Market Meltdown or Explosion?
By Jim Brown
The damage has been done to lives and buildings. The damage to
the stock market has yet to be seen. When the NYSE opens for
trading on Monday it will not be without problems. Still the
almost superhuman effort to reroute communications, occupy
temporary office space, install and configure new computers,
servers, routers, etc, will be tested under fire at 9:30
Monday morning. There is likely to be outages, bad ticks
and massive failures as record volume hits the boards.
Still America will be back in business but it will not be
business as usual.
There is a huge difference of opinion as to what will happen
on Monday morning. There is a group of analysts that think
the markets could easily drop 8-10% at the open, rebound
slightly and then fall off the cliff to extreme levels. The
bullish camp think that Americans have put on their red, white
and blue trading caps and will rush in to buy America on sale
on Monday and create a very strong patriotic rally. Reality
will likely be something in the middle of both those extremes.
The Fed is building a fortress around the U.S. stock market
and the American financial system. They have injected almost
$215 billion of liquidity into the system in the last three
days. $90 billion of that was funding for foreign banks to
prevent a cash drain as funds are shipped around the world
when the markets open for business. The Fed Funds Futures
are showing almost an 85% chance for a 100 point rate cut
in the next 30 days. The educated bettors are expecting a
50 point cut before the market opens on Monday with another
cut at the October 2nd meeting if the markets are still in
the tank.
The Fed action, if it comes, will provide a boost to the
market, temporarily. Because it has been telegraphed all
week much of the impact has already been dulled. Heaven
help us if they do not cut or only cut a quarter.
The biggest problems will come from the change in the world
as we know it. Airlines for example are literally on the verge
of bankruptcy from the already 50% drop in revenue over the
next 90 days. Reservations are being cancelled daily, and
new restrictions on travel are being added as well. The
CEO of Continental said on CNBC that most airlines would
not survive the next 90 days without intervention. The
government is trying to rush through a $2.5 billion grant
to keep them liquid over the next two weeks and then a $12.5
billion loan guarantee to prevent them from bankrupting over
the next 90 days. Air travel as we know it has changed. The
airline sector as we know it will likely change over the next
90 days as well. Expect smaller carriers with lower reserves
to experience problems and become prey for the giants.
The -50% drop in airline bookings will also impact hotels,
restaurants, retail and the service industry. Consumers were
already losing confidence in the economy as evidenced by the
huge drop in the sentiment numbers on Thursday. The University
of Michigan sentiment dropped to 83.6 from 91.5 in August and
was far below the 90.8 analysts expected. This is what the Fed
has feared for some time. Fueling this drop was the spike in
jobless claims to 431,000. With a head start down the recession
hill any pull back by consumers because of the fear of terrorism
could grease the skids not only in the U.S. but globally as well.
The state department has issued a strong caution for overseas
travel and the bombs have not even started falling. Without
the U.S. tourist as well as tourists in general there will be
serious problems with the global picture.
Local economists are painting a gloomy picture. First Union
said on Friday that the drop in retail, restaurants, hotels
and travel would be enough to push the U.S. economy into a
full blown recession. The economist for Bank One was also
negative about the possibility of avoiding a global recession.
In reality market fundamentals have worsened. Before the
attack the fundamentals were terrible and the markets were
tanking as companies warned on a daily basis. Now that the
fundamentals for a major portion of our economy have literally
been cut in half how can the markets react positively?
General Electric was the first major company to warn based
on the attack. They said losses in their reinsurance company
for claims on the WTC would knock four cents off their earnings
for this quarter. AIG also said they would lose -$500 million
for their part in the claims. These are only the first of
many warnings but these warnings may be seen as one time
charges instead of normal operating and therefore ignored.
It still sets a tone for the markets that is negative. Ford
said disturbance in supply lines would cause it to make fewer
vehicles and they would miss earnings estimates. Multiply this
by hundreds of companies and you can see what lies ahead.
Contrary to all the negative issues I mentioned above there
are also many positive benefits to the economy. The amount of
replacement hardware for the ground zero businesses will be
substantial but it will still only be a blip on the screen
long term. What will help is the change in business climate
nationwide. Many corporations will see the devastation and
complete destruction and start thinking about what would
happen if that happened to their building due to terrorism,
fire, flood, hurricane, tornado, earthquake, etc. It makes
you feel very vulnerable. There will be a rise in orders
as thousands of companies beef up their disaster recovery plans.
The security sector will undergo a complete makeover and
literally hundreds of thousands of people could find employment
there over the next year. As the counter attack progresses
it will heighten awareness and increase the security level
for all America.
This wave of capital spending will take some time to be
seen in sales and profits but it will happen. It will not
happen in time to help the markets next week. What will help
us next week is the relaxation of the buyback rules by the
SEC. They normally prevent companies from buying back their
stock in volume on the open market. This prevents companies
from manipulating their stock price. With the relaxed rules
companies have more freedom to buy larger amounts. Cisco has
already announced a $3 billion buyback to begin next week.
AIG, even after announcing a $500 million loss, has approved
a 40 million share buyback. This will put a floor under their
shares. CSCO at $14.47 could put out a blanket order for millions
of shares at $13. This would allow some market movement but
limit the downside. AIG at $74 could put in a limit buy at
$69.75 and basically support the stock in a very bad sector
while giving themselves a little breathing room.
Monday is likely to be historic in more ways than one. Many
analysts think we could easily see the biggest volume day
ever. Some have said we could actually see four billion
shares on the NYSE. While I doubt the four million mark
it will be very heavy. The best guess for direction is a
strong dip at the open followed by a patriotic rebound but
ending negative for the day. The war between the bears and
the bulls could be waged for most of the week. There is likely
to be a struggle to rally which will end with the realization
of the recessionary facts. Sentiment has taken a serious hit
on top of the drop from the prior week. Earnings will continue
to fall through the fourth quarter and any bounce from a new
wave of capital spending will not be seen until next year.
The Dow is going to face a challenge from Boeing, GE, GM, JPM,
AXP, C, WMT and DIS. Boeing is rumored to be at risk to drop
-15% to -20%. JPM, C and AXP could easily drop -10% to -15%.
The Dow, which closed at 9605 last Monday, could easily hit
9300 or even 9000 on panic selling. The European/Asian markets
have fallen close to -10% on the news and could fall more in
advance of our market open on Monday. A 5% drop on the Dow would
put it at 9124. A 10% drop would see 8644. The markets were
already severely oversold from the prior week and even a 5% drop
from here may be too much of a temptation for investors to resist.
That is of course if there are any investors willing to buy the
dip in front of a huge unknown. With comments in the media today
that Bin Laden has over 10,000 trained soldiers at his disposal
across several countries, the battle is shaping up to be long
and arduous. Up to 50,000 reservists have been approved to be
called into active duty. This is bound to weigh on investors
and consumers. The threats of revenge are already being made
by the Taliban and they have the resources to carry it out.
This will not be a couple cruise missiles launched in the night.
This is going to be a sustained conflict with a good possibility
of a ground war. Russia spent years and lost thousands of soldiers
in Afghanistan. It is a very rough terrain and not conducive to
a quick conclusion. Benjamin Netanyahu called the attack the
"wake up call from hell." The threat has always been there but
their technical ability to act on it was lacking. He said they
are capable of changing the direction of history if they are not
stopped soon. This type of information is being absorbed by
investors and it will weigh heavy on the markets.
I would love to tell you that the market will do thus and so on
Monday and have you plan your trades accordingly. Unfortunately
there is no human being with the ability to predict what will
happen. We have spent the entire week producing special reports
and analyzing the possibilities. We have received some great
emails from our readers about these efforts. The sector analysis,
trading tips and sentiment pieces were our efforts to equip you
to make the right decisions on Monday.
We have had some very successful put plays recently. Many of them
could have been very successful on Monday as well. Because we
do not want to look like opportunists trying to profit on
the tragedy we are dropping all of them this weekend. BA, PGR,
TSG, JPM, AIG, ACF and MER. How you continue to play these is
of course up to you. We have been asked by many to suggest some
plays that we thought would benefit from the money shuffle that
will occur. We tried to find a couple politically correct companies
that were not directly impacted but would benefit from a longer
term outlook. We chose ATK, Alliant Tech Systems and NBR, Nabors
Industries an oil driller that focuses on the lower 48 states.
We also suggested a couple plays on the QQQ and DJX to benefit
from any major dip and rebound. We will resume a regular play
pick schedule on Tuesday after the smoke clears.
If you are not in the markets currently I would be very careful
attempting to trade them on Monday. Those readers who are long
options and have seen time value evaporate over the last week
would do well to monitor those positions closely. The Options
Clearing Corp will not change the expiration date. Remember,
for every holder of a long option who is wishing for another
week of time to hopefully recover value, there is another
writer of that option that wants it to expire worthless. Do
not expect relief in that direction.
I apologize! Apparently many readers took my comments from Thursday
night incorrectly and not in the spirit given. I apologize for
the misunderstanding. I fully support Bush and realize that plans
for any military operation must be fully developed before being
put into operation. That was never in question. The point I was
trying to make was the tone of the delivery of every speech by
Bush was so soft and lacking in emotion that I feared the leaders
of the rogue nations would read it as weakness. I wanted to see
him speak more forcefully and with passion. I never suggested he
simply start flinging bombs with reckless abandon. The various
speeches on Friday were delivered with much more confidence and
determination. It was encouraging. I seldom use this venue to
make political statements and I apologize for any misunderstanding.
Check out the great strategy sections and special reports in
this weekends edition of the newsletter. New articles as well
as the articles from earlier in the week are being repeated and
summarized for your trading education. Profit from it!
Definitely, enter passively, exit aggressively!
Jim Brown
Editor
