No Recovery, No Kidding
The market lost ground today after economic reports and several corporate executives suggested the recovery may not happen until 2004. Where have I heard that before? Maybe in July 2000, 2001 and 2002. It is the month where expectations meet reality and for the last three years it has been the blind date from hell.
Dow Chart - Daily
Nasdaq Chart - Daily Bar
Nasdaq Chart - Daily Candle
The string is unbroken at 21 weeks and it does not look like it will change anytime soon. The Jobless claims soared to 439,000, +14,000 over consensus estimates and last week's number was revised up to 434,000. Continuing claims rose to 3.82 million and a level not seen since the early 1980s. This 20-year high was not received well by Wall Street. The insured jobless rate rose to 3.0%. Analysts trumpeted their seasonality claim for the increase this week. They have been trying to find an excuse for each of the last 21 weeks to no avail as the numbers continue to disappoint each week. This is also setting up another negative number in the Jobs Report for July. The lack of a recovery is being shown in the lack of jobs and the continued layoffs by companies still trying to cut costs from lack of demand.
Chain Store Sales showed a slight improvement of +2.4% but the gains were not broad based. WMT sales rose +2.7% but TGT only gained +0.8%, JCP +0.1% and KSS fell -2.4%. Several retailers issued profit warnings today after a lackluster month. The survey showed that most gains came from heavy promotional selling with high discounts which could hurt the bottom line as we saw with the earnings warnings. Additionally much of the sales gains came from the Harry Potter book and several new video releases. Those are one time events, not month to month improvements in general volume. Barnes and Noble said half of their +10.5% sales increase was due to the Potter book. Most retailers said their inventories are above plan which means they have not sold as much as expected and that old inventory will have to be heavily discounted to make way for the fall merchandise. Tax rebate checks and lower tax withholding beginning in July should help retailers get rid of the excess inventory but unemployment is still a problem.
Import/Export prices were about the only friendly report today with Import prices rising +0.8% and export prices falling by -0.2%. This is due to falling energy prices and the falling dollar. Considering the May import number was revised down to a drop of -0.8% the gain for June only produced a breakeven. Still the report was seen as evidence that deflation is less of a problem than earlier thought.
The MAPI Survey today fell to 60 for the 2Q, down from 63 in Q1 and 67 in Q4. The new orders index fell to 53 from 67. While this still shows growth most would argue that the magnitude of the drop is significant and could be seen as a warning for Q3. 77% of the survey participants reported operating under 85% of manufacturing capacity. The capital-spending component fell to 54 from 62 and indicates the potential for limited spending in the 3Q. While the overall survey still showed limited growth it did show that that growth was continuing to slow.
As if these economic reports were not enough we had Greenspan testifying before Congress on energy prices. The bottom line to the speech was don't expect them to improve anytime soon and high energy prices could be detrimental to the potential recovery. The speech was soft peddled by the press but the outlook was clear. There is no light at the end of the energy tunnel and the recovery has one more unexpected obstacle in its path. It was assumed the soaring energy prices would return to lower levels once the war was over and Iraq resumed production. After a brief dip to $25 at the end of the war oil has resumed its rise and closed on Thursday near $31 a barrel.
The earnings parade is beginning and already we have some no shows and several predictions of negative events ahead. JP Morgan said the semiconductor sector was "rich" and warned that they were ripe for the traditional summer drop. They fear the guidance from semis for the 3Q could disappoint. Cisco CEO John Chambers said in Europe on Wednesday that he saw a pickup in IT spending 2-4 months AFTER any pickup in the economy. Assuming the economy picked up in the 3Q, not likely since it is traditionally the weakest quarter of the year, then the IT spending would not occur until December or sometime in early 2004. If the recovery does not appear until the 4Q then IT spending would be late Q1-2004 or later. Intel CEO Craig Barrett said today that he expects growth in the semiconductor sector to slow several percentage points. Not a good indication for their earnings guidance next week. The President of UBS said the recovery in the markets exceeded the recovery in the economy and the current rally did not smell like a new bull market. This was not the outlook investors were expecting. After all just a couple weeks ago the number of analysts surveyed by Investors Intelligence was near 80% and at five-year highs.
The most current barometers for the tech sector were the earnings by YHOO and JNPR. Both beat the street but both suffered strong losses in heavy trading. Neither warned but the performance and guidance was less than investors expected. JNPR said today that the 3Q would be flat due to seasonal weaknesses. The keywords here were "seasonal weakness". Investors have been expecting a strong 3Q as the economy begins its recovery. Very few companies have actually said they were seeing any recovery. Remember, this is only the first week or earnings and a light week at that. Investors are now seeing the potential for even more serious questions next week and are becoming more cautious. On Friday morning we get GE earnings and while nobody expects them to miss there are plenty of analysts that think GE will try and talk down estimates for 2003 AND 2004. GE is very good at spinning their earnings and I do not expect a major event tomorrow. They typically dribble out negative comments in measured doses throughout the quarter it order to manage expectations. Still most analysts will be using their microscope tomorrow to try and derive the state of the economy from the GE comments.
The Dow traded below 9000 once again today and well off the highs from Monday at 9261. The Nasdaq traded down to 1707 and well off its 1758 high from Wednesday. While the selling was anticipated I did not think we would see 9000 until next week. The Dow 9000 support level is strong and it withstood a concentrated attack today. That does not mean it will hold. Remember we traded down to 8871 just a week ago and could easily return to that level or lower as the earnings begin to flow. I am not going to repeat the justifications for my outlook as you will get the expanded and updated version with this weekends newsletter. Suffice to say that there is nothing "surprising" in the earnings for investors to cheer about and the markets are still priced for perfection. The worry today was that history was repeating itself again. Not that we would see a dip in July but that the second half recovery was going to be missing in action for the fourth consecutive year. To investors that thought is worse than any Freddy Kruger movie and could be appropriately named "Nightmare on Wall Street Chapter IV". This week's sneak preview of 2Q earnings was not met with rave reviews and today traders reviewed their investment "Matrix" to decide which positions should be "Terminated". The GE earnings tomorrow will be the last chapter for the week and the potential for a positive surprise ending is close to zero. With the flood of mid year retirement cash slowing to a trickle remember to keep those stops tight if you are long.
Enter Very Passively, Exit Very Aggressively!