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Market Wrap

Earnings Rush

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04-14-2003                  High    Low     Volume Advance/Decl
DJIA     8351.10 +147.69  8351.94 8201.55   1315 mln  2131/ 694
NASDAQ   1384.95 + 26.10  1386.50 1359.32   1134 mln  1993/1042
S&P 100   449.61 +  8.64   449.63  440.97   totals    4124/1736
S&P 500   885.23 + 16.93   885.26  868.30
RUS 2000  377.61 +  6.31   377.61  371.60
DJ TRANS 2237.71 + 37.15  2231.71 2193.14
VIX        26.47 -  1.80    28.86   26.02
VIXN       39.51 -  0.11    40.24   38.54
Put/Call Ratio 0.79

Earnings Rush
By James Brown

Wall Street kicked off Q1 earnings with a rush higher today. The Dow Jones Industrial Average added 147 points or 1.8% to close at 8351.10. The NASDAQ Composite fared even better with a 1.92% gain of 26 points to close at 1384.95. The S&P 500 index out- performed them both with a 1.94% gain of 16.9 points to 885. It really shouldn't be a surprise to witness another big move today. The Industrials have been making big moves on Mondays for weeks now although this may actually be the first Monday in awhile where the focus is on stocks and not war news.

Adding support to American markets were European indices, which closed mostly higher. The London FTSE 100 added 1.08%, the France CAC 40 added 1.3% and the German DAX closed +1.57%. Quite the opposite were the Asian exchanges, while mixed, held a more negative tone. The Hong Kong Hang Seng index dropped 1.3% or 112 points to 8533. Meanwhile the Japanese NIKKEI lost another 0.8% marking its fifth straight day of hitting new 20-year lows. The SARS illness continues to spread and at least one major brokerage has lowered their GDP estimates for the region. Travel in the area is coming to a standstill and businesses are being hit hard. Some analysts speculate that SARS will send the global economy back into recession.

Also moving lower were bonds, which sent yields slightly higher. Traditionally one would expect that money coming out of bonds has to go somewhere and the logical place is stocks. The combination of cash coming out of bonds and a positive European market certainly didn't hurt this morning but traders were undoubtedly happy with the war news on Iraq. Over the weekend all we heard about was the non-stop looting, the expectation for a major battle in Saddam's hometown of Tikrit and the missing U.S. POWs. By Monday morning these were all but conquered. Looting was on the decline as Iraqi police started to work with Coalition forces to bring some sense of order back to the streets. The big battle of Tikrit was a no show after days of intense allied bombing took the spirit to fight out of the Iraqi resistance. Intelligence reports said that Iraqi soldiers were just putting their weapons down and leaving in droves. Monday's news reports had the U.S. forces driving through the middle of Tikrit. Probably the biggest emotional win for the Coalition was the discovery of seven U.S. POWs, all in relatively good health.

Fueling the market rally even further were positive earnings reports from a number of financial companies. Leading the charge was Citigroup (NYSE:C), Bank of America (NYSE:BAC) and Fannie Mae (NYSE:FNM). Citigroup, a Dow Jones Industrial component, reported a rising first-quarter profit of $4.1 billion. This was a record quarter and 18 percent higher than a year ago period. Analysts had expected 77 cents and Citigroup trumped it by 2 cents. BAC's Q1 profit numbers jumped 11 percent to $2.42 billion or $1.59 per share. This surpassed estimates by 11 cents.

It is no secret that mortgage rates have been hovering near 40+ year lows. Thus it should be no surprise that Fannie Mae blew past earnings estimates. The U.S. housing market has been hot but not as hot as the refinancing frenzy that many had believed ran out of steam months ago. FNM's Q1 net income rose to $1.94 billion, or $1.93 a share. This is a sixty percent increase over the same period last year. The company's CEO wisely admitted that this pace cannot be kept up and things would eventually slow down. Still, FNM does expect the stronger results to keep flowing for the rest of the year.

One third of the S&P 500 is expected to announce earnings this week and the reports are coming in fast and furious. Dominating the headlines tonight was IBM's report. If you've been watching CNBC then you probably heard (more than once) about how BIG IBM is in the technology field(s). According to the reporter, out of every $10 used in IT spending, $1 goes to IBM. They have a huge presence in a number of diversified industries but they're most dominant in IT services, servers and storage. There seemed to be nothing but cheering for IBM prior to the announcement but thankfully we saw some actual skepticism about what the numbers really mean. Big Blue is almost famous for "engineering" its earnings numbers each quarter through mass purchases of its stock to huge layoffs of its workforce. It appears they found it cheaper to lay off workers this quarter, which I believe numbered somewhere in the 15,000 range. Meanwhile the company only bought back $65 million worth of stock, which would barely make a dent in their results.

The headline number for Big Blue was 79 cents a share compared to estimates of 80 cents a share. However, even though IBM missed the net income consensus by a penny, their revenues were stronger than expected. Last year IBM brought in $18 billion the same quarter. This year the estimates were for $19.86 billion and the company actually turned in $20.1 billion. This is pretty bullish. Some industry watchers had suspected that global services might be weak with clients pulling back due to the conflict in Iraq. Fortunately, for Big Blue, global services rose 24 percent, boosted by their recent acquisition of PWC Consulting. Not so good, one analyst noted, was IBM's gross margins on their services actually slipped. Hardware sales were another weak spot for the company where sales actually slowed. This may not bode well for the Q1 results of other players like Hewlett Packard. What may surprise some pundits was the 8 percent rise in IBM's software division, who's sales rose from $2.9B to $3.1B. It will be interesting to hear Microsoft's (NASDAQ:MSFT) earnings report tomorrow.

Topping other news note worthies was a new development in the Phillip Morris case in Illinois. Altria Group's (NYSE:MO) Phillip Morris' division was hit hard recently when an Illinois judge commanded that the company post a $12 billion bond while the company appealed his decision in the case. We've written about this case before so I won't go into the details. However, MO basically said that they could not afford to post a $12 billion bond and in a closed-door negotiation the judge and MO met in the middle with a $6 billion bond. While this is good news for the company it's still four times more what they were hoping to post during the appeals process. Shares of MO did move higher on the news, further boosting the Industrial's rally today.

In what could change the telecom landscape Worldcom Inc. said it plans to re-emerge from bankruptcy with a new name, a new CFO and one-tenth its former debt load. I probably don't need to remind anyone that Worldcom filed the world's biggest bankruptcy case last year in a dramatic accounting scandal that completely eclipsed the Enron debacle. Word has it that the company has renegotiated a new plan with 90% of its creditors to come out of bankruptcy with only $3.5 to $4.5 billion in debt and a business plan that would allow it to be profitable the first year. Its new name will be MCI, the name of its current residential long- distance division.

Also of note was word that Deutsche Bank "might" lower its full- year outlook on MMM over concerns in Asia. DB believes that growth may be slowing for MMM in that region and this news is the probable cause for the stock's lack of participation in the Dow's rally today. Wall Street expects MMM to announce earnings on April 21st with consensus estimates pegged at $1.40 for the quarter. Some of our readers may not know that the Dow Jones Industrial average is a dollar weighted average. Higher dollar stocks have a bigger impact on the index's movement. What happens to MMM could have a major affect on the market as a whole through its influence on the Industrials.

Speaking of the Industrials, check out the chart below. Not only did the 147 point rally today put the index over Jim's resistance level at 8330 but it also close above its simple 200-dma. This is a technical victory for sure but just a few weeks ago an even more impressive close over the 200-dma turned into a bull trap. Will the rally hold and more importantly can the bulls breakthrough the 8520 level?

Chart of the Dow Jones Industrials (120-minute)

The NASDAQ Composite also looks encouraging but we can't know if Wall Street will suddenly sour overnight on some detail in IBM's report or if something negative slips out ahead of Intel's or Microsoft's report Tuesday afternoon. The 1400 and 1425 levels are the next hurdles to jump.

Chart of the NASDAQ Composite (120-minute)

Probably the most telling and the most foreboding chart for the markets today is the Volatility Index (VIX). If you did not read Jim's wrap on Sunday or Mark Phillip's LEAPs column from the weekend, I would encourage you to do so. Both of them discussed the importance of the VIX (again) and how the Fear index appears to have set a new operating lower boundary. The chart below shows the previous lows set in the VIX since last November. These lows were major tops in the Dow Jones Industrials. The VIX has hit these lows again signaling a top in the market may be at hand. Unfortunately, the signals provided by the VIX are not an exact science and the reversal in the markets could be a few days off. Furthermore, there is nothing to prevent the VIX from continuing to slide lower, especially if the markets have some sort of good news to keep the rally afloat. Unfortunately, this IS earnings season and with the future of the markets resting on the guidance that corporate America can give us...well, it only takes one high profile blunder to yank the carpet out from under the markets. In Mark's column he did offer his opinion that the effective "floor" for the VIX could be between 24.50 and 25.50, so it could have a bit farther to fall, which might coincide with the $INDU and the COMPX trading to their overhead resistance outlined in the charts above.

Chart of the VIX (daily)

Headlining the earnings reports tomorrow will be Microsoft (MSFT), General Motors (GM), Johnson & Johnson (JNJ), Intel (INTC), Bank One (ONE), Motorola (MOT), and Texas Instruments (TXN) just to name a few.

The earnings rush is upon us. Making this week even more dangerous to trade is the holidays. The combination of Passover and Easter will keep volume light. Without volume, any move in the stock prices and the major indices could be exaggerated in either direction. Trade carefully and monitor those stops!


P.S. Don't forget that equity options will stop trading on Thursday due to the market holiday this Friday.


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