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Market Wrap

Earnings Overload!

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      01-16-2003           High     Low     Volume   Adv/Dcl
DJIA     8698.91 - 24.30  8805.52  8673.05 1.80 bln 1713/1516
NASDAQ   1423.77 - 14.40  1449.13  1420.11 1.51 bln 1463/1816
S&P 100   464.70 -  2.18   471.04   463.04   Totals 3176/3332
S&P 500   914.60 -  3.62   926.03   911.98 
W5000    8650.96 - 29.00  8750.90  8627.94
RUS 2000  394.88 -  0.65   398.87   394.24 
DJ TRANS 2372.28 + 11.80  2395.00  2359.31   
VIX        27.67 -  0.19    28.51    27.09   
VXN        44.80 +  1.35    45.85    44.43 
Total Volume 3.505B
Total UpVol  1.162B
Total DnVol  2.299M
52wk Highs  262
52wk Lows    70
TRIN       1.51
PUT/CALL    .87

Earnings Overload!
By Jim Brown

What a day! The market was hit by all sides with earnings news, war news and economic news but still managed to trade in a narrow range and finish with only a minor loss. Iraq warheads were unable to do what earnings news after the bell may have accomplished.

Dow Chart - Daily

Nasdaq Chart - Daily

The news overload is huge today and I will try and cover only the hot spots in an effort to address the major issues. Economically the country is still struggling. The CPI came in slightly lower than expected and shows that inflation is not the problem we should worry about. With falling prices and no demand it appears that deflation is the major problem ahead. Jobless claims fell to 360,000 from the expected 400,000 level but analysts were quick to claim January as a highly volatile period. They did not expect that number to stick and with rising announcements of layoffs in 2003 it should increase.

Even worse news came from the Philadelphia Fed Survey at noon. The headline number came in slightly higher than expected at 11.2 but less than a revised 11.3 for December. While this shows a slight overall expansion of manufacturing in their district it shows that the pace of the expansion came to a dead stop from December levels. The headline comment was the most damaging. They said "expectations for growth diminished notably in January". Specifically dismal was a lack of job growth. 16% of companies surveyed expected to reduce jobs compared to only 10% which expected to increase hiring. The employment component fell to -6.1 for January from -0.9 in December. The future general activity index fell to 32.6 from 52.2 in December. This shows a marked concern for future growth prospects. The MAPI Survey also released today showed better trends with a positive outlook by manufacturers. The index at 67 for the 4Q-2002 was dramatically improved over the 59 for the 3Q-2002. The problem is the long time frame referenced. We all know the economy rebounded in the early 4Q of 2002 but we also know it tripped again in December. In April this survey will reflect the slowing conditions.

The market celebrated the Jobless claims and the CPI report by running up to 8800 again at the open. The bulls could not hold it and we retreated back to 8750 before news came from Iraq that the inspectors had found 12 chemical warheads that were not declared and were not there when they inspected in 1997. The warheads were not loaded and it remains to be seen if this is a material event. Still the markets remained very jittery for the rest of the day.

The worry over the warheads was offset by the "Where's Waldo, aaa.., Saddam" rumor game. More rumors were floated that he was still talking to a country in northern Africa about a friendly exile. The sticking points were an agreement from the U.S. that we would not try to prosecute him for war crimes and civil rights violations. I doubt that will happen. Also, a Saddam rule from afar could still be a problem in the eyes of the U.S. Also offsetting the warhead problem was a move by Turkey to create a Jan-23rd "Peace Summit" to prevent a war in Iraq. There was also talk about moving the deadline to March 27th instead of Jan-27th to allow the UN inspectors more time to work. If you wanted uncertainty about the coming war today was your cup of tea.

A bright spot for the morning was the earnings from GM which were very strong at over $1 billion despite the added incentives needed to sell those cars. These earnings were four times the $255 million earned in the year ago period. However, think back about that year ago period. This was right after 9/11 and even with the rushed incentive plan the sales were lousy.

Countering the GM news were comments from broker Raymond James that tough times were ahead. They reported earnings down -20% and said they expected the market recovery to be slow and erratic and for future earnings to come in at historically low levels. Just a bundle of good news there!

If you are a bull or a bear you got news after the bell to fit your market bias. IBM was the leadoff hitter for the bulls and beat the street by four cents at $1.34 for the quarter. They did not go out of their way however to paint a very bullish picture. The company said the current tech spending was "stabilizing" but IBM would continue to see pricing pressures going forward. They said the decision timeframe for customer purchases was increasing and the size of the deals were smaller than a year ago. The CFO said that they were comfortable with the "current average street consensus" for 2003. He was very specific that they should not expect more than high single digit revenue and earnings growth. The CFO said IBM would consider additional dividend options in the future. The stock rose initially from its $86 close to $87 but quickly fell to $84 as more info became available.

SUNW also beat the street with no earnings but the street had expected a loss of two cents. While SUNW said it was looking forward to the future is also said the outlook for the next six months was very cloudy and said they would not be giving mid-quarter guidance as they had done previously. The company claimed it was still gaining market share in the Unix server sector. This report was seen as positive but the cloudy outlook statements just added to the overall confusion.

The smoking gun? No, not in Iraq but in Redmond Washington. Microsoft came across as a snake oil salesman when it announced earnings. First, Microsoft announced it was going to pay a dividend of 16 cents. Great, but what were the earnings? Then it announced is was going to split its stock 2:1. Really surprising since they have a long history of not splitting the stock until the $120 range. What are they not telling us? Where are the earnings? The earnings did beat the street at 47 cents compared to estimates of 46 cents. So far so good but here comes the problem. Microsoft missed the revenue numbers slightly and warned for the rest of the year. They said that 2003 earnings would be weaker than expected due to "no material pickup in global IT spending in the near future". Turn out the lights the party is over. Microsoft, the biggest software monopoly on earth, said PC sales will continue to grow in only the low single digits. With most of that expectation backend loaded in the 2H of 2003 that means the next two quarters are going to be very cloudy. Sounds like the SUNW forecast. You can translate "very cloudy" into "ugly" without a thesaurus.

The impact was clear almost immediately. Microsoft knows what is coming and knew the impact to their shares was going to be drastic. They attempted to pull a rabbit out of their hat and transform it into a Mercedes right before our eyes but nobody was fooled. The rabbit was dead on arrival and smelled like a rotting first half. Despite the artificial enhancements to induce investors to buy MSFT stock it dropped -$2 in after hours.

There are multiple problems with MSFT at this stage. The dividend plan probably got a boost from Gates since he will receive about $40 million for the shares he owns. Other stockholders will benefit as well. Considering the stock dropped -$2 in after hours they are only down -$1.84 now and not -$2.00. I am sure that is comforting. The stock split is the toughest part. We have taught for years that the more a company splits its stock the harder it is to move that stock price in the future. After the split there will be 10.8 billion shares of MSFT stock in circulation. Moving the stock $1 on 10.8 billion shares requires a huge amount of buying pressure. Mutual funds with share limits will also be forced to sell excess shares. It makes you wonder what Microsoft really sees up ahead if they were so willing to grasp at straws to hold up their stock price.

AMD also announced earnings or lack thereof after the bell. Analysts had expected a loss of -41 cents. AMD had projected a "significantly narrower loss" than the 3Q showing of -74 cents. The actual number was significantly lower than analysts at -68 cents. Investors did not applaud this "significant" improvement and I doubt AMD will be doing anything but a reverse split any time soon. AMD said sales going forward will be flat to nominally up. Good thing they did not say "significantly better".

The only Internet stock on a roll announced earnings after the bell. EBAY, the worlds trading post, beat the street with 28 cents compared to estimates of 24 cents and exceeded revenue estimates. They tripled profits and also raised guidance for the full year. EBAY raised estimates to 30 cents for the 1Q compared to analyst estimates of 25 cents and full year estimates from $1.17 to $1.27. Their holiday volume was 68% higher than the prior year. Must be nice to own a cash cow like this one. Remember, EBAY was started to help the founders wife sell her PEZ collection. Really. The EBAY goal is to reach $40 billion in auctions within three years. They hit $14.9 billion in 2002. Want to talk stock splits? EBAY split its stock at $75 in 1999 and 2000. EBAY was trading at $72.50 in after hours. Does not take a rocket scientist to figure out the future here.

Where are we going from here? Duh! IBM said annual growth in only single digits backend loaded to the second half. That means they "hope" there is a second half. SUNW said "no guidance" and "very cloudy" so no help there. AMD said, who are we kidding, who cares what AMD said. MSFT said "no material pickup in global IT spending in the near future" and warned their earnings would be less than expected. EBAY is profiting because all the unemployed workers are selling assets to eat. Where do YOU think we are going?

The futures are down huge. The S&P futures are trading at 911, down from their 920 4:15 close. Nasdaq futures are down -12 already and could get worse. There is still an additional hurdle in our immediate future. GE reports earnings tomorrow before the bell. Bullish investors will be looking for any light at the end of the tunnel to hang their hopes on. If GE says something nice there is always the chance the market could recover. However, GE is expected to be in trouble with their power generation systems and their multiple exposures to the airline industry. Will they beat the street? I doubt it. More than likely they will announce inline with the reduced estimates and try to spin single digit growth as a good thing. Remember, 2002 was their +17% growth year any investor could be proud to own year. Too bad it did not work out that way. The best thing about GE earnings is that everyone is expecting them to be bad. That leaves the potential for an upside surprise or maybe earnings that are just not as bad as expected. I doubt it is going to help regardless of what they say.

The bulls got multiple chances to grab for the gusto this week. The Dow traded over 8800 every day for the last six days, even closing over it once. Obviously strong resistance even with high earnings expectations. Now that future expectations have been shredded by all four of the big techs I would seriously doubt we will see 8800 again anytime soon. Support begins at 8650 and continues down to 8400 in varying degrees. Tuesday night I said, "With every earnings report bulls will lose another reason to buy. The short-term reasons to buy will diminish even more with every "no recovery yet" guidance statement." That is even truer tonight than it was on Tuesday. The new bull market lost one leg on Tuesday with the cautions from Intel. Scratch another with MSFT and another with SUNW. We will call it a draw on IBM and AMD does not count. Are you getting the picture? The new bull market is tottering on its one remaining leg and GE is next at bat. Even if GE manages not to turn the bull into a piņata ready for a fall, just how far do you think it will get on one leg? Those DJX 88.00 puts are looking really good tonight.

Enter Very Passively, Exit Very Aggressively!

Jim Brown


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