Prudent Bear
Market Summary October 3, 2001
by Lance Lewis
Squeeeeze
Asia was lower last night with the Nikkei falling back below 10,000. Europe was up a percent this morning, and the US futures were a little lower. We opened lower and danced around while we waited for the NAPM services index. The number hit, and it rose to 50.2 in September from 45.5 in August (a number above 50 indicates expansion.) That set off a party to the upside, and we were off to see the wizard. We topped out around noon and began flopping around until CSCO’s John Chambers reaffirmed guidance for the current quarter. That set off another rocket ride that burned all the way into the last hour where we finally began to lose velocity. About that time, it hit the wires that an Indian airliner had been hijacked, and we had a bit of a selloff to send us out just off the highs. Volume picked up some (1.7 bil on the NYSE and 2.7 NASDAQ.) Breadth was 2 to 1 positive on both exchanges.
NT warned that the current quarter's results would come in less than desirable and that it was amputating another 30 percent of its workforce. ALA also announced layoffs. That news mattered for about 10 minutes until the squeeze began and everything in tech flipped into the green. Everything was up pretty good in the morning, but the real buying began when Chambers said he is “very comfortable” with the current quarter’s estimate of 2 cents, which is certainly a relief since CSCO now trades at almost 80x its 2002 estimate. That news sent CSCO’s chip suppliers like IDTI, AMCC, and PMCS to Pluto. AMCC and PMCS were up as much as 30 percent at one point during the day amidst the short covering frenzy. As we have noted before, the point here is that these multiples on these tech stocks are all still trying to discount a return to the bubble days, which isn’t going to happen. Consequently, the fact that CSCO is going to make their 2 pennies comes under the heading of “who cares?” These tech stocks still have a long way to go to the downside because their growth prospects are not what they were back when the bubble was expanding, not because their earnings are going to continue to collapse by 50% sequentially every quarter going forward. In any event, we have been through all that before. As far as the rest of today’s action goes there’s no point in listing through all the double-digit percentage movers today. It was just one giant short squeeze. If it was tech and still a going concern, it was up.
Financials were green as well. The BKX was up a percent, and the XBD was up 3 percent. GE was up a touch after announcing that it was laying off about 13 percent of its aircraft engine workforce. FNM and FRE were both up a hair. Retailers were on fire once again after we got some data on the coming stimulus package that is made up of tax cuts and rebates as well as some “relief” for laid off workers, which in total amounted to around $60 to $75 bil (i.e.- a drop in the bucket.) The RLX rose 3 percent.
Oil fell 71 cents. The XOI fell a touch, and the OSX rose 3 percent. Gold rose 70 cents, and the HUI fell 4 percent. The US dollar index rose a touch. The euro fell back to the 91-cent level. Treasuries continued to rally today despite the strength in equities, which could be an indication that people don’t think this rally in stocks is for real. Or, it may have something to do with the fact that Argentina appears to be in trouble again and may be forced to default on its debt sooner rather than later after a much larger than expected drop in tax collection put the government’s zero deficit plan in jeopardy earlier this week. Argentina’s Merval index fell 7 percent to a new low.
These short squeezes never seem to end without a day like today’s in tech. That’s one of the reasons I have felt this rally could keep going for a bit. But now that we’ve had a big squeeze day in tech, we have a chance to see this rally fail possibly. The fiscal stimulus ammo has now been used up since we know the number. We’ve gotten our usual 50 bp dosage of monetary stimulus from the Fed, which I'm not sure even counts as a good news bullet anymore since most have figured out that cutting interest rates more at this point isn't really going to help anything. There’s really no “good news” ammo left unless we catch some terrorists, which could still come at any time. None of these things really matter. 50 more bps doesn’t really matter, and $70 bill in stimulus comes under the heading of a “yawn.” This whole terrorist issue, while certainly negative for stocks and the economy, is secondary to what was already underway before the events of 9/11, i.e.- the unwinding of the biggest bubble in history. So, catching some terrorists really doesn't change anything as far as stocks are concerned. Once all of these bullets have been used up, there's not going to be any good news for some time because all the negative guidance for Q4 starts coming out in the next couple weeks as companies begin reporting. And that's likely where we finally get a panic I think. In the meantime though, we still have one possible "good news" bullet to go (US attacks on terrorists), and this rally has yet to show signs of exhaustion. Now, we got them up enough today that we have a shot at exhaustion tomorrow morning if they open higher again and fail, but we’ll just have to see… |
