Is That It?
The Dow lost -111, the S&P -13, is that all we get from a seriously negative flurry of earnings? No, the real damage came in the Nasdaq which dropped -47 points on Friday with Microsoft leading the drop at -$4.00. I guess investors were not that excited about the dividend.
Dow Chart - Daily
Nasdaq Chart - Daily
Let's get the economic news out of the way first. Industrial production surprised analysts with a drop of -0.2% compared to estimates for a gain of +0.3%. Nearly all the major segments experienced a decline. Makes you wonder what the next ISM report will show. Possibly a major correction to the last blowout number. With Capacity Utilization at 75.4% and the lowest since last March, the inflation pressures remain zero because pricing power is zero. The only positive factor, or so the analysts tell us, is that inventory levels are so low that any increase in demand will cause a strong jump in manufacturing. The key word in that sentence is demand.
The Michigan Consumer Sentiment came in at 83.7 compared to consensus estimates of 87. The index is getting very close to the October low of 80.6 despite the holidays and the Bush tax cut package. Unemployment is still rising and consumer debt is increasing. As more troops saddle up to leave for Iraq everyone in their extended family begins to worry that the war could be messy, lengthy and dangerous to their loved ones. The stock market rally has failed to produce any follow though in January and that was before the negative earnings guidance on Thursday.
Home Sales may have peaked according to the NAHB Index. It is much too early to tell but the index dropped from its high of 65 in December to 64 in January. Not a screaming decline but with everyone predicting the eventual demise it could be the beginning of the end. With the recent economic reports I don't think there is any chance of a rate hike soon which means a booming spring if everything remains the same. Once those rates start up it could be a long dry spell for builders.
Scratch the second half recovery. That was the tone of many analysts on Friday. They are quickly abandoning the hope of a recovery in the second half of 2003 and it is only January. There were several interviews on Friday about the "lack of any significant global IT spending" comment from Microsoft. Suddenly those bears who had been reconsidering their position only a week ago have suddenly become diehards again. When a dozen of the largest companies in the US lower guidance for the year due to a lack of visibility it makes for a lot of headline grabbing. Remember also that the early reporters typically have the best results and that paints a dreary picture for our future.
The Semiconductor sector was probably one of the hardest hit this week. With Intel's warning on Tuesday and several other unfriendly reports during the week the SOX dropped over -14% from the opening high of 348 last Monday to 297 at Friday's close. PMCS added to the gloom by saying they would be cutting -16% of their workforce. You could be tempted to buy chip stocks at this level because it is strong support. However, investors would be hard pressed to provide a reason to own them other than really long term given the recovery now moving to 2004.
GE added to the negative sentiment with a -$1.5 billion loss at a reinsurance unit and warned that profits could fall as much as -10% in the current quarter. The company has been hit in insurance, power generation, jet engines, airline maintenance and problems with its pension fund. GE said power systems could see its net income drop by -50% in the 1Q. The CEO said the pension fund was dwindling and could fall from its $14 billion surplus in 2001 to as little as $2 billion in 2003. Historically pension income has been a plus to the GE bottom line with +$1.4B in 2001 but in 2003 it will be a -$300 million drain instead. GE announced earnings of 31 cents, which were inline with reduced estimates. They are a long way from broke with net income for the year at $15.1 billion. They are just suffering from the same problems that are killing the smaller companies.
EBAY soared +3.60 and touched $75 intraday. CEO Meg Witman said they would consider offering a dividend once the tax plan was approved. She did not mention a stock split but they split at $75 in both 1999 and 2000. Does lightning strike three times in the same spot? Stay tuned.
The number one home improvement supply company, Home Depot, warned that same store sales could fall as much as -10% this quarter alone. They lowered their outlook for the year and said they were going to spend $4 billion to renovate old stores and enhance service levels. HD said long term sales were now expected to grow only +10% compared to prior estimates of +15% to +18%. The stock has fallen to $22 from $52 in 2002 and actually closed up +26 cents on Friday.
Microsoft took a lot of heat for its dividend program. For a company with nearly $50 billion in cash the 0.28% dividend was considered chump change. The average dividend from S&P companies in 2002 was 1.80% or six times the MSFT dividend. Considering the -4.00 drop in the stock it is going to take a long time to recover the money. With the cash on hand MSFT could pay the dividend for 51 years. Hopefully it won't take that long to breakeven.
The Fed heads are worried. At least that is the message I am seeing. SF Fed President Robert Parry said on Friday that there "are good reasons to feel a good deal of uncertainty about the road ahead." He said the war in Iraq, terrorists, lingering concerns over corporate governance and the fragile state of the economy were all causes for concern. Parry is a voting member of the FOMC. The next two day meeting is a little over a week away on Jan-28th/29th. No, they will not raise rates and an unexpected rate cut could send the market reeling on fears of the unknown.
Next week could be rocky for the major indexes. We came to a screeching halt at 900 on the S&P and 8560 on the Dow with the Nasdaq leading the drop. The bulls are kicking and screaming as they slide down that slope of hope and the odds are good we could see a rebound on Tuesday. Monday is a market holiday. I think a three day weekend prompted many traders to go flat or limit positions but they will come back into the market rested and eager on Tuesday. I see resistance at 8600 and again at 8650 and 8700. Going uphill is going to be rough. The only major support is at 8560 then it could be free fall to 8400 where the 100 DMA could slow the descent to real support at 8350.
The Nasdaq is grossly oversold with its -47 point drop but it may not be done. 1361 is the next support but that support may be weaker now than before. The 100 DMA at 1332 is the most likely resting place. Chips are on support at 297 on the SOX and MSFT could rest just over $50. The tech majors have already announced and what they said will now weigh on those others to come.
Colin Powell made a strong statement on Friday. He said that by the end of the month Iraq will be proven beyond a doubt to be in violation of the UN resolution. He said it forcefully and without wavering. There is a good possibility that somebody knows something and they are waiting until just before the Jan-27th UN meeting to "find" it. This would prevent days of posturing and excuses by Iraq and a "major" find the day before would color the opinions of the security council. The war could then begin around Feb-14th after the Muslim pilgrims return home. The deadline is fast approaching, Saddam is more defiant than ever and troop movements are escalating. All the players are taking their places and the curtain is about to go up on the show.
The market may rally once the shooting starts but with world opinion strongly against the war it is more likely to go down before the deadline. The UN deadline is Jan-27th and the President's State of Union speech is Jan-28th. The Muslim holy days are over Feb-12th and all troops and equipment will be in theater by Feb-14th. The key point for me is the Jan-27th and Jan-28th events. I suspect the speech will tell us we are going to start the war. The markets will expect this also and that weight should push them down in advance. Just my opinion but I think roadmap is clear. I see no reason to buy stocks now and I expect institutions are thinking the same thing. What if? What if Saddam really has a couple of nasty weapons and he manages to launch a preemptive strike somewhere? What if Osama is ready to launch a round of attacks on us when we attack Iraq. He already warned about it. "What if" is a game the market plays well. Are you ready to play?
Enter Very Passively, Exit Very Aggressively!
"An optimist sees an opportunity in every calamity, a
pessimist sees a calamity in every opportunity."