War Corners the Market's Commodities

There's no love on Wall Streetfor stocks following thisValentine's Day. For muchof February, markets across theboard have been down, adding to thelosses from the Dow's January closeof roughly 8053. Several market analystsare now predicting even lowerlows, possibly sliding under the priorlow of 7100 back in October. Threatsof war, a stagnant economy, lousyearnings, and plain boredom dominateperceptions.

WAR TALKS AND MORE

The daily talks of war, higher oilprices, and gold have obscured reality.In fact, of the companies reportingearnings for 2002's 4th quarter,over 65% reported better earningsthan expected. The talks of war andits effects obscure any good talk onthe economy. Businesses and individualsare all waiting. Even goodnews from the Philip Morris Company(now Altria Group; MO) thatit won several smoking lawsuitscouldn't help its stock. MO currentlypays a dividend close to 7%. Itchanged its name to reflect its diversifiedbusinesses that include cigarettesand food (ie, Kraft Foods).

Market players were fixated onTV screens on Valentine's Day asSecretary Colin Powell addressedthe UN report from Hans Blix onthe weapons inspections occurringin Iraq. The market moved as Blixreported an improvement in cooperationfrom Iraq, fell after Powellmade his case that "12 years wasenough," and jumped again asinvestors watched the UN discussions,which prompted thoughtsthat the war might be pushed back.

SNOWSTORMS

The rally gained steam theFriday before Presidents' Day asvolume fell. On Tuesday, February18, after the long weekend and theEast Coast snowstorm, the Dowjumped another 150 points. Marketpros believe the holiday and thesnow contributed to light volume.Also helping the rally may havebeen increasingly positive marketsentiment. "Investor Intelligence"reported in its last survey that bullsmade up only 40% of the market,the lowest level since last October.

SHORT SELLING

With no one believing that themarket could move higher, it did.Another market boost may havecome from the investing tactic ofcovering by shorts. Investors whobelieve stocks are headed lower canprofit by selling a stock short (ie,selling with the hope to buy it backat a cheaper price). The shortinvestors borrow and sell sharesthey don't own, but promise toreturn the stock when needed. Theoriginal owner retains all the rightsand privileges of stock ownership,but the physical paper is lent tosomeone else. Thus, on any rally,those who have short shares may getnervous that prices are headinghigher and close out positions,thereby locking in a profit. On alarger scale, that buying may accelerateeven more short buying.

FALLING OFF THE CURB

Dell Computer (DELL) helpedspark a late turnaround on February13 by reporting impressiveprofits. AOLTimeWarner (AOL)continued to disappoint investors asTed Turner left the firm and AOLstock shares fell to around $10.McDonald's (MCD) reported thatsales fell and its Asian markets wereweak. MCD also got hit by anotherlawsuit—this one claiming deceptiveadvertising has led to customers'obesity.

Barron's

Barron's

Barron's

magazine had an interestingarticle on the satellite radioindustry and featured a positivereport on XM Satellite (XMSR).also had a list of stocks thathave raised their annual dividendpayouts for over 25 years andlonger. See the February17 issue for the complete list.

CURRENT MARKET ADVICE

So what are advisors sayingabout the recent market activity?Basil Chapman of the "ChapmanReport" states, "The downwardpressure remains relentless in theDow, as the October lows remain atarget. It looks like gold rather thanoil will be the lone, very long-term,bear-market beneficiary." BobCarver of the "Daily Market Clues"letter says, "The market is telling usthat the crowd is tipped too far tothe bearish side."

Recent analyst recommendationsinclude: Morgan Stanley'supgrade to overweight on Guidant(GDT), Merrill Lynch's upgrade ofIntel (INTC) from sell to neutral,and Lehman Brothers' upgrade onHasbro (HAS) from underweight toequal weight.

Order of the

day:

Looking forward, the marketsare still on war watch, as any attackon Iraq may be pushed out untilMarch. In the meantime, expectdaily volatility, with rallies occurringafter days of extreme pessimism. Ibelieve that the lows that occurredlast October should be the bottom,unless there's some unforeseenattack by terrorists that could shatterany potential confidence rebuilding.The nibble investor/tradermay be able to make money if theycan time the market. Use dollar-cost averaging inthe present market.

Ernest Caponegro is a New

Jersey-based registered representative affiliated with First

Montauk Securities, member NASD/SIPC. He welcomes

questions or comments at 888-786-9507. Any opinions expressed are

the author's and do not necessarily reflect

the opinions of First Montauk Securities or

those of its officers, directors, or affiliated

registered representatives.