Help Wanted Signs
Evidently there are no help wanted signs or newspaper ads either as the numbers today came in very bad. The Jobless Claims also rose significantly and for once the market reacted negatively to negative news. The Dow gapped down but stopped at a 50% retracement of the gains since Tuesday's lows.
Dow Chart - Daily
Nasdaq Chart - Daily
The Jobless Claims came in +33,000 higher than expected at 455,000 and the number for the prior week was revised upward to 447,00. The positive corporate earnings are coming at the cost of jobs and those job cuts are increasing rapidly. The 4-week moving average rose to 439,250 and is only -11,000 away from a normal historical number of 450,000 which indicates a recession in progress. Lost jobs is the price of profits in an economic downturn and corporations are scrambling to cut costs to make the already lowered estimates.
Showing the same trend as Jobless Claims was the Help Wanted Index which came in at 38 today and at a 40-year low. This index peaked at 92 during 1999 and has been trending down since. The volume of help wanted ads in 51 newspapers across the nation are tabulated monthly by the Conference Board and the numbers reported as an indicator of future employment trends. This trend is not showing any signs of changing since the war ended. According to the report labor markets are still declining in the Midwest, Pacific Coast states and the South. It appears to have bottomed in the New England and South Atlantic states. Only the Mountain States have shown any improvement. The combination of the two employment related reports sank any hopes of any new highs today.
On the flip side the Durable Goods Orders rose significantly higher than expected at +2.0% and significantly over the -1.5% drop last month. Nondefense Capital Goods and Computers led the core gains. Defense rose another +16.1% with a +100% gain in aircraft orders. As we have seen in the last several months this headline number has vacillated in a wide range from month to month with sharp swings. Last month the index indicated an economy heading into recession and this month surprised with positive gains. Replacement of Y2K computers may have begun on a limited scale and this is the tidal wave many traders have been expecting. I suggest it may be more of a bathtub ripple based on fewer, smaller and leaner companies implementing the replacement on a staged basis as needed. We do not have a date deadline to replace these dinosaurs as we did in Y2K.
Merrill Lynch just finished a study of CIOs of major companies and they said the war had little impact on their budgets. They said the 2Q could see slight gains in capex spending but overall the rest of 2003 could be tough. The general consensus of opinion was for an increase in capex spending of 1.5% to 2% for the full year. This is very anemic and should not produce any significant recovery on its own.
The better read on the tech sector came from KLAC on Wednesday. The company beat the street by two cents but guided lower. The company said cost reductions had enabled them to manage their earnings but orders would remain flat through the June quarter. KLAC predicted the chip equipment makers could see an increase of +5% in 2003 after losing ground for two years. Yes, the bottom may be behind us but the rebound may be slower than many investors think. Microsoft CEO, Steve Ballmer, said on CNBC on Thursday the turnaround in the IT sector would take another year or TWO before IT spending returns to where people want it to be. He also said, "We'll continue to see lower growth than people might otherwise have anticipated for at least another year or two."
After the bell today AMZN blew the doors off their earnings beating the street by a whopping six cents. Analysts had expected four cents and AMZN managed ten. This is a huge win for AMZN and will doubtlessly provide yet another short covering bounce on Friday. The stock was up +$3 in after hours. To add even more shock and awe they raised guidance for this quarter for $1 billion in revenue. They said full year they would have revenue of $4.7 billion. They are still burning cash with a draw down of -$252 million for the quarter. Most of the cash was used to shrink accounts payable from $618 million to $393 million at quarters end. They are planning on retiring $277 million in 5% notes but will still have over $2 billion in long term debt. Even with operating income of $50 million a quarter as AMZN expects it will take a long time to pay that $2 billion. Regardless of the fundamentals the market impact on Friday should be clear. With AMZN up +3, EBAY +1.50, YHOO +1, etc, the Nasdaq Compx should open up strongly tomorrow. Problems on the Nikkei overnight could weaken that surge before the open.
Problems with the Nikkei are two fold. The SARS epidemic is growing with over 5,000 cases now. This is a number that has doubled in the past week. Multiple airlines are canceling flights to and inside Asia with one company canceling all flights for 30 days. Beijing sealed up a 1200 bed hospital including guests, doctors, patients and 2000 workers due to an influx of cases and the potential for spreading the disease. Residents of the city are fleeing to the countryside fearing even wider quarantines where they could be exposed to individuals already infected with the disease. Trade shows have been cancelled, shortened or postponed. Conventions are being cancelled daily. Toronto is reporting conventions being cancelled not only for the next couple months but for the next couple years. Airlines report passenger traffic into Toronto below 10% of capacity even with the large number of cancelled flights. This problem is not going away and it is only a matter of time before the same explosion of cases appears in some US city.
Another problem for Asia was the pronouncement today from North Korea that they had nuclear weapons. They had completed processing 80% of their fuel rod inventory to produce more weapons grade plutonium. They were prepared to use nuclear weapons if no agreements could be reached. They were prepared to sell weapons to others as well. They are flying combat fighter patrols to protect their airspace and keep spy planes from collecting data. This series of in your face threats cancelled the peace talks according to some reports and cast a pall of fear over countries in the region. Colin Powell thought the threats serious enough to go on TV with a "don't tug on superman's cape" message and a not so implied warning that threats could be dangerous to North Korea. It is not surprising the US markets were not able to pull out of their slump today.
The news that Tariq Aziz had given up to US forces failed to spike the after hours futures more than a couple points as traders looked ahead to the potential losses in those Asian markets.
Only two weeks before the FOMC meeting the Fed heads have been very active. Fed Governor Ben Bernanke said investment by business in new equipment is likely to grow in the latter half of the year. "Most factors point to a moderate pickup in business investment and economic growth in the second half of 2003 and in 2004. He also warned that the mindset of executives will be an "important wild card" that could derail that forecast. He said there was an undercurrent of pessimism that was persisting among business leaders. He said "this pessimism does matter, if for no other reason than because it has the potential to be self-fulfilling." Chicago Fed President Michael Moskow also made statements about the expected increase in the rate of growth later in the year. The trend in speeches was clear, pump up expectations but the focus was "later" in the year with multiple references to the 4Q and 2004.
William Poole said inflation was stable and the financial system was in good shape. He said the strength in the system had limited the impact of the recession and was helping to support the current equity market. Greenspan sent a letter to Congress warning them to keep a close eye on FNM/FRE due to the risks they pose to the US financial system. He stressed that the companies needed adequate capital to withstand sudden changes in interest rates, market disruptions and credit losses. He said the investors have trouble gauging risk to these GSE companies and that risk may be higher than most think. He said he feared market distortions created by those companies. Separately, Greenspan also said he would agree to accept a 5th term.
The markets tried to reach levels touched yesterday but the NDX was the only index that was successful. The negative jobless news put a damper on buyers and after two strong days the market simply took profits. The Dow failed again at the 200 EMA of 8484 in the afternoon rally attempt. This has been strong resistance that had been broken on Wednesday but came back to haunt us today. The Nasdaq bounced off strong support at 1448 and then failed just below the January high once again. I think this was another bullish day. We were due for profit taking and we got it. Very light and there was a definite barrage of dip buyers intraday. The key for me is still Dow 8520 but there are key levels on all three indexes. Dow 8520, Nasdaq 1467, S&P 920. These are all strong resistance levels and exactly where we failed for two days now. The AMZN news could provide lift on Friday along with mainstream realization that Tariq Aziz is in custody. Not because he knows that much but he may know where Saddam is hiding.
S&P-500 Chart - Daily
My admonition from Sunday is still intact. Be prepared to exit on weakness at Dow 8500. I would only add to that to be prepared to go long over 920 on the S&P. The chart above shows multiple levels of resistance at 920 and a break over that level would be strongly bullish. Conversely 920 may be a tough nut to crack. Either way it is a clear indicator that everyone can see and the implications are clear. This is the test the market must pass or be doomed to repeat the last quarter over again.
Enter Very Passively, Exit Very Aggressively!