Eight Days and Counting
The Dow closed down for the day on weakness in SBC and T and the Nasdaq closed up on strength in semiconductors. If you average the broader markets you get one more day very close to the highs for the year with only eight trading days left in October. This is more amazing than AMZN beating earnings.
What a day. For day traders it was several hours of sheer boredom interspersed randomly with several minutes of total confusion. The end result was a one-point gain on the S&P. I could have gone to the movies and saved the brain damage. The Dow opened down after AT&T and SBC shared their results with the world and told us that nobody is phoning home. Heck, according to them many more homes don't have a phone to call. SBC said it lost -323,000 land lines in the last quarter and it may have to review its dividend policy. SBC missed estimates by two cents. Not all the news was bad. They added +365,000 DSL lines and +745,000 wireless lines at its Cingular unit. Those new customers required more expensive infrastructure so costs rose during the quarter.
AT&T announced a charge of $125 million after disclosing that two employees concealed charges during 2001 and 2002. AT&T did slow the rate of its decline suggesting that the worst was over. AT&T reported earnings of 53 cents, more than double the same quarter last year. Revenue fell -8.1% for the quarter. AT&T claims lower expenses from several years of restructuring were the reason for the better earnings. Unfortunately AT&T saw revenue drop in its business segment by -6.2%. They said they saw no signs of a recovery in capital spending by businesses. T fell -1.07 in regular trading. Both T and SBC are Dow components and kept the index in the red for the day with the aid of CAT, BA, GM and Citigroup.
GM was hurt by earnings from Daimler Chrysler that posted a loss of nearly $1.8 billion for the quarter. The U.S. unit posted a profit on the strength of prior cost cutting and restructuring efforts. The massive loss weighed on the sector after DCX said competition was still very intense and they would do what was necessary to sell cars. The Mercedes unit sales were flat. Last week Harley Davidson was also lowering future production growth. Is this a sign of the current economic times or those to come?
AMTD and SCH reported earnings and while the earnings were not exciting the statistics were. SCH said trading volumes were up slightly but that new account numbers were still disappointing. New accounts fell -23% at Schwab. AMTD said trading volume in October was down about -10% from September levels. Schwab CFO said they are not expecting investors to continue to ramp up. Both companies were downbeat about the lack of new investor enthusiasm. Etrade also reported last week that new account openings were falling. If all three of the top brokers say investor participation is waning then it could be a sign there is still some doubt the market rebound is going to stick. Others think that the lack of new investors is related to unemployment, falling wages and lack of investing income.
JCOM dropped -10.39 after raising its guidance to $1.03 for the year. Analysts had already built in aggressive growth and were expecting $1.00 to $1.19 per share. The -20% drop knocked the stock back to $33 and a level where brokers are falling all over themselves to recommend it with a $50 price target. JCOM sports a compound annualized growth rate over 50% and better than 40% free cash flow. Never heard of them? Heard of eFax? That is one of their products. I have watched them soar from $8 to $48 over the last 10 months and kept saying I would buy them on a pullback. Looks like it is time. The 100DMA is just over $30 and I would love to see it there.
The 800lb gorilla left for the week is MSFT on Thursday after the close. There was a big press splash today on the release of the new Office product. MSFT is launching a $150 million ad campaign hoping that consumers will part with up to $499 for the full version. MSFT has 400 million users of its Office products and generated $9.2 billion in revenue over the last year. The last Office suite had the slowest acceptance rate of any release. This suggests that consumers may not rush out and buy a new copy when their Office-2000/XP still works just because the new one is available. MSFT saw a huge ramp into the 2000 product due to Y2K but while the computers may have increased in speed on a factor of ten over the last four years the ways you write a letter, work with a spreadsheet or receive email have remained the same. I doubt MSFT will starve if consumers do not rush out to stand in line to buy the new software. MSFT announces later in the earnings cycle this quarter and there is a sneaking suspicion that they might not be as bullish as everyone hopes. The lack of a PC upgrade cycle and the slow IT recovery could be hurting them. Also, the vastly increased speed of servers means fewer are needed now than in the past and that means fewer expensive licenses. Intel said the higher volume of laptops was driving their profits but laptops typically come preloaded with a MSFT bundle at a discount to list. Plus, laptops do not feed the onsite network and require fewer network fees. Also, in order to use the new features of the Office product, corporations must purchase a new server product that retails for $5,619 per server. With the SUNW Office clone at $79.95 per copy along with the free OpenOffice product this will not be a slam-dunk sale for MSFT.
Last night the Semiconductor Book-to-Bill number for September was announced at 0.95 and now 13 consecutive month at less than breakeven. Orders climbed +3.9% in September and was the second consecutive rise after four down months. This is encouraging but hardly something to shout about. On a year over year basis orders are still down -8.5% and shipments are down -23%. The 0.95 number was only a slight improvement over the 0.92 in August. This could be the start of a trend but it is not a blast off. Once the BTB passes breakeven, more orders than shipments, then we will have something to be excited about. There was some good news in a VLSI survey showed that global chip fabrication plants were reaching 90% capacity and may need to upgrade equipment soon. A large amount of chip capacity was taken offline or converted to other uses when the tech bubble collapsed.
The only economic report today was the weekly Retail Sales and they came in flat. The Bank of Tokyo was quick to lower the forecast for October once again. The yo-yo outlook has gone from +4.5%-5.0% to only 3.0% at present.
The Nasdaq rose on the strength of TXN earnings but overall the broader market strength was flat. 92% of companies who reported earnings last week were meeting or beating estimates. That number has dropped to about 66% this week as the quality of companies reporting diminishes and the number of smaller companies reporting increases. The blue chips are slowly dwindling with MSFT the remaining figurehead of note on Thursday. This quality fade is still not critical as 66% is a very respectable level.
The Dow has now traded for nine days in the 9700 range with a brief sprint to 9848 and a brief dip to 9650. Throughout all this the price magnet remains 9750 and that is exactly where it closed today. The lack of gains on strong earnings news is seen by many as positive. They feel that is shows a lack of unbridled bullish enthusiasm and more of a cautious optimism. The main point seen as positive is the lack of a drop. Given some high profile misses and the October time frame it is seen as remarkable by some.
The Nasdaq price magnet is 1940. It has traded within 30 points of that level since October 9th and ended there again today. The TXN news offset the weak book-to-bill numbers and the SOX is only a couple points away from a new high. The Nasdaq will face another challenge tomorrow. AMZN announced earnings tonight and beat estimates by a penny. This was the first non holiday quarter that AMZN has posted a profit and it squeaked out a $52 million gain on revenue of $1.13 billion. It dropped in after hours to $58 after trading as high as $61 during the day. AMZN only guided analysts to $5.75-$6.25 billion for 2004 and analysts had already expected $6.1 billion. While that is not much of a difference it was seen as conservative guidance and not exciting enough to justify the recent +200% gain in the stock. However, remember EBAY? The outlook was not exciting and it took a tumble but has nearly recovered the loss through Tuesday. Something I have been reporting but over looked by the public is the foreign exchange gains. This quarter more than 50% of AMZN profits were due to the weak dollar and gains in currency exchange. Without the gains AMZN earnings would have only been +0.05 cents. Is this relative to investors? AMZN traded down -$2 in after hours and Nasdaq futures are down only slightly (-3.00) at 8:PM.
Several readers have asked if it was time to back up the truck and buy puts based on the VIX at 16.55. Historically anything under 17.50 is a trigger point for a huge put buying opportunity. However, the VIX you see quoted in print these days is NOT the VIX that you have watched for the last decade. On Sept-22nd the CBOE changed the way the VIX is calculated to be based on SPX options and not OEX options. They also changed the calculation method to include more strikes and added some complicated math. The bottom line is the current VIX at 16.55 cannot be compared to the old VIX. The new calculation has taken some of the volatility out of the indicator in anticipation of offering options on it in the near future.
Now the good news. The old VIX, now called the VXO for VIX Old hit 17.43 today. Hit, not closed under 17.50. The close was 17.82 and in my book that is close enough for government work. Do you back up the truck? No, because the VXO is only one indicator of market sentiment. It is showing that there is no fear in the market and almost nobody expects the market to drop. When these conditions exist it can take several days for a market event or it can take weeks. There is not a trip wire that gets pulled and suddenly the bottom falls out. We may see a market reaction as there are normally some sell programs that are triggered on a close under 17.50 but then again this is not a normal market and we did not close under 17.50. That number is not magic. It could be 17.82 or 16.82 that draws sellers but 17.50 does tend to act like a target. The key to remember is it may not be immediate. There have been times when it stayed at relatively low levels for days. The last time we saw it this low (17.43) was July-20, 1998. It traded in the 16.43-17.80 range for about eight days before blasting off to a high of 60.63 in October.
Sure, sure but this is different! Is it? Jul-20th was the 3rd week of an earnings month and the market was at new highs. OK, it was not October but the other two conditions should make you think twice. Never ignore the VXO. Never say it can't happen.
The overnight futures are tame at 8:30 with just a small drop. There are several hundred companies still to report this week with MSFT the spotlight on Thursday. The only economic report tomorrow is Weekly Mortgage Applications and not a market mover. We will be left to fixate on earnings and see how the crowd reacts to the AMZN news. Volume was low again today and there is still no conviction on either side. Something big is about to happen and there are no clues in sight. Or is there? You decide.
Enter Very Passively, Exit Very Aggressively!