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Market Wrap

Good News And Better News

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       10-16-2001           High     Low     Volume Advance/Decline
DJIA     9384.23 + 36.61  9411.14  9298.70  1.2 bln   1965/1139
NASDAQ   1722.07 + 25.76  1722.85  1690.54  1.8 bln   2169/1434
S&P 100   564.14 +  3.71   566.83   558.74   Totals   4134/2573
S&P 500  1097.54 +  7.56  1101.66  1087.13
RUS 2000  434.53 +  4.44   434.54   430.09
DJ TRANS 2297.72 + 34.46  2302.68  2262.94
VIX        35.04 -  2.32    37.91    34.95
VXN        64.01 -  2.23    67.52    63.98
TRIN        0.90
Put/Call Ratio       .70

Another day closer to getting out of October alive and the earnings news just keeps getting better. IBM and Intel led the charge after the close and one was a winner and one a loser, almost. After the announcements the futures took a dip on the prospect of a flat 4Q but once the guidance and explanations started appearing in the press the after hours trading exploded.

Cutting to the chase, Intel met analysts estimates of ten cents and split the revenue numbers at $6.5 billion. Just meeting the estimates was a relief for investors but after looking under the hood the numbers were not pretty. Intel was very creative in their accounting to "make" their numbers and according to one commentator they threw in the kitchen sink as well. After one time items it appeared they actually were closer to three cents instead of ten. In after hours trading they soared to $26.20 on the news that they met estimates then fell to 24.34 after the real news was known. They did rally again to 25.50 after IBM said they expected IT spending to increase. While Intel was not the hero of the day at least they did not stink up the place.

Enter the hero, IBM! IBM said their profitable outsourcing business pipeline was "as strong as they had ever seen it" according to their CFO. PC sales had fallen but software and services were soaring. IBM beat estimates by a penny at .90 cents and said they were seeing a bottom in chip sales and expected a +10% increase in IT spending next year. Thank you IBM! The positive outlook floated all boats after the close and should be a positive influence on the markets on Wednesday. Many analysts had expected them to guide lower to the tune of -10 to -15 cents for the next quarter and there are bound to be some shorts running for cover at the open.

The storage sector got help from Veritas after the close when they beat estimates by a penny. A not overly optimistic CEO said he still thought VRTS had "a shot" at meeting guidance for +25% to +35% revenue growth. On the conference call he did hold the party line at +22% growth estimates. Still growth is growth and VRTS soared nearly +$3 to $32 in after hours trading. EMLX, QLGC and EMC joined the party with hefty gains.

The markets sold off again after the open on news that there were more anthrax cases in the U.S. and news that twelve employees of the London Bourse were being tested for it as well. The new case of a seven month old baby whose mother works at ABC was causing problems since they cannot find out how it came in contact with the bacteria. There was also traces of anthrax found at two post offices and an entire wing in the Hart building was closed. Still if you checked the averages at the close they were still positive! Amazing!

After trading on both sides of positive all day long the final jolt that boosted the markets was news that Citigroup had authorized a $5 billion stock buyback. The size of the buyback and the timing of the announcement, (2:45PM), prompted buying to cover before the close. There were significant "buy on close" orders on many issues after the sentiment boost provided by Citigroup. On a smaller scale RMBS also announced a five million share buyback ($60 million) as well. RMBS beat estimates today but in reality their glory days could be over. Intel is rapidly designing them out of the PC market and attempting to capture the higher speed, higher profit memory interface business. Rambus said they expected 1Q revenues to drop up to 15% but still expected to be profitable.

The economic reports showed industrial production fell -1% in September and has now shown a contraction for the last twelve months. This is the lowest level of capacity utilization since 1983 and the worst period of production since WWII. The next few months will continue to be negative as the impact from the attack works through the economy.

Commerce One gave itself nearly a 50% haircut today saying it will cut -2800 employees on Sept 30th or -46% of its workforce. There was also a rumor that SAP could be making a bid for the company but SAP denied it. There may have been conversations and when they failed CMRC had to cut costs without a savior in sight.

Not all earnings were rosy with KMB losing -4.48 after warning that 3Q earnings would be a nickel light. RTRSY (Reuters) said it would not hit estimates due to the results of the attack and lost -5.02. Downey Financial, DSL, lost -4.99 after income fell. Broadwing, BRW, lost -3.83 after lowering its guidance. Forest Labs dropped -5.61 even though it beat estimates by two cents. Semiconductors were hampered by Cognex (CGNX) which sees a loss instead of a profit due to lower capital expenditure spending by manufacturers.

Two days and counting! Futures are up strongly in after hours and would indicate a positive open on Wednesday. The odds are good that without any new terrorist attacks or new outbreaks of anthrax that the Dow could make a break above resistance at 9425. If shorts start feeling the heat it is entirely possible we could see a return to pre-attack levels near 9600. Before you start thinking I am smoking something funny I would still caution you about the normal October surprise. Remember from my Sunday article the historical time frame for any October sell off is a five day period beginning on Thursday of this week. If you are currently long this market and many of you are, please set some stops under those positions on Thursday morning. If we get lucky and the October drop never materializes then you remain in the market. If however it does occur you will get out with a nice profit and be ready to buy the dip again. Those entry points of 9050 and 1550 are looking better every day! I hope you took advantage of them!

Definitely, enter passively, exit aggressively!

Jim Brown

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