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Market Wrap

Super Thursday!

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      07-18-2002           High     Low     Volume Advance/Decline
DJIA     8409.49 -133.00  8621.95  8404.43 2.02 bln   1024/2138
NASDAQ   1356.95 - 40.30  1395.29  1356.80 1.80 bln   1025/2334
S&P 100   441.28 - 12.40   454.56   440.74   Totals   2049/4472
S&P 500   881.56 - 24.48   907.80   880.60 
RUS 2000  396.71 - 12.98   409.69   396.71 
DJ TRANS 2382.60 - 29.20  2435.12  2378.90   
VIX        39.95 +  0.15    41.33    38.24   
VXN        63.61 +  0.38    65.38    62.61 
Total UpVol   677.7M
Total DnVol 3,322.1M
52wk Highs   66
52wk Lows   436
TRIN        1.29
PUT/CALL     .93

For a day that started with five hours of pure boredom the close proved that investors were not as convinced in their heart as they were in their mind that Microsoft would beat the street. The markets not only sold off into the close they accelerated as investors raced to avoid a negative surprise from MSFT, SUNW, EBAY, GTW and NT. The actual earnings were a mixed bag but the market internals at the close were very lopsided.

Chart of the S&P/Dow

Chart of the Nasdaq

The day started off good with jobless claims coming in at an 18 month low. That was the end of the good news. The Philadelphia Fed survey crashed with a drop from 22.2 in June to only 6.6 in July. This was significantly below the 18.0 analysts expected and the lowest number since December. Analysts tried to spin the release saying it was still positive and still represented an expansion of the economy. It does not take a rocket scientist to see that a drop from 22.2 to a seven month low just over zero is a stark change in direction. This weighed on the markets as the possibility of that double dip grows larger. The conference board Leading Indicators were also flat and indicated the expansion could have topped.

This news weighed on the market along with the fear of negative earnings surprises tonight. The market traded in a very narrow range until 2:PM and then the bottom fell out. Had it not been for the MSFT bulls holding up the stock in the morning and indirectly the Dow and Nasdaq it could have gotten much worse. At the end of the day the up volume across all exchanges was only 677 million compared to 3.3 billion of down volume. For a day that was flat until 2:PM it proves how narrow the bullish support really was.

The after hours earnings parade was led by several of the giants in the tech sector. Microsoft announced earnings of $.43 cents that beat the street by a penny but included several charges not previously announced. There was a lot of discussion in whether it was actually a beat or possibly a serious miss but the revenue numbers outweighed the decision. They beat the $7.08 billion revenue estimate with $7.25 billion. They affirmed on the surface the numbers for the next quarter and revenue just barely under estimates. The preliminary outlook was still cautious. They said the environment remained very challenging which has become a familiar refrain. MSFT traded down about $1 in after hours.

SUNW announced earnings that were inline with estimates at a penny and broke a string of losses for the last four quarters. SUNW was optimistic and stressed gains in market share and sales of low end and high end servers. They predict a slight loss next quarter due to very strong competition for sales that reduced selling prices in the current quarter. They said their intention is to take market share and return to profitability later. The shares were down -15% to $4.90 from $5.80 in early trading.

EBAY posted results of $.19 cents and inline with estimates but guided analysts slightly lower on revenue for the next quarter. They affirmed earnings despite the lower revenue. Meg Whitman said they hoped to see a rebound in the economy in early 2003. The current weak economy is hampering their ability to grow despite hitting estimates. Investors fear the "fad" will burn out eventually and the very high PE will drop back to more realistic levels. EBAY is being added to the S&P at the close on Friday and will be added as a put play on OIN on Sunday.

GTW missed estimates by two cents when they announced a -.19 cent loss after the close. They expect conditions to remain challenging for the rest of the year and they are pinning their hopes on a sudden back to school buying binge in August. Don't hold your breath! The CEO said he was gaining share in the marketplace, which I am sure is news to Dell. He was pressed with questions about what they were having to do to gain this share and the answer was price. They are constantly cutting prices to undercut the bigger players which means their margins are shrinking. They were confident the business was going according to plan and would continue to improve. Let's hope they are right because Steve Jobs said yesterday he saw no recovery in the PC sector for AT LEAST nine months.

PMCS beat the street by a penny. VTSS reported earnings inline with estimates and said it would cut -200 more jobs to curtail research expenses and consolidate facilities. Cypress Semi (CY) beat the street by two cents on the third quarter of sequential revenue growth. XLNX reported earnings inline with estimates and said they saw continued steady sales of new chips. Reading between the lines on the semi earnings above, it appears the chip sector is actually seeing a rise in bookings. Nobody said they saw a jump but all said they were seeing business improve. Despite the gloom and doom that appears to be covering techs I think this is a positive light at the end of the tunnel. The Book-to-Bill numbers will be out on Friday. SMH calls anyone?

The IBM spin results continued to amaze. The stock ran to over $74 intraday before closing at $72.11. Despite the post earnings bullishness the stock may suffer from clearer heads next week. The comments about a slowdown in the global services business as well as profits from the currency impact has thrown a cloud over their future. The dollar is not expected to fall much more but the services appear to be suffering. ADP dropped nearly -25% after warning of slower growth and weak economic conditions. This was the first quarter in 40 years that ADP did not grow in the double digits. EDS dropped another -1.50 on fears of shrinking services contracts. PAYX fell -3.72 on the same fears. There is a good possibility IBM will end up back on the put list on Sunday as well.

AOL took another hit at the close with the resignation of Pitman as the CEO. This may actually be a positive as it ends the speculation about when/if it was going to occur. AOL is suffering from a drop in advertising revenue and the growing DSL market. Once you are on DSL you don't need AOL and with the bloom off the Internet surfing boom AOL is struggling to maintain dialup accounts. AOL traded under $12 at the open as the result of two separate newspaper stories. The Washington Post called their accounting into question and said they pumped up revenue to appear better than actual.

Analysts have been making a big deal out of the results of the current round of earnings. According to First Call of the first 125 S&P companies to report earnings 76 have beaten estimates, 36 reported inline and only 13 missed estimates. While that may look good on the surface we need to remember that nearly all of those companies have been guiding lower for the last three quarters. The bar is so low a snake could cross it! What is not reported in these stories are the number of companies lowering guidance for the next quarter and that is most of them. A year ago analysts were projecting earnings growth for the 2Q of +113%. In December they were still projecting +38% growth. In April those estimates had dropped to only +4% growth. The current estimates for the 3Q are +16% growth and according to First Call need to come down to a more realistic +1% growth. With the constant negative guidance from reporting companies these earnings downgrades should start to appear quickly.

With the market pause yesterday there were many traders who quickly got their hopes up that a bottom had been seen and a rebound was underway. Most would be surprised to learn that in the last five days there has only been two S&P-500 stocks that hit a new 52-wk high. The advancing S&P stocks on Thursday were 65 to 428 declining. This is not a picture of a rally in progress or even of consolidation in progress.

The Russell-2000, normally a leading indicator of any broad market rally, has lost more than -65 points since the reshuffle highs on June-30th, nearly -15% of its value in three weeks. It closed today at 397.47 with a loss of a whopping -12.98. While I applaud the positive comments from the semiconductor sector tonight I think the markets still have the confidence virus. They are afraid of the coming restatements of earnings beginning on or before August 14th. They are concerned about the possibility of a second recessionary dip. They are concerned about an anniversary attack on 9/11. They are afraid about holding stock overnight much less for weeks/months at a time. The retail investor is withdrawing cash from mutual funds in record amounts and there appears to be no end in sight. I believe it will take more than a couple positive earnings surprises to make the retail investor rush back into the markets. The stampede is still headed south and any attempts by individual cows to turn around is met with a swift end as they are run over by the herd behind them.

We blame everything on the shorts. Those dirty rotten scoundrels who are profiting off the misery of retail investors. Surprise! In numbers released today only 2% of the recent high volume on the NYSE was short sales. Does that surprise you? It does me. Suddenly the picture becomes clearer. If it is not the shorts then it must be real sellers liquidating portfolios and moving to cash or worse foreign investors taking that cash back overseas. If it is millions of individual sellers driving the markets down and not a few back rooms of fur coated bears then maybe this irrational pessimism is actually rational. Alas, for my final thought, remember the herd is always wrong on both ends. They are the last ones in and the last ones out just before the reversal comes.

The direction for tomorrow is a toss up. Futures have been on both sides or zero tonight as the earnings from more than 200 companies today are being digested. The markets closed right at support based on the S&P at 880. If that support fails then the next couple of weeks are not going to be pretty. With the major earnings leaders already announced we are back to depending on the second tier companies for inspiration. The earnings incentive to draw/keep investors in the market is basically over for the quarter. We are now back to the age old question, "why buy now?"

Enter Very Passively, Exit Very Aggressively!

Jim Brown
Editor

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