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Terrorism Spooks Global Markets

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     11-17-2003            High     Low     Volume Advance/Decline
DJIA     9710.83 - 57.85  9765.64  9629.87 1.62 bln    794/2030
NASDAQ   1909.61 - 20.65  1919.23  1890.72 1.84 bln    965/2126
S&P 100   516.23 -  2.78   519.01   511.74   Totals   1759/4156
S&P 500  1043.63 -  6.72  1050.35  1035.28
RUS 2000  526.21 -  6.75   532.96   521.51
DJ TRANS 2893.13 - 34.51  2926.59  2874.64
VIX        18.60 +  1.66    19.36    18.04
VXO        18.82 +  1.19    20.27    18.24
VXN        27.81 +  1.65    28.56    26.96
Total Volume 3,923M
Total UpVol  3,045M
Total DnVol    800M
52wk Highs     269
52wk Lows       42
TRIN          1.94
PUT/CALL      0.84

Terrorism Spooks Global Markets
By James Brown

Monday proved to be another rough day for investors around the globe. Asian and European exchanges swooned and U.S. averages joined the retreat with an extremely broad-based sell-off that left no survivors. Not one U.S. sector index closed in the green today. The catalyst for the declines, or as some market pundits might call an excuse to take profits, are renewed concerns that Al Qaeda is still threat. The terrorist network took credit for two synagogue bombings in Istanbul, Turkey over the weekend and threatened to bomb Tokyo if Japan sends troops to Iraq. Last week OptionInvestor.com reported on the Al Qaeda threat to launch a new attack in the U.S. during the Muslim holy month of Ramadan. Ramadan, the fourth pillar of Islamic belief, is a month-long fast (during daylight hours). This year it began on October 27th, 2003 and should end around November 27th. Major news media failed to carry the threat story last week and they still remain cautious on highlighting the threat today. Either they don't see it as credible or they don't want to raise a panic. The U.S. department of Homeland Defense has kept the risk level unchanged at elevated (yellow).

Japan's stock market didn't take the threat to bomb Tokyo lightly. The NIKKEI index dove 3.74 percent or 380 points to close under the 10,000 mark for the first time in three months. The selling in Japanese stocks was exacerbated by concerns that their banking system continues to defy improvement despite the government's actions. The Hong Kong Hang Seng index joined its neighbor with a 206-point decline to close at 11,997. Meanwhile European stocks were walloped one day before President Bush is set to appear in London for the first formal visit by a U.S. President. The English FTSE index lost 1.32% to close at 4338 but the German DAX lead the decliners down 3.24% to 3674.

Here at home stocks started the day with early weakness that eventually brought the S&P 500, the Dow Jones Industrials and the NASDAQ Composite down to their respective simple 50-dma(s). Yet by 2:00 PM ET the worse was behind us and traders began to buy the dip. By the end of the day the DJIA and the NASDAQ had cut their losses in half to close down 57 and 20 points, respectively. Not all averages were so fortunate. Several sector indices broke their 50-dma, technically a bearish development. The heaviest selling was in gold stocks, airlines and technology (Internet, hardware and disk drives). The selling in gold stocks was probably due to the failed rally in December gold futures. Gold shot up to $399.90 but couldn't break the $400 barrier. By the close, gold futures had lost $6.50 to close at $391.50 an ounce. The XAU gold index lost 2.13 percent. The XAL airlines fell almost three percent, which is most likely attributed to terrorism jitters. The group has been a big winner for investors so the urge to take money off the table is rather strong.

It is that very urge to harvest gains that many market commentators say is the real culprit behind today's losses. The S&P 500, the most common barometer and measure for the markets, was up 17 percent year-to-date last week and up about 26 percent from its March lows. Many a mutual fund manager is looking at 20 percent gains in their portfolio and could be thinking to quit now and lock in a very good year after three years of losses. Speaking of losses, there were certainly a lot of them today. Declining stocks outnumbered advancing stocks 20 to 8 on the NYSE and 21 to 10 on the NASDAQ. More telling was how down volume was five times up volume on the NYSE and three times up volume on the NASDAQ.

Chart of the DJIA:

Chart of the NASDAQ:

The economic calendar this week is devoid of any major reports and littered with second or third tier news. This morning unveiled a positive surprise as the Empire State Index jumped to a record 41.0 in November compared to what most had been expecting as a loss towards the 31 level. Obviously the news failed to fuel any buying but it is one more mile market on the road to economic recovery. Meanwhile the flight to quality in U.S. bonds continued today, stretching the bond rally to four days in a row. Terrorism concerns, if they continue, should fuel additional "safety" buying for U.S. debt. As bonds rise their yields fall. The bump today pushed the 10-year yield down to 4.188 percent.

Wall Street continues to hear from late cycle earnings announcements and two big caps making headlines were LOW and TOY. Home improvement and building supplies center Lowe's Companies (LOW) announced Q3 earnings of 56 cents a share, three cents better than estimates. Revenues also topped analysts' forecasts at $7.92 billion for the quarter. The company is seen moving in on larger rival Home Depot's (HD) turf and stealing market share. The stock failed to move much on the report and LOW's guided inline for the fourth quarter. Home Depot is due to announce its own earnings tomorrow before the opening bell. Estimates are for 46 cents a share. Shares of HD did react poorly to LOW's earnings report, dropping nearly 2 percent on the session. Or maybe it was just the widespread selling across the markets. Or maybe it was a comment from a Morgan Stanley strategist suggesting traders short HD and try and cover near the $30 level. Whatever the case, HD, as a Dow component, could be a stock to watch tomorrow after their morning report.

Contributing to the negative market action was Toys 'R Us (TOY), who's 12.24 percent drop to close under its simple 200-dma was the biggest percentage decliner in the S&P 500. The company severely missed its Q3 earnings numbers today. Analysts had been looking for a loss of 10 cents. TOY turned in a loss of 18 cents a share. Management commented on the growing competition from Wal-Mart, which investors fear the company is losing to. In their press release TOY stated they plan to close 146 freestanding Kids 'R Us and 36 freestanding Imaginarium stores along with 3 distribution centers that support these stores. "The majority of these facilities are expected to close on or before January 31, 2004." You know what that means, right? If they plan to close all of these before the end of January, not only will we probably see some huge sales during the holiday shopping season but the after-Christmas clearance sales at these locations could turn into an "everything must go" mob scene.

Now it wouldn't be a Monday without some merger news. Today's merger springs from the insurance sector. St. Paul Cos. (SPC) has announced their plans to acquire their larger rival Travelers Property Casualty Corp (NYSE: TAPa & TAPb) for $16.4 billion in stock. Investors rewarded SPC with a 2.63% gain in its stock price since the company is paying zero premium for Traveler's stock. Together they will become St. Paul Travelers Cos and will be the second biggest property insurer in the country behind AIG.

Drum roll please... remember on Friday that the SEC teased the market with a "big announcement" concerning action against a major Wall Street broker? That news sent the XBD broker dealer index to a 4% loss on Friday as everyone wondered who was to be fined and how big would the fine be? Ta da! The SEC announced a $50 million fine against Morgan Stanley (MWD) who was charged with failing to disclose incentive payments it was receiving from various mutual funds for pushing their products on MWD clients. Considering that the company brings in a net income close to $3.5 billion a year, the $50 million fine seems a little anti- climatic. Now maybe the fine fits the scope of the alleged "crime" but shares of MWD rose 9 cents by Monday's close.

Schwab, Bear Stearns and Putnam also made minor headlines. Schwab reportedly sent an email to all of its 16,000 employees stating they had uncovered 18 trades that were "problematic". Two employees were fired after the company retrieved deleted emails pertaining to the issue. Bear Stearns also fired six employees last week over the growing mutual fund probes. Meanwhile Putnam Investments, the lead pig in this scandal so far, reported that it has lost some $16 billion in assets under management due to withdrawals, leaving it with $256 billion.

Tomorrow could be interesting. The major U.S. averages have all bounced from their simple 50-dma(s). This normally sounds like a buying opportunity and the afternoon rebound today could easily continue into Tuesday's session. The real question is how long will it last? Tuesday will bring more earnings, the CPI report, and potentially more headlines from a number of ongoing analysts conferences.


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