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Confidence Soars

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      04-29-2003           High     Low     Volume Advance/Decline
DJIA     8502.99 + 31.40  8559.77  8442.34 1.86 bln   1822/1400
NASDAQ   1471.30 +  9.10  1482.49  1459.48 1.63 bln   1701/1475
S&P 100   465.93 +  1.15   469.89   462.75   Totals   3523/2875
S&P 500   917.84 +  3.00   924.24   911.10 
W5000    8700.51 + 28.70  8759.10  8645.80
RUS 2000  395.78 +  0.58   398.40   395.20 
DJ TRANS 2400.88 +  2.60  2415.27  2390.57   
VIX        23.53 +  0.48    24.30    23.03   
VXN        32.58 -  0.01    33.25    32.25 
Total Volume 3,725M
Total UpVol  2,534M
Total DnVol  1,069M
52wk Highs  403
52wk Lows    70
TRIN       0.76
PUT/CALL   0.89

Confidence Soars
By Jim Brown
Click here to email Jim

The Consumer Confidence soared in April as the war wound down and the markets wound up. The Nasdaq closed at the high for the year and is closing in on 1500 again. Everything appeared rosy and investors were left wondering what they were overlooking.

Dow Chart - Daily

Nasdaq Chart - Daily

Things were not all that rosy at the open with Chain Store Sales falling again by -1.6% for the last week. The reason given was the loss of a shopping day due to Easter. Come on guys, you can't have it both ways. Last week they were cheering the +1.6% gains for the prior two weeks due to the increased Easter shopping. While I agree it was a short week it seems there is always an excuse. Are you asking us to believe the short week was not factored into professional estimates? Sales were below plan for WMT, JCP and FD indicating that even the discounters were having trouble attracting customers. The BTM lowered growth estimates for April to only 2.0% to 3.0% and the combined growth for March and April to only +1.0%. Averaging the two months takes into account the Easter holiday date shift. With employment still rising retail sales are likely to remain under pressure.

Another problem for employers was the jump in the Employment Cost Index by +1.3% in the first quarter. This was significantly over expectations of only +0.8% increase. This is the fastest growth spurt in employment costs since 1990. Costs are up +3.9% over the same period last year. For employers trying to cut costs to maintain earnings this is not good news. It means they may have to cut more employees if the economy does not pick up soon. The biggest increase in costs is health care. This leads to employers hiring part time employees instead of full time and working them 32-38 hours a week and not offering health care as a benefit. Employees are then forced to buy higher priced individual health care or worse go without. Either way it produces less net income for the worker.

Despite the numbers above consumers were euphoric in April according to the Consumer Confidence released today. The number spiked to 81.0 from last months low of 61.4. This was completely due to the quick finish to the war in Iraq. In 1991 the same survey of confidence jumped from 59.6 to 81 when the last Iraq war was over. The jump today was the 3rd largest jump in the history of the index. The majority of the gains were in the expectations portion of the index which jumped to 84.8 on hope that the end of the war would remove uncertainty from the economy and bring back prosperity. The present conditions component only rose to 75.3 indicating consumers were counting on hoping more than actually seeing many changes.

The market was enjoying a lot of good news today but other than the closing bounce it was not acting like it. The SARS virus is starting to be contained and the W.H.O. lifted the travel ban to Toronto. Numerous countries have not reported any new cases and measures to control the outbreak appear to be working. China is the only major country where it is still growing. Over 10,000 people are quarantined in China today. They have restricted travel into areas that have not reported any cases in an effort to prevent any new outbreaks. China is 1/6th of the GDP of Asia and while the impact on China will be substantial it appears a successful containment will limit the further impact to the rest of the world. Airlines reported overseas traffic dropped -40% in the week ended April 20th. Overall the panic appears to be easing and that is good news for the markets. There will be an impact to earnings in the 2Q but how much remains to be seen.

Another positive for the market is the continued drop in oil. The futures closed at $25.24 today and a 52-week low. This is very good news for stocks because energy is such a big component in the cost of doing business. Profits squeezed over the last six months will see some relief from this change. However, despite the high cost of exploration, drilling, transportation and refining, oil still costs a fraction of what we pay for bottled water. With bottled water averaging about $2.00 for a 20oz bottle that makes it worth about $600 for a 50 gallon barrel. Not a bad margin for bottlers. Think about it.

North Korea is making noises that could be construed as a peaceful settlement in the making. NK and SK issued a joint statement on Tuesday saying they were committed to resolve the current crisis peacefully. This is far from a deal but the pressure from its neighbors appears to be working. With Iraq winding down, Afghanistan a footnote to the back pages and troops coming home daily there is little left on the global horizon to confront investors with war fears. Even the constant mention of Syria and Iran has cooled as the administration tries to move into the election cycle and out of the global conflict arena. This is another plus for the markets.

The markets need all the plusses they can get. Despite the gains today they are far from out of trouble. We are no longer close to March but the ICI reported today the official numbers for fund flows for March. Better late than never I guess. There was a net inflow of $243 million into equity funds in March. No applause please. There was a net inflow into bond funds of $10 billion. If you think backwards you will remember March was the beginning of the big rebound as the shooting started. From the March 12th low the Dow rebounded more than +1000 points in seven days. You would have thought that a rebound of that magnitude in the middle of the month would have skewed the numbers a little stronger to the equity side. Obviously April may show a different picture for the full month but last weeks inflows were basically flat for stock funds.

Markets are rebounding on the positive sentiment and the improvement in global news. The earnings are over for all practical purposes and the results are not exciting. 62% beat the lowered expectations and only 15% missed estimates. If the expectations had not been lowered so far by the war these would be stellar numbers. To get a better picture of the economic health we need to look at the guidance for the current quarter, the post war quarter. So far 58% of the companies that have reported earnings have warned that Q2 earnings will miss estimates. Only 23% have said they will likely beat current estimates. 58%, more than half are still seeing problems for multiple reasons. Bull markets are built over walls of worry but not normally earnings worries this steep.

The catch is expectations. Just like the sentiment, which jumped today on expectations, not present conditions, the markets are rising on expectations. Investors expect the economy to do better with no war, no terrorists, no SARS, no North Korea nukes and nothing to hold the economy back. Whether they are right or wrong remains to be seen. The facts are clear that somebody is buying stocks and we are right on the edge of a breakout, or a breakdown.

We should get a clearer picture of the current state of the economy before the week is out. Tomorrow we get testimony before the House Financial Committee by Greenspan and you can bet your bippee (ask your parents) he will be asked some tough economic questions. He will of course duck gracefully and try to answer in Greenspeak while reassuring but not inflating economic hopes. Greenspan speaks at 10:00, which is the same time we get the Chicago PMI. The biggest events remaining this week come on Thursday and Friday. The ISM, Productivity and Construction Spending will be out on Thursday. Friday is the Nonfarm Payrolls and Factory Orders. Before 10:30 Friday morning we will have a very clear picture of the current post war economy and I would be surprised if it has changed much. Investors typically discount actual economic events by about six months. The gains we are seeing this week are based on expectations that six months from now things will be significantly better. That is not yet being seen in the earnings guidance. After the Payroll Report on Friday investors will have to decide if their expectations are justified.

The Dow posted another milestone today with a close over 8500. This is the second time in a week and the second close over the 200 EMA at 8481. This is very bullish but until we can clear the 8520 resistance and hold we are still in danger of this rally ending. The bullish wedge on the chart above is very strong and the odds are good it will be broken soon. We have tested that 8520 level six times now and failed. Each time we wear away at a little more of the resistance. The reaction spike this morning to 8559 showed just how strong that resistance was. The selling pressure was very intense and pushed us back below 8450 before shocked bulls found enough courage to buy the dip.

The Nasdaq is forging ahead and closed at a new high for the year. It closed above resistance at 1465 and showed remarkable strength considering the magnitude of the recent gains. CSCO CEO John Chambers said today he is convinced companies will buy computer hardware before adding new employees but nobody knows when the recovery will come. CSCO guided flat to down -3% for this quarter. QLGC beat the street after the close but several others missed or came in flat so the net result to the futures was flat. With the Nasdaq bullish percent already at 70% there is a heightened risk for the bulls and caution is advised about entering new longs without a dip.

IBM and Cisco both fired volleys at the potential change to expense employee options. IBM shareholders voted no to expensing stock options in a meeting filled with dissention. Cisco CEO John Chambers called the plan to expense options the "High Tech Job Export Act of 2003." He said forcing companies to expense options would force employers to cut U.S. workers in favor of cheaper labor overseas during the first decade and companies would eventually follow. CSCO would have reported on third less profit in the last quarter if options had been expensed. Intel CEO Craig Barrett said earlier that CEOs may refuse to certify financials that contain expensing as an incorrect financial picture of the company.

The week is off to a good start but at a critical juncture. We have come a long way very fast and the odds of a future dip are growing every day. The next serious resistance for the Nasdaq is just over 1500 but the Dow still has a battle at 8520. The S&P has the same battle at 920 and then again at 930. The bulls may be excited and everybody has their hopes in high gear but the next three days are critical. Just keep saying to yourself, PMI, ISM, Jobs. Once past those hurdles the next week will be a breeze with nothing material but an old fashioned FOMC meeting on Tuesday. Will no challenges to overcome next week there is also the chance for a sell the news event. Yes, nothing is ever as simple as it looks and that goes for investing as well.

Enter Very Passively, Exit Very Aggressively!

Jim Brown
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