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Market Wrap

Earnings Warning Season Already?

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        05-31-2001        High      Low     Volume Advance/Decline
DJIA    10911.90 + 39.30 10979.00 10865.90 1.14 bln   1829/1232	
NASDAQ   2110.39 + 25.99  2140.07  2092.48 1.79 bln   2253/1587
S&P 100   646.20 +  3.27   650.13   642.01   totals   4082/2819
S&P 500  1255.64 +  7.74  1261.91  1248.07             69%/31%
RUS 2000  497.07 +  2.54   500.79   493.96 
DJ TRANS 2944.44 + 24.63  2947.16  2901.65 
VIX        25.96 +   .17    26.74    25.09
Put/Call Ratio      0.71

Earnings Warning Season Already?

Just another fun summer trading day. Volume on the NYSE was barely decent at 1.1 billion and the Nasdaq managed only 1.8 billion but the sentiment was positive. There was no big name tech stocks claiming the world was coming to an end and traders bought the Wednesday dip. Shorts began covering again after reaping big profits from the three day drop. The Dow has seen three of these accelerated oversold bounces since the sell off began on May 23rd.

Was it the absence of bad news that powered the markets today? Maybe, but there is surely more just around the corner. Oracle lead the rumor board today with analysts expecting a warning on Friday or Monday. The rumor is a 10% drop in revenue and if that comes to pass, most feel it is already priced into the stock. This may not be bad news and Larry Ellison would rather hug Bill Gates than say something negative about his company or business outlook. This means any warning should be wrapped in as positive a package as possible.

Novellus was one of the positive stories of the day when they held their analyst conference call after the close. They affirmed their current guidance for this quarter but said they were still experiencing cancellations and delays in orders. They said all geographic regions remained weak. The CEO said they were at a loss as to what is going on in the economy. He also warned that the expected upturn in the 3Q was not yet in sight. He maintained their revenue targets for the full year but warned that orders and consumer demand must increase or he would be forced to drop that number. Sounds like wishful thinking on his part.

Nextel also reaffirmed their revenue target of $7 billion on Thursday. They said their recent changes to manage the drop in orders was gaining traction and allowed them to minimize problems. They are the largest independent U.S. wireless company and they expect to add two million new subscribers this year.

So much for the good news. Altera warned today that sales would fall further than previously expected. This was the second consecutive warning as they wade through one of the worst chip slumps in history. The most important warning was the mention of a "sharper than expected decline in the international channels." Another Europe and Asia recession warning similar to the SUNW warning on Tuesday. After previously lowering estimates, ALTR refused to give a specific per share estimate for the current quarter. Does not sound good.

Another chip company, IDTI, also warned after the bell that revenues would drop around -44% from the prior quarter. They said sales were down -24% in the same period. They still see a slowing of end-market demand which began in 2000. No new news but just another strike against the chip sector.

Software companies were hogging the news today led by Microsoft which is releasing the Windows-XP product soon as well as a new Office-XP Suite of programs. currently there are over 250 million Office users. This is a significant cash cow for MSFT and coupled with the Windows-XP product will give Microsoft a significant shot in the wallet. Office accounts for over $8 billion a year in MSFT income. Siebel Systems was also in the news with new coverage initiated by Asset Partners with a buy rating up to $64 a share. He felt SEBL should remain at the top of the software sector and be a stronger grower than the rest of the crowd.

The market internals were good with advances beating decliners on the NYSE and the Nasdaq. The up volume on the NYSE was 2:1 over the down volume. John Hancock Advisors said that "depending on whose estimates you believe there is between $2 and $4 trillion in cash on the sidelines. With interest rates sure to go down again institutional investors feel like it is time to be moving into the more aggressive areas of the stock market." If this was the case today then why did the Dow lose over half of its intraday gains? The Nasdaq followed suit as well giving back 30 of its 55 point intraday gain. The answer could be short covering in front of tomorrows Employment report. With the Jobless Claims inching up again to 419,000 on Thursday, there is a good chance the Employment Report could show a worsening economy. It could also show an improving economy and the shorts did not want to get caught in another blowout open.

If the report is benign the pressure could come back into the market in anticipation of the summer doldrums. Our fate Friday will hinge on that report. Jobs are expected to fall another -30,000 and unemployment rise to 4.6%. In April payrolls fell -223,000 which was the biggest drop in seven years and another unexpected drop of that magnitude would be disastrous. Another negative report of any kind should force the Fed to cut rates again. With a bleak earnings season approaching the hope of yet another rate cut may be all investors have left to cling to.

The Nasdaq broke a three day slide but the sell off in the afternoon shows traders were not willing to hold profits over night. That points to just an oversold bounce and possibly a volatile Friday. The VIX has been climbing steadily since last week and is back in the 26 range. Put buying is increasing which indicates investor caution is increasing. Whether that caution is warranted remains to be seen and only time will tell us where the bottom actually occurred. We are significantly under resistance on the Nasdaq at 2200-2250 so that should not be a problem on Friday. Support is at 2050 which gives us a -60 point risk to the Nasdaq. After the Employment Report on Friday the economic schedule for next week is sparse with nothing of any major significance. If the report proves positive and the markets do not rally then there is real trouble under the hood. We need to be patient and wait for clear upward direction to appear before going long. Remember, patience produces profit.

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Enter passively, exit aggressively!

Jim Brown

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