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Market Wrap

Under Whelming

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      10-16-2003           High     Low     Volume Advance/Decline
DJIA     9791.72 - 11.30  9823.42  9730.38 1.71 bln   1848/1314
NASDAQ   1950.14 + 11.00  1951.76  1930.28 1.76 bln   1822/1355
S&P 100   523.51 +  1.37   525.06   520.44   Totals   3670/2669
S&P 500  1050.07 +  3.31  1052.94  1044.04 
W5000   10210.84 + 36.00 10234.32 10152.12
RUS 2000  529.64 +  2.29   530.49   526.05 
DJ TRANS 2872.58 +  8.90  2891.61  2865.78   
VIX        17.19 -  0.50    18.05    16.86
VXO VIX-O  19.12 -  0.14    19.83    18.70
VXN        25.47 -  1.30    27.13    25.37 
Total Volume 3,729M
Total UpVol  2,332M
Total DnVol  1,313M
52wk Highs  675
52wk Lows    16
TRIN       0.97
NAZTRIN    0.94
PUT/CALL   0.65

Under Whelming
By Jim Brown
Click here to email Jim

That was the term used to describe earnings reports from several Dow components that failed to live up to the great expectations. IBM, CAT and MO failed to impress investors and between the three they were responsible for over -50 Dow points. Take those three stocks out of the mix and the Dow would have set another new high. Interesting statistic but if small consolation to those expecting a continued rally.

Dow Chart

Nasdaq Chart

S&P Chart

It was a day of mixed economics but those that were positive were very positive. The Jobless Claims dropped to 384,000 and an eight month low. Ring a bell? That is because last weeks claims were also an eight month low at 382,000 but those numbers were revised up +6,000 to 388K. That took away the eight month title and passed it to this week with a higher number. Just word games but the bottom line was two consecutive weeks under 400K and the four-week moving average fell to the lowest level since February. Continuing claims rose to 3.67 million and a level not seen since June-28th. Layoffs may be easing but jobs are still hard to find. Last week the markets rallied strongly on the drop to 382,000 claims but this week they barely noticed. The Manpower CEO said that despite some recent signs of minor improvement he was unable to call an end to the current labor problems. His company is a leading indicator of job growth and he said improvement was still weak.

The Consumer Price Index jumped +0.3% in September with energy prices continuing to rise. The core CPI rose only +0.1% and pushed the annual rate to a new 38 year low of +1.2%. Obviously the pricing environment remains very weak and this prompted Fed Governor Parry to warn that inflation could fall further and that deflation was still the bigger risk. The markets ignored his comments.

Business Inventories fell more than expected at -0.4% compared to estimates of only a -0.1% drop. While this is a cause for concern this was August data and the market does not normally react to it. The same information is reported in several other reports on a more timely basis. This was the fourth consecutive monthly drop in inventories. Total business sales also fell in August by -0.2%. The inventory-to-sales ratio is at an all time low of 1.36. This would indicate a rapid buildup could occur if demand were to increase. That increase has yet to happen.

Industrial Production rose +0.4% as expected but August was revised from a minor gain to a minor loss at -0.1%. This indicates only a very minor pickup in manufacturing. Automakers were responsible for the majority of the gains with incentives enticing even more consumers to upgrade. Capacity Utilization rose only slightly to 74.8% from 74.5% in August. With 25% excess capacity there is no need to buy more equipment or upgrade plants. This excess capacity is contributing to the decline in prices and drop in inflation.

The NAHB Housing Index rose to 72 from 68 in September and jumped to the highest level since December 1999. The dip in mortgage rates over the last month prompted a quick rebound in housing activity. All components of the index were up. The seasonal activity also helped with homes hitting the market from the spring starts. While these numbers are up the number of new mortgage applications is already slipping and could be the beginning of a long term trend. Of course the housing bears have been claiming this for many months and the sector continues to grow.

The most bullish report was the Philly Fed Survey, which blew away estimates of 16.0 with a headline number of 28.0. This was far better than anyone had expected and was the fifth consecutive month of expanding conditions. Shipments, New Orders and Employment rose strongly. However, inventories fell to -2.5 and the six month outlook fell to 55 from 66. This mix of conditions indicate that there may have been a burst of activity but the long term outlook has not really improved. Because most manufacturers receive orders and bids for orders many months in advance the business they received last month was expected many months ago. They are now looking at orders for 3-6 months from now and without some increase in demand soon those orders may not come through. Several analysts mentioned today that the 1Q-2004 could actually be weak as the real 4Q business patterns are reviewed. Everyone is expecting a strong 4Q but as of yet it is still just an expectation. If it appears on schedule then we could be off to the races but if it is weaker than expected then the 1Q could see yet another round of cost cutting.

Last night we got earnings from IBM and as the headline to this article said, the results were less than exciting. The company met estimates and even said they could see hiring 10,000 new employees next year. Investors were not impressed. The key comment came from the CEO who said that although he was seeing signs of stabilization "it was too soon to call it a recovery." When coupled with Intel's comments that they were seeing strength in Europe/Asia but the U.S. orders were still soft you can see why tech investors were becoming worried. 4% of IBM earnings came from currency gains and not sales. Dow component IBM lost -3.46 for the day.

Another Dow component Caterpillar lost -4.02 after raising its outlook for 2003 to $3.00. Sounds good but analysts were already expecting CAT to make $3.15 and the stock was punished severely. CAT said retirement of $40 million in bonds and higher costs offset gains in sales. They stressed gains made in cost cutting but that does not normally please investors.

KO missed estimates by two cents despite a +2% gain in profits from currency gains. They were upbeat about sales and outlook but the two cent miss knocked nearly -$1.00 off the stock at the open. It recovered to close at $44.99 and +50 cents off its lows. Another Dow component, MO, reported earnings of +1.22 per share and beat the street by a penny but sales were slipping. Revenue jumped +4.7% to $20.9billion but primarily due to a favorable currency gains of +$940 million. Again, not a normal gain and MO dropped at the open but regained most of the losses by the close.

Dow component HON reported earnings that dropped -20% but were inline with analysts estimates. They also guided inline with analyst estimates for Q4. Yet another Dow component UTX beat the street by three cents on the strength of its elevator business overseas. UTX was one of the strongest gainers with a +70 cent bounce to a new 52-week high.

After the close there was a flurry of tech earnings as over 200 companies reported today. The overall tech earnings were positive tonight with BRCM, XLNX, AMD, AVID, DCLK, LEXR, PMCS, PLCM, RMBS, WEBX, FCS and ATML all beating the street. Only PXLW missed estimates. EBAY was the biggest company to report. They hit their numbers and raised THEIR estimates for revenue but their estimates for Q4 were for less than analysts had expected. EBAY dropped nearly -$4 in after hours. EBAY has a habit of disappointing analysts who constantly expect them to earn more. The estimates are always more than EBAY's and almost always sets up a failure situation.

Despite the few high profile misses today earnings are coming in above expectations with 92% of the S&P companies either meeting or beating estimates. This is a very strong ratio but they are competing against a very weak 2002-Q3. Despite the weak comparisons First Call said the overall results were +6.4% above expectations. Top line growth is running at +8% and bottom line growth at +18%. There is positive momentum in almost all sectors.

IDC reported today that PC shipments had risen +15% in Q3 with the strongest gains in Europe. In the U.S. growth was primarily in government and the consumer sector with slow growth in the business sector. IDC had previously projected +10.4% growth. The incentive was blowout specials and extreme competition in consumer PCs. Dell grew sales +27.9% with HPQ hot on their trail with a +28% gain. The combined sales of the next three vendors did not come close to those numbers. Dell is still in the top spot in the U.S. but HPQ is closing the gap according to IDC with strong momentum going into the 4Q. Dell's total market share for the quarter was 17.4% on 6.67 million units compared to HPQ at 17.1% and 6.55 million units.

Not everyone was positive with NOK saying sales would be flat or only up slightly. They reported that prices were still falling due to intense competition. Maytag lost ground after saying that competition from cheaper products primarily in the vacuum cleaner sector had impacted results. They are closing plants and restructuring in an effort to lower costs to compete more effectively in the market. They are shifting their manufacturing to Mexico to benefit from the cheaper labor. Sounds familiar. Analysts expected 57 cents and MYG posted only 46 cents.

HDI continued to fall on reports of stagnant sales and fears they would miss 4Q estimates. Sales slipped in the 3Q from the prior year and analysts fear they are a leading indicator for a slow down in the consumer sector. HDI is normally exempt from economic conditions as they are normally back ordered on their popular models. They announced plans to only increased the 2004 production estimates by +8.9% and contrary to historical double digit trends. If the sales growth trend has changed it could project weakness in the other high end toys and luxury cars.

While the earnings picture is really very positive the mixed messages from a few high profile misses and opposing economic signals worked to keep the Dow locked in its trading range for one more day. The Dow has been trading between 9700-9800 for the last six days. It closed once again under 9800 and could either be poised to rocket ahead or begin profit taking once earnings are over. The Dow has been very strong and the bulls are still supplying an underlying bid on every dip.

The Nasdaq managed to close at a new 52-week high but still below the intraday high set yesterday. The flurry of great tech earnings after the close are being overshadowed by the guidance change by EBAY and the massive after hours drop. The Nasdaq futures are down -4.00 but like IBM last night the broader strength in chips could offset the EBAY loss by morning.

Friday is option expiration and the volume today was very light. The direction for the averages is still up for grabs and after more than 200 companies reporting earnings today the good news is likely to be priced in. With 92% of companies beating estimates, as expected, there may not be enough excitement left to push the indexes much higher. I speculated this week that Thursday could be the market high and next Tuesday the pivotal day once expiration settlement has occurred. I still believe that Tuesday will be critical and it remains to be seen if the indexes will trend down from here on year end fund selling over the next two weeks. The lack of any upward progress over the last week could be telegraphing a cooling of the bullish sentiment. This cooling is far from a sure thing. I receive emails daily suggesting Dow 11,000 could be reached soon. With earnings estimates still rising for the 4Q, now officially at +22%, unofficially at +26%, there is plenty of reason to expect more gains before the year is out. However, once earnings are "perceived" to be over for this quarter the urge to take some cash off the table could be strong.

Using the roller coaster analogy from Tuesday, after a long climb we are beginning to level out. We still cannot see over the top to glimpse what is ahead but the tension is building. If the normal trend is buy the rumor, sell the news then what rumors are investors going to buy next week? Friday is flat economically with only Residential Construction and the final revision of the October Consumer Sentiment. Neither should be market moving. Next week is blank economically with only the Semi Book-to-bill on Monday night of importance. This leaves nothing to stimulate investors except for more earnings and we already know how that book ends. Typically the farther we get into earnings the weaker they become. The bigger blue chips with the best earnings announce first with the crowd of small to midcaps stretched over the next three weeks. There are still some big names left for investors to follow so we have not reached the credits on the earnings movie yet. You do sit through the credits when you go to the movies, right? We still have MSFT, AMZN and MMM leading a list of over 700 companies that will announce next week. There will be plenty of news but the question is will it be enough news to power the markets higher? Keep those seatbelts fastened.

Enter Very Passively, Exit Very Aggressively!

Jim Brown


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