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Market Wrap

Getting An Early Start

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06-23-2003                  High    Low     Volume Advance/Decl
DJIA     9072.95 -127.80  9199.70 9038.29   1632 mln   676/2170
NASDAQ   1610.75 - 33.97  1643.21 1601.45   1661 mln   758/2365
S&P 100   495.77 -  6.62   502.39  493.29   totals    1434/4535
S&P 500   981.64 - 14.05   995.69  977.40
RUS 2000  439.41 - 10.15   449.78  439.17
DJ TRANS 2395.30 - 48.19  2441.94 2394.27
VIX        22.66 +  1.57    23.02   21.32
VIXN       31.80 -  0.54    33.02   31.67
52wk Highs  137
52wk Lows    19
TRIN       2.30
Put/Call Ratio 0.66

Getting An Early Start
By James Brown

Investors are getting an early start on Wednesday's Fed announcement. That's right, in Sunday's wrap Jim suggested that no matter what the FOMC announces at the end of their two-day meeting, whether it be a 25 bps cut or a 50 bps cut, that the likely reaction would be "sell the news". Today looks like investors are getting a head start on the action and are taking some money off the table, which isn't a bad idea.

Helping traders in their decision making to sell stocks were a few earnings warnings. We knew this was going to be a tough week for stocks given that it's prime time earnings warning or "corporate confession" season before the July Q2 earnings announcements. Batting first for this week's warnings were Tenet Healthcare (THC), Avery Dennison (AVY), and Rohm & Haas (ROH).

Market internals were very negative as one might expect with the DJIA down triple digits and the NASDAQ composite slipping more than two percent. Volume on the NYSE was 1.6 billion matching the 1.6 billion on the NASDAQ. More importantly, the markets witnessed down volume that was almost eight times up volume on the NYSE and almost five times up volume on the NASDAQ. The advance decline ratio was about six advancing issues for every 21 decliners on the NYSE and approximately 7 advancing stocks for every 23 losers on the NASDAQ. New highs, which have been extremely strong for weeks, slipped to just 137 across the two exchanges compared to 19 new lows.

Chart of the Industrials:

Chart of the NASAQ Composite:

Chart of the S&P 500:

Topping the list of headlines today was an earnings warning from an already beleaguered Tenet Healthcare (THC). Shares dropped another 26 percent today ($4.22) to close at $12.01 after the company announced that its Q2 and full-year performance would be bleaker than anticipated. Analysts had been guesstimating THC's full-year earnings would ring in around $1.45 a share. Tenet now sees those results coming in between $0.80 to $1.00 a share for the year beginning July 1st. The company didn't exactly warn for this (second) quarter but THC did state that earnings for the first two months (April & May) were about $0.02 a share. Compare that to what analysts had been looking for near $0.34 and one can see why shares experienced a knee jerk reaction. It's been an extremely painful six months for THC shareholders. Late October to early November 2002 shares of THC plummeted from the $50's to $16 after Wall Street discovered that the company had been fraudulently billing the U.S. government for Medicare payments.

Not quite matching THC's percentage drop, shares of Avery Dennison, the labels-packaging-consumer products manufacturer, dropped almost $5.00 today for a 9 percent loss. Shares closed at $49.37. The stock was taken to the woodshed after lowering its Q2 outlook. The company is claiming slow sales in N. America and higher costs related to its recent acquisition as some of the factors for its poor performance. Previously the company had forecast 77 to 82 cents a share with analysts consensus numbers near 79 cents. Now AVY expects their Q2 earnings to fall between 68 and 72 cents a share. It is interesting to note that AVY specifically cites weak economic conditions in America and a weak market in Europe. This may be a company specific concern but it doesn't sit well with investors expecting an economic recovery.

Comments from chemical producer Rohm and Haas Co (ROH) sound eerily similar to AVY's. ROH's Q2 results won't miss quite as badly and the chemical company expects results around 39 cents a share compared to estimates of 42 cents. The stock dropped 2.5 percent. More important were statements from ROH's management. Total sales are actually up 8 to 10 percent but overall global business is rather "stagnant". ROH's chairman said that early in the quarter there were "indications that things might be improving, however demand in late May and early June has not shown the same momentum..." That's exactly what investors do NOT want to hear.

Failing to stall the Biotech index's 3.9 percent decline today was news of a merger "of equals" between Biogen (BGEN) and IDEC pharmaceuticals (IDPH). The merger was seen as a defensive move for two biotech companies who are struggling against the competition. Both have "blockbuster" drugs but sales are slipping. BGEN is better known for its multiple sclerosis drug, Avonex, and IDPH is known for its non-Hodgkin's lymphoma treatment, Rituxan. Wall Street discounted the deal and shares of both stocks slipped five percent. The deal, which is expected to close in the late third quarter or early fourth, would produce a new entity to be called Biogen Idec Inc., which will have revenues around $1.55 billion a year.

Continuing with the theme of "sell the news" shares of Barnes & Noble (BKS), Barnes&Noble.com (BNBN) and Scholastic (SCHL) were all hit with profit taking today. Oddly enough, shares of Borders Group (BGP) and Amazon.com (AMZN) remained green. What do these have in common? They're all participants in the biggest book event in history. Of course I'm referring to the launch of "Harry Potter and the Order of the Phoenix" by J.K. Rowling. This is the fifth book in the series and the 870-page tome went on sale at 12:01 AM Saturday morning. Of the 8.5 million copies printed by its U.S. publisher, Scholastic estimates that 5 million copies were sold on the first day. Barnes & Noble said it sold 286,000 books in the first hour. That equates to 80 books a second. I went to my local Borders and the local Barnes & Noble on Friday night and both were completely overrun with costumed fans of all ages.

So why do I mention Harry after the all-day media coverage last Friday? Because it's the best segue I can muster into what will need to be some FOMC magic. Alan & Company will take center stage for the next two sessions despite tomorrow's consumer confidence report and Wednesday's new and existing home sales reports. I wouldn't be surprised to see the market's stall ahead of the Fed decision but if the earnings warnings continue at their current pace investors may continue to sell first and ask questions later. Besides, we've already witnessed that Wall Street is in a sell the news mood. What's going to stop them come Wednesday?


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