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Market Wrap

Mixed Bag of Earnings Scares Investors!

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       10-18-2001           High     Low     Volume Advance/Decline
DJIA     9163.22 - 69.75  9233.94  9134.30  1.2 bln   1106/1994
NASDAQ   1652.72 +  6.38  1668.00  1634.72  1.8 bln   1505/2076
S&P 100   551.01 -  3.66   555.69   548.58   Totals   2611/4070
S&P 500  1068.61 -  8.48  1077.94  1064.54
RUS 2000  421.06 -  3.43   424.86   420.55
DJ TRANS 2204.70 - 23.00  2229.04  2194.19
VIX        37.36 +   .13    38.48    36.67
VXN        70.69 +  3.58    72.06    67.58
TRIN        1.39
Put/Call Ratio       .93

As in Super Tuesday for financial stocks today could have been called Tech Thursday. Big caps of all types announced after the close and results were mixed and sprinkled with future warnings. MSFT, SUNW, EBAY, GTW, GLW, KLAC, PSFT, IDPH, SCMR, GNSS and PVN were a few of the companies that reported after the bell. The barrage of earnings had something for everyone and after hours trading was hectic to say the least.

Starting with the biggest tech reporting, Microsoft, the news was not good. They beat the street by four cents but warned that earnings would be down for the next couple of quarters despite all the new products in various stages of delivery. They also said they saw PC sales flat to down in the fourth quarter with no holiday bounce. This is inline with what Intel said earlier in the week but not something investors wanted to hear repeated. MSFT traded on both sides of the line in after hours and appeared to be settling with a fractional positive gain. Volume was especially heavy and Friday is sure to see many position changes as well.

Following Microsoft was PeopleSoft which posted a +113% jump in 3Q income at $.15 and beating the lowered estimates of $.12 cents. The company said they were continuing to see accelerated adoption of their current flagship product, PeopleSoft 8. PSFT jumped around +$2 in after hours trading.

On the hardware side SUNW announced earnings that beat the street with a smaller than expected loss and revenue numbers that were inline with estimates. They said the current economic environment was very difficult but their strategy was giving them a competitive advantage. They also restated their profit goal by June-2002. They have over $6 billion in cash.

Another tech company, Gateway, also announced and missed the already lowered estimates by two cents. They did say they expected to see improved results in the fourth quarter which was contrary to other PC forecasts. They refused to give specific guidance for the next two quarters and used several qualifiers on their optimistic outlook. GTW was flat in after hours.

In the Internet world EBAY continues to rule the auction kingdom but there may be a crack in their armor. They did raise estimates for the 4Q but not as aggressively as in the past. The EBAY CFO said that they were concerned with the U.S. holiday season approaching that it did not appear as strong as it had been. The concern and minimal increase in revenue forecasts had investors fleeing EBAY stock in after hours. As the only Internet stock still holding a sky-high PE of 189 any slowing of profits could seriously impact the stock price. EBAY fell about -$4 in after hours.

The semiconductor sector got a lift in after hours with a flood of announcements. KLAC beat estimates by a penny and traded up slightly. AMCC announced earnings inline with estimates and called a bottom in the current crisis. The CEO said the sector had stabilized and had seen a bottom from a revenue standpoint. TQNT announced earnings of a nickel and announced several new initiatives aimed at cell phones which is a growing market. PMCS announced earnings that were two cents above the street and said inventories were hitting acceptable levels and they were reducing costs by laying off 350 workers. The clear chip winner was GNSS which beat the street by ten cents and double prior revenues. GNSS jumped over +3 in after hours.

Corning, Nortel and Scyamore announced earnings on the same day that Sprint said they would cut capital spending by about $1.4 billion in 2002. Sprint had not announced a 2002 target but their current rate had put them on a $5.4 billion track. They said they would only target $4 billion for 2002. Worldcom and Verizon had already slashed spending estimates by 25%. This is bad news for GLW, NT as well as SCMR, CSCO and the others. Corning reported steep losses for the quarter and warned that they do not see business improving any time soon. SCMR also announced cuts in their workforce and warned that next quarter would be less than expected. Nortel also warned that business was not improving. They said they hoped a bottom was near but could not tell at this time. All three companies traded positive and negative after the close which indicates that most of this bad news is already priced into their stocks.

There were dozens more earnings of every type but now comes the crunch. With the majors companies out of the way the urge to buy and hope for an upside surprise is gone. This may have been a small factor in the last three weeks of market rally but it did exist. This is why this period in October is normally very rough for investors. Summer is typically a slow time in the corporate world and October earnings are weak at best. The number of companies beating estimates is not relative at this time. Why? Because if you dig a hole to lower the earnings bar to account for recent events it is very easy to step over the bar. If XYZ company saw its estimates fall from a $1.00 profit to a loss of -$.25 it does not take a genius to realize that a loss of only -$.23 is not earth shaking in the overall scheme of things.

Money flow is marginally positive. Lipper reported that $32 billion left equity funds in the last month. We knew that since we report on the TrimTabs.com numbers each week. Lipper also said money was beginning to come back into funds but only a trickle. There has been no rush to buy. Yes, there has been an amazing upward bias prior to the real earnings this week but not a rush to buy. Investors were nibbling on stocks just to prevent the train from leaving the station without them. Institutional investors are still scared and are waiting for October to be over and some resolution to the current terrorist problems. Many had hoped that these earnings reports would bring news of a coming rebound to validate their urge to own stocks. Instead the reports are validating the current recession and pushing the expected recovery further into the future.

As investors we need to be very careful here. For the last three weeks I have warned you that although the markets had a bullish bias in spite of the current world events this week was the most dangerous week. The momentum provided by earnings is over and forward visibility is still weak at best. True investors should be buying stocks to hold for long term on any dip but long call only option traders should set stops under current plays and be ready to move to the sidelines. Almost every big cap Nasdaq stock closed the after hours trading down after the flurry of warnings. Those few optimistic earnings statements appear to have had little lasting impact. After being positive earlier, futures are starting to increase to the negative side. As always there is a lot of darkness before morning but Fridays have not been wildly bullish recently. With Bush and other world leaders congregated in one spot in China anyone could almost see a bullseye floating over Shanghai. God forbid that something dreadful could happen but investors are likely to want to go flat just in case. The increasing unrest and demonstrations around the world are causing instability in most of the world markets, not just ours. The daily roster of new anthrax cases is not building any confidence among the American people either.

It all boils down to time frame. If you are buying stock now with a 10-30 year time frame then buy every dip. Stocks can get cheaper in the next few weeks but compared to where they will be ten years from now it is immaterial. If you are a long call "trader/buyer" then this is probably not a good week to buy. The Dow could easily test 9000 again and many "analysts" think we could see much lower numbers. I personally think there are too many investors lurking just under the bids for a significant sell off below the 9000 level. As a long call buyer I would buy any rebound from below 9000 if we dipped below that level again. As a put buyer the financial sector is clearly under pressure. Providian said today that earnings in the 4Q could fall to 10-15 cents when analysts were expecting $.60 cents. This is the tip of the iceberg in the consumer community. Zero interest on cars but nobody with a job left to buy them. Loan loss reserves are rocketing and defaults are increasing. More layoffs are ahead. Airlines are openly talking about bankruptcy. Put buyers should be very excited with their short term prospects.

In a nutshell, if you have long positions set stops and be prepared to go flat. The next ten days could provide another entry point. This is still a news driven environment. News of a captured or killed Bin Laden could provide a 1000 point rally and news of another attack could swing us 1000 points in the opposite direction.

Friday is the 14th anniversary of the 1987 market crash. October 19th, 1987, -22.6% in one day. Are you superstitious?

Definitely, enter passively, exit aggressively!

Jim Brown

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