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MARKET > Commentary Thursday, March 15, 2001
by: Craig Seidler
Assistant Editor

Consumer Sentiment On Trial

Traders beware, before you relax and start making St. Patrick's Day plans, keep in mind tomorrow will give us triple-witch combined with a quartet of economic news. The four-course breakfast buffet will include the Producer Price Index, the Michigan Consumer Sentiment report, Housing Starts and on the side, a serving of Industrial Production.

Out of all these reports, the maestro of the markets, Mr. Greenspan, will be most interested to see what figures we get for the Consumer Sentiment Survey (economists are predicting a reading of 87.0). This is because he has mentioned time and time again how important the consumer is to an economic turnaround. All economic reports up to now have shown real weakness in corporate and industrial spending, but through it all, the consumer has not hesitated to spend.

These economic reports certainly have the potential to influence what the Fed decides to do with rates next week. Herein lies the problem. Given the importance of these reports, combined with the rampant pessimistic tone that the market has taken on, I just don't see a net-positive slant coming out of tomorrow morning's events. In other words, the market has had a way of seeing only the downside to any news event.

Case in point, if the PPI number comes in high, analysts will scream stagflation. If the PPI comes in low, they will scream recession. Likewise with the Consumer Sentiment number. If it comes in high, the Fed is less likely to cut rates aggressively. If it comes in low, analysts will warn of a crumbling economy.

It's like the whole Japanese bank issue that has been known about for months that suddenly became an issue for Wall Street yesterday. Essentially, Japanese banks, as of the end of March, are required to mark to market all their stock market losses. When doing this, their balance sheets will look even worse and it is thought that some may teeter over the edge.

Yes, this is certainly an issue in an economy that is more global in scope than ever, but if markets are even slightly efficient, why was this not already priced in? My answer: the news was priced in, but pessimism and high emotions have taken over the markets and the old news served to take stocks lower anyway. It's not just our market either. The U.K, Hong Kong, Belgium and other markets around the world are all plummeting to new lows.

Today's Markets

The markets got off to a great start today only to fade into the close. Many speculated that the morning's strength was attributed only to short covering.

After opening up 51 points, the NASDAQ (COMPX) proceeded to sell off for the rest of the day, closing down by 31.38 to 1940.71. Gaps have come to define the opens on the NASDAQ. It's the high levels of emotion and the influx of news (profit warnings, economic reports) that have set us up for this almost daily pop from the previous day's close.

The DOW (INDU) fared slightly better but also sold off from its morning levels. The financials and brokers, after taking it on the chin yesterday, served to boost the old-economy average back up over the psychologically important 10,000- level today. The DOW closed up 57.82 to 10031.28.

Shorter-term treasuries benefited from increased optimism for aggressive rate cuts and a further flight to safety. The 10- year note finished up 11/32 to yield 4.80% while the 30-year bond closed lower by 1/8 to yield 5.27%.

Stocks and Sectors on the Move

The left-for-dead telecommunications sector rallied today on the heels of merger speculation out of The Washington Post involving BellSouth (NYSE:BLS) pursuing Sprint (NYSE:FON). There was also talk of SBC Communications (NYSE:SBC) looking into buying Worldcom (WCOM). All this was enough to get investors' attention and worked to boost share prices across the sector. WCOM added $1.13 to $17.56, SBC finished higher by $0.71 to $42.82, Qwest Communications (NYSE:Q) rocketed higher by $2.48 to $37.92 and AT&T (NYSE:T) closed up by $0.93 to $23.39.

Brokers recovered nicely today despite a warning out of Charles Schwab (NYSE:SCH). The big brokerage firm said it doesn't think it will meet current earnings estimates and that trading was down by 13% sequentially in February. Chucky S. should release bad news more often because shares actually rose 5%, or $0.86 to close at $17.90.

Other brokers to outperform on the day included Merrill Lynch (NYSE:MER) up $2.81 to $55.51, Goldman Sachs (NYSE:GS) up $4.04 to $87.95 and Lehman Brothers (NYSE:LEH) up $3.95 to $65.50. Most of the brokers, however, remain in a downtrend and have not been able to hold onto a sustained really since before the Fed cut in January.

Turning to the wireless sector, it becomes very apparent when looking at these charts, that investors don't think anyone will ever buy another cell phone again. These stocks have taken a beating and that's putting it mildly. However, today Nokia (NYSE:NOK) gave investors a reason to stay on hold when the company announced that it expects its earnings to be in line with expectations. Nokia also mentioned that it is projecting first-quarter sales to grow by 20%, down from earlier estimates of 25-30% but still healthy. Shares of the handset provider jumped $3.15, or 14.45%, to $24.95.

Looking Forward, Always Forward

With short-term bond yields moving even lower, many market players are calling for a 75-basis point cut on the March 20th Fed meeting. In fact, the Fed futures have priced in a little better than a 60% chance of a larger than 50-basis point cut this time around.

With a lot of this talk circulating around trading desks worldwide, I just hope we are not setting ourselves up for more disappointment. I think if we get the 50-basis point cut that the market doesn't even blink an eye. If we get the 75- basis points, I think the market does a knee-jerk short covering rally, followed by another pullback. Folks are going to wonder why such an aggressive cut and are we really in that much trouble.

With much of the trading as of late being defined by short rallies followed by more short selling, I think the choppy, gapping markets will persist for quite awhile, or until we get a large enough move higher to convince the shorts to finally quit it and cover their positions.

Be aware that defensive sectors like the consumer staples, drugs and tobacco are vulnerable to a surprise tech rally. All the traditional "safe haven" hiding places have been hit recently, so don't get caught in the trap of assuming that if tech rallies the worst thing that will happen is that you will miss out on some gains. It has been a zero sum game as far as sectors go recently.

So keep those seatbelts fastened and stick to the green beer if you lack conviction in the market's direction. Just don't turn to the green beer first, and then evaluate your conviction second. That usually doesn't work too well.

Trade Smart and Have A Great Weekend

Craig Seidler
Assistant Editor


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