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Market Wrap

A Mixed Bag Of Earnings Brings Confusion To Markets.

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       7-17-2001          High      Low     Volume Advance/Decline
DJIA    10606.39 +134.27 10628.48 10438.66 1.22 bln   1841/1204	
NASDAQ   2067.32 + 38.20  2067.44  2006.80 1.66 bln   2125/1593
S&P 100   626.91 +  6.31   627.62   616.45   Totals   3966/2797
S&P 500  1214.44 + 11.99  1215.36  1196.14             
RUS 2000  490.57 +  6.77   490.57   481.65 
DJ TRANS 3007.08 + 44.29  3007.81  2957.78 
VIX        25.36 +  0.05    26.87    25.12 
Put/Call Ratio      0.63

Intel, Apple, Biogen, Veritas and Merril Lynch. These were only a few of the companies that announced earnings on Tuesday and produced a mixed bag of results. They were the leading edge of the flood of over 850 announcements this week and set the stage for market volatility with a capital "V".

Leading the parade after the close was the biggest chip company to report, Intel. They initially excited investors by beating estimates by two cents but warned that gross profit margins would be down the rest of the year. INTC gave revenue guidance that fell generally inline with analysts estimates but dropped the low end to only $6.2 billion. AMD is causing problems and the price war is having an impact on margins which are narrowing. Intel said sales of microprocessors were stronger than expected which helped maintain their revenue numbers. Still the P4 ramp is not moving as fast as analysts expected. Many had thought Intel would sell 20-25 million this year and current estimates are only in the 10 million range. Intel did express confidence that the seasonal bounce would occur in the fall. Intel jumped after the announcement but then fell in after hours as the conference call wore on.

Apple Computer also announced profits that beat the street after the close but then said things looked gloomy. Contrary to the Intel guidance Apple said they "did not" see a seasonal recovery and no upturn in consumer spending anytime soon. AAPL dropped almost -$3 in after hours to $22.50.

Veritas announced earnings that beat the street but warned that the second half of the year would fall. Analysts had expected $.84 earnings for the year and VRTS is now expecting $.73 to $.75 and revenue growth in the 25% - 35% range which was a drop from close to 50% this year and compared to 75% in prior years. VRTS took a serious -$7 hit in after hours.

Merrill Lynch announced earnings that dropped -41% and was not very exciting. Commissions were down -17%, transaction revenue -41% and underwriting was even worse. They said the future did not look promising until the economy improved. Schwab also announced and profits dropped -26%. They missed earnings by a penny and said online trading was off substantially. They said it might be next year before they see any positive signs. They also said there was not anything they could do until the market came back. Come on - tell us something we don't know!

Not all the news in after hours was bad. RFMD announced earnings inline with estimates at a nickel but said they saw business conditions improving in the next quarter. Revenue grew +27% in a tough environment. They said orders increased during June and they were now 100% booked. They make chips for communication devices and this could be a leading indicator for the recovery. They also said they expected gross margins of 28-33% in the Sept. quarter. Traders liked what they heard and RFMD gained almost +$3 to $22.16. Increasing visibility? What a concept!

The good news for the day was the semiconductor rebound. After several chip companies said dire things on Monday, chip stocks actually rebounded on Tuesday. All the bad news priced in? It would appear many traders felt that was the case with NVLS falling to $43.70 at the open but rebounding to $48.85 at the close. AMAT fell to $39.87 before rebounding to close at $44.57. These chip equipment makers are immune to the price wars going on between the retail chip makers like AMD and INTC. This type of business environment leads equipment makers to spend money on R&D to be able to offer leading edge products when the next economic revival appears. AMAT and NVLS have significant support at $40 which would indicate that there are ready buyers whenever the price dips to near those levels. Not a bad sign and somewhere you could put a limit order to buy and be comfortable if you were filled.

Economic reports today were headlined by the Industrial Production Report which came in much weaker than expected at -0.7%. This was the ninth consecutive decline and impacted all the major industry groups. June was the worst decline since January and contained no positive signs. Capacity fell to 77%. This is a major reduction of inflationary pressure. With every manufacturer begging for business it is very hard to command higher prices. There are worries now that GDP growth will be negative due to the seriousness of the 2Q decline in production. Wednesday will bring us the CPI report which is expected to be basically flat. The good news here, if any, is that the Fed will almost surely continue their current rate cut program.

Greenspan will get a chance to talk to the markets through his report to Congress on Wednesday. He will be grilled on interest rates as well as his view of the economy and projections for a revival. This can be a market moving event and in light of the current market conditions it could be explosive. Alan needs the markets to rally in order to maintain consumer confidence, fuel future growth and provide that tax surplus. The fourth quarter recovery has now moved into the 2Q of 2002 in econo speak and we may hear it slide even further on Wednesday.

Papa tech announces earnings on Wednesday. I am referring to IBM and there has been no shortage of speculation on their numbers, hit or miss. Many say they will beat since they did not warn. Others think they will miss due to currency problems and the softening global economy. Either way the most critical part of their report will be the guidance. Since they have major business in most countries around the world anything they say about a global slowdown will be believed.

The recovery by both major indexes on Tuesday was impressive. The Dow bounced off support at 10450 on profit taking from last weeks gains and then headed for higher ground. The Dow jumped from support at 10450 to resistance at 10600 in one trading day. The test of course is now to the upside where 10600 has been resistance for over a month. The Nasdaq was slower to respond after coming within seven points of support at 2000. It was not until after 1:PM that the Nasdaq started moving upward with any conviction and then only weakly. The Nasdaq has 33 points to regain before hitting resistance at 2100-2140. Stock movement in after hours has given no indications as to direction tomorrow. The news from APPL and INTC has depressed equipment stocks. VRTS has depressed storage stocks ahead of the EMC earnings tomorrow. The RFMD positive guidance did not appear to impact anyone but RFMD.

Traders will be watching the next 200 or so earnings reports on Wednesday as well as the Greenspan show on TV. Direction is far from settled but volume is good for a July week. Technically the Dow over 10600 is in buy territory but the Nasdaq is still in the "wait and see" zone until it breaks 2140. Aggressive traders could nibble on techs here but without some strong news a breakout could still be in jeopardy. The markets today showed that traders want to buy. Money is coming into the markets but still without conviction. Shorts are covering but longs are not convinced. I doubt we will get another "irrational exuberance" comment from Greenspan but I would look for him to try and talk the markets up instead of down and that cannot be all bad! Enter passively, exit aggressively!

Jim Brown

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