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Market Wrap

Trouble in Paradise

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      09-30-2003           High     Low     Volume Advance/Decline
DJIA     9275.06 -105.20  9378.10  9230.47 1.78 bln   1402/1528
NASDAQ   1786.94 - 37.60  1812.81  1783.46 1.87 bln   1087/1735
S&P 100   498.56 -  6.46   505.02   496.57   Totals   2489/3263
S&P 500   995.97 - 10.61  1006.58   990.36 
W5000    9649.68 - 93.30  9742.98  9595.20
RUS 2000  487.68 -  5.03   492.71   483.56 
DJ TRANS 2673.86 - 36.40  2709.55  2671.03   
VIX        22.72 +  1.05    23.26    22.03   
VXN        32.83 +  2.17    32.83    31.17 
Total Volume 3,979M
Total UpVol  2,999M
Total DnVol    933M
52wk Highs  130
52wk Lows    14
TRIN       1.90
NAZTRIN    2.73
PUT/CALL   1.06

Trouble in Paradise
By Jim Brown
Click here to email Jim

Those analysts predicting a +6.0% GDP for the 3Q received a serious shock this morning when several economic reports came in much lower than expected. There is a rising concern that the economic recovery tripped in late August and slid face first into September. The markets tried to rally off the lows as the bad news bulls showed up in volume but they ended up giving back yesterday's gains to close down substantially.

Dow Chart

Nasdaq Chart

S&P Chart

The morning opened negatively with the Chain Store Sales down -0.4% and the third straight week in the negative column. Most retailers were generally below plan for the week. Last week analysts said the drop was due to the hurricane. This week they said it was more likely a drop due to weakening financial conditions and not the hurricane. Some analysts said spending last week was actually helped by hurricane repairs and the numbers still came in weak. The Bank of Tokyo lowered estimates once again for September to +3.5%, down from earlier estimates of +5% and +5% growth in August. Wal-Mart, who has repeatedly said sales were running ahead of plan, guided analysts to a lower range for earnings. Analyst's estimates were for 47 cents and Wal-Mart guided them to 45-47 cents OR a quick calculation shows us a median of 46 cents and a penny less than the street. Jobs are still falling as you will see below and consumers are beginning to hoard money again now that the tax rebate checks are gone.

The NY-NAPM report was flat at 222.2, up only a fraction from the August 221.70. There were some positive internals with the current conditions component rising to 51.1 and the first time over 50 this year. The rest of the internals were mixed and analysts had hoped for a generally better showing but they were still happy to see the improvement in some key indicators.

Not so positive was the Chicago PMI, which fell to 51.2 from 58.9 in August. This was very negative and the lowest reading since April and only marginally over the 50 boundary for expanding conditions. New orders fell to 53.2 from 60.5 and employment fell to 45.3 from 51.2. The employment drop is the most critical component as it indicates management is not expecting rising demand in the near future. Last month was the first time in three years that employment rose over 50 and it could not hold the gains. This would indicate the early quarter bounce in the economy could have been failing as the quarter closed.

Also shocking analysts was the drop in Consumer Confidence to 76.8 from 81.7 and well under the consensus of 82.0. The bulk of the decline came in the expectations component which fell to 88.4 from 94.9. This is a large drop and represents a material shift in sentiment. Consumers planning to buy a home fell to 2.9 from 4.1, a car 5.4 from 6.6 and a major appliance to 26.7 from 32.5. This decline in purchasing trends is substantial with the home buying component at its lows for the year. The auto number and appliance numbers are at three year lows and the auto manufacturers were making announcements after the close to support this outlook. Overall the headline number was the lowest level since March. This was not a good report in any context.

Ford announced after the close that they would be cutting -12,000 jobs citing increased competition and falling sales. Daimler Chrysler also announced they were planning to layoff "thousands" in the near future. Numbers due out tomorrow are expected to show auto sales falling to an annualized 16.8 million units. Ford said it was also going to cut -3,000 contractors. Sales concessions were said to have run as much as 20% of the list price in September as dealers were told to push the inventory out the door and get ready for the new models. High dollar cars were rumored to have been offered at 30% discounts to unload the inventory. It does not appear the consumer is coming to our rescue again.

One sun rose in the east this morning and another crashed into oblivion. SUNW warned that current quarter earnings would be less than expected and that it was going to take a $1 billion charge. SUNW said it reflects a "particularly difficult quarter for the company due in part to intense market and competitive dynamics." Analysts were expecting a -2 cent loss for the quarter and SUNW said it was now expecting a -7 to -10 cent loss. SUNW lost nearly -15% on volume of 163 million shares to lead the Nasdaq to a -37 point loss.

ETS, a network equipment manufacturer, warned that they would miss earnings and blamed it on the hurricane. While I would be skeptical that a hurricane in the last two weeks of the quarter would cause a miss, that was the excuse. The sector took it on the chin on the one bad apple principle. The SUNW warning of a dismal quarter did not help the overall tech sentiment and ETS just added to the gloom.

Also not helping sentiment was an announcement from the SEC that they were investigating FNM/FRE for possible evidence of fraud. There are several agencies currently targeting those firms not only for evidence of wrong doing but also for evidence of liquidity. The OFHEO (oversight committee) said FRE had sufficient liquidity as of June-30th. Glad to hear that a quarter later. The committee said they had $29 billion in capital compared to the $4.7 billion required. How that capital was impacted by the bond implosion is yet to be disclosed.

The major indexes closed the quarter in positive territory stretching the consecutive strings of positive quarters to .. two. Yes, two, back-to-back positive quarters. So what? It was the first time in three years that this has happened. Break out the bubbly! It was a squeaker for the S&P which started the quarter at 975 and at one point this morning appeared it could challenge that level today. It was not to be and somebody bought the dip and held the indexes up to push them into the record books and create good press for mom and pop investor. I say somebody because the Feds were in the market today. The Fed intervened on behalf of the Bank of Japan to stabilize the rising Yen. The BOJ said they had spent 4.457 trillion yen in the last six weeks to keep the yen from climbing against the dollar. ($40 billion dollars) This was the first intervention by the BOJ since the G7 meeting in Dubai called for more flexible exchange rates and discouraging intervention. With the dollar diving today on the bad economic news the BOJ was forced to act to keep the Yen at 110 to the dollar and the current line in the sand.

Ten Year Yields

Once the economic news hit the fan bonds soared with the Ten Year yields dropping a full 140 basis points. While this is a positive for the bond market and the housing market it could be a negative for the stock market. Cracks are beginning to appear in the economic recovery picture and it appears there could be a concerted effort to sell stocks and buy bonds in process.

The markets may have finished the quarter with a gain but they finished the day with a loss and at the low for the month. There was a definite attempt to buy the dip intraday but it failed as darkness approached. Some claimed that the intraday buying was last ditch end of quarter window dressing from funds that wanted to show stocks on the books but not willing to buy at higher risk levels over the last couple weeks. While that could be true it paints a bleak picture for the coming week.

For those that were trying to hold on until September closed the pressure is off. The first day of October is known for losses as the window undressing begins. Ironically the following two days are typically up. The Dow closed under 9300, the S&P under 1000 and the Nasdaq well under 1800 again. The Dow and SPX are well under their 50 DMA and the Nasdaq is pressing it at 1779.

The drops are beginning to worry traders as they are occurring on stronger volume with today's move on over 4.1 billion shares. The down volume was 3:1 over up volume. The VXO (old VIX) hit 24.98 today and is showing an increasing level of fear in the market. The new VIX hit a high for the month at 23.26 despite its lower volatility. Even more amazing was the TRIN which closed at 1.90 and the Nasdaq TRIN at 2.73. These are very oversold indicators but odds are good they will get more oversold before the week is out.

On Wednesday we are facing the ISM report and the consensus is for a headline number that is flat with last months 54.7. If it holds there the carnage may be spared. That was the highest reading since the 55.2 in December-2002 and the same reading in June-2002. March through June-2003 were under 50 and showing contraction with July at 51.8, a squeaker back above the line and then the large spike to 54.7 in August. There are quite a few analysts that expect the ISM to drop several points below consensus but any number over 51 should keep the bears at bay. As long as traders can grasp at the "over 50" economic expansion hope we should not see any fresh new economic selling. We also get construction spending and layoffs tomorrow. The worry for the week is that the nonfarm payrolls on Friday will break 100K in job losses. The current estimate is -25K but the whisper number is growing.

This puts the bears on the defensive. With negative expectations for the ISM and Jobs it sets up a potential relief bounce if the numbers are not as bad as the whisper numbers. This means bears are probably not as likely to short heavily into the announcements. The risk of disaster is more on their heads than the bulls. The bulls already know this is a bad season and the recent reports and earnings warnings have them in bunker mode. The wild card tomorrow is the window undressing, if any, and then the wait for Friday. If you are long the 100 DMA on the S&P is at 988 and the 25% retracement level at 977. Both of those levels should provide some support but we are in October. This month is known for some monster drops but it is also known as the "bear killer" month. Investors know to buy the October dip and ride it into January and hopefully that will happen again this year. For tomorrow, ISM is the morning focal point then we are on our own until we see if the institutions are undressing or not. The ISM could help make up their minds. If the number drops in the 50 range it could convince many investors that the recovery is in danger and profits in hand now allows for selective buying later.

Enter Very Passively, Exit Very Aggressively!

Jim Brown


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