Scared To Hell And Still Saddling Up

reactions to bad news.  After a seemingly endless barrage of
half-witted

attempts by the perma-bulls of Wall Street to march through the Arc de

Triomphe for the past several months, it appears the battle cries for
a

second-half recovery have been obliterated.  As many may have
noticed, we

have been force-fed the Wall Street fantasy of a second half recovery
in 2001,

and now find ourselves in the middle of June, with earnings warnings
and

economic conditions continuing to deteriorate–and actually
accelerating to the

downside. 

Just this week, telecom giant Nortel
(
NT |
Quote |
Chart |
News |
PowerRating) warned that it is facing
a $19.2 billion

(that is $19,200,000,000) loss for the second quarter, and is planning
to lay

off another 10,000 employees.  These layoffs will be in addition
to the

20,000 employees announced previously. Nortel also stated that it
“doesn’t

see a turnaround until at least 2002.”  The Canadian prime
minister was even

summoned to Nortel’s defense by publicly stating: “There is a big
adjustment

that has to be made in that sector….and they (Nortel) just have to
do it.” 

Very succinctly put, indeed.  Oh yes, I almost forgot, they also
eliminated

their dividend as well. But what the hey, the average dividend of the
S&P

500 is only 1.125% anyway, so what does it really matter?

As the new rounds of layoffs continue to mount each week (so far this
year

1/2 million manufacturing workers have been laid off), it is
painstakingly

clear that the firms making the job cuts do not foresee any uptick in

business conditions or demand in the next several quarters. If we are
to

believe that the worst is over, as Intel and other clueless management
teams

will have us believe, why are corporations laying off thousands of
employees

that they have already trained–and incurred the costs for doing
so–if demand

and business conditions are soon to improve? Why would they lay off
trained

employees this month only to have to hire new employees and train them
again

in a few months from now?  The logic of the bullish argument
continues to be

fundamentally flawed, and the entire premise of their claims are
firmly

founded purely in speculation, hope,  and rumor.  Just
yesterday, as soon as

the Nasdaq futures put together two back to back green hourly closes,
the calls

started pouring in from hedgies and trading desks that rumors of an

intra-meeting Fed cut were raging.  For the first time ever, I
actually

laughed uncontrollably at the thought of this.  Not that

I think an intra-meeting cut is impossible–to the contrary, I believe
Alan

Hood and his gang of misguided disciples are capable of doing the most

outlandish and ill-advised thing at any given moment.  My point
was that we

have had 250 basis points of Fed easing in the first five months of
this year and the

Nasdaq is still trading at substantially lower levels then when the
interest

rate easing began.  So for those of you who have the answer as to
why another

rate cut will help this market, please email it to me and the winner
will

receive his/or her own “Easy Al Cut Rates Nearly 3% And All I Got
Was This

Rotten T-Shirt” shirt. These are in very limited quantity so
please only one

entry per household.

On to the economic front, the capacity utilization numbers released on
Friday

came in at 77.4%, and marked the lowest level since August of 1993. In

addition, industrial production also decreased by 0.8%; this puts
industrial

output contracting at a 6% annual rate over the last three months,
further

providing evidence that the United States economy is currently in
recession.

and the malaise in the manufacturing sector may prove too formidable
an

opponent for the spend-happy, credit burdened consumer to counteract
and

neutralize as Wall Street has suggested. Frighteningly, we are
beginning to

see Wall Street instill optimism when economic data shows a lack of

inflationary forces. The reality is and has always been that bear
markets

are deflationary events, particularly in the commodity markets, due to

companies not possessing pricing power–the inability to pass on cost

increases to the consumer.  Obviously, by watching the
foolishness with OPEC

for the past several months concerning high gasoline prices, as well
as

feeling the high cost of electric and natural gas, we have once again
been

programmed to fear inflation. However, the real inflation taking place
is

not where you would expect it to be, but rather, is raging out of
control in

the monetary supply.  Try to grasp the magnitude of this
scenario: 

productivity and industrial production declining at historically high
rates,

jobless claims raging higher (the 4 week average), corporations having
a

complete lack of pricing power to offset losses in operations with
price

increases to the consumer, the Fed cutting the funds rate by nearly
50% in 6

months (taking into account the next FOMC action), while the monetary
base

and money supply is being inflated at historically high rates. All the
while,

conditions both within the United States as well as Europe and Asia
continue

to deteriorate and accelerate to the downside. Folks, we are about to

witness a train-wreck akin to no other we have observed in our
lifetime.  By

all means, consider the risks to your portfolio and financial
livelihood, and

consider taking the necessary measures to protect yourself.  Hey,
maybe

Wall Street will get Wilford Brimley to do a commercial on how
“wholesome” the

equity market is and how those “good old boys on Wall Street
would never do

anything to hurt anybody.”  Can’t you just see it?

Some of you may also have heard about discussion on Capitol Hill this
week

regarding the methodology of Wall Street analysts, and the possible
revisions

to the current “system.”  If these hearings proceed
properly, we may finally

witness an attempt to curb the Wall Street brokerages’ license to
steal. 

Currently, we are all aware of the closely knit manner in which one
hand

washes the other with regard to the analyst, investment banking, and
trading

operations within a brokerage house.  Until these insider trading
operations

get wiped out as well as an elimination of “price targets”
set by analysts,

we will not see anything close to resembling a level playing field. 
As

traders, I feel it is the responsibility of all of us to write our
lawmakers

urging for extensive and far-reaching restructuring of this system. 
This is

our chance to have our voices heard in Washington, so I urge you to
take the

time and send an email to your Senator or Representative this weekend. 
In

fact, send five.

Now, on to the pinball arcade:

As we see from the chart above, the Nasdaq hit the targets set by our
trading

office (both myself and Carolyn Lueck have discussed this target in
our

commentaries for the past few weeks). At this stage, the trading
activity on

Friday certainly held this key support level but did not put in a

convincingly bullish session. As you can see, the NDX 100 was unable
to

sustain a move into Thursday’s real body. Interestingly, the put/call
ratio

had gotten to very high levels on Wednesday and Thursday leading into

Friday’s expiration so this may have aided in keeping the major
indexes from

going much lower. Unclear here as to direction.

Another well publicized target of mine, HOTT disintegrated off its
“breakout”

highs of late May. The signals were there and we made the trade.
Period.  

No emotion, nothing to cloud your vision. Was it tough shorting into
the buying frenzy?

It always is, don’t let anyone tell you otherwise.  But as J.
Wayne used to say:  “Courage

Yet another entry in the long list of failed breakout short targets by
this office. What a pleasure when your technicals work. Looks like I’m
going to meet my minimum payment due on the Visa card this month.

Have a great weekend, and remember, it’s dangerous out there.

Don’t try to draw any conclusions here, the market is feeling for
direction but lower prices look 

possible in the coming weeks. Any rallies that may ensue here may
potentially set up more outstanding short setups.

Goran