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Not That Bad

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      09-05-2002           High     Low     Volume Advance/Decline
DJIA     8283.70 -141.40  8420.20  8217.05 1.53 bln   1089/2066
NASDAQ   1251.01 - 41.30  1274.76  1251.01 1.46 bln    981/2362
S&P 100   439.14 -  8.84   447.98   435.65   Totals   2070/4428
S&P 500   879.15 - 14.25   893.40   870.50 
RUS 2000  381.06 -  8.69   389.75   380.91 
DJ TRANS 2204.26 -111.00  2314.26  2186.18   
VIX        42.23 +  2.29    44.87    41.79   
VXN        60.72 +  3.30    61.72    59.59 
Total Vol   3,205M
Total UpVol   663M
Total DnVol 2,511M
52wk Highs  110
52wk Lows   282
TRIN        1.41
PUT/CALL    0.89

Not That Bad
By Jim Brown

Despite the drops in retail sales, a falling ISM number and lower Productivity numbers the headline everyone waited from came from Intel. The initial consensus was not that bad after hearing they would lower numbers to only the midpoint of their initial guidance. Now the question is why did they not bounce higher after the announcement?

Chart of the Dow

Chart of the Nasdaq

The day started off with more negative news from the retailers. Wal-Mart missed same store sales estimates again with only a +3.8% increase but other stores faired much worse. GDYS -8%, FTUS -10.8%. Remember this is for the last week of back to school sales and numbers were dropping in many cases instead of rising. The Chain Store Sales report showed August sales only grew +1.6% and was the weakest number since last September. It appears the zero interest car loans are continuing to close wallets for general retail goods. Retailers missing estimates include WMT, GDYS, FTUS, JWN, AEOS, ROST, DG, KSS, TGT, FD, SKS. Even the discount stores posted losses which disturbed analysts who thought they would continue to thrive.

Other economic reports included Factory Orders, which surged in July to 4.7% and offset a revised -2.5% drop in June. The conflicting signals did not provide investors with confidence that things have changed but that the low level of activity made reporting very erratic. The majority of the gains were in aircraft orders (+8.76%) and when that number is removed results showed a much weaker +1.8% number. Obviously +1.8% for the broader manufacturing sector is very anemic.

The Productivity numbers surprised to the upside at +1.5% but it is due to manufacturers maintaining current production levels with fewer employees. Continued cost cutting (layoffs) raises productivity levels. However, unit labor costs rose +3.1%. New jobless claims came in +8,000 higher than expected at 403,000 and the second week over 400,000. The four-week moving average also rose over 400,000 which was troubling for the broader trend. The initial claims from last week at 403,000 were revised upward to 411,000. It appears that the downward trend in July has failed and unemployment is accelerating upward. We will get the real story on Friday morning with the Non-Farm Payrolls which are expected to increase by 30,000. I strongly doubt this but we will know at 8:35 in the morning.

The big report of the day was the ISM non-mfg and it came in at 50.9 and well below consensus of 54.0. This was the third monthly drop in a row. (60.1, 57.2, 53,1, 50.9) Anything below 50 represents a contraction. The services section has normally been exempt from severe recession drops but even that sector is suffering now. The low for the year was 49.6 back in January and I would bet we see another 49 number next month. This was the lowest number since January. New orders fell to 51.6% and inventories fell to 46.0%. This indicates businesses are trying to lower inventory to offset slowing sales. Exports fell -13.5% to 46.0% indicating that global demand is also slowing. Getting the picture? The unemployment numbers for Germany were released today showing a 9.9% unemployment rate. This would confirm the global trend.

In the tech arena HPQ announced yesterday that the back to school season was much weaker than expected at only 60% of the expected increase. This appears to be the pattern across the board. TLAB warned today that this was the worst downturn they had ever experienced and said Q3 sales would be -15% to -25% less than prior estimates. After the bell Motorola affirmed estimates and said they were making advances in cost cutting and were targeting 93,000 employees in mid-2003 down from 150,000 in 2000. The CEO said the 3Q and 4Q estimates were in range. Banc America also reiterated their estimates for the SOX to drop to 200. They said chip earnings estimates were still 15% to 25% too high.

On the Intel conference call they said sales were down across the board including the consumer products. They refused to answer any questions on servers individually. They avoided any detail about business demand. This would be negative to me. If business demand was increasing they would want to brag about it. Intel said they were going to guide down to the lower mid point of their previous estimates. They refused to give guidance about the 4Q but said full year estimates were in still in the range of their previous guidance. They also refused to give processor mix guidance. It was a very subdued call with questions being dodged constantly.

When pressed by Dan Niles they said any 4Q seasonal bounce was not a sure bet meaning they were seeing weakness in 4Q orders. Also, they said their inventory levels were rising (sales slowing) and that we should not expect any big sell into the pipeline for seasonal trends. They said their channel vendors were not interested in ordering any more product than they could sell in a weakening environment. They were asked about pricing since they just cut prices drastically and they said the price cuts helped some but that pricing remains very aggressive. This means the channel will only order for inventory if they can steal it and that AMD is cutting their throat trying to hold market share. This is going to cause margins to drop and their new estimate is in the 51% range. AMD has already warned that it is only seeing a modest increase in demand for the 3Q. In my opinion it was very contentious with Intel avoiding any hardball questions and any references to guidance past this quarter. The stock had run up slightly after the first announcement but then moved back to $15.50 in the middle of the call. Buy the end it spiked back up to 15.78 after a couple positive responses. Futures traded on both sides of zero during the call but were positive when the call ended.

The impact to our markets tomorrow should be positive. The QQQs were up +16 cents in after hours and Intel finished up about +75 cents from the closing numbers. Most of the tech related stocks like BRCM, PMCS, CSCO, MSFT, DELL all saw decent increases after the call with MSFT up over $1.00. If our future was left up to Intel tomorrow we would probably see a positive bounce. Dow component Phillip Morris was also up in after hours. However the bigger impact on the market will be the Non-Farm Payroll report. If we get a negative jobs number tomorrow then all bets are off. A negative number will telegraph even more weakness to the double dip crowd and bring back that recession fear. A positive number, even if below estimates, should be ignored on the better than expected Intel news.

If we get a decent jobs number I would expect a relief rally that could carry over into next week. The Intel bad news has been priced into the market and those waiting on the sidelines will start moving back in. I have been expecting a post 9/11 rally next week beginning with bargain hunting on Monday. This could jump start that rally. I will be giving serious thought to going long on Friday instead of Monday depending on the market reaction to the jobs report.

Enter Very Passively, Exit Very Aggressively!

Jim Brown
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