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Market Wrap

Good News Opens, Bad News Closes, Who Is Listening?

HAVING TROUBLE PRINTING?
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       12-18-2001           High     Low    Volume Advance/Decline
DJIA     9998.39 +106.42 10015.34  9892.59  1.3 bln   1975/1152
NASDAQ   2004.76 + 17.31  2010.91  1989.81  1.8 bln   2123/1589
S&P 100   583.38 +  4.41   585.07   578.97   Totals   4098/2741
S&P 500  1142.92 +  8.56  1145.10  1134.36
RUS 2000  485.49 +  5.55   485.49   479.94
DJ TRANS 2657.27 + 38.21  2658.87  2613.02
VIX        24.13 -  1.30    25.06    24.02
VXN        49.02 -  2.05    51.02    48.93
TRIN        1.00
Put/Call Ratio       .62

The news wires were smoking today with dozens of conflicting earnings reports, warnings and affirmations. Surprising economic numbers added to the excitement and the Dow traded over 10,000 again for a whole fifteen minutes. The Dow ran out of steam and slipped back under the psychological level at the close but the Nasdaq managed to hold over its equivalent at 2000.

Jeffery Immelt, GE CEO, put on a Santa hat today and then pulled a Dow 10000 event out of his bag of presents. The biggest Dow company said it expected to meet 4Q and full year estimates and raised its growth estimates for 2002 to as much as +18%. These estimates were made assuming NO turn around for the economy until 2003. This means that any rebound which comes sooner than that would increase their results. Jeff said GE was a stock you could own and sleep at night.

Pfizer added to the holiday cheer with news that they would meet of exceed 2001 and 2002 estimates and raised 2003 and 2004 estimates to reflect +15% expected growth. They said they would request approval for fifteen new drugs over the next five years. This boosted the stock of PFE at the open but it weakened as the day progressed. Contrasting the warnings from MRK and BMY last week it would appear that PFE is leading the league.

Banc of America raised estimates on Siebel Systems and the stock soared over previous resistance to gain +3.74 or +13.75% for the day. He said field checks indicated that Siebel's quarter closed strongly and included one very large deal. He said commissions as well as increasing advertising indicated that the company was enjoying strong revenues at the expense of Oracle and PeopleSoft.

Dupont was upgraded by Merrill to a strong buy and gained +1.10 on the day and helped the Dow to hold its initial gains.

The most surprising news was economic with new housing starts soaring +8.2% in November. It was the biggest gain since July and many analysts said it was due to the warmer weather than normal in November. This surge in building will filter through the economy as orders for components and indicate the consumer is still not dead. The news from Best Buy and Circuit City, both of which beat estimates, showed that the consumer was still cocooning. They are buying electronics like big screen TVs. For the first time ever DVD players are outselling VCRs which means the industry has finally overcome the cost barrier and achieved consumer acceptance of the new medium.

The flood of all that positive news at the open helped to power the indexes back up to their recent psychological resistance levels. I say psychological because the real technical resistance lies at 10100 on the Dow and 2030-2050 on the Nasdaq. As they say, it looks good on paper but it does not mean anything. Those magic 10000/2000 levels may evaporate again before the open because of the massive amount of negative news that came out after the bell.

Where to start? Motorola tried to pull a fast one on investors after the close by saying they expected to post a $.15 cent profit in 2002. The stock soared to almost $18 in after hours after closing at $16.61. Almost immediately investors found out that the announcement had more land mines than Afghanistan. They said they were laying off 9400 more employees, they would see lower revenues in 2002 due to falling sales and they would be closing some businesses. Analysts quickly saw that the 2002 profits would come from cutting expenses and product lines and not increased business. The stock immediately gave back all of its gains and continued dropping in after hours. This was not a good omen for tomorrow.

Following up on that news was Micron which missed earnings by a nickel and said that their average selling price was down by -88% over last year. They also announced that they were buying a DRAM plant from Toshiba and were in talks with Hynix, the third largest DRAM maker in the world, regarding their plants. Micron dropped over -$2 in after hours on the news.

The chip sector, already reeling from a 1-2 punch from MOT/MU, was not out of trouble yet. Triquint Semiconductor warned after the bell that it would miss estimates due to weaker than expected sales in its communication chips. They said lower than expected phone sales had impacted their revenue. This could impact the phone makers on Wednesday as well as the other communication chip makers. They also warned about the next quarter saying they did not feel comfortable with a recovery in the immediate future.

Solectron (SLR), the world's largest contract electronics manufacturer reported a loss at the open and then warned about the next quarter as well. It looks like the semiconductor sector, which had rallied for the last three sessions, may have a tough road ahead on Wednesday. With all the negative chip news which should spill over into cell phones and communications equipment, Nasdaq 2000 could be in trouble.

The Dow did not escape either with a major warning from Alcoa. AA got hammered in after hours after saying that they would miss 4Q estimates. Customers failure to pay for contracts and charges for restructuring to cut costs would cause the earnings shortfall. AA expects to post a ten cent profit compared with estimates of thirty cents by analysts. AA dropped over -$2 in after hours.

So, who are you going to listen to? GE and Pfizer or Motorola, Micron and Triquint? Even after a very strong affirmation of earnings GE failed to break resistance at $40, again. The catch I think was a clear message that they expect trouble ahead in 2002. They still expect to meet estimates but do not expect any rebound until 2003. If that is true than the markets are clearly ahead of themselves. Motorola, Micron and Triquint, manufacturers of components for electronics to be sold next quarter, all saw weaker results ahead. Do you see the common thread here? Weakness still ahead.

We also are faced with a deflation in the "war premium" and an increase in the terrorist problem. Usama Bin Laden apparently escaped and now the task of hunting him down BEFORE he can cause more trouble has suddenly become much more complicated. An angry Laden that is free to communicate with operatives around the world is a prospect that nobody wants to face. A scared terrorist dodging 250 bombs a day on a remote hilltop is much less dangerous than the same man several countries away in a safe house with telephone and Internet. In light of the GE/PFE news that carried the market all day the war news was mostly ignored. It will eventually hit home and the impact on the markets may not be favorable.

Despite the gains in the markets on Tuesday the internals were not pretty. Up until the last hour the advance/declines were basically even. Only a buy program in the last thirty minutes pushed them into strongly positive territory. All the major indexes are still below resistance with a strongly negative after hours session. What do you think will power the markets on Wednesday? There are no major economic reports and earnings warnings are picking up speed. According to First Call quarter to date earnings affirmations are much stronger than last year by 319 to 160 but warnings are also ahead at 491 to 378 last year.

Basically it is a toss up for the rest of the week depending on how much of this bad news is already priced in. Still without any good news to break through the current ceiling the path of least resistance is down or flat. S&P futures are down almost four points as I write this but there is plenty of holiday bullishness still present. Our task for Wednesday is to keep our stops in place and trade what the market gives us. The VIX is hovering near a post attack low and the possibility of another entry point is very good! I would be hesitant about buying the next dip. We are approaching the end of year flash point and there are way too many variables to just blindly buy the next drop. If consensus changes to a recovery in 2003 instead of 2002 then we do not want to be long.

Enter very passively, exit aggressively!

Jim Brown
Editor

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