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Pick A Number

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07-17-2002        High      Low             Volume Advance/Decl
DJIA     8542.48 + 69.37  8723.37  8452.76 2243 mln   1760/1364
NASDAQ   1397.25 + 21.99  1426.28  1370.21 1942 mln   1873/1467
S&P 100   453.68 +  4.87   463.50   447.46   totals   3633/2831
S&P 500   906.04 +  0.00   926.53   895.03
RUS 2000  406.69 +  2.42   415.26   402.06
DJ TRANS 5411.76 - 22.34  2491.33  2377.93
VIX        39.80 +  0.28    42.14    38.94
VIXN       63.23 -  2.01    66.04    63.16
Put/Call Ratio      0.82 

Pick A Number

All eyes were on the IBM earnings announcement after the close today and Big Blue did not disappoint -- if you were looking to play a shell game of hide the real earnings number. While the official spin from IBM was that Q2 numbers beat by a penny, with 84 cents over estimates of 83 cents, GAAP numbers were only 3 cents a share. Wall Street had already been expecting a ton of "one time" charges from IBM but the range was from 2.0 to 3.0 billion. The current number they are quoting is a $2.1 billion in one time pre-tax charges due to job cuts, restructuring and the sale of its hard-disk business, which it hasn't sold yet. Company management tried to spin the numbers with earnings of $1.45B and said the real number investors should be looking at is 89 cents a share excluding "all" charges.

Analysts had been looking for revenues to come in around $19.4B and IBM turned in almost $20B, but this is down 6% from the year before. It was interesting to note that IBM's CFO said, "We continue to improve our position in the industry for when demand picks up." Ah... for when demand picks up, so there isn't any pick up yet but when it happens they'll be ready. They didn't specify which industry they'd be ready for but sales in Big Blue's hardware division were down 16% from last year. Even their massive services division was down 1% from Q2 2001. Initial investor reaction was actually positive as IBM traded up over $2 in after hours. However, in today's OptionInvestor.com Market Monitor, Jim had some excellent insights into the usual IBM shenanigans that will likely come to light as analysts dissect the earnings report.

Traditionally, IBM has been able to manage earnings with massive stock buyback programs. Simply put, if revenues aren't going to meet the earnings per share estimates, then reduce the number of shares outstanding to make them look better. According to notes in the earnings release, IBM bought back $1.8B in stock last quarter, which is about 25 million shares. This was enough that it could have given the company a 2 to 4 cent edge on the EPS outcome. In addition to the buybacks the write offs dropped the company into the next lower tax bracket from 28.9% to 25.3%. This alone was worth an extra $52 million in "profits", which comes awfully close to the $56 million IBM said their total operations churned out in net profits for the quarter (after charges). Whether Wall Street believes the 84 cents, 89 cents or 3 cents results, it looks like you can pick a number because they're all going to be judged with a callous eye.

While the markets waited to hear from International Business Machinations, I mean Machines, it was another volatile session for traders. The futures were positive ahead of the opening bell due to stronger than expected earnings numbers from a few DJIA components. Unfortunately the rally failed just as it begun. The Dow popped up to 8723 or +250 points before immediately succumbing to a slow and steady drift downward. By 1:00PM, the index had reached its lows for the day at 8452 and merely bounced around the afternoon but ended positive by the close. This broke a seven-day losing streak for the Industrials but it wasn't a very convincing performance for anyone still wishing to invest new money. The Nasdaq Composite offered similar action for traders with a big gap up at the open to 1426 or +50 points before sliding into lunchtime. Traders must have been cautious with Greenspan speaking for a second day on Capital Hill. Alan came across as optimistic and voiced his opinion that the long- term outlook for the economy is the best he's ever seen it. Too bad investors we're willing to commit any cash on Alan's optimism.

What seems like the first time in a long time, the market internals were positive. Advancing issues out paced decliners on both the NYSE (17 to 13) and the Nasdaq (18 to 14). 52-week highs versus 52-week lows were 26 to 109 on the NYSE and 52 to 111 on the Nasdaq. Volume was strong with 2.2B for the NYSE and 1.9B on the Naz.

Chart of the Dow Jones Industrials

Chart of the Nasdaq

Yesterday evening, no one knew how Wall Street would eventually interpret Intel's earnings report. Considering the open this morning, it looks like everyone just turned their head and pretended not to notice. A similar reaction to IBM's numbers would help but if brokerage houses start coming out with negative remarks it could have the major indices aiming for Monday's low again. The 8900 to 9000 level, which currently coincides with the top of the Dow's descending channel, could be a tough hurdle to overcome. On the other hand, the Nasdaq is trying really hard to break through short-term resistance at 1400 (to 1450). As we mentioned last night and again this morning in the intraday updates, the Nasdaq 100 bullish percent has actually moved into bull confirmed status. This internal reading on the index is projecting a bullish posture and bears should become more conservative and act quicker to cover shorts if they move against them. Of course that is a "should" and not a "will" and they still have the S&P 500 in a bear confirmed status to give them moral support.

Plus, there are still a lot of earnings reports yet to be seen and heard and odds are skyrocketing that Wall Street will have to revise their estimates for the second half of 2002 lower again. Looking again at the Nasdaq composite traders will notice that the top of the longer-term descending channel from January is currently near 1550. That would be a 16% rally from the bottom on Monday (7/15/02) and you can bet bears will be lining up to short anything with four-letter symbols should this occur.

News of Note

Contributing to the positive open this morning for the DJIA were a couple of Dow components announcing Q2 numbers. Boeing (BA) flew past estimates of 80 cents with earnings of 92 cents(a) but lower than the 95 cents from the prior year. The number one soft-drink manufacturer, Coca-Cola (KO), popped over the prior year numbers of 47 cents and met estimates of 52 cents a share. Financial behemoth, Citigroup Inc (C), cashed in with 78 cents a share versus estimates of 77 cents. Also beating estimates was conglomerate United Technologies (UTX). Earnings were $1.23, which beat estimates by three cents.

Not contributing to the rally were JPM and HON. J.P. Morgan Chase missed Q2 estimates of 65 cents with results of $0.58 a share. Honeywell met estimates due to cost cutting but then revised their guidance lower and announced additional job cuts.

Of note in the hardware sector was Apple Computer (AAPL). Shares gapped down this morning and ended the day -12.4% after announcing that quarterly profits had fallen by almost 50%. The company also lowered guidance going forward despite revealing new products at the Macworld trade show.

Beating Lowered Estimates

If you happened to catch Jim Jubak's spot on CNBC tonight, I thought he made an interesting point. It's no secret that analysts have lowered the earnings bar so low that even the slow down in the economy's comeback will not stop many companies from meeting or beating the consensus estimates. Jim pointed out that as of July 2001 analysts were projecting a 113% increase in earnings gains in Q2 2002 for technology stocks. As of April of this year, that estimate had dropped to a more modest 38% gain in earnings. According to his numbers that estimate had fallen to just +4% heading into this week. More importantly, Jubak felt that analysts' estimates for the third and fourth quarters of 2002 were still too high and he believes we'll see a rash of revisions after the Street digests the Q2 numbers.

He might be right. The economy is expanding but it's not expanding as fast as projected last fall and Q1 of this year. In the last few months we have all but shot down a second half recovery for I.T. spending and we're seeing a slowdown in the growth across the rest of the economy as well. It's still growth and that's the good news but the current expansion is not going to fuel current earnings estimates. While Jubak didn't mention it in his report the mid-August deadline for the top 1000 companies to turn in revised or "CEO-approved" financials could prompt an even quicker move by Wall Street to realign their expectations with reality.

Tomorrow

It would be a strange twist indeed if Intel and IBM, two companies we expected to tank the markets with foul earnings news, fail to exact a response from investors and kick-start another shot at the much talked about capitulation event. But instead of Intel and IBM it turns out to be MSFT that does the dirty deed? The software giant announces earnings after the close on Thursday and the current expectation is that MSFT meets or beats estimates, especially with the possibility of increased sales as corporations rush to purchase software before MSFT moves to its leased-application revenue model. The challenge then becomes what does MSFT say in their conference call. It is tradition that MSFT downplays their numbers for the next quarter so we have to expect the same sort of rhetoric tomorrow. However, it may come down to just how badly do they down play the current quarter's and end of year projections?

Short-term the markets are poised for a rebound and a bullish report by MSFT could be just the trick. However, traders need to be careful. If you're long, tighten stops as we approach resistance and if you're not, then start picking out what you'd like to short when we get there.

While we wait for MSFT's earnings it looks like tomorrow could be another down day. IBM's after hours gains have fallen from +2.00 to just 30 cents and the futures are down. Maybe a nice double bottom at 8235 will be just the entry point bulls' need for a quick trade.

James

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