Option Investor
Market Wrap

187 and Counting

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      10-14-2003           High     Low     Volume Advance/Decline
DJIA     9812.98 + 48.60  9812.98  9732.31 1.57 bln   1831/1358
NASDAQ   1943.19 +  9.70  1043.33  1922.82 1.75 bln   1958/1162
S&P 100   523.30 +  2.33   523.31   518.70   Totals   3789/2520
S&P 500  1049.48 +  4.13  1049.49  1040.84 
W5000   10211.14 + 43.40 10211.14 10126.80
RUS 2000  531.84 +  4.27   531.88   525.78 
DJ TRANS 2881.66 +  6.90  2890.38  2857.44   
VIX        17.37 -  0.18    17.79    17.20
VXO (VIX-O)19.39 +  0.06    19.95    19.05
VXN        26.49 -  0.28    27.33    26.31 
Total Volume 3,569M
Total UpVol  2,301M
Total DnVol  1,187M
52wk Highs  967
52wk Lows    18
TRIN       1.12
NAZTRIN    0.51
PUT/CALL   0.70

187 and Counting
By Jim Brown
Click here to email Jim

The Dow managed to climb another +48 points in front of the Intel earnings announcement and is now only 187 points away from Dow 10,000 once again. The Nasdaq, not to be outdone, added +9 to 1943 and only 57 points away from NAZ-2000. But, putting them all to shame was the Russell-2000 which tacked on +4.27 and closed near 532.00 and a three year high. This is a very bullish move and suggests that fund managers are not afraid of the next two weeks and are putting money into the market.

Dow Chart

Nasdaq Chart

S&P 500

The good news just kept rolling in and started with the California Manufacturing Survey. The headline number rocketed to 63.3 for the 3Q from 47.5 in the 2Q. If California is growing in the manufacturing area can the rest of the country be far behind? After two quarters of declines, a number under 50, this was a very strong rebound. The high tech component rose to 71.3 from 43.4 and employment showed strong gain to 51.5 from 39.6. New orders had a huge jump to 72.3 from 47.1. Great news for Arnold that he is taking control just as the momentum turned.

Elsewhere the Kansas City Fed Manufacturing Survey jumped to 31 for September from only 20 in August. Unlike the CA survey any positive number is an increase in conditions and a negative number a contraction. Only prices received still lingered at -1 and negative. The headline number was a multi year high and well above any recent readings. Production, shipments and new orders all jumped significantly and even job growth grew slightly. Unfortunately the Kansas District Surveys tend to be on the bullish side so this report was well received but not overly so.

In the Richmond District the news was not as good. The same manufacturing survey for that district turned negative with a headline number of only -7 and down from the flat line last month. The only improving components were the backlog of orders which improved to a still negative -14 and the six month outlook which improved to 33 from 31. The employee component dropped -11 points to -22 and the lowest level since Dec-2001. The overall report clearly showed a declining manufacturing sector in the Richmond district.

The Weekly Chain Store Sales fell -0.5% for last week and the Bank of Tokyo was quick to revise the outlook for Oct down to +3.5% from the +4.5% to +5.0% just last week. The outlook for a consumer led recovery in the 4Q is slowly fading and all hopes are for businesses to pickup and take control. Unemployment is still high and shrinking claims checks are hurting the consumer base.

Over all it was a very positive day. JNJ announced strong earnings and beat the street with pharmaceuticals up +13% and medical devices up +20%. Merrill Lynch beat the street by +18 cents but mostly on cost cutting from about -20,000 jobs over the last two years, -400 last quarter. Bank of America posted earnings of $1.92 as mortgage fees tripled. BAC took a charge of $100 million to cover mutual fund probe expenses. BAC said the consumer sector was stronger than they had expected and a major drop in loans due to the higher mortgage rates had not occurred. While these numbers were outstanding Merrill warned that the good times might not last. They said investor sentiment was very strong and that was one reason they were expecting a substantial correction in the 4Q. First Data reported earnings that were inline with estimates but took a hit on broker comments that the internals were weaker than expected. FDC specializes in payment systems with its Western Union unit growing +14%.

The big news of the day was Intel after the close. They beat estimates by +2 cents and revenue by +.08 billion. They guided to $8.1-$8.7 billion for the current quarter compared to prior estimates of $8.32 billion. The median of their current estimates would be $8.4 billion so this is a slight increase. The key number was the estimate that gross margins would be around 60%. It was 58.2% in the 3Q. Intel's earnings grew +15% over last quarter and Andy Bryant said that was the highest 3Q growth rate in over 25 years. The company reported record shipments of processors, chipsets and motherboards. They said the most demand was from Russia, India and China. They said the mature economies like the U.S. were growing much slower. Intel said it was growing market share in most sectors due to the absence of strong competition. Profits for the 3Q was more than double the same quarter in 2002 and highlights the weak comparisons across the tech sector. Flash memory revenue fell nearly -25% due to a weak market and strong competition in that product line. With profits of $1.7 billion for the quarter and estimates of something over $2 billion in the 4Q it would appear Intel is firing on all cylinders. On the conference call Andy Bryant was pounding the soapbox on their performance. The initial news had some analysts pegging $45 as a fair value for their stock based on the current earnings ramp. For the economic outlook Intel said PC unit growth was only modest and their earnings came from a higher value processor mix rather than a flood of new PCs. Intel said it was an "orderly market" and there was no rush to buy and no real inventory buildup.

Other chip companies reporting after the bell were NVLS, LLTC and PWAV. NVLS reported earnings of +0.04 cents when estimates were flat. NVLS said they expected bookings to increase +5% to +10%. LLTC reported earnings that beat the street by a penny and said demand was improving in all markets. PWAV missed estimates by a penny but affirmed guidance for the 4Q. PHG announced before the open and beat earnings estimates but cautioned that the consumer outlook for the 4Q could be weak.

The net of all the chip/tech earnings was that business was improving but at an orderly, (read slow), rate into the 4Q. Most quarterly guidance was for a seasonal +5% to +8% growth rate. Definitely not a blowout. Intel is winning the profit battle because they have no real competition and they are keeping the prices high for their high performance chips and those are the chips most vendors are buying. The cheap chips do not appear to be moving well. I read that as businesses are adding sparingly and the consumer market is still weak. Also, the majority of the gains were not in the U.S. but in Europe and Asia. That means our economy is still in the slow growth mode.

Two Fed heads spoke today and Bernanke was quoted as saying that growth in 2004 should be in the 4% range. That is well below the generally accepted +5% to +6% rates making the rounds. He qualified the statement saying it could be higher IF inventory rebuilding or a strong pickup in the economies of our trading partners occurred. He repeated the lack of job growth problem and said the timing of a recovery in jobs was still unclear. The main tone of his speech and that of Ferguson was that deflation was less of a problem than before. They said inflation was still tame but the shifting of focus away from the deflation worry immediately magnified the inflation concerns. They both went out of their way to stress that the Fed would remain neutral for some time. Many Fed watchers feel the 1Q may be the trip wire for a rate hike despite their continued denial. If the Q4 shows any major gains in the economy most feel they will be hard pressed to prevent hiking rates by March. This put pressure on bonds and helped keep the markets in check until late afternoon.

Contrasting the +4% official Fed growth targets, Goldman Sachs raised their growth rates to +6.5% for 2004 and up from +5%. This is an incredible jump and indicates the bullish sentiment already in the market. This contrasts with a comment by John Chambers in Geneva where he said "the IT recovery is muted and customers remain in a show me state." The recovery is going to be impacted by rising oil which traded over $32 today and the rising interest rates. How much they will impact the recovery is unknown.

Tomorrow we get earnings from GM and IBM, both Dow components and IBM could be a challenge for the tech sector. Several analysts went on record today as expecting IBM to downplay the recovery and possibly warn that IT spending was still very light. IBM is the leading indicator for how larger companies are investing in capex. If that large expenditure component has not triggered then analysts will start pushing recovery estimates into 2004 and writing off the 4Q. That may be hard to do in the face of the Intel earnings but there was no real table pounding on business demand by Intel.

Russell 2000

S&P Small Cap Index

The markets responded well today and the Dow close over 9800 was a key event. There is no material resistance between us and Dow 10,000 other than the IBM earnings. The market is very bullish and sentiment is strong across all sectors. Earnings are coming in strong and investors are racing to place bets. The strongest indication of sentiment by the funds is in the Russell-2000. This index of small cap stocks would be the most volatile and most in danger of any October drop. Instead of trading cautiously it set a new three year high at 530 and showing no signs of any weakness. The S&P Small Cap Index closed at 255 and is very close to an all time high. This is very bullish considering the calendar. If funds are buying heavily in the small caps before the fund year end in two weeks then there is the possibility that we are not going to see any massive fund selling after option expiration.

With IBM tomorrow plus more than 100 other companies and another 225 reporting on Thursday we will be buried with reports. The flood of earnings across all sectors this week will give investors a clear picture of the 4Q without having to wait for the next three weeks of earnings to unfold. With options expiration on Friday and nearly half of the S&P earnings over this week it sets up a dangerous period for next week. Once the expectations component expires with the passage of earnings there is nothing left to pull buyers off the sidelines.

On Sunday I suggested we could see an attempt on Dow 10,000 by Thursday and it looks like that could easily come to pass. The Dow has gained nearly 500 points in the last ten sessions and the Nasdaq is following suit. The S&P has the closest near term resistance at 1050 but with futures rising in after hours it appears that resistance will be broken at the open. The bullish percent on all the major indexes is approaching recent extreme highs once again. The difference is that the oscillators for those indexes are actually rising and could do so for several more days. My outlook from last week is still the same. Should we actually touch Dow 10000 and Nasdaq 2000 I am betting we will see some immediate profit taking. I would plan on it and either bail from long positions as we near that level or at lease snug up your stops and consider some index puts. Should we break that level the Dow has further resistance at 10100, 10300, and 10500. Without some really blowout guidance over the next couple days it may be really difficult for the Dow to move much above the 10,000 level. We are very extended, especially over the last ten days and once earnings are over we could see some consolidation before pressing higher. The October roller coaster is coming to the top of that long first hill. We can't see the other side yet so we don't know if it is another hill or a cliff. Enjoy the ride and keep those seatbelts fastened.

Enter Very Passively, Exit Very Aggressively!

Jim Brown


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