Tired of Waiting for Second-Half Comeback, Investors Head to Exits

Look out tomorrow for triple witching and the CPI, which may hold the key to whether the Fed cuts by 50 basis points or 25.
By Robert Mann ,

SAN FRANCISCO -- "Nowhere to run -- nowhere to hide" was the title of a report sent by a fund manager to his clients today. Although defensive groups such as health care and gold fared well, that title pretty much summed up the session for equity investors.

The

Dow Jones Industrial Average

tumbled 1.7% to 10,690.13 today and is now down year to date for the first time since April 30. Meanwhile, the

S&P 500

shed 1.8% and the

Nasdaq Composite

lost 3.7% in its fifth-consecutive losing session. Declining stocks bested advancers by more than 2 to 1 in

NYSE

trading and by nearly 3 to 1 in over-the-counter trading.

The market's rally from late March to mid-May now seems a distant memory. Faced with another round of profit warnings -- today's batch including

Ingram Micro

(IM)

,

Silicon Storage

(SSTI) - Get Report

,

Charles Schwab

( SCH) (sort of),

STM Microelectronics

(STM) - Get Report

and

Heinz

(HNZ)

-- investors are wondering why they ever believed the second-half recovery scenario in the first place.

Add to that concerns about the

General Electric

(GE) - Get Report

-

Honeywell

(HON) - Get Report

deal (although GE closed higher) and

Kraft

( KFT) breaking its offering price the day after its IPO, and suddenly, it seems, there is talk again of major averages revisiting their lows.

Recent history has shown that it is at these points -- when stocks are falling and fears are rising -- the prudent thing to do is to buy. But that's easier said than done, and one trader who's been betting against the prevailing tide lately isn't convinced the time to buy is at hand.

"Short term, I'm getting decidedly negative," said Sam Ginzburg, senior managing director of equity trading at

Gruntal

. "If they take 'em up tomorrow, I'll short into it. If they take 'em down tomorrow, my gut is to pile on and catch the momentum."

It should be stressed that this is a short-term trading call and Ginzburg can (and might) change his approach at any time.

But in the moment Thursday afternoon -- even before

the news after the close from

JDS Uniphase

(JDSU)

-- he expressed concern about how "hard it is to game what goes on with

triple-witching tomorrow." Traders concerned about holding positions into tomorrow's simultaneous expiration of equity index futures and options partially explains why "selling begat selling" today, Ginzburg added. "People don't want to take the risk."

The trader is concerned because the only salvation in today's otherwise gruesome session was the bond market's

solid advance. The price of the benchmark 10-year Treasury note gained 8/32 to 98 9/32, its yield falling to 5.23%. Additionally, the yield on the two-year note fell below 4% for the first time since October 1998.

"If you get a bad number tomorrow, it will add insult to injury," Ginzburg said, referring to the

Consumer Price Index

report for May, which is expected to rise 0.4% overall and 0.2% in the core. A higher-than-expected CPI could hurt the bond market, he explained, because it would unwind growing expectations that the

Federal Reserve

is going to ease by 50 basis points at its June 26-27 meeting.

No Inflation Here

Equity investors haven't latched onto it just yet -- certainly not today -- but fixed-income participants are increasingly expecting another 50 basis-point cut. Today's weaker-than-expected

Producer Price Index

report allayed nagging inflation fears, while the latest upturn in jobless claims reaffirmed the economic need for continued aggressive Fed action. The

European Central Bank's

reduction of growth estimates for the euro zone further stoked such sentiment, although today the euro traded at its highest level vs. the dollar since May 23.

The dollar was hurt by the

National Association of Manufacturers'

comment that the greenback is "out of balance" by as much as 25% and by expectations the Fed will continue its aggressive easing while the ECB fiddles.

Today, bond traders focused on the noninflationary implications of the PPI and how it gives the Fed ample room to move another 50 basis points.

Drew Matus, financial market economist at

Lehman Brothers

, today changed his forecast to expectations for a 50 basis-point cut vs. 25. He also cut his

gross domestic product

growth forecast by 0.5% for both the third and fourth quarters, to 2.5% and 3.5%, respectively.

Matus now expects another 50 basis points because the Fed's easing so far "hasn't shown up yet" in the economic data, which remain "mixed to slightly negative."

The economist, however, believes the 50 basis-point cut will be the Fed's last of the cycle. He's also looking for economic activity to sharply rebound, to near 4.5% GDP growth in the first quarter of 2002. "We're still looking for a V-shaped recovery, but the bottom of the V got a little wider," he said.

A Treasury note trader, who requested anonymity, said "the idea of a V-shaped recovery is bogus," but also believes the Fed is going to cut by another 50 basis points later this month.

Earlier this week, he bought some July

fed funds futures because the contract was pricing in a nearly zero chance of a 50 basis-point cut. "I'm saying 'they're going to go at least 25 basis points and you're going to give me a free look at an extra 25?' " he recalled. "There's no way the market is going to let that happen."

Indeed, the market hasn't. After today, the fed fund futures are pricing in about a 23% chance of a 50 basis-point cut vs. about 10% Wednesday morning.

The trader expressed little worry about being long those fed fund futures heading into tomorrow's CPI report. "From

Alan Greenspan

to Fed governor

Laurence Meyer

to

White House

economic adviser

Lawrence Lindsey

to

New York Times

columnist Paul Krugman, no one believes there's inflation," he said. "I don't agree

with that view, but what the market is generally concerned about is psychology. That's why the biggest number tomorrow is consumer confidence."

Either way, tomorrow is potentially a seminal day on Wall Street or, at least, "an awesome day to trade," as Gruntal's Ginzburg declared.

In preparation, he's "going to bed early tonight," which is almost never a bad idea.

Aaron L. Task writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

Aaron L. Task.

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