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Earnings Warnings Flying Faster Than Bullets in Tora Bora

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       12-13-2001           High     Low    Volume Advance/Decline
DJIA     9766.45 -128.36  9889.20  9745.07  1.4 bln   1065/2053
NASDAQ   1946.51 - 64.87  1985.79  1945.29  2.0 bln   1305/2316
S&P 100   570.60 -  9.77   580.37   569.85   Totals   2370/4369
S&P 500  1119.38 - 17.69  1137.07  1117.85
RUS 2000  468.67 -  6.64   475.31   468.67
DJ TRANS 2554.08 - 26.20  2580.46  2552.33
VIX        26.75 +  1.23    27.16    25.65
VXN        51.95 +  3.86    52.37    50.66
TRIN        1.04
Put/Call Ratio       .79

The biggest news maker of the day was the Bin Laden tape which when released caused a noticeable pause in trading as everyone stopped to see just what was said. After seeing what they expected they went back to begin selling again. After two weeks of much lighter than expected earnings warnings the dam burst this week. Bristol Meyers dropped another "daisy cutter" after the close today saying that 2002 earnings would be substantially below estimates and they were cutting -4000 jobs. Not a pretty picture of what lies ahead.

The tech landscape was littered with smoking craters after several tech giants carpet bombed traders with a barrage of warnings. The fiber optic sector took the biggest hit after traders discovered that the struggling recovery did not include increased demand for fiber optic capacity. Without new demand there will not be a recovery in earnings. What a novel concept!

Lucent warned (again) that revenues would be far less than expected due to a continued fall off of capital spending by communication companies. As if to emphasize the point Qwest announced another cut in its capital spending for 2002. Qwest also warned again and said it was going to cut an additional -7000 jobs.

The biggest hit was still from Ciena. They said "slowing sales" were continuing to plague them and their first quarter earnings would be -30% to -40% below the fourth quarter and it could post a loss for the year instead of an expected profit. The massive downward revision in their sales forecast as well the possible loss for the year knocked nearly -17% off the stock price and pushed it to close under $15. JDSU had started the week with a warning which should have set off alarms about this sector.

The warnings in the fiber sector echoed in the chip sector since slowing fiber equipment sales will mean lower chip sales as well. AMCC, PMCS, BRCM and VTSS led the drop as communication chip makers but the weakness was wide spread after the AMAT warning from Wednesday. AMAT said they would cut their workforce by another -10% and investors added 2+2 and got weaker chip equipment sales = slower chip sales as well and sold the sector to a seven day low. The SOX.X traded down to 536 with support still far below at 510.

Prudential cut AMD all the way to "sell" after saying the current run on Athalon processors was not due to demand for the processor but a shortage of the Intel P4 processor instead. They said that as soon as Intel caught up with demand that AMD would see a sharp drop in sales and a drop in average selling prices. The AMD cut only accelerated the drop in the SOX even though it should have been a positive for Intel.

The dueling "macros" traded warnings with Macromedia (MACR) losing -8.16 to $19 and Macrovision (MVSN) dropping -3.30 to $34.53. Macromedia cut its estimates and said it no longer expected to post a profit by the end of the current fiscal year. The software maker said it expected weakness in the economy to continue and does not see an upturn by the March as previously announced. Macrovision fell on warnings that they expect the business environment to remain challenging through the first half of 2002.

Adobe and Oracle both announced earnings after the bell and each stressed the severe impact of the 9/11 attack on their business. Larry Ellison said this was the worst quarter in a decade. Each company met estimates and were cautious about the immediate future but were confident that they would post huge gains when the economy did recover. Neither however predicted when that would be.

Microsoft rolled over and threatened to break support after the Senate began picking apart the suggested settlement. MSFT had experienced a short term rally but is still struggling with the $68 level.

The Bristol Meyers warning after the bell today was just more proof that stocks other than techs were still suffering. AXP said yesterday that they were cutting another -6500 jobs, AET cut -6000 and Boeing said it would drop -1700 more. These layoffs were contrary to the jobless claims announced this morning which dropped below 400,000 for the first time in over three months. At 394,000 new claims we are far below the 505,750 peak reached the week of October 20th. Analysts were pointing to the number as evidence that a recovery is beginning but there were close to -30,000 layoffs announced just this week. Somebody is wrong. Over the past 25 years the initial jobless claims have peaked very near the end of each recession. Since the October 20th peak nearly everyone had suggested the recession to be easing. There is however growing evidence that it may be as late as the second half of next year before it is over.

The minutes of the November FOMC meeting were released and showed that the Fed expected weaker corporate earnings through early 2002. The talked about the market rebound and the need to be aggressive as being offset by "growing risk tolerance" in the financial markets. They felt the rate cuts already in place along with government stimulus would be enough to produce a 2002 recovery. They disagreed on the need for more rate cuts and several wanted to take a "wait and see" posture for the future. The PPI dropped -0.6% in November, mostly due to falling energy prices, but confirming that inflation pressures remain muted.

The biggest piece of negative economic news was the -3.7% drop in retail sales in November. Even the hot auto sector and zero percent interest rate deals cooled and produced the worst monthly performance in nine years. The auto sales continued to dominate the total retail sales figures but they could not prevent the huge drop. The growing book of information regarding holiday sales confirms the late November numbers. The first two weeks of December have been soft and those sales have produced only minimal profit. There are discounts upon discounts and massive advertising campaigns. My son in law bought a $750 snowboard including bindings and boots at a chain sporting goods store last week and after all the discounts, sales, coupons, etc his total cost was only $219. The items were on sale, there were 20% off any advertised price coupons in the newspaper and they were giving another 10% off if you used a gift certificate which could be bought at another register in the store. They were practically giving away cold weather sporting gear. Our "parking lot indicator" has registered only three days so far this year that compare with any holiday period in 2000. Multiply these trends across the retail sector and you can bet they will be missing estimates for this quarter.

This explosion of negative news and earnings warnings have collectively pushed all the major indexes below my "go flat" zones of 9800/1950/1125 with 9758/1946/1118. The break down of each index has produced a whooshing sound as investors hold their breath against another possible retest of prior lows. Should the markets move lower from here the next support levels are 9700 on the Dow and 9550 below that. The Nasdaq could dip to 1850-1900 and 1050 on the S&P-500. Nobody wants to see this. Remember, we expected earnings warnings last week which did not appear. The delay has compacted the time frame remaining for tax selling along with the warnings into only the ten trading days remaining this year.

All the uptrend lines we have been following have been broken with the drop on Thursday. This is a critical event. With tax selling upon us there may be some rocky days ahead. With many more losers than winners in mutual fund portfolios those funds will be forced to sell winners along with the users to prevent showing massive losses. This means that those seemingly bullet proof stocks like SPW, BRCM, NVDA, IBM, TOL, NVR and GNSS to name just a few, could be sold to offset losses in stocks like CIEN, CSCO, JDSU, ORCL, SUNW or any of the hundreds of spectacular losers for 2001. The resistance at 10000/2000 held and there could easily be a flood of sellers with even the slightest hint of weakness.

You should now be flat and waiting to see what Santa Claus has in store for us. The historical Santa Claus rally (the last five trading days of the year and first two of the new year) has been more and more scarce as of recent. Last year was rocky and everyone remembers the -600 point slide in 1999. Historically the five days after Christmas are bullish which would mean the next 6.5 trading days before Christmas would be highly suspect. Remember there is a triple witching option expiration next week! My recommendation has not changed. We want to be invested for any future recovery and rebound but not unless the averages are over my entry points of 9800/1950/1125. The last dip failed and without those firm entry/exit points above traders would be at risk. Stay flat until the next rally appears.

Enter very passively, exit aggressively!

Jim Brown
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