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Market Wrap

Telecom Bounce, Telecom Drop

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      01-23-2003           High     Low     Volume   Adv/Dcl
DJIA     8369.47 + 50.70  8386.61  8255.86 2.01 bln 2033/1201
NASDAQ   1388.27 + 28.80  1388.27  1377.50 1.49 bln 1902/1399
S&P 100   450.70 +  5.03   452.34   445.27   Totals 3935/2590
S&P 500   887.34 +  8.98   890.25   876.89 
W5000    8405.68 + 83.60  8429.05  8311.22
RUS 2000  383.71 +  3.18   384.39   380.22 
DJ TRANS 2230.77 + 17.10  2236.56  2211.52   
VIX        30.97 -  1.04    33.22    30.42   
VXN        43.27 -  0.89    45.20    42.56 
Total Volume 3,700B
Total UpVol  2,693B
Total DnVol    953M
52wk Highs  210
52wk Lows   126
TRIN       0.87
PUT/CALL    .68

Telecom Bounce, Telecom Drop
By Jim Brown

The market was poised to open up this morning on the stronger than expected earnings news from QCOM, TXN and NOK. Just as the opening appeared to be a shuttle launch AT&T announced earnings that missed by a mile and the Telecom bounce turned into a retest of the Dow's December lows.

Dow Chart - Daily

Nasdaq Chart - Daily

Adding to the negative earnings announcements before the open was news that Jobless Claims rose again last week. There was only a +18,000 gain to 381,000 but it showed that the holiday pause in the layoffs was over. Continuing claims also rose to 3,408,000 despite expiring benefits for many workers. Jobless claims should actually be dropping as employers hire workers to replace soldiers called up for Gulf duty. The pace of layoffs is still increasing with corporations announcing 426,000 layoffs in the 4Q compared to 269,000 in the 3Q. Nearly two million workers have now been out of work from 6 to 12 months.

Helping hold up the market was the Leading Indicators which rose +0.1% to 111.3. This was the third consecutive monthly gain however slight. The gain today was the total gain for the last six months which indicates how fragile this recovery really is.

The really significant news that shook the market was earnings related. AT&T shocked investors with a loss of -79 cents a share compared to a loss of -31 cents a year ago. Revenue is dropping fast and they said it would continue in 2003 but at a slower rate. The stock dropped from yesterday's close at $25.29 to $19.50 in early trading. This was a huge deficit for the Dow to overcome and AT&T kept it in the cellar most of the day. AT&T said it would no longer provide forward guidance and joined a growing group of companies who would rather release no news than bad news.

Adding to the Dow problems was an earnings miss by another telecom, BellSouth. BLS missed earnings by a penny. The results by BLS and T knocked -$1.40 off Dow component SBC. Also hurting the Dow was the first ever quarterly loss by McDonalds. The company pulled out of three foreign markets and was closing 719 outlets. The loss included an -$810 million charge related to store closures. The current fast food price war as well as healthier eating habits are taking a bite out of the big Mac. They also lowered growth prospects going forward.

CAT, another Dow component, beat estimates but lowered its outlook for 2003. They expect profits to drop -5% on flat revenue.

KRB, a prime credit lender which operates at the opposite end of the spectrum from COF and PVN reported its first loss since 1993 due to higher charge offs and repossessions. We have been reporting for months that auto repossessions were soaring as much as 50% in some areas as unemployment made it tough to keep up those payments. KRB is feeling the heat. KRB said it may be forced to slow loan growth especially in its consumer division which makes home repair and college tuition loans. They said the economy and the market has been bad for so long that even the better credits are starting to "fray" around the edges.

After the bell today AMZN reported earnings that beat the street's estimates by four cents. The stock traded down in after hours after comments about potential 2003 earnings. The company said it was going to keep the free shipping for orders over $25 as a permanent feature and they were going to lower prices across the board again. This was expected to raise revenues by as much as 30% for the year but reduce profits by -8%. Since this was only the second quarter ever that they made a profit analysts were disappointed and expressed concern that the business model was never going to work. You can't keep raising costs and reducing prices forever to capture customers. Eventually you have to make a profit to keep the doors open. I had a lot of email about my editors play on AMZN last Sunday. Evidently many other investors felt the same way.

KLAC also reported earnings that beat the street by a penny and said current orders were "roughly" the same as the last quarter. Analysts are currently forecasting a -9% drop in the current quarter. BRCM posted a 4Q loss of about -$2 billion including charges for prior acquisitions and the CEO resigned. Without charges the loss amounted to -2 cents a share and inline with analyst's estimates. They said they expected to post a penny profit in the current quarter. Needless to say these two earnings reports are not going to energize the chip sector tomorrow. The SOX has tried unsuccessfully for three days to break above 300 again.

Thursday was a big earnings day with 10% of the S&P reporting. 206 S&P companies have now confessed and the guidance is shaping up like this. 40% of companies are giving guidance inline with estimates, which is not really exciting. 20% have raised guidance for the current quarter. Here is the kicker, 40% have warned going forward. That 2:1 warn:raise guidance is very disturbing. Analyst estimates for 2003 are dropping fast. On Oct 1st analysts were expecting +17.4% earnings growth for 2003. On January 1st it had dropped to only +11.7% for the year. As of today the estimates have dropped into the single digits at +9.8% for the year. This means that the end of year rally on +17% earnings growth expectations is very overdone at +9.8% and dropping.

The war update for the day came in the form of another "running out of time" speech by Colin Powell. The emphasis was on "if we decide to act we will act with or without the UN or willing partners." Sounds like a warning that next week the war will be announced regardless of the UN report. Hans Bliz also got some more face time with news of Iraq road blocks to the inspectors including things like refusing to let the helicopters take off once the destination was known. Iraq police dressing up as scientists and posing for interviews and acknowledgement from several sources that Saddam has promised to kill any scientist who talks to inspectors and his family. Whether you believe these reports or not the rhetoric is increasing and we all know what the end result will be.

Late this afternoon there was news out of Korea that they would work toward diplomatic resolution of the nuclear problem. The market spiked up slightly, just enough to stop me out of a short signal on the futures monitor, then it sold off again. The headline caught attention but the reality was that nothing changed. South Korea is simply trying to keep North Korea and the U.S. from starting a fight that would involve the South.

The Dow gained +50 points! Cheers and backslapping was could be seen on the trading floor. You would have thought the new bull market had begun. In reality all we got was a wimpy bounce after a retest of the December lows. We got a +50 point rebound after a five day -600 point drop. Am I being too bearish? My thought process after a -600 point drop to major support is a V bottom rocket on heavy volume, IF it is really the bottom. Instead we stopped well below yesterday's resistance on the Dow and the Nasdaq rolled over right on schedule at 1391 again.

The Dow dropped to 8255, only +13 points above the December lows and the last major line on the chart before a potential retest of the October lows at 7197. Yes, 7197. Very few traders actually expect it to drop that far but should 8242 fail it could be a quick trip. Do not discount this possibility because it is very real. Maybe not 7197 but somewhere below 8242 is a chart point waiting for us.

Tomorrow has no major economic reports. The markets will be left to react to earnings from a reduced slate of 35 companies, most of which I have never heard of. There will be the required smattering of IRAQ news and posturing for next weeks events. I don't see it as being a wildly bullish day. Dow gains, if any are likely to stop at 8425 and Nasdaq gains at 1400. Many traders will probably decide to go flat for the weekend with the UN report on Monday, State of the Union on Tuesday and a two day FOMC meeting ending on Wednesday. Keep your seatbelt fastened. There could be some bumps ahead.

Enter Very Passively, Exit Very Aggressively!

Jim Brown


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