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Daily Newsletter, Thursday, 01/16/2003

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The Option Investor Newsletter                Thursday 01-16-2003
Copyright 2003, All rights reserved.                       1 of 3
Redistribution in any form strictly prohibited.


In Section One:

Wrap: Earnings Overload!
Futures Markets: First Calm, Now Fear
Index Trader Wrap: 
Market Sentiment: Tide Shift
Weekly Manager Microscope: Henry Hewitt: Light Revolution Fund 
(LUXRX)


Updated on the site tonight:
Swing Trader Game Plan: Hangover Continues


Posted online for subscribers at http://www.OptionInvestor.com
************************************************************
MARKET WRAP  (view in courier font for table alignment)
************************************************************ 
      01-16-2003           High     Low     Volume   Adv/Dcl
DJIA     8698.91 - 24.30  8805.52  8673.05 1.80 bln 1713/1516
NASDAQ   1423.77 - 14.40  1449.13  1420.11 1.51 bln 1463/1816
S&P 100   464.70 -  2.18   471.04   463.04   Totals 3176/3332
S&P 500   914.60 -  3.62   926.03   911.98 
W5000    8650.96 - 29.00  8750.90  8627.94
RUS 2000  394.88 -  0.65   398.87   394.24 
DJ TRANS 2372.28 + 11.80  2395.00  2359.31   
VIX        27.67 -  0.19    28.51    27.09   
VXN        44.80 +  1.35    45.85    44.43 
Total Volume 3.505B
Total UpVol  1.162B
Total DnVol  2.299M
52wk Highs  262
52wk Lows    70
TRIN       1.51
PUT/CALL    .87
************************************************************

Earnings Overload!

What a day! The market was hit by all sides with earnings
news, war news and economic news but still managed to trade
in a narrow range and finish with only a minor loss. Iraq
warheads were unable to do what earnings news after the
bell may have accomplished. 

Dow Chart – Daily


 

Nasdaq Chart – Daily


 

The news overload is huge today and I will try and cover
only the hot spots in an effort to address the major issues. 
Economically the country is still struggling. The CPI came
in slightly lower than expected and shows that inflation is
not the problem we should worry about. With falling prices
and no demand it appears that deflation is the major problem
ahead. Jobless claims fell to 360,000 from the expected 400,000
level but analysts were quick to claim January as a highly
volatile period. They did not expect that number to stick
and with rising announcements of layoffs in 2003 it should
increase. 

Even worse news came from the Philadelphia Fed Survey at noon.
The headline number came in slightly higher than expected
at 11.2 but less than a revised 11.3 for December. While 
this shows a slight overall expansion of manufacturing in 
their district it shows that the pace of the expansion came
to a dead stop from December levels. The headline comment
was the most damaging. They said "expectations for growth
diminished notably in January". Specifically dismal was a
lack of job growth. 16% of companies surveyed expected to 
reduce jobs compared to only 10% which expected to increase
hiring. The employment component fell to -6.1 for January 
from -0.9 in December. The future general activity index 
fell to 32.6 from 52.2 in December. This shows a marked 
concern for future growth prospects. The MAPI Survey also 
released today showed better trends with a positive outlook 
by manufacturers. The index at 67 for the 4Q-2002 was 
dramatically improved over the 59 for the 3Q-2002. The 
problem is the long time frame referenced. We all know 
the economy rebounded in the early 4Q of 2002 but we also 
know it tripped again in December. In April this survey 
will reflect the slowing conditions.

The market celebrated the Jobless claims and the CPI report
by running up to 8800 again at the open. The bulls could not
hold it and we retreated back to 8750 before news came from 
Iraq that the inspectors had found 12 chemical warheads that
were not declared and were not there when they inspected in 
1997. The warheads were not loaded and it remains to be seen 
if this is a material event. Still the markets remained very 
jittery for the rest of the day.

The worry over the warheads was offset by the "Where's Waldo, 
aaa.., Saddam" rumor game. More rumors were floated that he
was still talking to a country in northern Africa about a
friendly exile. The sticking points were an agreement from
the U.S. that we would not try to prosecute him for war
crimes and civil rights violations. I doubt that will happen. 
Also, a Saddam rule from afar could still be a problem in
the eyes of the U.S. Also offsetting the warhead problem
was a move by Turkey to create a Jan-23rd "Peace Summit" to
prevent a war in Iraq. There was also talk about moving the
deadline to March 27th instead of Jan-27th to allow the UN
inspectors more time to work. If you wanted uncertainty about
the coming war today was your cup of tea. 

A bright spot for the morning was the earnings from GM 
which were very strong at over $1 billion despite the added 
incentives needed to sell those cars. These earnings were
four times the $255 million earned in the year ago period. 
However, think back about that year ago period. This was
right after 9/11 and even with the rushed incentive plan
the sales were lousy. 

Countering the GM news were comments from broker Raymond
James that tough times were ahead. They reported earnings
down -20% and said they expected the market recovery to 
be slow and erratic and for future earnings to come in at
historically low levels. Just a bundle of good news there!

If you are a bull or a bear you got news after the bell 
to fit your market bias. IBM was the leadoff hitter for 
the bulls and beat the street by four cents at $1.34 for
the quarter. They did not go out of their way however to 
paint a very bullish picture. The company said the current
tech spending was "stabilizing" but IBM would continue to
see pricing pressures going forward. They said the decision
timeframe for customer purchases was increasing and the
size of the deals were smaller than a year ago. The CFO
said that they were comfortable with the "current average
street consensus" for 2003. He was very specific that they
should not expect more than high single digit revenue and
earnings growth. The CFO said IBM would consider additional
dividend options in the future. The stock rose initially 
from its $86 close to $87 but quickly fell to $84 as more 
info became available. 

SUNW also beat the street with no earnings but the street
had expected a loss of two cents. While SUNW said it was
looking forward to the future is also said the outlook 
for the next six months was very cloudy and said they
would not be giving mid-quarter guidance as they had done
previously. The company claimed it was still gaining
market share in the Unix server sector. This report was
seen as positive but the cloudy outlook statements just
added to the overall confusion. 

The smoking gun? No, not in Iraq but in Redmond Washington.
Microsoft came across as a snake oil salesman when it 
announced earnings. First, Microsoft announced it was 
going to pay a dividend of 16 cents. Great, but what were
the earnings? Then it announced is was going to split its
stock 2:1. Really surprising since they have a long history
of not splitting the stock until the $120 range. What are
they not telling us? Where are the earnings? The earnings
did beat the street at 47 cents compared to estimates of 46 
cents. So far so good but here comes the problem. Microsoft
missed the revenue numbers slightly and warned for the 
rest of the year. They said that 2003 earnings would be 
weaker than expected due to "no material pickup in global
IT spending in the near future". Turn out the lights the
party is over. Microsoft, the biggest software monopoly 
on earth, said PC sales will continue to grow in only the
low single digits. With most of that expectation backend 
loaded in the 2H of 2003 that means the next two quarters 
are going to be very cloudy. Sounds like the SUNW forecast. 
You can translate "very cloudy" into "ugly" without a 
thesaurus. 

The impact was clear almost immediately. Microsoft knows
what is coming and knew the impact to their shares was
going to be drastic. They attempted to pull a rabbit out
of their hat and transform it into a Mercedes right before
our eyes but nobody was fooled. The rabbit was dead on
arrival and smelled like a rotting first half. Despite 
the artificial enhancements to induce investors to buy
MSFT stock it dropped -$2 in after hours. 

There are multiple problems with MSFT at this stage. The
dividend plan probably got a boost from Gates since he
will receive about $40 million for the shares he owns. 
Other stockholders will benefit as well. Considering 
the stock dropped -$2 in after hours they are only down
-$1.84 now and not -$2.00. I am sure that is comforting. 
The stock split is the toughest part. We have taught for 
years that the more a company splits its stock the harder
it is to move that stock price in the future. After the
split there will be 10.8 billion shares of MSFT stock in
circulation. Moving the stock $1 on 10.8 billion shares
requires a huge amount of buying pressure. Mutual funds
with share limits will also be forced to sell excess 
shares. It makes you wonder what Microsoft really sees 
up ahead if they were so willing to grasp at straws to 
hold up their stock price. 

AMD also announced earnings or lack thereof after the bell.
Analysts had expected a loss of -41 cents. AMD had projected
a "significantly narrower loss" than the 3Q showing of -74
cents. The actual number was significantly lower than 
analysts at -68 cents. Investors did not applaud this
"significant" improvement and I doubt AMD will be doing 
anything but a reverse split any time soon. AMD said 
sales going forward will be flat to nominally up. Good 
thing they did not say "significantly better".

The only Internet stock on a roll announced earnings
after the bell. EBAY, the worlds trading post, beat the
street with 28 cents compared to estimates of 24 cents
and exceeded revenue estimates. They tripled profits 
and also raised guidance for the full year. EBAY raised
estimates to 30 cents for the 1Q compared to analyst
estimates of 25 cents and full year estimates from $1.17
to $1.27. Their holiday volume was 68% higher than the
prior year. Must be nice to own a cash cow like this one. 
Remember, EBAY was started to help the founders wife
sell her PEZ collection. Really. The EBAY goal is to 
reach $40 billion in auctions within three years. They
hit $14.9 billion in 2002. Want to talk stock splits?
EBAY split its stock at $75 in 1999 and 2000. EBAY was
trading at $72.50 in after hours. Does not take a rocket
scientist to figure out the future here. 

Where are we going from here? Duh! IBM said annual 
growth in only single digits backend loaded to the 
second half. That means they "hope" there is a second
half. SUNW said "no guidance" and "very cloudy" so no
help there. AMD said, who are we kidding, who cares
what AMD said. MSFT said "no material pickup in global
IT spending in the near future" and warned their earnings
would be less than expected. EBAY is profiting because
all the unemployed workers are selling assets to eat. 
Where do YOU think we are going? 

The futures are down huge. The S&P futures are trading
at 911, down from their 920 4:15 close. Nasdaq futures
are down -12 already and could get worse. There is still
an additional hurdle in our immediate future. GE reports
earnings tomorrow before the bell. Bullish investors
will be looking for any light at the end of the tunnel
to hang their hopes on. If GE says something nice there
is always the chance the market could recover. However,
GE is expected to be in trouble with their power generation
systems and their multiple exposures to the airline 
industry. Will they beat the street? I doubt it. More
than likely they will announce inline with the reduced 
estimates and try to spin single digit growth as a good 
thing. Remember, 2002 was their +17% growth year any 
investor could be proud to own year. Too bad it did not 
work out that way. The best thing about GE earnings is 
that everyone is expecting them to be bad. That leaves 
the potential for an upside surprise or maybe earnings 
that are just not as bad as expected. I doubt it is 
going to help regardless of what they say. 

The bulls got multiple chances to grab for the gusto
this week. The Dow traded over 8800 every day for the
last six days, even closing over it once. Obviously
strong resistance even with high earnings expectations. 
Now that future expectations have been shredded by all
four of the big techs I would seriously doubt we will 
see 8800 again anytime soon. Support begins at 8650
and continues down to 8400 in varying degrees. Tuesday
night I said, "With every earnings report bulls will 
lose another reason to buy. The short-term reasons to 
buy will diminish even more with every "no recovery yet" 
guidance statement." That is even truer tonight than
it was on Tuesday. The new bull market lost one leg
on Tuesday with the cautions from Intel. Scratch another
with MSFT and another with SUNW. We will call it a draw
on IBM and AMD does not count. Are you getting the picture? 
The new bull market is tottering on its one remaining
leg and GE is next at bat. Even if GE manages not to 
turn the bull into a piņata ready for a fall, just how
far do you think it will get on one leg? Those DJX 88.00
puts are looking really good tonight.

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor


***************
FUTURES MARKETS
***************

First Calm, Now Fear
By John Seckinger
jseckinger@OptionInvestor.com

The markets rallied, bulls exited, and then things really got 
quiet as traders anxiously awaited IBM, MSFT, and SUNW.  After-
hours is a four-letter word:  Fear.  Will it last?  

Thursday, January 16th at 4:15 P.M. 

Contract      Last    Net Change    High        Low       Volume    

Dow Jones    8697.87   -25.31     8805.52     8673.05
YM03H        8683.00   -48.00     8790.00     8655.00     22,764
Nasdaq-100   1061.46   -12.14     1084.36     1057.87     
NQ03H        1064.50   -12.50     1087.00     1059.50    231,496
S&P 500       914.60    -3.62      926.03      911.96
ES03H         916.50    -4.50      925.75      910.75    629,637

Contract         S2         S1       Pivot       R1         R2    

Dow Jones      8593.01    8645.44   8725.48    8777.91    8857.95
YM03H          8574.00    8628.00   8709.00    8764.00    8844.00
Nasdaq-100     1041.41    1051.44   1067.90    1077.93    1094.39
NQ03H          1042.75    1053.75   1070.25    1081.25    1097.75
S&P 500         903.46     909.03    917.53     923.10     931.60
ES03H           902.75     909.50    917.75     924.50     932.75

YM03H = E-mini Dow $5 futures   
NQ03H = E-mini NDX 100 futures  
ES03H = E-mini SP500 futures    

=================================================================

Note:  The 03H suffix stands for 2003, March, and will change 
as the exchanges shift the contract month.  The contract months 
are March, June, September, and December.  The volume stats are 
from Q-charts.  

=================================================================

The March E-mini S&P 500 Contract (ES03H)

The morning's activity seemed to make perfect sense.  A bid, and 
then traders using the pivot as solid support.  The risk was 
clearly for a move down to 912 in the SPX contract (correlates to 
910.50 in the ES contract).  It didn't seem that this would 
happen until the markets failed to hold their pivots during some 
slight weakness.  Then, for the last few hours of trading, things 
got very quiet as traders became anxious over IBM's, MSFT's, and 
SUNW's earnings announcements.  In after-hours, possibly due to 
MSFT's dividend and stock split, the ES contract has traded as 
low as 910.25 and underneath the 50% retracement of December's 
decline.  This is not a good sign for bulls.  

The pivot for Friday is much higher at 917, and bears should look 
to defend this area in case we do get a rebound as shorts cover.  
On the downside, I would look for support to hold near the 900-
902 area (Note: S2 comes in at 902.75).  If this level is 
reached, then traders can expect resistance back up at 910.50 and 
the 50% level.  

Chart of ES03H, Daily 


 

Looking at a 30-minute chart of the ES contract, the close was 
relatively neutral; however, the bullish trend line (blue) was 
broken and should now act as resistance.  The MACD indicator was 
softer-than-expected, taking out the last relative low as the 
markets came close to testing its 910.75 area.  Also helping 
bears on Friday would be the 200 PMA (914) rolling over and 
most likely capping any possible bounces.  

Chart of ES Contract, 30-minute


 

Bullish Percent of SPX: 61.92% and still in column of O’s (Recent 
High at 66%, Low of current column at 58%).  The weakness in 
after-hours will likely add to the column of O's (four 
currently), and there certainly is now risk to the downside.  

The March E-mini Nasdaq 100 Contract (NQ03H)

With the 1059 area hit on Thursday (profiled on Tuesday), bears 
seemed to become confident taking shorts home with them. The 200 
PMA (red line) did act as support on Thursday, but, like the ES 
contract, this level should become solid resistance if the 
futures markets open lower.  The objective now is for a test of 
1047, but note that in after-hours the NQ already traded 1049.50.  
Under 1049.50, intermediate traders can look for a move down to 
1013.  Only a close back above 1068 (on a 30-minute bar) should 
shift sentiment towards more neutral levels.  With the pivot at 
1070.25, traders can wait until the pivot is cleared as well.  

Chart of NQ03H, 30-Minute


 

I put in a 15-minute chart to get the retracement between R2 and 
S2.  S2 comes in at 1042.75, and this is a few points under the 
level profiled above.  Conservative traders can use S2 instead, 
especially as the next area below is not that close (1013).  It 
is also interesting how the top of the aggressive regression line 
comes in at Friday's pivot.  This should heighten its importance.  

Chart of NQ03H, 15-minute


 

Bullish Percent for NDX:  Higher by one percent to 65 and still 
in a column of X's (Recent High at 82%, last Significant Low at 
14%).  There is still risk is that the BPNDX reading rolls to 58% 
during trading on Friday.  

The March Mini-sized Dow Contract (YM03H)

Now we have our close under 8714 and a bearish signal; however, 
it would have required some risk ahead of the powerful earnings 
announcements.  Going forward, the 8620 level should be a solid 
psychological level; moreover, S1 is at 8628 and very close to 
this level as well.  With that said, its importance should be 
magnified.  If 8620 is not reached and the market closes back 
above 8714, a trader can either look long or get flat until the 
volatility calms down.   

Chart of YM03H, 120-minute


 

A five-minute chart of the YM contact shows how Wednesday's 
retracements worked for Thursday, as well as the levels for 
Friday.  I was looking for a close above 8800 in order to get 
bullish; however, that area became solid resistance during the 
trading session.  The most surprising thing is that the Bullish 
Percent actually rose 3.33% to 60 and put more X's in the upward 
column.  A bull trap?  Sure feels like one now; therefore, watch 
to see if S2 is taken out and then fitted retracement is used 
(using 0% at the high of the day, and then putting 19.1% at the 
bottom of the first five minutes of trading).  .  

Chart of YM03H, 5-minute


 

Bullish Percent of Dow Jones: 60.00% and in column of X’s.  A 
move to 50% would cancel out the recent bullishness.  The last 
significant high comes in at 72%.  On Thursday, despite the close 
lower, the bullish percent actually rose 3.33% to 60%.  

Good Luck.

Questions are welcomed,

John Seckinger
jseckinger@OptionInvestor.com 


********************
INDEX TRADER SUMMARY
********************

Check the Site Later Tonight For Jeff’s Index Trader Article
http://members.OptionInvestor.com/itrader/marketwrap/011603_1.asp


**************************************************************
Annual Renewal Special
**************************************************************

The annual special this year is far too large to put into an
email. The highlights include two option expiration mousepads
to which we have added the FOMC meeting dates this year. There
are also two videos with Jim, Jeff and Buzz and seven books 
by leading market professionals like John Murphy and and Jim 
Rodgers. We even brought back the Trading Strategies CD from 
last year for all the new subscribers who have been asking 
for it. 

Click here for the full details:  

https://secure.sungrp.com/03renewal/#m
**************************************************************

****************
MARKET SENTIMENT
****************

Tide Shift
by Steven Price

The nice thing about earnings season is the abundance of opinions 
that seem to take alternate form on a daily basis.  However, two 
days after Intel beat earnings and Yahoo and General Motors did 
the same, investor sentiment seems to be coming into focus.  
Unlike the last earnings season, where seemingly bad news was 
taken with a "could have been worse" buying spree, we appear to 
be getting the opposite - a "that's all you've got" sell-off. So 
far three major upside earnings surprises have been met with 
selling.  There were certainly bearish comments about spending 
over the next year that accompanied Intel's news, but anyone 
paying attention to the last month's jobs data knows that the 
economy is still not strong.

That brings us to this morning's initial claims report, which was 
better than expected. The weekly claims number fell 32,000 to 
360, 000 and the closely watched four-week average fell 19,500 to 
387,500.  It is the lowest reading in six weeks and suggests 
December's loss of over 100,000 jobs may be reversing itself for 
a more positive January.  The moving average drop below 400,000 
is also significant since that number is the gauge most 
economists use for a worsening employment picture. This time of 
the year can bring some quirky results and the numbers are less 
reliable than they are during the rest of the year, but the news 
was certainly positive.  It appears that now that we are into the 
new year, some companies are getting back to the hiring that was 
put off during the holidays.  That good news, on top of the 
earnings surprises, was met with selling, which tells me that we 
have seen a change of sentiment after the rally to start the 
year.   We did get a bounce to start the day, but that bounce 
found sellers once again at 8800.  Although we managed a close 
above 8800 on Tuesday, the rally failed at the exponential 200-
dma the following morning and we have now set lower lows for the 
last two days.  Today's close below 8700 is also significant in 
that we bounced off that level intraday on Wednesday and the 
bears mustered enough strength to move the bulls out of the way 
on a closing basis. 

With IBM and Microsoft releasing results after the bell, it is 
likely we will see a big move in the morning.  How that move is 
met should be the key to whether we are just taking a breather 
after an unsustainable rally pace, or whether we are truly ready 
to roll over, now that beginning of the year fund contributions 
are out of the way. Another failed bounce could spell near-term 
doom, while a big rally through the 200-dmas may signal a sigh of 
relief and another leg higher.  If we do break those averages, I 
would expect additional resistance at the December 2 highs.  On 
December 2, the Dow traded up to 9043, which is awfully close to 
the 9077 level where it failed in August. 

IBM beat the street estimates by $0.04 per share, posting $1.34 
per share gains. Profits were down from a year ago, when the 
company earned $1.46 per share, but that was expected.  The stock 
got a slight boost after hours, trading up to $87 at one point, 
but cautious comments about earnings and revenue growth for the 
next year eventually caught up to it and it finished the after 
hours session down almost $2.  When a company like IBM says it 
would not get ahead of the curve by predicting better results 
than the street, and that those results are reasonable only if 
the pundits predictions of IT spending growth come true, 
confidence does not exactly ooze from investors' pores.

IBM also wasn't helped any by Microsoft, which first announced a 
2-for-1 stock split, as well as the first dividend in its 
history.  Great news, huh?  Not exactly.  Accompanying the 
dividend announcement was its guidance for the next quarter and 
full year 2003.  The revenue and profit targets were both below 
consensus expectations for both the quarter and the year and 
investors sold the stock off from its close of $55.46 to $53.60 
as of the time of this writing.   Friday should give us a better 
gauge as to just how investors will react to both companies' 
results, but if we have seen a tide change from the recent rally, 
it is unlikely that anything we heard after the closing bell will 
change that.  

The Semiconductor Index rolled over today ahead of the IBM 
earnings, with the SOX falling through the 50-dma that had 
provided support on last Wednesday's big pullback.  The Intel 
capex budget numbers that accompanied its earnings surprise were 
reduced from expectations of $4.0 billion to a range of $3.5-$3.9 
billion.  The low end at $3.5 billion would be a 25% reduction 
from the $4.7 billion it spent in 2002. That was bad news for the 
semiconductor equipment makers, who continued to take the brunt 
of the selling today.   Some of the big losers over the last 
couple of days that got no bounce from yesterday's sell-off were 
KLAC (-1.6%), TER (-4.5%), NVLS (-0.8%) and AMAT (-0.83%). After 
the bell, AMD missed its earnings by a quarter and is likely to 
lead a sector sell-off in the morning. With the SOX back at 315, 
which was one-day resistance on January 3, the next leg down 
could be a re-test of support at 300.  The 300-level has tended 
to act as a magnet and traders shorting the sector may want to 
tighten stops as we approach that level. 

Judging by the after hours activity, we will be headed lower in 
the morning.  We could easily test the January 8 low of 8580, 
which represented a bounce from the 50-dma at that time.  The 50-
dma now sits at 8608 and a drop through 8580 would re-ignite talk 
of the bearish head and shoulders pattern that seemed dead just a 
couple of days ago. It would take a neckline break at around Dow 
8200 to complete the pattern, which would have a measuring 
objective of about 7500.  If, however, we get another round of 
dip buying after the world's largest software company essentially 
warns for 2003, then there is not much left in the business world 
that can derail a rally.  Of course, part of today's drop 
reflected the discovery of 11 empty chemical warheads in Iraq and 
further developments toward an invasion could always pop up and 
derail any rally.  For tomorrow, at least, that does not seem to 
be an issue, as a rally is unlikely.


-----------------------------------------------------------------

Market Averages

DJIA ($INDU)

52-week High: 10673
52-week Low :  7197
Current     :  8697

Moving Averages:
(Simple)

 10-dma: 8729
 50-dma: 8606
200-dma: 8902



S&P 500 ($SPX)

52-week High: 1176
52-week Low :  768
Current     :  914

Moving Averages:
(Simple)

 10-dma:  921
 50-dma:  907
200-dma:  946



Nasdaq-100 ($NDX)

52-week High: 1734
52-week Low :  795
Current     : 1061

Moving Averages:
(Simple)

 10-dma: 1068
 50-dma: 1049
200-dma: 1055



-----------------------------------------------------------------
The Semiconductor Index (SOX.X):  The SOX finally gave up support 
at the 50-dma, falling almost 3% to close at 315.  That level 
matches the January 3 high that failed at the 50-dma on the way 
up.  Following an earnings miss of $0.25 by Advanced Micro 
Devices (AMD), as well as cautious comments from IBM and 
Microsoft, I expect the SOX to re-test the 300 support level that 
has tended to act magnetically on recent trips and could do so 
again, as options expiration tends to pin optionable products at 
round number strikes on expiration.  If that level is broken, 
look for support in the 283-289 range.

52-week High: 657
52-week Low : 214
Current     : 315

Moving Averages:
(Simple)

 21-dma: 313
 50-dma: 323
200-dma: 366


-----------------------------------------------------------------


The VIX held support at 26, just as it appears the equity market 
topped out and is beginning to roll over.  Following the 
disappointing comments from IBM and lower guidance from 
Microsoft, the market will likely head lower and the VIX should 
be on the rise.  Readers who took last week's suggestion to 
invest in straddles at the lower end of the recent volatility 
range should be pleased as the VIX climbs higher.  If the sell-
off is for real, look for the VIX to head back into the 30s by 
next week.


CBOE Market Volatility Index (VIX) = 27.67 –0.19
Nasdaq-100 Volatility Index  (VXN) = 44.80 +1.35

-----------------------------------------------------------------

          Put/Call Ratio  Call Volume   Put Volume

Total          0.87        715,211       621,531
Equity Only    0.70        491,234       344,093
OEX            1.13         36,892        41,777
QQQ            1.63         24,123        39,331


-----------------------------------------------------------------

Bullish Percent Data

           Current   Change   Status
NYSE          53      + 0     Bull Confirmed
NASDAQ-100    65      - 1     Bull Confirmed
Dow Indust.   60      + 3     Bull Confirmed
S&P 500       63      + 1     Bull Correction
S&P 100       61      + 1     Bull Confirmed

Bullish percent measures the number of stocks in an index 
currently trading on a buy signal on their point and figure 
chart.  Readings above 70 are considered overbought, and readings 
below 30 are considered oversold.

Bull Confirmed  - Aggressively long
Bull Alert      - Cautiously long
Bull Correction - Pause or pullback in upward trend
Bear Alert      - Take defensive action if long
Bear Confirmed  - High risk if long, good conditions for shorting
Bear Correction - Pause or rebound in downtrend

-----------------------------------------------------------------

 5-Day Arms Index  1.13
10-Day Arms Index  1.06
21-Day Arms Index  1.31
55-Day Arms Index  1.24


Extreme readings above 1.5 are bullish, and readings below .85 
are bearish.  These signals don't occur often and tend be early, 
but when they do, they can signal significant market turning 
points.

-----------------------------------------------------------------

Market Internals

        Advancers     Decliners
NYSE       1553          1309
NASDAQ     1404          1718

        New Highs      New Lows
NYSE        108              22
NASDAQ       78              26

        Volume (in millions)
NYSE       1,805
NASDAQ     1,543


-----------------------------------------------------------------

Commitments Of Traders Report: 01/07/02

Weekly COT report discloses positions held by small specs
and commercial traders of index futures contracts at the 
Chicago Mercantile Exchange and Chicago Board of Trade. COT data 
can be found at www.cftc.gov.

Small specs are the general trading public with commercials being 
financial institutions. Commercials are historically on the 
correct side of future trend changes while small specs tend 
to be wrong.  

S&P 500

Commercials increased long positions slightly, while reducing 
shorts by 7,000 contracts.  Small traders added 4,000 long 
contracts, while also adding 8,000 short contracts.

Commercials   Long      Short      Net     % Of OI 
12/17/02      465,361   528,896   (63,535)   (6.4%)
12/23/02      408,592   467,259   (58,667)   (6.7%)
12/31/02      410,968   462,782   (51,814)   (5.9%)
01/07/03      411,542   455,538   (43,996)   (5.1%)

Most bearish reading of the year: (111,956) -   3/6/02
Most bullish reading of the year: ( 16,472) - 10/01/02

Small Traders Long      Short      Net     % of OI
12/17/02      194,740    90,803   103,937     36.4%
12/23/02      138,756    58,236    80,520     40.9%
12/31/02      139,383    75,640    63,743     30.0%
01/07/03      143,169    83,895    59,274     26.1%

Most bearish reading of the year:  36,513 - 5/01/01
Most bullish reading of the year: 114,510 - 3/26/02
 
NASDAQ-100

Commercials added 6,000 long contracts, while adding 4,000 
shorts.  Small traders left long positions basically unchanged, 
while increasing shorts by 3,400 contracts, or 68%.


Commercials   Long      Short      Net     % of OI 
12/17/02       51,999     54,383   ( 2,384) ( 2.2%)
12/23/02       32,067     44,451   (12,384) (16.2%)
12/31/02       31,399     44,387   (12,988) (17.1%)
01/07/03       37,966     48,156   (10,190) (11.8%)

Most bearish reading of the year: (15,521) -  3/13/02
Most bullish reading of the year:   9,068  - 06/11/02

Small Traders  Long     Short      Net     % of OI
12/17/02       23,027    18,027     5,000    12.2%
12/23/02       17,009     5,865    11,144    49.0%
12/31/02       19,841     5,009    14,832    60.1%
01/07/03       19,708     8,453    11,255    40.1%

Most bearish reading of the year: (10,769) - 06/11/02
Most bullish reading of the year:  14,832  - 12/31/02

DOW JONES INDUSTRIAL

Commercials left positions relatively unchanged, while small 
traders increased short positions by 1800 contracts. 

Commercials   Long      Short      Net     % of OI
12/17/02       23,782    20,605    3,177       7.2%
12/23/02       14,991    11,103    3,888      14.9%
12/31/02       15,940    11,253    4,687      17.2%
01/07/03       16,210    11,333    4,877      17.7%

Most bearish reading of the year: (8,322) -  1/16/01
Most bullish reading of the year: 15,135  - 10/16/01

Small Traders  Long      Short     Net     % of OI
12/17/02        5,498     9,045    (3,547)   (24.4%)
12/23/02        4,584     6,296    (1,712)   (15.7%)
12/31/02        4,997     6,553    (1,556)   (13.5%)
01/07/03        4,963     8,334    (3,371)   (25.4%)

Most bearish reading of the year:  (8,777) - 10/12/01
Most bullish reading of the year:   1,909  -  1/16/01

-----------------------------------------------------------------


**************************************************************
Annual Renewal Special
**************************************************************

The annual special this year is far too large to put into an
email. The highlights include two option expiration mousepads
to which we have added the FOMC meeting dates this year. There
are also two videos with Jim, Jeff and Buzz and seven books 
by leading market professionals like John Murphy and and Jim 
Rodgers. We even brought back the Trading Strategies CD from 
last year for all the new subscribers who have been asking 
for it. 

Click here for the full details:  

https://secure.sungrp.com/03renewal/#m
**************************************************************


*************************
WEEKLY MANAGER MICROSCOPE
*************************

Henry Hewitt: Light Revolution Fund (LUXRX)

Henry Hewitt is president, chief executive officer, director and 
majority shareholder of Light Index Investment Company of Tacoma, 
Washington that serves as investment adviser to the 5-star rated 
Light Revolution Fund.  This sector fund seeks growth of capital 
over time by investing principally in the common stocks of large-
cap companies in the technology business that are engaged in the 
processing or delivering of information.  

This specialty-technology fund is designed to be a convenient way 
for investors to participate in the long-term growth potential of 
the information revolution.  The prospectus states that this fund 
is a long-term investment, intended to compliment someone's other 
investments.

Investment Style/Strategy

Hewitt seeks to achieve the fund's long-term growth objective by 
investing primarily in the common stocks of large companies that 
are engaged in the processing or delivery of information, but he 
may also invest in other types of securities consistent with the 
investment objective.  While technology companies are considered 
to be growth-oriented investments, Hewitt follows a value-driven 
investment methodology to identify undervalued securities, which 
possess characteristics that can lead to a higher security price 
over time.

Hewitt's investment methodology is based on the same methodology 
that he uses to manage the Light Index - an equity index that he 
developed to encompass companies believed to be at the forefront 
of the Light Revolution.  He created the term "Light Revolution" 
to describe the transition of the world's economy from one based 
on the ability to perform physical work with high-speed machines 
to one based on the ability to process and deliver information at 
the speed of light, the website states.

The companies that Hewitt includes in the Light Index and invests 
in may be involved in a variety of businesses, including computer 
hardware, computer software, and telecommunications.  He may also 
invest in financial services and other types of businesses, which 
may benefit from the Light Revolution.  Hewitt selects equities 
and other securities based upon a thorough review of attributes 
including sales growth and R&D expenditures.  Holdings are sold 
when the business is no longer a leader in its market segment or 
the security no longer possesses the desired characteristics for 
long-term growth.

The prospectus states that the Light Revolution Fund intends to 
be fully invested in stocks at all times and to be invested for 
the most part in large-capitalization companies (market leaders).  
Hewitt's process identifies common stocks with long-term capital 
appreciation potential and then holds on to those common stocks 
for an extended period of time.  Accordingly, the fund is meant 
to have low turnover and to make low capital gains distributions.

According to Morningstar's report, the Light Revolution Fund had 
an average market capitalization of $23.3 billion at November 30, 
2002, with approximately 83% of assets invested in giant-cap and 
large-cap stocks.  Relative to the S&P 500 index, the fund's P/E 
ratio and other price valuations are above market, landing it in 
the large-cap "growth" style box.  Hewitt had 94.9% of assets in 
equity securities at November 30, 2002, with 18.5% of the equity 
allocation invested in foreign stocks.

The number of stock holdings at that time was 50, with roughly a 
quarter of assets represented by the fund's top 10 holdings.  At 
just 17 percent, the fund's turnover ratio is low and consistent 
with its long-term investment philosophy.  The fund's "top five" 
holdings as of November 30, 2002 per Morningstar were as follows:

 Canon ADR (CAJ) 2.99% of assets, P/E 26.1
 Wells Fargo (WFC) 2.90% of assets, P/E 15.7
 Dell Computer (DELL) 2.65% of assets, P/E 36.1
 Sony ADR (SNE) 2.54% of assets, P/E 310.6
 Intel (INTC) 2.53% of assets, P/E 41.0

Add to that such household names as Texas Instruments, Microsoft, 
Cisco Systems and Nokia and you have a portfolio that can easily 
be mistaken for a traditional tech sector fund.  Since all firms 
are driven by technology and information to some degree, Hewitt's 
reach generally goes beyond the tech sector to financial services 
firms like Wells Fargo which benefit from information technology.  
Compared with his technology fund peers, Hewitt has greater-than- 
average exposure to media, telecommunications, financial services 
and consumer goods.

It's noteworthy that Hewitt currently has no exposure to "health" 
stocks.  Intuitively you would think that the health industry is 
influenced greatly by information and technology, so one is left 
to assume that the reason that Hewitt has no healthcare exposure 
is because stocks in the industry are not undervalued or they do 
not possess the desired growth characteristics.

Investment Performance

While Henry Hewitt has published a monthly newsletter named The 
Light Revolution Herald since September 1993, his equity mutual 
fund has been around only since June 28, 1999.  Therefore, this 
fund has only a small track record in up-market conditions with 
most of the fund's performance history coming during the recent 
bear market.  That makes it difficult to evaluate how well this 
fund may do in the next bull market, but considering that stock 
holdings come primarily from the PSE 100 index, you can use the 
PSE 100 index to get a sense of what you might expect.  Per the 
Morningstar report, the Light Revolution Fund is compared to the 
S&P 500 index and the PSE 100 index, its best-fit match.

The Light Revolution Fund has 14 full quarters worth of returns 
one can analyze.  In its first two quarters of operation (third 
quarter 1999 and fourth quarter 1999), Hewitt put up returns of 
2.6% and 48.4%, respectively.  In the first quarter of 2000, he 
posted a 16.5% return for investors, and that's when the market 
began its descent.  So in the brief period that Hewitt was able 
to invest into the tech-led bull market the fund did relatively 
well.

In eight of the next 11 quarterly periods, Hewitt's fund posted 
losses.  Still, Hewitt posted quarterly gains of 6.8% in Q2 2001, 
24.0% in Q4 2001, and 14.8% in Q4 2002.  While tech losses have 
been severe through the market downturn, Hewitt has done a good 
job both in advances (capturing return) and declines (preserving 
capital) relative to other specialty-technology funds, resulting 
in a Morningstar 5-star overall rating.

Below is a summary of the fund's trailing returns as of January 
13, 2003 using data from Morningstar.

 1-Year Return/Category Ranking:
 -30.0% Light Revolution Fund (LUXRX) 8th percentile
 -28.8% PSE 100 Index
 -39.5% Technology Fund Average

 3-Year Average Return/Category Ranking:
 -23.2% Light Revolution Fund (LUXRX) 10th percentile
 -19.7% PSE 100 Index
 -35.0% Technology Fund Average

As you can see, Hewitt's negative returns were bigger than the 
PSE 100 index, but compared to his technology fund peers, fund 
returns ranked in the top decile of the category, according to 
Morningstar.  Hewitt lost an average of 23 percent a year over 
the past three years, compared to a 35 percent annualized loss 
for the average technology fund in Morningstar's database.  So, 
he has done a respectable job of minimizing losses relative to 
the tech peer group.

Relative to the technology fund peer group, the fund has "low" 
risk according to Morningstar.  The fund's low risk profile vs. 
peers, along with its top decile performance, has resulted in a 
Morningstar 5-star overall rating for risk-adjusted performance.  
Still, if you are considering this fund for the long-term, then 
three years isn't really enough to base a long-term decision on.

Conclusion

While the Light Revolution Fund is offered a no-load NTF basis 
through Charles Schwab and other brokerage networks, it has an 
annual expense ratio currently of 2.00%, in line with the tech 
fund average, but high compared with the average equity mutual 
fund.  That diminishes its appeal somewhat, as there are other 
tech funds out there with longer tracks records of performance 
and lower annual operating expenses.  Waddell & Reed Science & 
Technology Fund is one example.

While it's clear that the market got way ahead of itself in the 
1990s, I still believe that information technology is a primary 
driver of economic and corporate performance over time and that 
this fund will eventually make a comeback along with the sector.  
So, if you were to add technology exposure today, at the bottom 
of the cycle, Hewitt's fund may be one to consider further, but 
no one would fault you (I wouldn't) for giving Light Revolution 
Fund a little more time to prove itself.

For more information or to download a prospectus, you may go to 
the Light Revolution website at www.lightrevolution.com.

Steve Wagner
Editor, Mutual Investor
steve@mutualinvestor.com


**************************************************************
Annual Renewal Special
**************************************************************

The annual special this year is far too large to put into an
email. The highlights include two option expiration mousepads
to which we have added the FOMC meeting dates this year. There
are also two videos with Jim, Jeff and Buzz and seven books 
by leading market professionals like John Murphy and and Jim 
Rodgers. We even brought back the Trading Strategies CD from 
last year for all the new subscribers who have been asking 
for it. 

Click here for the full details:  

https://secure.sungrp.com/03renewal/#m
**************************************************************


***********************
SWING TRADER GAME PLANS
***********************

Hangover Continues

It took all my will power not to get short ahead of the big after 
hours earnings releases from IBM and Microsoft. Of course, that 
decision is one I'd like to have back after the Microsoft 
disappointment, but taking big risks is not part of my game plan 
and it appears tomorrow may give us a better snapshot of just how 
decisively the tide has shifted over the last couple of days.

To read the rest of the Swing Trader Game Plan Click here:
http://www.OptionInvestor.com/itrader/indexes/swing.asp


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The Option Investor Newsletter                 Thursday 01-16-2003
Copyright 2003, All rights reserved.                        2 of 3
Redistribution in any form strictly prohibited.


In Section Two:

Dropped Calls: LTR, VRTY
Dropped Puts: PG
Daily Results
Call Play Updates: CI, RJR, CMCSK
New Calls Plays: None
Put Play Updates: ASD, WLP
New Put Plays: CTAS


****************
PICKS WE DROPPED
****************

When we drop a pick it doesn't mean we are recommending a sell
on that play. Many dropped picks go on to be very profitable.
We drop a pick because something happened to change its
profile. News, price, direction, etc. We drop it because we
don't want anyone else starting a new play at that time.
We have hundreds of new readers with each issue who are
unfamiliar with the previous history for that pick and we
want them to look at any current pick as a valid play.


CALLS:
*****

LTR $47.00 +0.16 (-0.60) Now that's just been downright
disappointing.  LTR had all the earmarks of a play ready to
break out over resistance, but over the past week it just
hasn't been able to get the job done.  The past two days have
been particularly disappointing, with LTR being rejected at
resistance, and then falling to close near the low of the day.
About the only thing that seems to be holding the stock up is
the 10-dma, just under $47.  With oscillators rolling and price
action weak, it seems like a good time to bring the play to an
end.  We're dropping it tonight ahead of what looks like more
downside action.

VRTY $15.10 -0.38 (-0.85) While VRTY was looking good following
the breakout last week, it seems the stock is experiencing some
extended profit taking.  After probing above the $16 level on
Monday, it's all been downhill on rather light volume.  With
prominent earnings out tonight from MSFT and IBM, it is hard to
justify keeping the play open, when it is showing such poor
health.  While a rebound from the $14.50 level might turn out
to be a decent entry into the play, with the deteriorating
conditions in the broad market, VRTY has the look of a stock
that has finished with its bullish run for now.


PUTS:
*****

PG $86.87 +0.97 (+0.74) Anticipating a breakdown from its recent
trading range, we added PG to the Put list a week ago. Since
then, the stock has been vacillating in a fairly narrow range,
but today's strength is enough to have us pulling the plug.  In
contrast to recent behavior, PG actually moved up throughout the
day today, closing near its high of the day.  This came on a day
when the broad market opened near its high of the day and then
persistently worked lower.  With relative weakness turning to
relative strength and no break from the recent range, PG is a
drop tonight.


***********************************************************
DAILY RESULTS
***********************************************************

Please view this in COURIER 10 font for alignment
*************************************************

CALLS              Mon    Tue    Wed   Thu

CI       46.27    0.29   1.14  -0.26  0.77  Great start
CTAS     44.74   -0.45   0.21  -1.20 –0.51  New, $44 breakdown
CMCSK    26.80    0.02   0.80  -0.24 –0.31  Holding over support
LTR      47.00   -0.33   0.28  -0.61  0.16  Drop, Big wick
RJR      46.24    0.24   0.83  -0.14  1.15  Holding breakout
VRTY     15.10   -0.18  -0.12   0.31 –0.38  Drop, sector weak


PUTS

ASD      68.16   -0.15   0.03  -0.25  0.66  $68 pivotal
PG       86.87    0.06   0.17  -0.38  0.97  Drop, defensive
WLP      67.10   -0.96  -1.00  -0.14 –0.61  Lower lows


**************************************************************
Annual Renewal Special
**************************************************************

The annual special this year is far too large to put into an
email. The highlights include two option expiration mousepads
to which we have added the FOMC meeting dates this year. There
are also two videos with Jim, Jeff and Buzz and seven books 
by leading market professionals like John Murphy and and Jim 
Rodgers. We even brought back the Trading Strategies CD from 
last year for all the new subscribers who have been asking 
for it. 

Click here for the full details:  

https://secure.sungrp.com/03renewal/#m
**************************************************************


********************
PLAY UPDATES - CALLS
********************

CI $ 46.27 +0.77  (+1.96 for the week)  So far, so good.  Shares 
of Cigna are doing a good job of maintaining their relative 
highs, in spite of a wishy-washy broader market.  On Thursday the 
stock outperformed the IUX.X insurance index (which finished 
solidly in the red) and posted a new multi-month closing high.  
Although CI hasn't quite been able to move above Tuesday's high 
($46.69), this relative strength is a sign that shares will 
continue to fill in the October gap.  Speaking of the IUX.X, 
we're a bit concerned with the fact that the index appears to be 
rolling under resistance at 275.  However, we don't expect that 
sector weakness will pose a serious problem as long as CI 
continues to outperform.  It's also comforting to note that the 
IUX also has underlying support in the 262-264 area.  CI is still 
playing catch-up with the rest of the group and looks well-
positioned to rally towards the next level of psychological 
resistance at $50.00.  New entries can be targeted on either move 
above Tuesday's high or a pullback to $45.00.  Our stop has been 
raised to $42.25.  Slightly more aggressive traders could use a 
stop just below the 50-dma at $41.50.

---

RJR $46.24 +1.15 (+2.49 for the week)  Not a bad start for this 
long play.  RJR reached our entry trigger of $45.33 on Wednesday 
morning when the stock spiked higher at the opening bell.  Shares 
pulled back with the broader market but were still able to close 
above $45.00 for the second consecutive session.  Today's action 
saw RJR tag another multi-month high before settling into fairly 
tight range for the rest of the session.  What's interesting 
about this sideways trading action is the fact that the Dow Jones 
was actually trending lower throughout the day.  This relative 
strength might have resulted from a combination of defensive 
buying ahead of the IBM and MSFT earnings announcements, combined 
with short-covering that was precipitated by the stock's 
breakout.  In any case, bulls can be very pleased that RJR is 
trading at new relative highs with no clear overhead resistance 
levels.  If the current uptrend remains intact it looks like 
shares could reach the $50.00 area by the end of the month.  New 
bullish positions can be evaluated on a move above today's high 
of $46.50.  A pullback to $45.00 might also yield an entry point 
if RJR sees some profit-taking on Friday.  Bear in mind, however, 
that RJR announces earnings next Thursday.

---

CMCSK $26.70 -0.41 (+0.29) The last two days have certainly not
been kind to the bulls, with Wednesday's sharp drop at the open,
consolidation and then rally failure and drop this morning.  In
light of that weakness, it's good to see our CMCSK play holding
its ground as well as it is.  Sure the stock dropped back a bit
with the rest of the broad market, but we expected that after
the strong run up the chart over the past 2 weeks.  It is
interesting that buyers were waiting at that first support
level ($26.50) and they defended the stock there this afternoon.
That rebound would have made for an acceptable entry into the
play, at least for partial positions.  But a drop into the
$25.50-26.00 area (stronger historical support, backed by the
10-dma at $25.79) followed by a rebound would be the preferable
strategy.  Clearly a volume backed move (not like today's brief
spike) through the $27.50 level is going to be necessary before
traders should consider new momentum-based positions.  Keep stops
set at $24.


**************
NEW CALL PLAYS
**************

None


**************************************************************
Annual Renewal Special
**************************************************************

The annual special this year is far too large to put into an
email. The highlights include two option expiration mousepads
to which we have added the FOMC meeting dates this year. There
are also two videos with Jim, Jeff and Buzz and seven books 
by leading market professionals like John Murphy and and Jim 
Rodgers. We even brought back the Trading Strategies CD from 
last year for all the new subscribers who have been asking 
for it. 

Click here for the full details:  

https://secure.sungrp.com/03renewal/#m
**************************************************************


*******************
PLAY UPDATES - PUTS
*******************

ASD $68.16 +0.66 (-0.38) There's no question that today's pop
at the open had ASD bears wondering if the decline was over.
But it didn't take long for the pop to fade and the stock
settled in just above that pivotal $68 level around which the
stock has been gyrating for much of the past week.  The stock
still hasn't broken the $67 bullish support line yet, and that's
what we need to see before considering new entries on a
breakdown.  In the meantime, we continue to watch for failed
rallies near resistance to allow entry into the play.  Today's
early pop to the $68.50 level was a good one, but you had to be
quick to catch it before the euphoria deflated.  Another failed
rally near that level or even as high as $70 resistance can be
used for entry into the play.  with the PnF chart giving us a
target of $64 to work with, it appears to only be a matter of
time until the bears win.  Take the cautious approach and enter
on a failure near resistance.  Keep stops set at $71.

---

WLP $67.10 -0.61 (-2.47) After knocking on the door of pivotal
support this afternoon, WLP managed to claw its way back from the
brink.  But that rebound isn't likely to last, as the sellers are
definitely in control.  After falling again on Thursday, WLP
found support just above $66 (just as we suspected it would) and
rebounded to back over the $67 level by the closing bell.  In the
big picture though, it was another in a long series of losing
days.  Daily Stochastics are now buried deep in oversold and a
rebound has been expected for the past couple days from the $66
area, hence our reticence to initiate new positions on a
breakdown.  Traders that entered on the rollover near $70 will
want to snug up their stops or even close a part of the position
on another rebound from the vicinity of $66.  This support level
will likely fail in the near future, but probably from a higher
level.  We want to be able to take advantage of that next
rollover when it occurs, possibly near $68, but more likely up
in the vicinity of $69.  Lower stops to $70.25, just above
Monday's intraday high.


*************
NEW PUT PLAYS
*************

CTAS - Cintas Corp. $44.74 -0.51 (-2.03 for the week)

Company Description:
Cintas Corporation, with revenues of $2.27 billion, headquartered 
in Cincinnati, Ohio, is the leader in the corporate identity 
uniform industry providing uniforms to a wide variety of 
industries nationwide. The Company also provides a wide range of 
outsourcing services including entrance mats, sanitation 
supplies, cleanroom services and first aid and safety products 
and services. (source: company website)

Why We Like It:
As NASDAQ-100 components go, CTAS wouldn't be classified as one 
of the "sexier" stocks.  Their primary source of revenue - 
providing uniforms for a wide range of businesses - is decidedly 
low-tech.  This helps to explain why the stock held up so well 
over the past few years while the NDX.X and NASDAQ suffered huge 
losses stemming from the bursting of the tech bubble.  
Unfortunately for shareholders of Cintas, the company is not 
immune to broader economic weakness.  Rising unemployment numbers 
equate to reduced orders for uniforms as huge corporations and 
smaller business slash their workforce in order to remain 
profitable.  The company's CEO outlined these difficulties last 
September, saying that in spite of success in adding new 
customers, "...we continue to experience lower sales volume with 
our existing customers as they shrink their work forces, 
eliminate shifts and departments and even close operations."  The 
economic situation hasn't improved much since those comments were 
made.  

What earned CTAS a spot on our bearish play list is the recent 
breakdown out of a loosely-defined bearish pennant formation.  
Shares spent nearly a month trading in an increasingly narrow 
range before breaking to the downside on Wednesday.  Given the 
lack of apparent news to explain this weakness, it looks like the 
stock simply fell victim to a declining NASDAQ.  Today's action 
saw CTAS continue to move lower before rebounding near the 
December low at $44.55.  If this support level gives way we'd 
expect shares to retrace the rapid gains that occurred in mid-
October and move down to the $40.00 area.  Point-and-figure 
enthusiasts will notice that a trade at $44.00 would create a 
triple-bottom sell signal.  While conservative traders may want 
to hold off on entries until this level is violated, we're 
willing to enter the play once CTAS moves under today's low 
($44.50).  NASDAQ futures were moving solidly lower on Thursday 
evening.  With the market looking poised to continue its decline 
on Friday, we think odds are good that Cintas will soon be 
trading below $44.00.  If the play is triggered our stop will be 
set at $47.25, slightly above the exponential 200-dma.  On a 
final technical note: try slapping a retracement bracket on the 
daily chart, from the October lows to the October highs.  There 
are some interesting correlations, including the 50% level at the 
$44.50-$45.00 support region.

*****January Contracts Expire Friday*******

BUY PUT FEB-50*NQQ-NJ OI= 583 at $5.90 SL=3.00
BUY PUT FEB-45 NQQ-NI OI= 552 at $2.20 SL=1.10

Average Daily Volume = 1.3 mil



**************************************************************
Annual Renewal Special
**************************************************************

The annual special this year is far too large to put into an
email. The highlights include two option expiration mousepads
to which we have added the FOMC meeting dates this year. There
are also two videos with Jim, Jeff and Buzz and seven books 
by leading market professionals like John Murphy and and Jim 
Rodgers. We even brought back the Trading Strategies CD from 
last year for all the new subscribers who have been asking 
for it. 

Click here for the full details:  

https://secure.sungrp.com/03renewal/#m
**************************************************************


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The Option Investor Newsletter                 Thursday 01-16-2003
Copyright 2003, All rights reserved.                        3 of 3
Redistribution in any form strictly prohibited.


In Section Three: 

Play of the Day: PUT - CTAS
Traders Corner: Roll It Over In The Clover and Do It Again
Futures Corner: Q-charts for Futures Traders
Options 101: To Inflate or Deflate - That is the question

*********************
PLAY OF THE DAY - PUT
*********************

CTAS - Cintas Corp. $44.74 -0.51 (-2.03 for the week)

Company Description:
Cintas Corporation, with revenues of $2.27 billion, headquartered 
in Cincinnati, Ohio, is the leader in the corporate identity 
uniform industry providing uniforms to a wide variety of 
industries nationwide. The Company also provides a wide range of 
outsourcing services including entrance mats, sanitation 
supplies, cleanroom services and first aid and safety products 
and services. (source: company website)

Why We Like It:
As NASDAQ-100 components go, CTAS wouldn't be classified as one 
of the "sexier" stocks.  Their primary source of revenue - 
providing uniforms for a wide range of businesses - is decidedly 
low-tech.  This helps to explain why the stock held up so well 
over the past few years while the NDX.X and NASDAQ suffered huge 
losses stemming from the bursting of the tech bubble.  
Unfortunately for shareholders of Cintas, the company is not 
immune to broader economic weakness.  Rising unemployment numbers 
equate to reduced orders for uniforms as huge corporations and 
smaller business slash their workforce in order to remain 
profitable.  The company's CEO outlined these difficulties last 
September, saying that in spite of success in adding new 
customers, "...we continue to experience lower sales volume with 
our existing customers as they shrink their work forces, 
eliminate shifts and departments and even close operations."  The 
economic situation hasn't improved much since those comments were 
made.  

What earned CTAS a spot on our bearish play list is the recent 
breakdown out of a loosely-defined bearish pennant formation.  
Shares spent nearly a month trading in an increasingly narrow 
range before breaking to the downside on Wednesday.  Given the 
lack of apparent news to explain this weakness, it looks like the 
stock simply fell victim to a declining NASDAQ.  Today's action 
saw CTAS continue to move lower before rebounding near the 
December low at $44.55.  If this support level gives way we'd 
expect shares to retrace the rapid gains that occurred in mid-
October and move down to the $40.00 area.  Point-and-figure 
enthusiasts will notice that a trade at $44.00 would create a 
triple-bottom sell signal.  While conservative traders may want 
to hold off on entries until this level is violated, we're 
willing to enter the play once CTAS moves under today's low 
($44.50).  NASDAQ futures were moving solidly lower on Thursday 
evening.  With the market looking poised to continue its decline 
on Friday, we think odds are good that Cintas will soon be 
trading below $44.00.  If the play is triggered our stop will be 
set at $47.25, slightly above the exponential 200-dma.  On a 
final technical note: try slapping a retracement bracket on the 
daily chart, from the October lows to the October highs.  There 
are some interesting correlations, including the 50% level at the 
$44.50-$45.00 support region.

*****January Contracts Expire Friday*******

BUY PUT FEB-50*NQQ-NJ OI= 583 at $5.90 SL=3.00
BUY PUT FEB-45 NQQ-NI OI= 552 at $2.20 SL=1.10

Average Daily Volume = 1.3 mil



**************************************************************
Annual Renewal Special
**************************************************************

The annual special this year is far too large to put into an
email. The highlights include two option expiration mousepads
to which we have added the FOMC meeting dates this year. There
are also two videos with Jim, Jeff and Buzz and seven books 
by leading market professionals like John Murphy and and Jim 
Rodgers. We even brought back the Trading Strategies CD from 
last year for all the new subscribers who have been asking 
for it. 

Click here for the full details:  

https://secure.sungrp.com/03renewal/#m
**************************************************************


**************
TRADERS CORNER
**************

Roll It Over In The Clover and Do It Again
By Mike Parnos, Investing With Attitude

Well, we’re getting down to the short hairs again.  Only one more 
day till option expiration.  Your heart is palpitating faster – 
without the aid of a cattle prod or a magazine. 

Well, at the very least, it’s thought provoking.  This week, a 
number of readers have written me about the ITM Strangles we’ve 
been discussing over the past few weeks.  They’ve brought up some 
interesting questions that warrant attention.
_____________________________________________________________

“Never start a sentence with ‘I don’t think.”  The only thing 
what makes you a higher order of animal is your ability to 
think.”  Henry H. Buckley
_____________________________________________________________
  
Mike,
Would you please answer some questions on your long term in the 
money strangle?
1. What is the initial margin? 
2. What is margin on the first adjustment?
3. Why 8 points?  Are 7 points or 9 points better?
4. Why not use SPX options that are European so there is no risk 
of early assignment? 
5. Do the sold strikes continue to move towards the long strikes 
to keep making the original cost stay the same?  And what effect 
does that have on the margin?
6. Do you only adjust when the QQQ moves 3 or 4 points and not 
based on time at all?  Would that mean you may adjust two times 
in one month and then may make no adjustments for 3 months if the 
market is flat during that period? 
7. When do you close the 2004 leaps and move to 2005 leaps?

Response:
1.  There is no margin.  You own the long options covering the 
short options.  All you have is the out of pocket debit.  
2.  Same as question 1.
3.  You want to out in either direction as far as possible, but 
close enough to be able to generate premium income when you sell 
options at either end or within the range.
4.  SPX options are much higher priced and in $10 increments and 
huge bid/ask spreads.  Besides, we always have a plan to make 
adjustments way before there is any threat of a short option 
being exercised.
5.  Yes, they continue to move because we want to maintain the 
integrity of the spread to keep the intrinsic value.  If the 
intrinsic value (or the range) becomes smaller, the risk becomes 
larger (and we don't like that).  There is no margin 
consideration.
6.  Yes, you make the adjustments when necessary, and ONLY when 
necessary.  There may be extended periods of little movement.  
But the QQQs are pretty predictable -- as far as 3-4 point 
movement is concerned.
7.  I've never carried it that far.  I suppose you could take it 
up through the last adjustment (if premiums make it worthwhile) 
and make it to the 05 LEAPS and start all over again.
______________________________________________________________

Mike,
In your 1/2/2003 article, someone asked you about selling the $23 
puts and $27 calls.  I had actually done this, but with January 
instead of February options because the February $21 put and $29 
call premiums went down significantly the Monday after you put 
the trade into the CPTI portfolio.  I also saw support and 
resistance between $23 and $27 so I thought it should hold until 
January expiration.  It's getting to the point where you say we 
should take action because the short call will gain more than the 
long call gains.

I do not want to close the call portion, although profitable, 
because that will leave the long put exposed.  If I also close 
the put portion I'm not sure I'll make any profit due to the 
bid/ask spread and commissions.   Therefore, I am 
considering rolling out the January $27 call to the February $27 
call.  If the QQQ is threatening the $27 area, should I roll it 
out before expiration Friday or can I wait until Friday?  If I 
wait until Friday the QQQ might drop back down by that time.  If 
it closes only slightly above $27 then I would still make a small 
profit (I hope). 

I’m not sure about the exercise and rolling out procedure.  I see 
risk if the QQQs move above $27 and someone exercises the option.  
Then I will have to exercise my long $21 call at a loss because I 
don’t have enough money to buy the QQQs in order to meet the 
call.  Is that what would happen?

Also, on expiration Friday, if it looks like the QQQs will close 
slightly above $27, should I roll out to the February call before 
close or will there be a problem waiting until after the close?  
I understand the options market stays open a little longer than 
the stock market.

Response:
If the QQQs are above $27, you should not be exercised unless 
almost all the time value goes out of the option.   Since it's 
trading almost at the money, where time premium is at its max, 
you would not likely have to worry about that.
 
On expiration Friday, you'll have to evaluate whether or not you 
think the QQQs will continue up.  If the QQQs are above $27, you 
could buy them back and roll out to the Feb. $29s and, on Monday, 
perhaps sell the Feb $23 puts.  It all depends what happens this 
week.
 
Any option trading you plan to do on expiration Friday should be 
done during trading hours.  You cannot trade options after hours 
at all.
 
If the QQQs are at $26.50 and you can buy back the Jan. 27s for 
$.05 during the last hour of trading.  Then you are free to roll 
out perhaps to the Feb. $29s.  Your spending the nickel would 
likely be offset by the erosion of the $29 of about the same 
nickel.

When you narrow the range as you did, you have to be alert 
because the QQQs don't have that far to move before they threaten 
to violate the short options -- especially since we know the QQQs 
have a tendency to move 3+ points in a short period of time.
_____________________________________________________________

CPTI PORTFOLIO UPDATE – As Of Thursday’s Close

BBH Iron Condor – Currently trading at $93.05.
We want BBH to finish the January option cycle anywhere between 
$80 and $95.  We’re still looking good – BBH had a huge up day 
today, finishing up $3.18.  It traded as high as $94 interday.   
We’re still below $95, but it’s getting exciting.  If you’re the 
nervous type, you can buy back the January $95 calls for $.25 
tomorrow morning.  Or, you can ride the roller coaster and throw 
the dice.

XAU Calendar Spread  – Currently trading at $77.18.
We bought the June $80 call for $7.20 and sold the January $80 
call for $2.20.  Our debit (or cost basis) is $5.00.  We want XAU 
(Gold & Silver Index) to move up slowly and finish as close as 
possible to $80.  This is a longer-term cash flow generating 
strategy in which we sell against the June $80 call as many times 
as we can.  It’s a neutral to bullish strategy.  

After only three weeks in the trade, XAU ran up over $81 and we 
closed our calendar spread for a profit of $1,300.  We bought 
back the January $80 call for $3.60 and sold our June $80 call 
for $9.90.

As often happens, shortly thereafter, within an hour, XAU pulled 
back below $80.  For CPTI traders that missed the opportunity to 
close out their position on Monday and who still have the 
position, we’ll continue to monitor the XAU calendar spread.  
With XAU at 77.18, we have only one day left to expiration.  As 
of today’s close, those still in the spread could buy back the 
January $80 call for $.25 and sell the June $80 call for $7.40.  
That’s a credit of $7.15.  If you entered the trade with a debit 
of $5.00, you profit for four weeks would be $2.25 ($2,500) on a 
$5.00 risk.  Even if it cost you a little more to get into the 
trade originally, it’s still an impressive return.

With only one day left until expiration, the likelihood is 
excellent that the January $80 call will expire worthless.  You 
will then have to decide if you want to take your profits (which 
are very good) or if you want, on Monday, to sell the $80 or $85 
calls for February.  We’ll discuss this in more depth in Sunday’s 
wrap-up.

QQQ ITM Strangle – Currently trading at $26.44.
This is a long-term position to generate a monthly cash flow.  We 
own the January 2005 $21 LEAPS call and the January 2005 $29 
LEAPS puts.  We’ve sold the February $29 calls and February $21 
puts.  Now, it’s just a matter of being patient and collecting a 
chunk of money every few months.
____________________________________________________________

Happy trading! Remember the CPTI credo: May our remote batteries 

and self-discipline last forever, but mierde happens. Be 
prepared! In trading, as in life, it's not the cards we're dealt. 
It's how we play them.
 
Mike Parnos
CPTI Instructor


**************
FUTURES CORNER
**************

Q-charts for Futures Traders
By John Seckinger
jseckinger@OptionInvestor.com

I get a number of emails wondering what my computer screen looks 
like as I prepare myself for a day of trading.  Let us now take a 
look. 

Let us not waste any time and begin looking at how my Q-charts 
are set up as I watch the market action unfold.  I have always 
put my quotes on the upper left hand corner of my screen, and the 
Dow has to be the number one symbol listed.  The list of symbols 
are actually pretty straightforward, and a few symbols not shown 
include MSFT, QCOM, IBM, ORCL, INTC, BBBY, YHOO, DELL, AMAT, 
AMGN, CSCO, IDPH, VRTS, as well as a few others from the Nasdaq 
100.  I really do try to keep it as simple as possible, since the 
more sectors I include, the more "noise" I have to deal with.  I 
really do consider myself a futures trader (starting with bonds), 
and I believe that less information can definitely be a good 
thing at times.  

Chart of Q-charts Setup, Upper Left 


 

Because I put so much emphasis on the Dow, I might as well have a 
chart of my favorite Index in the lower left corner of the 
screen.  Of course, it has to be in the five-minute time frame.  
This is where I get my "Open to Close" information, as well as 
the range for the first five minutes of trading.  Also note that 
I list the retracements listed between R2 and S2 in this chart.  
- a great roadmap for short-term trades.  Also nice to have is 
the MACD oscillator, since it can at times indicate either a 
bullish or bearish divergence versus price action.  With that 
said, the Dow could test 61.8% at 8795 and a bearish divergence 
in the MACD would add to the possibility of shorting the YM 
contract.  

Chart of Q-Charts Setup, Lower Left


 

The middle of my Q-charts setup is a large and one small chart, 
which rotates from one of the three contracts (YM, ES, or NQ).  I 
pay for real-time quotes on NQ and ES through Q-charts, but I get 
the YM feed from a different source (because of my prior 
connections in Chicago).  The top chart is a five-minute pattern 
of the YM contract, with a daily chart underneath with 
retracements included as well.  I like the daily chart to remind 
me if I should think about holding a position overnight or not.  
Moreover, there is usually a few instances a day when the daily 
and five-minute levels line up; therefore, I want to make sure I 
don't miss them (sometimes the alert doesn't force me to realize 
why it went off).  These two chart timeframes do not change:  
Always five minute and daily.  I like to keep the middle area 
relatively clean with only retracement analysis and a few lines 
drawn.  

Chart of Q-charts Setup, Middle of Screen


 

It is the right side of the screen that I like to use the most.  
This is usually the only charting box that has the two green 
boxes in the upper right hand corner of the screen (meaning that 
it will be the only one to change after a symbol and Interval is 
placed).  Every time I click on a symbol on the left hand side, 
the chart appears in this area.  The middle is always for 
futures, while the right side can go from bonds to stocks to 
whatever.  I usually have this chart riddled with weird trend 
lines; experimenting with new ways to look at the market and 
hopefully seeing something that other technicians might have 
overlooked.  I also like the Time & Sales feature in the bottom 
right hand corner, but I have to confess that I try only to focus 
on it if we are at either a relative high or low.  I like to 
wonder if it is more than simply stops hitting the market, or 
actual size coming in and trying to begin a new move.  

Chart of Q-charts Setup, Right Side 


 

A few other things to note.  In the very first chart, you can see 
the "draw" tab listed.  After clicking on "draw", go to 
"Preferences" at the bottom.  There will then be seven tabs 
listed, one being "Retracement".  Click on the "Retracement" tab.  
In Q-charts, you can list 12 different retracement areas.  I 
recommend the following numbers to be included (all under the 
percent area): 0, 19.1, 38.2, 50, 61.8, 80.9, 100.  Also note 
that there is a "right justify" tab in the upper right.  I like 
to use a few different retracement analysis, so one I will right 
justify and the other I will not.  If you use the color feature 
to differentiate also, it certainly helps when preparing for a 
trading session. 

Chart of Tools Preference Tab


 

I have said this before, "Why force your mind to process hundreds 
of indications and oscillators, especially if a few will not 
agree and delay execution while confusing a trader's plan?"  I 
really like my very simple setup, since it is as "unbiased" as I 
can make it.  Just trade levels, I constantly tell myself during 
the day.  Understand risk and reward, and then become confident 
in your analysis.  If more than a couple levels match up, 
increase trade size.  Sure, this set up will not tell you to look 
at the Dollar and then the Dow, or the relationship between Bonds 
and the five-year note; however, this setup will start to have a 
futures trader look at the same basic patterns as a lot of 
institutional traders.  The key is to actually see the five-
minute and daily line up, accompanied by a test of a solid 
retracement level (S1, S2, pivot, R1, R2).  I truly believe that 
the 'Holy Grail' to trading futures comes from experience and 
years of really understanding the psychological development of a 
particular trading day.  Also, keep it as simple and void of 
emotion as possible.  

Note:  I also like to look at charts from www.stockcharts.com 
(Bullish Percent), making sure what status the SPX, NDX, and DJIA 
are in (Bull Confirmed, Bull Correction, Bull Alert, Bear 
Confirmed, Bear Correction, or Bear Alert).  And that is 
basically it.  Getting extremely fancy and sophisticated can work 
for some traders, but I like as little noise as possible.  When I 
first started, I needed every new tool on the computer ready to 
give me a signal; however, I much prefer to focus on patterns 
within these charts as a way to understand psychology.  This is 
why I spend so much time on articles relating to seeing patterns 
as they develop.  "Open to Close," "Got a Minute," "Using Pivots 
Effectively," etc.  These are the real tools.  Trust me.  

Questions are welcomed,

John Seckinger
jseckinger@OptionInvestor.com


***********
OPTIONS 101
***********

To Inflate or Deflate - That is the question
Buzz Lynn
buzz@OptionInvestor.com

Pardon me while I morph this column today from an "Options 101" 
into an "Economics 101" of sorts.  Yes, I know economics is a 
boring subject to the majority.  In fact, economists traditionally 
only tell us what will happen or when something will happen, but 
never both at the same time.  However, hang with me on this and I 
promise to keep it interesting - really!  

In an ongoing effort to fulfill my promise of serving up 
prognostications for 2003 or whatever timeframe we care to 
reference, Fundamentals Guy feels compelled to delve into the 
currently raging "inflation vs. deflation' debate.  

Why care?  It's a Big Picture thing.  Here's why it's important 
though.  There is a major asset shift taking place worldwide that 
has wealth flowing out of financial assets and into tangible 
assets.  Concurrently with that, the Fed is literally printing and 
electronically creating American Dollars, still the favored 
currency throughout the world, from thin air.  Contrast that with 
worldwide excess production capacity that keeps corporate pricing 
power of all goods and services under control.  Business has no 
pricing power as long as fierce competition between factories 
remains a part of the business landscape.  Everyone is striving to 
be the low-cost producer.

Based on the outcome of these two opposing forces - inflation and 
deflation - we may know, or at least understand the possibilities 
for our own, individual economic futures.

Let's start with the case for deflation.

Factories in the U.S. are running at approximately 76% of 
capacity.  Doing the math, that leaves 24% of a factory's 
capacity, on average, available for additional production.  

Imagine for a moment that we are the operations V.P. for an S&P 
500 company, and we have to make a decision on future capacity 
needs.  We have 24% excess capacity, as we stand right now.  We 
are barely making a profit and are considering ways to save on 
expenses, thus raising our profit potential.  As with most 
companies, our employees - aggressive or lazy, confident or meek, 
smart or not - are our largest expense, whether we like it or not.  
Without discrimination, we are faced with the unpleasant prospect 
of layoffs, even for the best people.  No division or 
organizational chart is sacred.  While that has been an important 
decision in years past, it is especially true now.

Given that current backdrop, is it prudent to expand production 
capacity?  Congratulations on your intelligently thought out 
answer!  In probably 499 of 500 cases, we have no plans (other 
than lament or wishful thinking) to expand in the coming year, and 
we are likely going to lay some people off.  Tough decisions, but 
survival depends on it.

But forget the human aspect of it for the moment.  Moving beyond 
that, we see the very plain implications.  The first is that 
companies to whom we sell goods or provide services are in the 
same boat and have likely also scaled back any expansion plans.  
We cannot count on them increasing their business to us this year.  
Nor can they count on us to ring up their sales.  Not that we 
don't want to give it to them, nor them to us.  But all that 
capacity means we simply won't be investing in MORE capacity.  
Thus, business investment falls off across the board.

The second implication is that many of those people with whom we 
work will no longer be required if we tighten our belts in the 
name of profitability and ultimately survival among those also 
competitively tightening their belts.  Once an employee becomes a 
"consultant" (euphemism for "unemployed"), he or she no longer has 
the monthly resources in the name of "disposable income" to 
participate in that great American pastime of Consumer Spending.  
That, in itself becomes a vicious circle since a reported 70% of 
the economy is consumer spending.  When your neighbor ceases 
buying stuff, it affects our ability to remain employed I order to 
produce it for them.  And likewise, them for us.

Let's now couple the prospect of individual unemployment plus lack 
of pricing power born of excess capacity with a need to service 
the incredible debt load we have amassed from credit cards, auto 
loans with $0 down, 0% financing, and a sea of refinanced home 
loans that frequently involve cash back to the borrower from all 
that real estate equity built out of thin air.  Bottom line: A big 
loan needs to be paid back from decreasing income from more people 
who no longer have jobs.

I didn't just make this up.   5% of all consumer credit is in the 
delinquent or default category - an all time high.  Furthermore, 
1.8% of all home loans are in foreclosure with an even greater 
percentage in default or delinquent.  Again, an all time high.  
What makes matters worse is that while prices of goods are now on 
trend to begin falling and incomes (see airlines for starters) are 
likewise on trend to begin falling, the debt service required to 
pay for the assets (real estate in this case, cars or what have 
you) is not going to change.  

Connecting the dots, even if overall debt does not increase, debt 
service becomes a greater percentage of take-home pay if incomes 
start shrinking.  Those with debt are going to have to apply a 
greater percentage of their shrinking paycheck to a loan amount 
that remains constant while the value of the asset also 
diminishes, as in the case of that $0 down, 0% car.  But I'll save 
my real estate thinking for next week.  (Heads up - you thought 
the stock bubble popping was painful - just wait until real estate 
foreclosures, with greater household net worth, take over the 
front page of the local newspaper.)

Now, let's expand our horizon to encompass the whole world, 
including an emerging consumer goods production behemoth, China.  
Ever notice that Wal-Mart no longer advertises the "made in 
America" aspect of its good that we buy?  That's because they are 
mostly made in China now.  Same with the goods at Home Depot.  

As an aside, and given that each of us effectively "votes" with
 our Dollars, a few years ago I was personally protesting buying 
anything made in China and opting to spend a few more dollars to 
buy made in the USA products.  Forgeddaboudit - I can't do that 
anymore.  Nearly everything I buy at "Stuff-Mart" is made in China 
anymore.  Like it or not, I now buy the formerly "Verboten" mostly 
because there no longer remains easy access to the Chinese 
alternative.  And to think, "stuff" used to say "Made in Japan".

. . .Which leads to the next part of the deflation argument, 
competitive devaluations.  Competitive devaluations are where, 
like in a beauty contest, each currency takes a crack at making 
itself more attractive to the pageant's remaining judges - in this 
case, the U.S. consumer.  Europe, especially Germany, is headed 
for recession, and Japan has been in it so long (actual deflation) 
they may have forgotten the word, "prosperity".  All are trying to 
compete for the business by selling their factory goods the 
cheapest.  How do you make it cheaper?  Have your local Central 
Bank (your counties version of the Fed) lower the value of the 
currency by printing more of it!  

Japan is doing just that.  The Yen currently trades at roughly 120 
to the American Dollar.  But Japanese central bankers (Japanese 
Ministry and the Bank of Japan) have made no secret of printing up 
(or electronically generating) enough currency so that the 
American Dollar will buy roughly 150 Yen at the end of 2003.  
Spoken or not, the reason for doing so is so that the consuming 
world will buy Japanese goods as opposed to other country's 
because it is inexpensive for the buyer to do so.

And don't forget China, as mentioned above.  They are the lowest 
cost goods producer in the world.  While China's GDP has grown 
roughly 8% annually since opening its doors to a bastardized, but 
functional form or capitalism, its Achilles heel remains 
unemployment, which is running at about 10%.  To keep these people 
employed, China would rather produce lower and lower priced goods 
than idle the factories and risk higher unemployment.  This also 
has the added beneficial consequence of making its products 
continually more affordable to the rest of the world.  

And fortunately for us here in the U.S., the Chinese Yuan is fixed 
at slightly more than eight per U.S. Dollar.  China has 
steadfastly refused to change that arbitrary ratio for selfish 
reasons in that it keeps U.S consumers interested in buying 
inexpensive goods.  Judgment day for the U.S. will be when Chinese 
unemployment falls to a figure they find acceptable.  Whatever 
that number is in the single-digit range will give China the 
confidence that its own people can take up the slack where the 
U.S. consumer leaves off, as the Yuan rises against the Dollar.  
That's the point at which the U.S. Dollar will begin to shrink in 
value to the Yuan.  It is our Achilles heel.  

China is a sleeping giant, but now awakening - a powerhouse 
waiting to happen.  They will figure prominently and dominatingly 
in the world economic picture over the next 20 years.  We ignore 
their emerging presence at our own peril.  

In fact, just for the fun of it and to capitalize on what for me 
and my family will likely be a lifelong trend, Fundamentals Guy is 
contemplating an introductory Mandarin Chinese class at the local 
junior college sometime this year!

Let's not leave out India either.  India ranks highly as a low-
cost producer in the high tech world by offering skilled software 
engineers on par with our own and inexpensive call-center labor, 
both at a fraction of the price of those in the U.S.  In fact, the 
call center or customer support department you call for help with 
your widget may likely already be located in India.  Through the 
abundance and cheapness of fiber optics (not to mention pretty 
decent English skills), it is becoming common practice to locate 
these departments where labor is a fraction of the cost of that on 
U.S. shores.  Again, cost of goods and wage expense falling equals 
exported deflation.

Criminy, here we are approaching deadline again, not to mention 
I've used up my "word quota" for the day (Only so much can go on a 
page, you know?), and I haven't even touched on inflation yet!  
OK, I promise to get to the case for inflation next week instead 
of real estate.  Then I'll wrap up the prognostication series with 
real estate followed by may case for gold and possibly some other 
hard assets or commodities.

But for this evening, let's get back to deflation so we can 
deliver this pretty package and tie it up with a nice bow.  In 
short, producing countries are going to compete to get their 
excess capacity into production even if it means a devaluation of 
their own currency - generally considered devastating practice to 
any economy.  All of this means that the cost of goods, services, 
wages, and the corporate generation of profits is likely to come 
down.  We got our first taste of this today as the core CPI 
figures registered a meager 0.1% for the month of December.  Were 
it not for the 11% increase in energy costs, or the steadily 
rising cost (bubble) in housing, education, and healthcare, the 
core cost of goods including cars and all purchases from "Stuff-
Mart" during 2002 would have been negative.  Much as I like to see 
cheaper goods, it's a double- edged sword that will ultimately 
slice disposable income and thus our ability to repay a strapping 
debt burden.

Deflation is a grave danger to the U.S. economy only because 
Americans savings rates are less than 2% of income.  We simply 
have nothing but income - increasingly tenuous income - and little 
savings with which to meet our personal obligations.  

The good news, if we can call it that, is that the Federal Reserve 
is making currency - both electronic and printed - so available 
that it desperately hopes it can stave off deflation by inflating 
the money supply.  The Fed theme is to "Inflate or die".  The Fed 
cannot risk the perils to the economy that deflation would bring 
and will stop at nothing, not even a drastically weakened Dollar 
or a real estate bubble to keep the U.S. economy afloat.  Monetary 
inflation brings its own set of perils, which will have negative 
economic affects too.  But, as noted, I'll have to get to that 
next time.

Hmmm. . .Scylla and Charybdis; Devil and the Deep Blue Sea.  Both 
are examples of extremely hazardous alternatives.  Pick one!  
Neither spells an appreciating equity market.  But there is a way 
to profit from this situation, and by the time this series is 
over, you'll know my thinking on the subject.  Big hint: I'm no 
gold bug. . .disliked the stuff for 20 years.  But gold is in a 
secular bull market as depicted on the charts and moving averages 
not unlike stocks in the early 1990's.

Until next time, make a great weekend for yourselves!

Buzz


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