow volatility moves using the old calculations can do so using the new symbol VXO.

Chart of the Industrials:

Chart of the NASDAQ:

One of the biggest stories today, behind the G7 announcement, was news from Motorola (NYSE:MOT). After six years as the CEO of Motorola, Christopher Galvin, grandson of the company's founder, resigned after a conflict with the board of directors. The stock market welcomed the news with an 8.74% gain in the stock price and a wave of analyst upgrades. Critics had been harsh on Galvin after MOT's stock price lost nearly half its market value during his reign and Motorola, once the king of mobile phone handset production, fell behind Nokia.

Other than the G7 news and the Motorola shake up most of Monday's session felt pretty quiet. Of course it's tough to have a Monday without new M&A activity and today was no exception. InterActiveCorp (IACI), previously known as USA Interactive, has added yet another dotcom to its stable. The house that Barry Diller is building now includes HotWire.com, the discount travel/lodging website. The acquisition is said to cost upwards of $665 million in cash and the assumption of $20 million in options and warrants. HotWire.com now shares the IACI umbrella with Expedia.com, Hotels.com, TicketMaster(.com), Match.com, CitySearch(.com), LendingTree.com and the HomeShoppingNetwork.

Jim's wrap over the weekend seemed rather appropriate. Was Friday's session just the calm before the storm? Is the reaction to the G7 statement merely the first flash of lightening before it starts to rain or will buyers step in to by the dip yet again? There were plenty of comments over the dollar today. Most believe that a weaker dollar should actually be beneficial to the U.S. economy in the long run as it makes U.S. products more competitive overseas. However, part of the concern is how fast will the reaction be. If the dollar spirals out of control it could throw the markets into a panic with global repercussions. The general attitude is that the dollar should see more weakness near term. Plus, the new consensus for flexible exchanges rates is going to put a lot more pressure on Asia and Europe to generate stronger domestic growth.

Jim and I both mentioned over the weekend that we've just stepped into the most dangerous time of the year. It's traditionally the weakest period for the equity markets as bears try and gorge themselves in a fall feeding frenzy before hibernating during the Q4 holiday shopping season. The markets have been less than kind to the bears so they should be starving and willing to bite at anything that starts to stumble. At least one analyst told the financial media today that some investors may want to move to the sidelines.

Tomorrow will be day without major economic news and traders will be reacting to earnings news and upgrades/downgrades. Headlining the earnings reports tomorrow are three of Wall Street's biggest brokers. Goldman Sachs (GS) is estimated to turn in $1.22 a share, up from $1.00 last year. Lehman Brothers (LEH) is expected to earn $1.35, up from $0.70 last year. Morgan Stanley (MWD) is estimated to earn $0.69, up from $0.55 last year. Expectations could be high after last week's major blow out by Bear Stearns (BSC). The XBD broker-dealer index has been hitting new two-year highs and investors are expecting results to back up these gains.

While not market-moving news, the media will also be reporting on the OPEC meeting tomorrow as well as President Bush's address to the U.N. concerning Iraq.

Keep an eye on those stop losses.


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