The start of the earnings warning season is not until next week but several companies have already jumped the gun. In what may be an effort to announce early and hope to be forgotten quickly once the rush starts, Dupont Chemical, Campbell Soups and TRW warned today. The Dupont warning was the most visible and as a Dow component was responsible for almost 30 points of the Dow drop today. The other major Dow mover was JPM and the on again, off again, merger/takeover rumors. Speculation that Deutsche Bank was not interested caused JPM to drop -5 or almost -30 Dow points. JPM and DD accounted for almost the entire Dow drop at the close. The Nasdaq rebounded from a -221 point drop in the last two days to post a +85 point gain. Is it real or is it an oversold bounce?
The Dupont warning was the third in three quarters from the company but it may be a prelude of things to come from the market in general. Citing problems with higher raw materials costs, higher energy prices, strong dollar, weak Euro and slowing sales the only thing they did not blame was the election. The factors given for their earnings woes are the same factors that are going to be quoted again and again as the warnings season begins in earnest next week. Oil costs are soaring with light crude closing at a 10 year high of $35.39 a barrel even after Saudi Arabia said they were going to increase output. No help there. Raw materials are soaring with the CRB Index at a two year high. Other examples include copper, up due to the strong economy, cotton at a two year high and platinum at a ten year high. The dollar is at an all time high against the Euro, a 7-yr high against the Pound and an 11-yr high against the Frank. Get used to hearing the "standard excuses." Need proof? TRW prewarned after the close and blamed the strong dollar, weak Euro, high energy prices and Ford slowdown.
Another confessor that did not use the standard excuses was Campbell's Soup. CPB said simply soup sales were weak and if you take a look at the soup isle you will see dozens of new competitors. CPB said it was going to energize soup sales by ramping up its popular "Campbell's soup is Mmm-Mmm good" slogan campaign and by adding pop tops to its cans. Investors liked the approach and CPB closed up slightly for the day. Let's see, could we start something like "Dupont chemicals are Mmm- Mmm good" to prop the Dow back up?
The dot.com time bomb finally exploded on Wednesday, or did it? Tim Koogle gave the keynote speech at the Robertson Stevens Internet Conference on Wednesday and mentioned that "Internet consolidation would limit the upside to companies that depend on advertising revenues in the short term." Many analysts mistook his comments for an admission that YHOO would have earnings problems going forward and YHOO dropped to a low near $103 in after hours trading. After the market closed Steve Franks interviewed Koogle on CNBC and questioned him about this apparent misconception. Koogle said that YHOO was not changing any guidance they had issued to analysts and still felt that YHOO prospects looked great. Consolidation in the market place will actually help YHOO since they will be able to dictate terms from a stronger position and use their strength to offer advertisers more benefits due to scale that smaller companies cannot. We made YHOO a call play on Wednesday night because the misinterpretation had driven YHOO to the normal pre-earnings run low. Each earnings season YHOO normally hits a low in this time frame and then rallies the next three weeks. We felt that the news event simply gave us a clearly defined entry point with minimum downside risk. YHOO closed after hour trading on Wednesday at $107.88 and only $107 today. Down from $140 two weeks ago we could see the bounce begin on Friday. Of course the Nasdaq must remain positive for this play to succeed.
The chip sector looks like the current analyst battle ground. Some noted analysts are calling for blanket selling across the board and others are calling the recent drop a buying opportunity. With still others downgrading individual stocks like Intel or Micron. The divergence of opinion is huge and the vocal war could become a self fulfilling prophecy for the bears. The verbal war may confuse chip investors and cause them to lighten up to avoid a fall. The difference in opinion is based on the expected duration of the current chip cycle. Some feel it is over while others are calling for another 16-24 months of growth. If you are invested in this sector I would strongly advise stop losses to avoid missing the real sell signal until it is too late.
Nasdaq +85, is it real or is it an oversold bounce? That right answer to that question would buy Wendy Passomonte that Jag she wants. Unfortunately no one knows for sure. The earnings warning season begins for real next week as well as a huge slate of economic reports including PPI, CPI, Industrial Production and Import/Export Prices. All inflation sensitive and likely to start another fire storm of Fed worry if they are not market friendly. Will investors buy stocks ahead of these reports AND a sure flurry of earnings warnings? I doubt it but then the market is not called the great humiliator for nothing. Money is still piled on the sidelines by the billions waiting for a sure sign that the bottom has passed. The Nasdaq needs to close above 4250 before many will take the bait. Everyone was expecting a strong rally this week and one downgrade (Intel) dropped the market -221 points. Historically next week is a down week. Add another random downgrade or two, mix with a flurry of earnings warnings and the possibilities of a drop are stronger than a gain. SFAM and ZOOX both warned late in after hours today. Is that a clue?
Good luck and sell too soon.
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I want to thank Chris, Steve and Scott for the excellent workshop held in Detroit last week. Having been to the Expo in Denver in March (which was fabulous), I was ready for a smaller, hands-on approach to hone my less-than-perfect skills. I was not disappointed. One can never get too much education in options investing, and Chris and Steve offer terrific, unique approaches. Laurie
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Jim, I had the good fortune of attending the meeting in Orlando. Like your newsletter, it was a CLASS ACT. Chris and the others did a great job. Chris was by far the best performer but the gentlemen beside me was an option trader with several seminars under his belt and almost freaked out when Chris finished his Index Presentation. JC
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