The market was bombed by economic reports and earnings warnings on Thursday but the bullet proof market failed to respond. The markets were at the highs of the day at 2:45 and only fear of the nonfarm payrolls tomorrow morning was able to turn them negative. The Nasdaq was by far the strongest index and resisted the sell off until the very end but finally gave up a dime at the close.
Dow Chart - Daily
Nasdaq Chart - Daily
The morning started positive with another overnight surge in the futures on positive reports from Iraq. Just before the open the Jobless Claims were announced and the tone quickly turned negative. Jobless Claims soared to 445,000 and the highest level since April 2002. The continuing claims rose to 3.6 million. Claims for last week were revised upward as well. The four week moving average, which is supposed to smooth out the week to week gyrations, also rose to 426,000. The continuing claims rose to levels not seen since last November. 22% of unemployed workers have been jobless for more than six months. A survey by Manpower Inc showed that the 2Q was not likely to get any better. This is a terrible report and the worst in several weeks of terrible reports. This is yet another leading indicator for the nonfarm payrolls on Friday. The official estimate is for a loss of -11,000 jobs but many analysts have suggested we could see a drop as large as -250,000. A number this large after a drop of -308,000 in February is widely accepted as proof that the economy has already fallen back into a recession.
Another proof that the economy may have slipped back into a recession was the ISM Non-Manufacturing report which came in at 47.9 today. This was the worst reading in 14 months and the first month under 50 since the 1Q of 2002. This was the worst services number since Oct-2001. While the manufacturing version of the ISM is the common indicator of economic health the services sector is normally seen as a lagging confirmation of any manufacturing trend. This drop below 50 in both the manufacturing and services reports does not paint a positive picture.
Earnings are starting to take center stage on the stock front and we are starting to see a strong increase in warnings. Borders Group (BGP) warned today that sales were below plan in all segments. Software company JDAS warned that they would miss earnings due to a lack of completing any large orders and that global orders had slowed significantly. WEBM warned that war worries had impacted their earnings and revenue would be a little light. NSDA, a chip stock, warned that price pressures, delays and cancellations of customer orders would knock about -35% off their earnings estimates. PMTC followed the same pattern and said customer cancellation and delays of large orders would knock about -4% off their revenue for the quarter.
Sybase (SY), a database software maker, warned that weakening business conditions over the last several weeks could knock -15% off their revenue. STM, the 4th largest semiconductor maker, warned that earnings would come in at the bottom of the current range of estimates due to order delays in a number of its markets. AFFX warned that revenue and earnings would fall short of estimates citing global and economic weakness. CERN said earnings would fall below estimates because clients are cutting budgets. CERN provides information technology to doctors and hospitals. NWRE, ADVS, MONE, ENTU, VIRL, ADVS, CHKP, CNF, PSFT and SBGI also warned but I won't bore you with the details.
There were some stocks raising or affirming guidance but they were definitely in the minority. Dell affirmed guidance and said sales were up across the board. They credit the sales to taking market share from others not from a rebound in the tech sector. This means it is a net-net deal. If HPQ loses 5% of its business to Dell then it is just a shift not 5% of new business growth. Dell also said they were committed to holding the line on earnings by cutting -$3 billion in costs over the next 24-30 months. Read between the lines here.
Several surveys and reports were released on Thursday. First Call said top line revenue growth for the 1Q was now estimated at only +2.3% and only +1.2% for the 2Q. They said these numbers were still falling and were calling into question the current +8% estimated earnings growth for the entire year. One hundred of the Fortune 1000 companies were asked about trends and 45% said they expected +1.5% growth or less in IT spending for 2003. The trend mentioned above of delaying large orders in the IT sector is expected to weigh on the big cap techs like CSCO and IBM. New network development is being delayed and high dollar mainframes are finding buyers scarce. ORCL is also expected to see earnings pressures from delays in major contracts and a slow down in licensing revenues.
The SARS disease continues to weigh on the global economy. The disease is spreading in Hong Kong and several other areas in Asia. Many tech companies are telling their workers to stay home rather than risk losing a large portion of their staff to illness. INTC, DELL, BRCM, MOT and FLEX all have substantial manufacturing plants in the affected areas. 85% of computers and 50% of chips are made in areas where the disease is producing a real scare. Travel to these countries is being curtailed and in some cases stopped all together. Several airlines have cut flights to offset weak demand. Continental said no shows for flights to Asia were approaching 30%. Some are starting to compare it to the Spanish Flu in 1918 that killed 20 million people. If it is a virus then there is not much defense against it other than quarantine. Obviously our medical technology and current methods would prevent a repeat of that disaster scenario but there is still the potential for increasing problems.
There were some rumblings from countries other than Iraq today. Rumsfeld said Syria was continuing to supply Iraq with war material and action could be taken. On another front UN envoy Maurice Strong warned that war could be "entirely possible" over North Korea's pursuit of nuclear weapons. He said UN sanctions, which could be adopted next week, would be seen by North Korea as an act of war. A former CIA Director, James Woosley, said the Iraq war could be the start of a new world war if Arab emotions continued to rise. There were also accusations by Iraqi prisoners that Russia and France were aiding the Iraqi war effort with intelligence and advisors. All of these problems are far from imminent but something to keep on your radar screen.
The nonfarm payrolls report tomorrow is the last piece of the economic puzzle this week. The estimate is for a loss of -11,000 jobs but the whisper number is for a lot more. Even if the number is significantly worse it is not likely to move the market. Economic reports are like taking a trip and deciding where you are going by looking in the rear view mirror. All economic reports are past tense. They are a history lesson for all practical purposes. We try to predict the future but plotting trends from the past. If six weeks of Jobless Claims showed a +25,000 increase in claims each week then we could probably guess that the employment report will be weak since it covers the same period.
What we are seeing is a total disregard for economics. All eyes are on the war and the impression is that the economy WAS bad due to the coming war. The reports we are seeing today represent the weeks immediately before the war when pessimism was the strongest. Essentially analysts are saying that these very bad reports are already priced into the market by the pre-war drop. The consensus by the bulls is to see what the economy looks like three months after the war is over. I am not going to argue that theory but simply point out that winning the war will not change the economy overnight. Current estimates have 250,000-300,000 troops in Iraq for a minimum of 2-3 years. There is likely to be civil strife and terrorist attacks for at least the first year. Unlike Desert Storm where almost everyone packed up and came home once it was over this will be a continuing effort.
I am sure the economy will get a boost from consumer sentiment once the initial shooting stops. How far this boost will take us is anybody's guess. The market rallied today on news that the coalition was trying to capture the Saddam International Airport. Every positive event provides a little more evidence that the war will be won and the markets will react positively. The lack of chemical weapons and the lack of an appearance by Saddam continues to raise hopes as well.
When trying to analyze the immediate impact of the nonfarm payrolls tomorrow it has to be balanced with the positive war sentiment and the "priced in" analysis. If it is a hindsight look at the prewar period is it relative? If it is significantly less than last months -308,000 job loss does that mean we bottomed and are already recovering? Obviously those questions don't have a simple yes/no answer. About the only conclusion analysts appear prepared to make is that a big loss will raise the potential for a move by the Fed to cut rates again. Many expect an intermeeting rate cut if the job loss exceeds -250,000. Historically the Fed has been known to react to a bad jobs report on the following Monday. The Fed funds futures are already pricing in a 69% chance of a rate cut by the May-6th meeting.
This means bad news could be good news depending on your outlook. This means the market could ignore yet another bad economic report and move up again. The Nasdaq struggled valiantly to hold 1400 today but will be pressed tomorrow after warnings from several high profile tech companies. Overnight Tokyo Electron the second largest chip company in the world warned they would post a loss for the second year in a row. This is expected to put even more pressure on techs when Asia opens for trading.
We are left with the potential for trading on news that the Saddam airport has been captured assuming that occurs overnight. The war news has provided the underlying bid this week and the closer we get to the end the higher those bids are going to be. The most significant event on Thursday was the lack of a sell off from Wednesday's gains. Yes, we did have a drop at the close on fear of the nonfarm payrolls but it definitely lacked conviction. Assuming the jobs report is not a disaster I would look for the market to consolidate gains on Friday. There are not nearly as many shorts in the market now as there was earlier in the week so I do not expect a strong short covering rally at the close. It is also possible to see some traders with long positions go flat to avoid a disaster over the weekend. This equalization of sentiment could provide a range bound market. Last Friday we traded sideways as traders squared positions for a hoped for war news bounce on Monday. The good news did not come and Monday was ugly. There is likely to be the same positioning in hopes of a weekend surrender this week as well. If all this chess move strategy is confusing you don't feel alone. Everyone is confused and you are in good company. Hopefully the war will be over soon and we can turn off the news channel and go back to real investing. Until then keep those stops in place regardless of which direction you are trading.
Enter Very Passively, Exit Very Aggressively!