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      07-17-2003           High     Low     Volume Advance/Decline
DJIA     9050.82 - 43.80  9113.57  9017.84 2.01 bln    741/2464
NASDAQ   1698.02 - 50.00  1729.59  1693.47 1.89 bln    704/2522
S&P 100   494.80 -  6.27   501.07   493.10   Totals   1445/4986
S&P 500   981.73 - 12.36   994.00   978.60 
W5000    9443.32 -136.00  9579.32  9418.10
RUS 2000  459.93 - 13.75   473.68   459.93 
DJ TRANS 2543.34 - 54.20  2596.99  2539.01   
VIX        22.82 +  0.53    23.47    22.34   
VXN        35.47 +  1.48    36.35    34.74 
Total Volume 4,221M
Total UpVol    614M
Total DnVol  3,565M
52wk Highs  280
52wk Lows    40
TRIN       1.19
PUT/CALL   0.89

By Jim Brown
Click here to email Jim

Nice try against overwhelming odds. Dow components KO +1.85, CAT +4.90 and UTX +1.50 struggled vainly to keep the Dow from crashing after IBM failed to paint a rosy picture with their earnings on Wednesday night. IP and XOM were the only other Dow stocks in positive territory but only fractionally. With 25 of the 30 stocks in the red it was remarkable the Dow only lost -43 points.

Dow Chart - Daily

Nasdaq Chart - Daily

It was a good day economically but you could not tell from the market direction. The Jobless Claims fell to 412,000 but still extended its string of weeks over 400K to twenty-two. There was an unexpected drop in continuing claims of -117,000 and the prior week was revised down -47,000. Nobody appears to know why but they are not complaining considering last weeks numbers were near records. Analysts keep saying the last two weeks of claims are skewed by auto plants being shut down for the summer retooling and we will see a huge drop in the next couple of weeks. They have no excuse for the prior 20 weeks or at least none that holds water. Still 412,000 was a significant change from the prior week's 441,000. Maybe things are getting better.

New residential construction soared to an annualized rate of 1.80 million units but this should not surprise anyone even the analysts. With interest rates at 45 year lows a month ago and expected to go lower it is a sure bet any builder with a lot was starting to turn dirt. Strike while the iron is hot WOULD have been the plan. With rates rocketing the demand for homes could take a sudden downturn before those slabs are even dry. There could be a glut of homes by fall. Look for Greenspan to pull some rabbit out of his hat if rates continue to climb because this would be a severe blow to the sputtering economy.

The strongest report came from the Philly Fed Survey which jumped to 8.3 from 4.0 in June. This should have been a huge positive for a market in the dumps but we saw an immediate sell off. Why? The whisper number was over 10.0 and traders were disappointed that conditions were not better. Remember, the current market is priced to perfection and in some cases better than perfection and traders are frustrated when that perfection does not come to pass. There were some negatives with prices paid dropping sharply as well as inventories. Prices received still showed contraction and unfilled orders fell to 3.5 from 7.9. It was a positive report but still had some cracks in the foundation.

While the economics were mildly positive the biggest influence on the market was the lackluster guidance from IBM on Wednesday night. According to analysts IBM missed earnings by a penny despite their claims to the contrary. Almost every component of the earnings announcement drew fire from analysts. They derived strong gains from currency conversions and that is not a normally recognized profit center. They continued to lose money in the chip business and services bookings fell. One analyst said IBM actually missed estimates by as much as -12% when all factors were considered. That equates to a clean 85 cents when estimates were for 98 cents. Other analysts view it differently but none viewed it as strongly positive. All would have liked to see a stronger top line. Without the currency gains the growth would be an anemic +3% not 10% as claimed.

The real killer was their lack of optimism. CFO John Joyce said demand is good but not robust and he was NOT holding out hope for an economic recovery over the next five months. He also said, "I don't have to remind investors that second-half recoveries were expected in 2001 and again in 2002. We are going to take a more pragmatic view." Turn out the lights the party's over. At least that was the investor sentiment towards IBM on Thursday. The stock lost -3.41 and led the Dow decline.

Helping the negative outlook was a warning from Nokia before the open that knocked -3.55 of a $17 stock. There were numerous other warnings as well as several strong reports as dozens of companies announced. The mixed messages only succeeded in convincing many traders that we may be seeing a stabilization of the economy but we are NOT seeing a strong recovery. July is normally when expectations meet reality and it is not a pretty picture. With growth for the economy expected to be 3-5% for the second half earnings are expected to be up significantly. With companies still giving cautious guidance or worse now that they can see order flow for the next quarter it simply drives home the no strong recovery picture.

The Manpower CEO said today that they were seeing NO signs of an economic recovery yet. They typically see job requirements 90-120 days in advance and there has not been any pickup in expectations. The travel sector is still in the tank. The transportation sector is losing ground. Boeing announced another 5,000 worker layoff today. According to IDC PC demand in the 2Q was up +7.6% and according to Gartner Group it was up +10.6%. This could actually be bad news. The surge could have been in anticipation of a post war rebound that fizzled. Also, where is the surge in profits from the jump in PC demand? Answer: It is a buyers market and there is no profit. Without a substantial increase in demand that will support higher prices the tech companies could be left to tread water until the 2H of 2004. There it is out, I said it. I expect the term "second half recovery in 2004" to begin to appear more often in the mainstream press over the next couple months. It would be funny if it were not so painful.

I deviated from the topic above but the main problem with the markets this week is simply "inline won't cut it." With the great expectations for the 2003 recovery it does not excite investors to hear inline or flat guidance. One trader said today after a disappointing earnings release, "if this keeps up everyone will be long on nothing." Bingo! In a market priced to perfection and facing expectations that look like a ski jump from the bottom it is rapidly becoming clear that those expectations may be impossible to obtain. Not only are the earnings tough to produce but the quality of earnings is being called into question even quicker.

IBM was a prime example. Numerous earnings components were seen by analysts as one time events or the product of cost cutting and not repeatable. COF got killed after posting earnings of $1.23 and blowing away estimates of $1.11. Analysts said fears of losses from the growing unemployment and a maturing loan portfolio were to blame for the -$7 loss. COF committed the unforgivable sin of not raising its guidance. Correct, it did not warn but simply said they were comfortable with estimates. They said the effort to attract better credit borrowers would offset gains in other areas. Guilty, of giving accurate guidance, penalty -$7.

I am not trying to beat a dead horse here and I am sure you are getting the picture. The economy is stable, maybe recovering but recovering very slowly. It is not recovering at the pace that would justify the recent 50% rally in tech stocks. This does not mean we are not going to see a year end rally. It only means that we should see the normal July adjustment period. As the July earnings reality dawns, investors will continue to readjust their valuations to fit that reality. If that means EBAY needs to trade at $95 instead of $115 then it will eventually settle at $95. If the 3% real growth for IBM is only worth $75 then it will be a long time before it sees $87 again.

The Dow closed at 9053 today and over -200 points below the Monday high. No big deal really. A 200 point drop from the high but only -70 points from Friday's close. This is not a material drop, yet. What was holding it up was the hope that earnings would surprise to the upside. The hope that Intel would guide much higher. The hope that IBM was setting the globe on fire. And finally the hope that Microsoft would announce a windfall profit and strong guidance. Intel "no recovery yet, no major upgrade cycle, no pickup in IT spending." IBM "not holding out hope for a recovery over the next five months." And finally Microsoft tonight, "not expecting a marked improvement in the economic environment" and "we may be seeing indications that the spending environment has stabilized but IT budgets remain tight." They missed estimates by a penny and guided lower by a penny for the next quarter. They also said factors that helped profits in the past would disappear this year. Could that be a pre-warning warning for future quarters? MSFT closed the after hours up only +16 cents and S&P futures fell from their post MSFT bounce at 982 to 978.50 as I write this.

Friday we get the Michigan Consumer Sentiment and Semiconductor Book-to-Bill report and a handful of earnings before the market opens. Last week we saw a relief rally after a four-day slide. That rally was in anticipation of good news. Now that the news is out I would doubt we get anymore rocket rides and instead we could see some short covering or profit taking as the week draws to a close. I do not expect to see 9250 again any time soon and there is a good chance support at Dow 9000 is about to break. With 70% of the S&P still to report there will still be fireworks but they may have lost their market moving potential. Technicians tell us that market drops on low volume are nothing to worry about. Thursday's volume was above average and decliners beat advancers 3:1. New 52-week lows rose to a level not seen since May-23rd. New highs fell to only 25% of the July-14th level. For those that are watching the internals are changing. Follow the internals.

Enter Very Passively, Exit Very Aggressively!

Jim Brown


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