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Market Wrap

Microsoft - Just Kidding!

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         7-19-2001        High      Low     Volume Advance/Decline
DJIA    10597.13 + 40.17 10679.12 10523.92 1.34 bln   1772/1266	
NASDAQ   2046.35 + 30.42  2079.33  2027.11 1.97 bln   2133/1511
S&P 100   626.44 +  4.02   632.23   622.11   totals   3905/2777
S&P 500  1214.06 +  7.31  1225.04  1205.80             
RUS 2000  487.64 +  3.92   491.13   483.62
DJ TRANS 2981.28 +  6.62  2998.12  2965.32 
VIX        26.47 +   .16    26.50    25.06 
Put/Call Ratio      0.76

Dell announced this morning that their earnings would meet their previous guidance of sixteen cents and revenue of about $7.6 billion. The surprising "pre-announcement" caught investors off guard and the markets soared. Instead of speculating on a possible warning from Dell of missed earnings due to the weak economy investors were surprised with a positive event. Nokia also made some positive statements and lifted the telecom sector. What to do? Buy something appeared to be the answer and euphoria reined for several hours. Then reality crept back into the picture and the gains evaporated.

The Dow hit 10679 or +122 just shortly after the open but moved back down to negative territory shortly before the close. Over 150 points erased from the high on no bad news. The bad news was the earnings after the close on Wednesday. IBM, EMC, AOL and SEBL but all that was ignored at the open. Traders still want to buy ANY good news regardless of the bad news still on the way.

After the close on Thursday there was a mix of good and bad news but the bad is what investors will be fighting on Friday morning. Microsoft announced earnings that beat the street by a penny but then cancelled their previous "sales and revenue are better than we anticipated" statement which rallied the markets recently and replaced it with an earnings warning going forward. Saying they only made a penny this quarter after taking a -$2.6 billion charge for investment losses their tone had changed significantly. Citing the "continued softening demand for personal computers" they expect profits in the next quarter to be more than a nickel below analyst estimates. So did they have their fingers crossed when they said sales and revenues were exceeding estimates a week ago? Did the software market implode in the last five days and catch them by surprise? It is not nice to fool Mother Nature or lie to investors and MSFT may suffer from this on Friday. MSFT dropped to a low of $69.17 in after hours before firming just below $70.

PMCS also announced earnings after the close and then warned that the current quarter would be below estimates. They said that customers were being "irrationally conservative" but that inventory was burning off at an acceptable rate. PMCS dropped -5 in after hours to $26.

SUNW announced earnings that beat the street by a penny but said that sales in Europe were down by -$200 million. They would not issue any guidance going forward due to the highly unpredictable economic environment. They did say that earnings would be at least breakeven. That would be a four cent drop from this quarter and about a -$600 million revenue shortfall from current estimates.

The implosion in the PC sector also hit Gateway which announced a six cent loss instead of the breakeven analysts expected. They also announced a massive restructuring to reduce costs and said they expected to do no better than breakeven the rest of 2001. This was based on the economic conditions remaining the same and Microsoft said this was not likely. They said worldwide PC sales had declined to low single digit growth and was still dropping. This does not bode well for any of the PC companies. Gateway dropped almost $2 to $13 in after hours trading.

All was not as grim as the computer/software results would have led you to believe. EBAY announced earnings that beat the street on the revenue side and had the audacity to do the unthinkable. They raised earnings guidance a couple pennies above expectations for the coming quarters. Must be all those excess computers being sold at auction that is holding them up. They now have over 34 million registered users. It is a good site. I buy something on Ebay almost every week. Just last week I bought a 1987 Honda Trials motorcycle. This is one of the few business models that works really well on the Internet. Putting unrelated buyers and sellers together electronically may not be as sexy as some other business models but it works well enough for almost 35 million users. Amazon has yet to turn a profit and may continue to struggle long after EBAY doubles their existing business. Good job Meg!

Another company that got brushed under the warning rug with the rest of the news releases was Broadcom. They reported a loss of sixteen cents but said they saw signs of improving conditions. BRCM was upgraded by Goldman Sachs and they gained +3.45 on the day but lost over $2 in after hours once the flood of negative news hit the wires.

So it is official! Dell and Broadcom remain isolated pockets of optimism while the rest of the companies in the computer/software/chip sectors melt into the summer asphalt. At least that is the way it seems and it sounds better than saying the CEOs of those companies must be smoking a contraband substance that produces hallucinogenic results. Either way this week of 100 point swings will be one that traders will be glad to see come to an end.

The Dow settled right back on upper resistance at 10600 on Thursday but will open up substantially below that if the futures hold their current position overnight. The Nasdaq closed at 2046 and dead in the middle of its recent 2000-2100 trading range. It too will open significantly lower, possibly under 2000, if the current Nasdaq futures hold at -48.

Many earnings announcements have left smoking craters in their wake while the vast majority of companies have beaten their lowered expectations. 61% of the 215 S&P companies that have announced, beat their estimates. Only 12% have missed the posted numbers. This scenario fits the suggestion I made last week that many companies had increased the severity of their warnings to enable them to beat the lowered numbers and avoid being taken to the wood shed and beaten on earnings day. Are we investors so stupid as to not see through this ploy? I doubt it and the drop on the Dow from the triple digit gains was selling based on this reality. Odds are also good that some of the big boys knew in advance that MSFT was going to spoil the party but that of course is simply speculation.

On Friday we will be looking for strength in the afternoon. There is likely to be a dip, possibly a serious dip, but it is the reaction to the dip that we are looking to for direction. If investors decide it can't get any worse then there may be some bargain hunting. If they are tired of trying to pick a bottom and simply decide to wait for calmer times then the dip may not be followed by a bounce. Remember, I said 2100-2140 was the "wait and see zone" several days ago. I hope you waited! Aggressive traders could buy any bounce from below 2000 on Friday but be ready to go flat should that level fail again. Cisco CEO John Chambers was cautiously optimistic about the future in a late interview and should his comments be construed as calling a bottom the markets "could" react to those comments. The futures improved several points after his comments but there is a lot of darkness left before morning.

Enter passively, exit aggressively!

Jim Brown

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