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Market Wrap

Three For Three

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      04-15-2003           High     Low     Volume Advance/Decline
DJIA     8402.36 + 51.30  8402.43  8307.54 1.72 bln   2095/1111
NASDAQ   1391.01 +  6.01  1394.03  1376.03 1.27 bln   1741/1397
S&P 100   452.08 +  2.47   452.53   447.88   Totals   3836/2508
S&P 500   890.81 +  5.58   891.27   881.85 
W5000    8432.14 + 50.90  8433.09  8351.61
RUS 2000  379.60 +  1.99   379.62   375.68 
DJ TRANS 2316.62 + 84.90  2317.43  2232.69   
VIX        26.04 -  0.43    27.43    25.79   
VXN        36.50 -  3.01    39.48    35.98 
Total Volume 3,174M
Total UpVol  2,048M
Total DnVol  1,085M
52wk Highs  297
52wk Lows    97
TRIN       1.00
PUT/CALL   0.87

Three For Three
By Jim Brown
Click here to email Jim

The three biggest tech stocks have announced and all three pleased investors with the results. MSFT and INTC beat estimates by two cents each on Tuesday after the close. IBM missed by a penny due to more shares outstanding than analysts had expected but results were good despite the lagging economy. With this trio of tech giants setting the earnings standard can the rest of the sector match their marks or are we doomed to be disappointed?

Dow Chart - Daily

Nasdaq Chart - Daily

Despite the strong earnings by the tech trio, economically nothing changed. The Chain Store sales for the week were up +1.3% and the second consecutive positive week. This is a positive trend but not very encouraging. Pre-Easter is usually a strong retail period and only a +1.3% gain is mediocre at best. Retailers said the CNN effect was dwindling and shoppers were coming back into the malls for Easter, but not in large numbers.

Industrial production fell by -0.5% in March and was a larger decline than expected. All of the major market groups lost ground. Capacity Utilization fell to 74.8% and very near the lows seen in 2001. Companies do not need to buy new equipment and start new lines if 25% of their capacity is currently unused. All the factors are in place for an increase of profits without spending additional money but the demand must appear first.

Manufacturing problems are still growing as represented by the NY Empire Manufacturing Survey. The April number dropped to -20.4 from -2.8 in March. This is a drastic drop and there was weakness in all areas. New orders fell to -15.9 from -4.7, back orders fell to -26.3 from -15.5. Inventories fell to -16.6 from -3.3. This is a very negative report and should it prove to be a proxy for the next ISM we could be in deep trouble.

In earnings news GM beat estimates but then gave cautious guidance according to early reports. The stock dropped on the news but if you analyze it a bit closer maybe it shouldn't have. GM said it was "less certain" of hitting its internal earnings target of the $5.00 for the year. The consensus estimate for GM was $4.63 so anything close to $5.00 would be a win even if it did not hit the "internal" number exactly. Is that a warning? GM said higher incentive costs and the wobbly U.S. economy could impact their 2Q earnings. The stock lost -.95 cents on the news.

JNJ was the only other major earnings cloud if you don't count airlines. JNJ beat estimates by a penny but said that it was seeing slower sales of some of its bigger drugs. JNJ lost -1.80 on the news.

IBM missed earnings by a penny last night because analysts were expecting their aggressive stock buyback program to continue. They had overestimated the number of shares to be bought over the last quarter and calculated the estimates on the lower number of shares outstanding. IBM surprised them by only buying $65 million in shares because they bought Rational Software in February and that $2.1 billion cash/share drain postponed any buybacks. Other than the earnings per share number the earnings were better than expected. They said they had the second best 1Q ever in services sales. They received over $12 billion in new orders in the 1Q alone. IBM was up +2.83 on Tuesday.

After the bell Intel beat lowered estimates on all fronts and affirmed estimates for the next quarter. Intel beat estimates by two cents, revenue slightly and profit margins by 3 points. Intel had warned that margins would be "below the midpoint 50% level" during their mid-quarter update. Actually they also cautioned that revenue would also be at the low end of the range. Today they blew out all the ranges and surprised on all fronts. They did warn that flash memory sales were still hurting their overall profits. Since analysts were so kind to ratchet down their estimates after the mid-quarter guidance Intel was able to come in smelling like a rose. Their inline guidance for the 2Q will likely lead to an increase of estimates requiring another round of lower guidance from Intel at mid-quarter. Don't you love this earnings game? This is normally the worst quarter for the chip maker. INTC was trading up +.88 cents at $18 in after hours.

Microsoft threw its hat into the ring with earnings that also beat the street by two cents on better than expected revenue. There were some clouds in the MSFT report. CFO John Connors said MSFT was only seeing PC growth in the low to mid single digits through June 2004. He said growth in their subscription businesses would also be slower. MSFT guided analysts lower for full year earnings to $1.04 to $1.06 a share where the First Call consensus was $1.08. They said they expected .23 to .24 cents for the current quarter and analyst's estimates were for 24 cents. Not much but it is the second quarter MSFT has guided analysts lower. With their lower forecast for the next 12 months it could put a damper on their stock and temper the outlook from Intel. MSFT was trading up +1.05 at $25.82 in after hours.

TXN also beat the street by a penny at +.07 cents and reversed a loss of -.02 cents in the prior year. TXN also guided analysts to a gain of +7% in revenue for the second quarter. They are planning on cutting -1250 jobs in a restructuring move to cut costs and bring plants closer together.

Seagate Technology also beat the street by a whopping +10 cents and said sales of disk drives rose by +1.6 million units in the past quarter. They said by the end of June their 80GB drive would comprise virtually all of their 16 million units sold. This is an increase from 4.6 million of the 80 GB in the first quarter. The standardization of components and higher volume is helping profitability. They also declared a three-cent quarterly dividend. STX closed at $11.39.

Corning also affirmed estimates of returning to profitability by the third quarter. They said they were closing another plant and getting out of another money losing venture of making glass for televisions. They are cutting -1000 jobs and taking a substantial charge but are making progress on their recovery.

On the negative side NVLS predicted a drop of -26% in revenue on Monday due to the SARS epidemic. NVLS was off -1.06 today but analysts were trying to decide if NVLS bean counters were being honest or searching for another excuse now that the Iraq ate my earnings excuse was over.

Some good news from a non-tech sector came from MBNA, the credit card issuer, which said credit losses were easing and the worst appeared to be over in the consumer sector. This prompted gains across the board in the credit card stocks but more importantly appeared to point out that the worst may be behind us. This conflicts with the NY Manufacturing survey and the weekly Jobless Claims but any glimmer of hope is still hope.

With all the earnings news investors are glazing over to the Iraq war. Been there, done that, next! Well next could be Syria. The war of words is heating up and the U.S. said it was considering various options including military action to prevent Syria from exporting weapons of mass destruction and terrorists. They claim they have documentation supporting their claim that Syria has an advanced bio/chemical weapons program and they have been intercepting potential terrorists from Syria heading into Iraq with leaflets promising rewards for killing Americans. While this may sound like another conflict shaping up I believe it is just pressure to make Syria turn over all the Iraqi leaders who have escaped into Syria. The U.S. turned off an illegal oil pipeline that was sending 300,000 barrels of oil a day into Syria. This was a windfall for Saddam Insane and Syria as profits from the illegal oil sales went both to Saddam and Syria. That is about $250 million in additional revenue a month. Syria's cut for buying the illegal oil was a 50% discount on 200,000 barrels per day. With Syria on the brink of financial disaster already, cutting off this flow of cash and threatening sanctions is all meant to lean on them hard to turn over Iraqis. (my opinion) Not that all the other benefits would be nice as well but first things first.

Where are we going next? With the futures up strongly already and still rising(S&P +8.50 and NDX +24) there is little doubt we will explode at the open on Friday. Short of some seriously negative news event or a tech earnings disaster before the open the odds are good we will test the 1425 level again on the Nasdaq and 8500 on the Dow. Anyone still short will be buying chip stocks with both hands and enduring a large amount of pain. Most of the chip stocks were up in after hours on the TXN/INTC news. The enthusiasm for the tech trio's earnings will eventually wear off if the rest of the sector fails to meet the high standards. With Thursday before Easter normally bullish and this being a short options expiration week the volatility is likely to be huge.

Earnings slated for tomorrow include MO, AMD, AAPL, ASML, BRCM, CAT, F, GDT, HDI, JPM, NITE, LRCX, MERQ, MER, MGG, MIPS, RBAK, SNDK, SUNW, TLAB, KO, PGR, VNWK, WB and BK. These are just a small portion of the companies to report on Wednesday. 35% of the S&P report this week plus hundreds of smaller companies. We are not out of the woods yet. 54% of the companies already reported have warned about the 2Q.

The markets have seen an upward bias already this week but the volume has been very light. The volume on Wednesday will be the key. The Nasdaq only traded 1.2 billion shares today and there is a good bet it will do two billion on Wednesday. If it does it could be a major turning point in the market. If it tops out at something in the 1.5 billion range then the long term weakness could still be with us.

Make no mistake. The 8522 level has been STRONG resistance since the first rally in March. The same type of resistance equates to 1425 on the Nasdaq and it appears we will gap well over that at the open. A strong move over these levels could generate some serious short covering and some defensive buying. Everyone that expected an earnings disaster and an opportunity to buy lower could react to the rebound with knee jerk buying. If we do get over 8520 the next real resistance is 8850 and would be a serious change in market sentiment. Fasten your seatbelts.

Enter Very Passively, Exit Very Aggressively!

Jim Brown


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