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Market Wrap

Job Fears Rampant

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      05-06-2004           High     Low     Volume   Adv/Dcl
DJIA    10241.26 - 69.70 10308.20 10170.51 1.84 bln  607/2683
NASDAQ   1937.74 - 19.50  1949.55  1923.30 1.80 bln  933/2204
S&P 100   543.90 -  3.29   547.19   540.23   Totals 1540/4887
S&P 500  1113.99 -  7.54  1121.53  1106.30 
W5000   10851.70 - 86.25 10937.00 10777.86
SOX       452.48 +  0.20   454.17   444.31
RUS 2000  563.09 -  6.97   570.06   556.97 
DJ TRANS 2912.51 - 10.50  2927.82  2889.07   
VIX        17.05 +  1.28    17.67    16.45
VXO (VIX-O)17.65 +  1.42    18.98    17.47
VXN        25.28 +  0.84    25.86    24.79 
Total Volume 3,980M
Total UpVol    903M
Total DnVol  3,031M
Total Adv  1761
Total Dcl  5517
52wk Highs   64
52wk Lows   438
NasTRIN    1.12
TRIN       0.98
PUT/CALL   1.26

Few traders are afraid of losing their job but they are very afraid that too many workers may have found jobs in the month of April. That April Jobs report will be released at 8:30 on Friday. You would have thought time came to a stand still for traders today while they waited for the release. Volume was very light and most of it was down. Traders had visions of Greenspan with phone to his ear and finger poised over the auto dialer to raise rates on a blowout number.

Dow Chart - Daily

Nasdaq Chart - Daily

Helping that fear today was a huge +15% jump in employment ads on over 1500 websites as surveyed by Monster.com. The index jumped to 125 in April from 109 in March and up from 86 in December. The steady climb over the last three months really exploded in April and that could have supplied added jobs to the April employment report to be released tomorrow. Keep in mind job ads do not translate into jobs until somebody actually starts to work. Since the low in December there has been a +50% increase in the number of advertised jobs. The Monster data is more current than the Conference Board and shows that jobs were hot in April. The Mountain region jumped +30% in the last month with New England gaining +29%. The south Atlantic region was the slowest with +13% gains.

Also helping feed the fear was the lowest Jobless Claims since October-2000 at 315,000. The bounce last month has been completely erased and forgotten and traders see sub 300K numbers ahead. The larger than expected drop of -25K in claims shocked everyone and the drop to post recession lows put some real fear into traders that the jobs report on Friday would be a blowout.

I am not going to repeat all the commentary about the Jobs from the last couple weeks but just hit the highlights. Consensus estimates are +185,000, down from the +308K actual gain in the April report. The whisper numbers have been running in a wide range between 60K and 250K until this morning. After the Monster.com survey posted such strong gains the numbers being discussed rose to as much as +350K. The latest jobs estimate I heard after the market close was for a range of 350K to 400K by Cramer. The fears of a blowout hit the already weak market and down we went. At least that is the conventional wisdom.

My current thought process is for a number under 200K to produce buying in equities because it would justify the Fed's "no rush" position on rate increases. Having a negative revision to last months number would not hurt. A number over 200K could produce more consternation over a potential move in rates at the June meeting. A number over +300K could produce a rate hike a soon as Monday. The Fed has raised rates on Monday in the past after stronger than expected Jobs numbers in a rising economic environment.

In a nut shell an inline jobs number means the Fed was right to remain on the sidelines and the economy is still growing moderately. If the number is much over the current consensus then the Fed will be seen as behind the curve and needing to raise rates faster to catch up. Thus the fear factor for traders is that the Fed may be behind the curve. We will know the answer at 8:30 tomorrow morning.

While the talking heads were using the rate hike worries as the reason for the selling that does not make it true. There are several reasons for the selling with oil, Iraq, elections and terror among the leaders.

The market is selling off on risk aversion concerns and weak guidance on potential earnings. Leading the risk list for the short term is the rate fears but in reality those fears are already priced into the market. One of the items not priced in is the current Iraq prisoner scandal. This is an Iraq problem the Bush administration did not need and may turn into a serious political anchor. There are already calls for Rumsfield's resignation and the president is having to devote public face time to defending officials while condemning the event. This is a lose-lose situation. Nothing good can come from it and the outcry from the world wide Muslim community is giving strength to the anti U.S. opposition. This may be a small event enacted by a handful of soldiers but it has the potential to swing the election.

Another worry is the Olympics. With a monster bullseye currently painted on Greece and the games starting in just over 90 days there is an extreme risk for multiple terror attacks. Greece is spending more than $1 billion on security but you can't protect everyone when the attackers are not afraid of dying. This is going to be a major deterrent to buying stocks for the next 100 days.

Oil prices rose to within three cents of $40 today with another 13-yr high and are showing no indications of falling. Global demand is still rising and OPEC may be punishing us for invading Iraq and destabilizing the region. They refuse to raise production or even discuss it until their next scheduled meeting. Every $1 over $25 a barrel adds billions in undeclared energy taxes to the U.S. consumer. $2-$3 per gallon gas will be commonplace very soon and that is sucking dollars available for other spending out of consumer pockets. April retail sales reported today were much weaker than expected and this is one of the reasons.

Earnings guidance for coming quarters is slipping. 429 S&P companies have reported and current average earnings growth for Q1 is +26.7%. Estimates for the coming quarters are in the mid to low teens. Investors are dealing with the fact that earnings growth has peaked and will be slowing for the rest of the year and potentially falling in 2005.

As if the market and the administration did not have enough problems Greenspan took aim at the deficit once again in a speech today. He launched a tirade about the now 4.25% of GDP deficit for this year and the rising deficit in years to come and on the rising household debt. He reiterated his warning that the budget and Social Security would become unbearable by the time the baby boomers begin retiring in 2008-2012. He railed on the growing trade deficit at 5% of GDP. His point was that long term stability of the U.S. economy was far from guaranteed and tough times lay ahead. He questioned "if something fundamental had happened to the U.S. economy that enabled us to disregard the time tested criteria for economic danger." His answer, "The free lunch has still to be invented." It is obvious to me that Greenspan is not going to lobby for reappointment when his term expires and he feels free to take parting shots whenever the opportunity arises. His comments this morning helped to cloud the outlook for equities and added to the overall market weakness. Greenspamed again.

Adding to the negative tone was a late day news report that Bin Laden had offered 10,000 grams of gold to anyone that killed specific U.S. and U.N. representatives to Iraq and the UN. This equates to $136,000 at today's prices. On the list of targets who were specifically mentioned were Kofi Annan, UN Secretary General, Paul Bremer, Chief U.S. administrator in Iraq and Lakhdar Brahimi the UN envoy to Iraq. While we know those who are listed would be obvious targets the bounty adds to the risk. The statement said the family of the killers would get the reward if the killer did not survive the attack. How the reward would actually get to the family remains to be seen. Believing it would appear would take more faith than most would have.

The multitude of negatives coupled with the rate fears have pushed shorts in the 10-year treasuries to an all time high. It appears everyone is counting on a rate increase very soon. No wonder the pits booed the Fed announcement on Tuesday. The yield on the ten-year note rose to close at 46.02 today and highs not seen since last August. The move off the March lows is nearly vertical and shows the market is doing the work of the Fed already.

Despite all the negatives today the market was not as bad as it appeared. The internals were very negative for most of the day with the A/D negative 5:1 and A/D volume negative 6:1. However, it was on light volume with only 3.0B shares traded going into the last hour. We added another billion shares in the last hour rebound. There were simply no buyers until the end of day short covering rally. Up volume was under 500m shares total until late in the afternoon. Those who want to be long are smart enough to wait for the Jobs report before wading into shark infested waters. Every tick lower before the report just provides a better buying opportunity for them.

Just because I said it was not as bad as it looked does not mean it was good. The new 52-week highs fell to a new 52-week low at only 64 across all markets. The new 52-week lows rose to a new 52-week high at 438. This is NOT a good sign and illustrates the real underlying market weakness despite the gyrations of the indexes. While the indexes did not really tank today the internals that count did.

The Dow dropped to a low of 10170 intraday and broke its long term uptrend at 10200 but managed to rebound back over that level at the close. Still the outlook is not good. We are continuing to flirt with the bottom of the recent range and the short term trend is still down. There is significant resistance in the 10300-10350 range and I can't imagine what surprise on Friday could push it above 10400. If jobs are bad then the economy is still struggling and the earnings outlook would weaken even further. If jobs are a blowout then more Fed fears would appear. Tough uphill climb ahead for the bulls.

The Nasdaq also gave up ground gained over the last couple days and closed back at the 200dma once again but only after a fight. The intraday lows were near the lows from last week at 1923 and we could easily trade down to critical support at 1900 with any bad news. Like the Dow the Nasdaq is in a short term down trend and even a strong rally on Friday would not get it out of trouble.

I cautioned last Tuesday to maintain a short posture below 10275/1940 and that advice still holds. Any gains over that level will be questionable and I would be very careful about new long positions. The Nasdaq has very strong resistance at 1965 and above 2000 which should stop/slow any rebound. The Dow has strong repeat resistance at 10350, 10400 and 10500. With all the negative items I mentioned earlier there is simply no catalyst on the horizon that may push the indexes above those levels. They may be out there but they are not on my radar. All the good news is priced in and the bad news keeps growing. Caution is the key and Friday could be mild or wild.

Enter Passively, Exit Aggressively.

Jim Brown


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