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Market Wrap

Good Day For A Walk

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      11-04-2003           High     Low     Volume Advance/Decline
DJIA     9838.83 - 19.60  9874.83  9819.86 1.75 bln   1693/1522
NASDAQ   1957.96 -  9.70  1971.38  1053.64 2.11 bln   1610/1582
S&P 100   521.38 -  2.63   524.01   520.43   Totals   3303/3104
S&P 500  1053.25 -  5.77  1059.02  1051.70 
W5000   10271.46 - 45.70 10317.20 10257.98
RUS 2000  538.87 +  1.03   540.32   535.72 
DJ TRANS 2941.56 +  0.80  2952.51  2930.74   
VIX        16.55 +  0.00    16.78    16.45
VXO (VIX-O)17.42 +  0.33    17.74    17.11
VXN        25.69 +  0.31    25.96    25.46 
Total Volume 4,129M
Total UpVol  1,729M
Total DnVol  2,319M
52wk Highs  954
52wk Lows    25
TRIN       1.83
NAZTRIN    1.18
PUT/CALL   0.61

If you took the day off and went hiking, played some golf or maybe started some early Christmas shopping you were spared a great deal of boring trading. The markets wandered aimlessly for much of the day mostly in negative territory. The new highs from Monday were left behind today as the indexes digested the gains and pondered some negative economic news. Considering the Dow had been up for the last six days it was due for a rest.

Dow Chart

Nasdaq Chart

The economic news started out positive with Retail Sales up +0.5% for last week. While it was positive it only retraced about half of the -0.9% drop in the prior week. Sales of Halloween merchandise was reported to be strong but sales of Fall merchandise was hurt by unseasonably warm weather in many areas. Retailers are not daunted and are widely expected to post the best holiday season since 1999. My bet is that competition is going to be fierce with the price slashing to start in the next two weeks. Odds are they will not be waiting for the Thanksgiving break to pass.

The October Senior Loan Officer survey showed that the same number of banks that had reported decreases in commercial real estate loan demand in August were still seeing a drop in demand. Bankers also reported a decline in home mortgages for the first time in two years. Despite a decline in the standards required to get a loan the demand for mortgages has fallen substantially over the last three months. No real excitement here or anything we did not already know but there was a small pickup in general business borrowing.

The worst news for the day was the Challenger Layoff Report which showed a jump of +125% in the number of layoffs since September. Announced layoffs rocketed to 171,874 from only 76,510 last month. This is more than twice as high as the average for the second and third quarters. This was the largest number since Oct-2002 at 176K and the next largest of Jan-2002 at 212K. The soaring layoffs are not expected to continue despite catching analysts off guard. With the Nonfarm Payroll report on Friday you would expect this to be a factor. However, today's report totals "announced layoffs" and not actual layoffs. These are layoffs that will occur over the next 3-6 months. This does not mean the Friday payroll report will not be negative but it does cast a shadow over the rest of the quarter. Layoffs soared in October last year as well. November saw 157K announced as well before December dropped to only -93k. Far from a trend but it was enough for analysts to cling to and enough to keep the markets from self destructing.

I was amazed that the market did not collapse. This was very negative news and news that was not expected. The Dow was already at the lows of the day when it was announced and it dipped another -5 points and then began a rebound. I stared at the screen in disbelief as the Dow gained ground. The bullish sentiment is so extreme that the name bad news bulls fit very well today. Although the markets did not implode the bulls were not able to take them back to positive territory. The flipside was the bears were not able to take them down either. The markets simply traded in a very narrow range after 10:30 and on low volume until time expired.

This should not be seen as a win by anybody but the bulls. Tuesday was slated to be a consolidation day at best even before the layoff report. With the Dow up +3% over just the last six days and at new highs there was ample reason for buyers to be passive and profit taking to be aggressive. It simply did not happen. The A/D was flat at 3303:3104 with the edge in favor of the advancers. Declining volume did beat out advancing on the strength of a few high profile losers. RHAT, FHCC, MCDTA, HEPH, PTN, CYCL, PMACA and FIC topped the list with SUNW the winner with over 86 million shares traded followed closely by LU with 84 million shares and a loss of 12 cents. Considering SUNW was up +25% over the prior three days and LU up +41% over the last two weeks a little profit taking should be expected.

I am chalking up Tuesday in the bullish column due to the lack of any real profit taking on very negative economic news. However, Wednesday might be a different story. The market felt heavy all day even though there was no drop. After the close today PCLN cut its outlook and warned that demand for airline tickets began to fall in September and that weakness had continued into October. PCLN cut profit forecasts for the 4Q to between 2 cents and 8 cents. The previous analyst view was 8-12 cents. PCLN said the drop would have been worse were it not for some new offerings of hotel rooms, rental cars and some retail products. The bad news was seen as the drop in airline demand over the last two months that seems to be confirming the drop in consumer spending we saw last week. The drop in September was initially ignored as 9/11 event risk but when it continued into October that caused additional concern. PCLN was down -$7 in after hours to 22.50. Southwest Airlines also announced after the close it was shutting down three reservation centers and 1900 workers would be displaced.

Adding to our event risk for Wednesday is an appearance before the Senate Banking Committee by Greenspan. He will be grilled about interest rates and the economic recovery. As if this is not enough he will speak on Thursday morning to a group in Boca Raton on "New Developments in the Economy". This speech will be watched very close for signs of position hedging. Currently the Fed Funds futures are not predicting any rate increases until a 25 point hike in May-2004. One reason for no rate hike not quoted in print is the huge borrowing requirements by the government. On Wednesday there is expected to be another $60 billion in various denominations of notes. With the deficit growing daily and several hundred billion in notes to be sold over the next few months there is the implied need to keep rates down until as much of the deficit funding is over as possible. While the "official" interest rate has no direct bearing on the note auctions it does help depress the general bond prices.

The mutual fund scandal continues to overhang the markets but no real impact has been seen in equity prices. Officials today said that easily one half of all funds are guilty of allowing market timing and probably one third have allowed some version of late trading. Spitzer went on record as saying that "ALL" and he emphasized "ALL" fees collected by funds while any of these practices were in force "WOULD" be forfeited. Considering these inquiries are going back to 2000 in many cases this could be a huge amount of money. It is far too soon to try and decipher the end result of the investigations, amounts of money paid, what funds will be forced to do to raise this cash and how it will impact the market. The only thing we can be sure of is that it will impact the market if only to keep a cloud over it for the next couple months. Investors will pull money out of some funds and send it to others and the constant churn could keep stock prices from making any large gains.

Economically Wednesday should not be a challenge. If the Layoff report today could not deter the bulls the reports on Wednesday should not either. We have Mortgage Applications, Factory Orders and the ISM Services index. We already know mortgage applications are weak so any surprise should be to the upside. ISM Services has been leading the ISM Manufacturing and the estimate is to remain flat so that should be an easy number. The Factory Orders were down -0.8% last month and the estimates are for an increase of +0.6%. Any number over zero should be accepted and ignored. The Greenspan appearance will get more attention than the reports but odds are good the head cheerleader will be in top form. There is always the potential for a slip of the lip but those odds are slim.

The general consensus of opinion still appears to be we are still going higher before serious profit taking appears. This is likely the thought process that will prevail but there is a growing contingent that believe otherwise. There were several major analyst firms making dire predictions on stock TV today. "Hard drop by Nov-21st" and "down December" were a couple of the high profile claims. Everybody is welcome to their opinion and everyone has at least one. The earnings estimates for the 4Q have been remarkably quiet. The prognosticators appear to be still crunching numbers and nobody wants to be the first to go public with their results. Despite the increase in the semiconductor sector the outlook for the 4Q is still cloudy. The outlook for the 1Q is even more cloudy and that is when the worry will start building about Fed rate hikes. Once we pass 1/1/2004 the focus will be rates. Once the January earnings cycle has a couple weeks under its belt the investing climate is likely to change drastically.

Why is that a worry for us now? Because markets are forward looking by 3-6 months. That 3-6 month window from here is Feb-Apr and that puts the interest rates firmly into focus. The thought process remains that we should move higher this week but the future discounting process may limit any gains. Dow 10500-11000 were being mentioned as targets a lot over the last couple weeks and those numbers are slowly being lowered to 10000-10200. Where we will actually end up is anybody's guess. With the Nonfarm Payrolls on Friday we could continue to wander until that number is out. The estimate is for a gain of 50,000 jobs.

While the US markets did not react negatively to the Layoff report the Asian markets did. The Nikkei opened down -108 points and pushed our futures a little farther into negative territory. Still a lot of darkness before the open and far to soon to draw any conclusions. Technically the Dow is holding above support at 9800 and it is still at the high end of the recent 9600-9800 range. There has not been any real weakness appear and we could easily give up a couple hundred points with no harm done. The Nasdaq is also holding at the highs over 1950 and has plenty of support above 1900. It will take a significant change of sentiment to cause any serious damage to either of these indexes. The VXO is still flashing red in the low 17s but nobody appears to be taking notice. We have not seen any obvious changes in the markets despite the extreme levels. November and December are the two best months in normal markets so there is a lot of momentum in the form of historical sentiment behind us. Whether it will be enough to power us much higher is too soon to tell.

Enter Very Passively, Exit Very Aggressively!

Jim Brown
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