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Market Wrap

Blackouts, earthquakes and IBM beats earnings estimates!

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        01-17-2001        High      Low     Volume Advance/Decline
DJIA    10584.30 - 68.40 10705.90 10545.30 1.33 bln   1591/1330
NASDAQ   2682.78 + 64.23  2756.63  2668.48 2.82 bln   2370/1600
S&P 100   691.98 -  1.07   703.15   689.61   totals   3961/2930
S&P 500  1329.47 +  2.82  1346.92  1325.41           57.5%/42.5%
RUS 2000  493.46 +  0.18   501.05   493.22
DJ TRANS 3062.49 -  2.25  3075.50  3047.55 
VIX        28.51 +  0.33    28.77    26.93
Put/Call Ratio      0.49

That title sounds like a multiple choice question you would hear on a TV game show. Name three things that cannot happen on the same day. If that was your answer, you lost. After a huge gap up at the open the Nasdaq gave back over half of the gains before the day ended. The Dow traded above 10705 only briefly before losing ground to close down -68 points. It was a frustrating day. The huge gap up was untradable and then the slow point burn as the day progressed offered no real opportunity to go long. Fear of the IBM earnings due after the bell today kept tech stocks from holding their gains.

Before the bell today JPM announced earnings that missed estimates by -.08 cents. After dropping to a low of 52.13 at the open JPM actually rallied to close almost flat for the day at $53. There was no dramatic drop or investor flight. Evidently the bad news was already priced in and traders breathed a sigh of relief that it was not worse.

The biggest loser on the Dow today was MMM which dropped over -$5 after reporting earnings of $1.12 instead of the expected $1.20. MMM claimed the missed earnings were a result of a significant slowdown in the U.S. economy. Their plans going forward include significant restructuring and layoffs. The impact to the Dow was about -30 points at the worst level but MMM rallied off its lows to close down only -3.50. Other Dow stocks reporting included GE which announced earnings inline as expected and EK which also matched estimates. Boeing beat estimates by a dime and had an upbeat forecast but still lost -2.25 as investors moved on to other trades. GM also announced earnings that beat estimates by three cents but warned that there was trouble ahead. The estimates had already been cut by -75% from earlier numbers so it was no surprise that GM beat them slightly. Estimates for 2001 of $.91 were guided down by GM to zero or a break even for the year.

The big earnings winner for the day was IBM. Widely expected to warn and didn't, IBM announced earnings that beat the street by two cents AND said they were comfortable with analysts estimates for all of 2001. Incredible and totally unexpected. IBM was widely seen as suffering from currency issues, PC slowdowns, IT spending restrictions and a host of other problems. Instead they beat the estimates and said good things about the future. Just shows that nobody can predict the future. IBM stock soared over +$10 in after hours trading which if it holds in pre-market tomorrow will provide a significant lift for the Dow. However the futures are not showing that as of 7:PM.

Other major earnings tonight included ITWO who beat estimates by a penny and EXTR which announced inline with estimates. AAPL announced its first loss in three years but pledged to do whatever necessary to move back into profitability. AMD missed estimates by -$.02 but said it was still gaining market share from Intel at about 2% per quarter. SYMC beat estimates by a nickel and continued its breakout from the under $30 bottom from last month. BGEN also beat estimates by a penny as well as RBAK. RBAK sees revenues increasing going forward but margins shrinking.

Only one day after the semiconductor earnings rally began, Dan Niles from Lehman Brothers, broadcast negative comments to his firm. Calling it a sucker rally he cautioned that there was more downside to go before the semiconductor sector could rally. He fells the weakness in PC sales will continue into the summer and not pickup until fall. The rally by the chip equipment manufacturers on the news that Intel would invest almost $8 billion in new equipment was misplaced optimism according to Mr. Niles. Chip stocks ignored his comments with AMCC +10, PMCS +11, AMAT +3.50, VTSS +8.

All in all this has been a very positive earnings week. Most big name companies have met or exceeded estimates when almost everyone expected a very rocky quarter. We are not out of the woods yet but the forecast is good. The economic reports out today were positive with the CPI only gaining +0.2% as expected. The core rate was only up +0.1% which was less than the expected 0.2%. The report continued to show inflation trending upward but not at a rate that would mean trouble to the economy or the Fed. Industrial Production fell faster than expected at -0.6%, the largest decline in more than two years. The weakness in the industrial sector is broadening and the pace of the decline is accelerating. The Beige Book today showed a further slowdown in economic activity. Retail sales have slowed, inventories are beginning to rise, manufacturing activity is weakening and some pressure is beginning to ease in labor markets. Bond traders today indicated that these reports nudged the possibility of another -.50% rate cut much closer to 100%. Actually there is a rumor making the rounds that there is a secret (sure) and unscheduled Fed meeting either Thursday or Friday of this week. (Wonder what market maker started this rumor?) I have heard it several times today and if they really meet it will either be to talk about the California energy crisis or another inter- meeting rate cut. Now that would be a real shocker!

The market internals continue to be good. Advance/declines are still positive with up volume on the Nasdaq swamping down volume by 10:1 in early trading. New highs are beating new lows by 5:1. Sounds like a very positive picture. However, I am concerned about the Nasdaq roll over this afternoon. Sure, there were significant profits to be taken and investors were afraid to hold over night again with IBM expected to miss earnings. The fragile market is still afraid of the evening darkness. On one hand JPM misses earnings by -.08 and nothing happens, AMD misses by -.02 cents and rallies +$1 in after hours but nobody wants to hold over night. This fear of holding is a serious problem. It means there is no conviction in the markets. Traders rush in at the open and rush out at the close. Remember last week when we dipped at the open and rallied into the close? That was funds buying not retail investors. The current reverse scenario means investors are again selling into rallies. Historically, as I mentioned last Sunday, there is a market dip at the end of this week. The earnings excitement is starting to wane and investors who played the earnings runs will move to the sidelines and decide what to do next. Earnings are far from over but the big headline names will be mostly done. IBM, INTC, MSFT, etc, will be history.

The only thing to move the markets from this point is expectation of another rate cut on Jan-31st. That expectation, two weeks from today, is a driving force. That expectation can make investors quickly forget weak earnings on selective stocks, bad decisions on previous trades and fear of a slowing tech sector. With most tech earnings coming in above expectations and the Fed in our future it is entirely possible there will not be a pull back this year. Still we need to be focused and ready to capture any move and/or protect ourselves should it move against us.

The California energy crisis is rapidly approaching a flash point. While it may be just another news item for most of us in states that have no problem, it is our problem as investors. With BAC and JPM facing a bankruptcy of the entire California utility system and billion of dollars of debt, we have no way to tell how that may impact the Fed or the economy. With the California governor talking about "eminent domain" meaning a government takeover of private assets, that alone could cause serious repercussions. My point here is that just because we are warm and comfortable in our homes and offices we need to keep an eye on the blackouts in California and the impact on the markets. The stock market outlook looks too good to be true and when that happens something always shows up to spoil the picnic. OPEC voted to cut -1.5 million bbls of oil as expected so energy prices for the rest of us are not going down any time soon either.

Just to emphasize my point there was an earthquake today in an area that could seriously impact your trading profits had it been any worse. Where? Queens New York and Newark New Jersey. There were no injuries and no serious damage reported but add several points on the Richter scale and you would have had a real problem for the NYSE and trading in general. Now you can't plan for something like this but as traders we should NEVER be 100% committed as long as Murphy is alive and well. Earthquakes, blackouts, government takeover of private companies. Shucks, and all you thought we had to worry about was hitting earnings estimates! Alan, you have our approval to hold that unscheduled meeting but only if you promise to cut rates again this week. No rate cut and we will move your office to California!

Enter passively, exit aggressively!

Jim Brown

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