Things economic have not quite stabilized. The report rekindled speculation that the Fed will reduce interest rates again in an effort to stimulate the economy. Also adding to the possibility: Treasuries rose for the first time in five days after Federal Reserve Governor Laurence Meyer said the central bank still has room to lower interest rates. (Beige: I think I'll paint the ceiling Beige).

Closing Summary

Index	Last	Change	% Change
Dow Jones Industrial Avg.	9711.9	-160.70	-1.63%
S&P 500	1128.52	-20.98	-1.83%
Nasdaq Comp	1887.9	-48	-1.52%
Russell 2000 Index	453.7	-7.01	-1.52%

Deficits likely for at least three years
Tax cuts, recession, & the costs of war make annual federal deficits likely for at least the next 3 years, the White House Budget Director said Wednesday.

The prediction by budget chief Mitchell Daniels was the gloomiest assessment yet of the government's fiscal health. It was the first time an administration official has publicly acknowledged that deficits -- banished since surpluses first appeared in 1998 -- are likely now for several years.

Most forecasters -- until several months ago -- were envisioning an ever-growing string of budget surpluses for the next decade, fading as the huge baby boom generation begins to retire. But then the recession took hold, and the condition of the government's books began to weaken. In addition, President Bush pushed a $1.35 trillion, 10 year tax cut through Congress, further eroding the projected black ink. (AP)

Enron Whacks Market
U.S. Stock Fall Led by ENE, Financial Shares
Blue chips, banks and energy traders all fell yesterday, after Enron's sale to Dynegy collapsed. Citigroup Inc. and J.P. Morgan Chase & Co., Enron's biggest lenders, dragged the Dow Jones Industrial Average lower. Enron, deeply entwined with financial institutions, may file for bankruptcy, as early as this week. Also impacted were utilities, who may be owed money by ENE.

Analysts See Signs of Chip Rebound
Economists and analysts are beginning to see faint signs the chip sector has hit bottom. An industry group forecast a rise in fourth-quarter chip sales.

- NVDA / ENE ENE will be removed from the S&P index of 500 top companies after the close of trading TODAY and be replaced by multimedia graphics firm nVidia Corp (NVDA).

- MSFT RUMOR: An unconfirmed rumor from a retail toy store source that several X Boxes have been returned after "catching fire." Details are scant -- Is this smoldering, smoking, or genuine flames? -- but since this is Microsoft's first larger venture into hardware beyond mice and keyboards, any potential wrinkles would have great significance. NOTE: This is a COMPLETELY UNVERIFIED rumor. I'm monitoring this to see how it impacts NVDA, which would be a potential short if this can be verified

- BRCD upside surprise? Brocade Communication's reported Q4 earnings of $10.9 million, or 5 cents a share, on sales of $116.5 million, in line with guidance, and a head of consensus by a penny. Shares, which closed down nearly 10 percent at $28.82 ahead of the report, failed to gain their footing and traded at $28.45.

- MSCC the semiconductor firm reported Q4 net income of $4.5 million, or 15 cents per share, compared with net income of $4.2 million, or 15 cents per share, a year earlier. Picture is unclear due to pro forma basis. Shares closed down 10 percent at $32.23 and then slid 6.8 percent to $30.04 after hours.

- AOL  Next up: "Lord of Rings" Following on the successs of Harry Potter, AOL Time Warner is counting on the movie "Lord of the Rings to start a three-year reign over holiday box office sales. "Lord of the Rings'' is expected to grosss $175 million to $250 million at the box office after it opens Dec. 19, according to Salomon Smith Barney. AOL's New Line studio filmed three "Lord of the Rings'' movies simultaneously at an estimated cost of $275 million.

- AA Alcoa abandons pursuit of WMC; U.S. aluminum giant Alcoa put a damper on speculation it would return with a sweeter offer for Australian miner WMC, saying it plans instead to pursue growth elsewhere.

- IBM will lay off about 1,000 workers in its semiconductor operations, primarily at two plants in New York and one in Vermont.

Topping action continues
A pretty ugly day and the market, as expected, followed through yesterday afternoon's decline, although we did have some early morning strength after a drop. The market had a snapback rally to resistance of 1620 on the Nasdaq 100. The rest of the day was spent making lower lows and lower highs, with the indexes basically closing at the lows for the day going away.

The S&P looked worse today, and trended more sharply lower on the angle. It closed right at the lows of the last three weeks, which we reached on the 16th and 21st of November. The Nasdaq 100 is now on its three-week trend line, and if it breaks any lower than here, we'll probably see 1525, the next support level. Beyond that we're looking at 1480.

We may get a bounce off this area, but it sure looks like the market is topping and began its rollover today. Even though we may see some countertrend rallies tomorrow at some point I still believe the market is headed lower. Perhaps this is the beginning of the major retracement I've been looking for. Several of the indicators as I had stated previously were indicating a topping process, negative divergences, overbought conditions, and all of that has resulted in this sell-off we've seen since yesterday's high.

The technicals today were very much in line with how negative the market looked. Advance declines were 21-10 negative on New York, and a similar number on Nasdaq. Up/down volume was 5-1 negative on Nasdaq and about 4-1 negative on New York. (Source: Harry Boxer www.thetechtrader.com)

Market Stats

Market	NYSE	Nasdaq
Total Volume	1406.37m	1865.67m
Up Volume	221.47m	318.22m
Down Volume	1,161.70m	1,530.12m
Advancers	1069	1289
Decliners	2078	2365
New Highs	53	60
New Lows	41	21

Short Stuff
- CCR Countrywide Credit was recommended earlier this month as a short at 46. It is now $41. Start thinking about an exit.

- AEP a technimentals short since October. Obviously, it was impacted by yesterday's Enron debacle. It broke key support at 41.50. Downside target remains $34-36.

Relative Strength a Key During Selloffs
During a pullback, keep your eyes open for stocks which maintain their prices relative to the overall markets. Three recent long recommendations -- Gilette (G), Ambercrombie & Fitch (ANF), and Adelphia Communications (ADLAC) all held up rather well over the past few days. That's a positive sign.

Things That Warrant Attention On The Charts

Did the Market Get Ahead of Itself?
Although there may be a variety of sentiment and technical gauges to identify potential inflection points in the markets, I would point out just a couple.

First would be the recent sell-off in bonds. The December future contract on the 30-year bond (US/Z1 – 104'06) shed 8.75 percent in the brief period from its November 1 all-time contract high through November 27. The November low almost fully tested the late-September pullback. Factors that could influence the sell-off in the long bond are competition from corporate issuance (traders sell or short bonds to seize opportunities in the corporates), fear of impending inflation, or the potential for an economic rebound (in the current environment).

The market appeared to be telling investors that economic recovery was right around the corner (usually around a six month lead-time). It was this perception that prompted the sell-off in bonds. With economic recovery comes the additional risk of increasing inflationary pressures. Yesterday's release of the consumer confidence report may have shaken investors back toward the reality that economic recovery might not be as near as the market had been indicating.

With the month about to end, we must note that the three major averages are approaching their 10-month moving averages. These averages represent levels that have not been breached in quite sometime and, as such, represent the potential for considerable resistance with the potential for a reversal.

The S&P 500 Index (SPX – 1137.05) will encounter its 10-month moving average at 1172. The index has not closed above this trendline since August 2000. The Dow Jones Industrials (INDU – 9744.7) has not closed above its 10-month moving average (10079) since May 2001. The Nasdaq Composite (COMP – 1900.3) had actually moved above its 10-month moving average (1933.68), but has not closed a month above this trendline since August 2000. (SOURCE: Al Schwartz, Schaeffer's Investment Research)

"Never invest in any idea you can't illustrate with a crayon."
-- Peter Lynch

Prepare for Year End Tax Manuevering After Thanksgiving, many investors begin focusing on their year-end portfolio decisions. The most likely concern of new (or existing) investment decisions will be the Tax Man.

US tax-payers can offset capital gains dollar-for-dollar with capital losses, and can then deduct from ordinary income remaining capital losses up to $3000 annually. Thus, there is typically pressure toward year-end on those stocks that are carried at a loss in many portfolios. Even -- or perhaps especially -- stocks that have rebounded from their extreme lows, but are still down sharply relative to price levels at which many investors own them, are likely to encounter increasing selling pressures as the year winds down.

This year, we have seen 3 substantial rallies: December- January, April-June, and September November. With many funds and investors now sitting on a mix of winning and losing trades, tax implications will factor into the rest of the year's trades. Even overseas clients need to be aware of this. Tax selling may pressure some of their holdings; Its best to get out of the way beforehand.

Several websites -- ie, MSN Investor, Silicon Investor -- allow you to screen for stocks that may be likely candidates for tax selling. Look for companies that are down 80% over the past 24 months, but are up 50% or more since over the past 60 days. You can tweak these numbers however you like.

As the momentum developed since the September lows starts to dissipate, consider cutting loose your dogs before tax selling adds additional pressure.

Beware the perennial optimists
Commentary: We're not even close to recovery
By Paul Erdman, CBS.MarketWatch.com

EXCERPT: Let's re-examine the basics that are supposed to explain why, despite the recent strong rally, stock are destined to move a lot higher.

The reasoning goes like this. Expectations of rising earnings beginning early next year justify rising stock prices now. The fact that the economy will very soon be in the recovery stage, if it is not already, justifies those expectations of rising earnings. Therefore the current average PE ratio of 31 for the S&P 500, vs. the historic norm of 15, makes sense.

What's wrong with this picture?

Just about everything. To be sure the reasoning is sound. But the basic premise upon which it is based is not.

Because our economy is not even near the recovery stage.

Consumer confidence is still sinking. Retail sales figures are sending out false signals because they are totally skewed due to the spike in automobile sales, which has its basis in zero financing. The automotive industry is borrowing from Peter (next year's sales) to pay Paul (this year's sales.)

The fiscal stimulus package is stalled, and when it does come through it will be long on corporate welfare and woefully short on financing income streams that will immediately convert into consumption. And most important of all, we still have a huge overhang of under-utilized manufacturing capacity.

It is of a magnitude not seen in decades.

--Barry Ritholtz
November 29, 2001

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