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Market Wrap

Greenspan Giveth What He Previously Took Away

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       1-24-2002           High     Low     Volume Advance/Decline
DJIA     9796.07 + 65.11  9856.97  9734.21  1.5 bln   1736/1380
NASDAQ   1942.58 + 20.20  1959.93  1936.34  1.8 bln   2037/1530
S&P 100   575.09 +  1.46   579.40   573.63   Totals   3773/2910
S&P 500  1132.15 +  3.97  1139.50  1128.18
RUS 2000  479.73 +  2.28   481.33   477.45
DJ TRANS 2747.21 -  8.42  2797.35  2746.97
VIX        22.77 -  0.89    23.45    22.39
VXN        47.37 -  0.78    48.69    46.84
TRIN        0.81
Put/Call Ratio       .46

Greenspan Giveth What He Previously Took Away

The Fed chairman went back on camera today and tried to gracefully eat his previous words on the state of the economy. The markets gained on the expectations that he would be more bullish but the comments left much to be desired. Earnings continue to be a problem as mixed results and continued lowered guidance takes the excitement out of investor expectations.

It was a Greenspan morning and an earnings afternoon. Greenspan may have taken out the "significant risks ahead" comment from his speech but he stressed that "markets assume a FAR more rapid recovery than is likely." He did say "the economy has stabilized" and "GDP growth is close to zero." Each of those comments were soothing to the markets but not encouraging to investors straining to find some positive signs to justify being bullish. Greenspan, long known for choosing his words very carefully and with great eloquence was surprisingly down to earth in his retraction. How long the soothing words will prop up the weak markets remains to be seen. One factor that will influence them to some extent is the doubt that the Fed will cut rates again next week. The positive comments Greenspan did make, implied that the Fed's work was done and there would not be any more cuts. The Fed funds futures fell from a 70% chance last week to a mere 25% chance today. On an ironic note Greenspan said he did not think the economy would snap back as fast as investors expected because it had not dropped as far as it could have. Considering the comments from many fortune 500 companies that this was the worst and fastest drop in decades, his comments are even more surprising. Assuming he was talking about the GDP drop below zero he may be right but the drop from near 6% growth at the high was catastrophic for those involved. Nearly two million workers became unemployed as a result and more are being added every day. Not as bad, compared to what Alan?

After the Greenspan speech investor focus returned to earnings and there were plenty available for investors to watch. Nokia surprised analysts with better than expected sales in the 4Q but said soft demand in the wireless sector would impact profits for the 1Q. They expect the demand to rebound later in the year and set a growth target of +15% for the year. They lowered guidance for 1Q to between $.13-$.15 and said sales could be down -6% to -10%.

Adding to the wireless problems was a warning from QCOM that continued weakness in the economy would produce lower revenues in the current quarter. QCOM announced earnings of .23, which was inline with estimates, but said 1Q results could drop -3% to -6%. The weak guidance for 1Q from both QCOM and NOK could help push the sector, which was upgraded Wednesday, back into a dive.

Fiber optics maker JDSU was probably the most bearish with their earnings announcement when they said they were unsure if the current quarter would be the bottom. Correct, not the last quarter but the current quarter. This means they see the possibility of another drop in the telecom/networking sector in front of us, not behind us. They announced a loss of -.19 per share compared with estimates of a two cent loss. The nineteen cents contained some complicated cost moves and tax deferrals and cannot be compared equally to the estimates but with any analysis it was larger than expected.

Gateway also announced earnings after the bell and announced that they were cutting another 2,250 jobs and closing some 19 Gateway Country stores. GTW said it earned two cents per share but revenue fell to $1.1 billion from $2.4 billion last year. Many analysts are questioning Gateway's future as Dell and a HWP/CPQ combination could continue to spell trouble. Lower end computer sales have stalled which was a profit point for Gateway even though they claim they focus on higher end systems. Analysts had expected a one-cent loss before GTW preannounced on Jan-7th that they would likely post a profit. GTW rose slightly in after hours trading on the better than expected results but the future remains cloudy. They are forecasting no additional cuts in 2002 and finished the year with $1.2 billion in cash. Ted Waitt, CEO, said they were more competitive than ever and after the announced cutbacks were stable and ready for growth.

Other companies which announced included LLY, SGP and BMY which led the drug group with inline earnings. Dow component MCD met estimates with declining sales and Eastman Kodak beat the street by a penny but warned for 2002. EMC posted a smaller than expected loss of three cents per share against analyst estimates of a seven cent loss. They said the price war with IBM was not going to drive them out of business but reiterated another 2140 employees would lose their jobs by midyear. They said current quarter sales would be about 5% below last quarters as customers remained cautious about IT spending.

PeopleSoft beat estimates of .16 cents with profits of .18 cents but the shares lost ground in after hours after saying they would buy MMTM for $90 million in cash. They claimed it would not have any material impact on future results. PSFT had spiked to a close of 38.43 today after hitting lows of $32 on Tuesday. It fell back to $35 in after hours.

Other tech earnings included SEBL, which beat the street by four cents last night and helped power the software sector today. Lehman said corporate IT software decisions were improving and upgraded the sector. MUSE announced earnings inline with estimates. Several other software firms already beat estimates including RATL, BARZ and WEBM.

RIMM shot up on news that it was in a pact with Nextel to produce a BlackBerry wireless email device with voice and data capabilities. The device would not be available until the fourth quarter but the stock jumped +2.33 on volume of over eight million shares. Chip stock LSI Logic jumped nearly +10% after saying its 1Q loss will be smaller than expected and KLAC was flat after beating estimates but posting a drop in sales.

Jobless claims surprised everyone with another drop for the third week in a row and added another layer of doubt that the Fed will cut rates again. At 376,000 the claims fell to their lowest rate since July. Continuing claims also fell to 3,458,000 its third consecutive decline and the lowest rate since Sept-22nd. During past recessions claims peaked at the end of the recession and began falling as the economy entered the recovery period. Using this as an indicator it would point to a bottom in the fourth quarter.

As you can see there is a mix of news good and bad but nowhere except in the software sector is there a rash of positive guidance. The chip sector saw an increase in orders of +7% in December but the book-to-bill ratios remained anemic at .78, which means they are only booking 78 cents of orders for every $1.00 of product shipped. Nearly 25% of all shipments are still being made out of existing inventory which is still positive but shows no need to ramp up production. Seasonal demand is expected to slow even further in the 1Q which will delay any recovery in this sector even farther.

We also have Greenspan alluding to another possible pullback in the economy, creating a double dip, before returning to upward growth. This is troubling for investors as institutional types may start hoarding cash for the next dip and create a self fulfilling prophecy.

The problem as I see it is the continued uncertainty about if or when the recovery begins. There is still doubt. The rally we saw today was clearly Greenspan driven but may not have any staying power. The levels we saw earlier this week may not hold on any retest. We got the trading bounce we were expecting from very oversold to flat again. The put/call ratio moved into bearish territory at .48, the TRIN is bearish at .80 and the VIX collapsed in only one day from highs near 26 to lows at 22.50. The major indexes all rallied only to bounce off overhead resistance from the last week. There was no conviction and as evidenced by the afternoon drop there were plenty of traders willing to sell into the rally. We are nearing that time each quarter when most earnings runs have finished and investors have little incentive to buy stocks. The post earnings depression begins to settle in and those stocks with strong runs begin to sell off. Take ACS for instance, which closed at $92 today from a pre-earnings close of $108 and they even announced a 2:1 stock split. How quickly stocks become unloved after the excitement of earnings fades.

Friday we face weekend event risk again and traders may choose to take profits and move to the sidelines to see what develops. That sounds like a good plan to me. I would raise my exit stops to Dow 9750 and Nasdaq 1925. Should those levels break I would be worried about the stronger levels at 9700/1900 providing another bounce like we had this week. The FOMC meeting next week should not provide any news we did not hear today and only a surprise rate cut would be of interest. I would not count on that so we remain focused on earnings as the smaller companies get their turn in the spotlight. Repeat, long above 9750/1925, short below 9700/1900.

Enter very passively, exit aggressively!

Jim Brown

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