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Market Wrap

Great Expectations

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      01-13-2004           High     Low     Volume Advance/Decline
DJIA    10427.18 - 58.00 10509.85 10367.41 1.99 bln   1519/1733
NASDAQ   2096.44 - 15.30  2114.91  2080.29 2.38 bln   1390/1824
S&P 100   555.75 -  3.66   560.05   552.62   Totals   2909/3557
S&P 500  1121.22 -  6.01  1129.07  1115.19 
W5000   10935.88 - 53.40 11003.88 10877.32
RUS 2000  581.16 -  1.85   583.18   575.04 
DJ TRANS 3017.06 -  2.20  3023.87  2986.81   
VIX        18.04 +  1.22    18.33    16.53
VXO (VIX-O)16.87 +  0.62    17.86    16.38
VXN        23.05 +  0.49    23.89    22.26 
Total Volume 4,634M
Total UpVol  1,593M
Total DnVol  2,969M
52wk Highs  787
52wk Lows    12
TRIN       1.36
NAZTRIN    1.77
PUT/CALL   0.61

The markets suffered another setback today and analysts were racing to find a reason. Greenspan's speech? Rising oil prices or O'Neil's criticism of the president? Sorry, it is just a plain case of profit taking on fear that reality may not match expectations. Even great news for the telecom sector could not prevent fears that INTC might disappoint.

Dow Chart

Nasdaq Chart

The economic news was mixed and not really a negative for the market. The Weekly Chain Store Sales fell -0.4% and year over year growth fell to +4.9% and the lowest rate in five weeks. Redemption of gift cards remains the primary driver for chain stores with new cash shopping continuing to slow. Cold fronts and snow storms are still being used as excuses but in reality it is the middle of winter. What changed? Cash has dried up. Mortgage refinancing has dried up and the tax rebates are history. Until consumers start getting the next round of tax refunds/rebates there is not much for retailers to look forward to.

Import Prices rose only +0.2% and only about 1/2 what was expected. This will be drastically different next month when the mad cow halt to beef exports hits the tape. Meat export prices are going to plummet due to oversupply and shortage of buyers. Beef prices fell -20% after the discovery of the mad cow in Washington. Rising oil prices are also going to make an impact with oil moving over $35 in trading today.

Offsetting the Retail Sales news was the Richmond Fed Survey which fell to 8 for December and down from 11 in November. Despite the drop the internals were still strong. Shipments fell -3 points but New Orders rose from 14 to 22. The backlog remained the same at only 3 and the Six Month outlook rose +3 to 44. The Order Backlog at 22 is the highest level since last January. The employment component rose to zero from -14 and this is the first non-negative number in nineteen months. Just like the Kansas Fed Survey on Monday the headline number fell but critical components are still showing growth.

Wednesday is a big economic day with Mortgage Applications, PPI, International Trade and the Fed Beige Book. Thursday is even bigger with Jobless Claims, CPI, Empire Manufacturing Survey, Monthly Retail Sales, MAPI Survey, Philly Fed Survey and the Treasury Budget. Add in the major earnings after the close Wednesday from YHOO, QLGC and INTC and you have a critical 48hr period.

Fear of the next 48 hours made the earnings announcements Tuesday morning even more important. Leading the list was SAP which reported a drop in software revenues and planted seeds of disappointment in tech land. SAP was profitable but the key point was the -3% drop in software revenues. The SAP results were good but not great. Since SAP is a major competitor to IBM the road signs were clear to many. IBM had already been weak on rumors they would not make their revenue estimates and weakness in competitor revenues seemed to signal the rumors could be true. IBM does not report until Jan-20th but IBM fell to six-week lows on the news.

Adding to the SAP negativity was a lowered forecast from Accenture, (NYSE:ACN), another competitor to IBM. Accenture missed estimates by a penny but said profits could be as much as -22% below analyst estimates. Accenture lost -3.66 on the news and helped to push IBM even lower.

The ACN/SAP ripple knocked the Nasdaq back below 2100 but not by far. You could probably call it an Intel hiccup more than anything else. With great expectations priced into the market the first really clear road sign for the global recovery is going to be Intel tomorrow night. If Intel sneezes the entire market could catch cold. We know Intel will go out of their way to spin the news positive. However, if you remember their last conference in October there was a minor blip after the call when they admitted there was a small drop in bookings. This was not picked up by the mainstream press and the markets rallied on the headline news. Intel did revise to the upper end of estimates for the 4Q in their mid-quarter update but the key for tomorrow is their guidance for the 1Q. Considering the solicitations I am getting by email on almost a daily basis it appears computer vendors are in a January sales slump. They don't call/email when business is good. It could be just a coincidence but I can't wait to see what Intel has to say.

The Semiconductor Index fell from a 52-week on Monday at 560 to initial support at 540. Considering the huge gains in the chip sector it is not surprising investors wanted to take some money off the table before the Intel announcement. XLNX lost -2.46, PMCS -1.30, NVLS -1.79. Bucking the trend was LSCC which finished the day positive and appeared ready to launch even higher from 11.50 support.

Also used as an excuse today was the Greenspan speech but while uninspiring there was nothing really detrimental to the markets. He said the lack of job creation would not keep the economy from growing and the lower dollar really did not matter. Dallas Fed President McTeer said he was "shocked" by the Friday Jobs report showing only +1000 jobs created in December. He said he expected a seasonal adjustment and the missing 149,000 jobs would show up in January's report. Let's hope he is right. He said he expected strong growth and low inflation for some time to come. This reinforced thoughts that the Fed would not be raising rates soon. Fed Governor Olson also pushed that common thought by reiterating the "considerable period" phrase in a speech. Let's hope the "seasonal adjustment" McTeer spoke about is a real adjustment and not the Fed just pushing the numbers around in our best interest.

The Conference Board published a survey that showed CEOs' were less positive about the future than they were before. The poll's outlook component also fell to 66 from 73 for the first six months of 2004. This drop was contrary to the rise in confidence in current conditions to 68 from 64 from the 3Q to the 4Q of 2003. The Conference Board did not feel this was a problem and more of an acknowledgement that the soaring growth from the 3Q could not continue.

The earnings parade is beginning this week with the consensus estimates now up to +26% for the 4Q. These great expectations are very risky and it will not take many more events like SAP and Accenture to puncture the balloon. Even if the earnings do come in as expected we know from experience that just meeting estimates does not normally send markets higher. They have to meet or exceed estimates and guide higher. This does not take into account the current tech valuations at a two-year high. YHOO is currently trading at a PE of 145 for just one example. Insider sales are typically a leading indicator for earnings. Since YHOO hit $40 insider selling has been very brisk. The CFO, somebody who knows exactly what the numbers will be, just sold 80,000 shares. We will get to see tomorrow if he was beating the rush or simply capitalizing on the good news ahead to exit without a cloud of questions.

As an example of the lack of upward momentum we saw almost no impact from the $2.3 billion telecom deal with China today. Motorola, the biggest winner with over $1 billion, only gained +12 cents. Lucent with a +$350 million win gained +6 cents. CSCO got $140 million and lost -14 cents. Nortel showed the biggest gains at +21 cents. Unlike most contract awards that take years to play out this contract will be completely funded in 2004. Instant money for current products but no real impact to prices. Another problem there is a demand that the companies turn over the intellectual property to China to enable them to make these products on their own in the future. They also demanded a different encryption method than currently in use. Last I checked they were still a communist nation. Sure, sell them $2.3 billion in goods and then give them the results of years of research so they can avoid buying anything else in the future.

Also hurting the markets was continued depression in the homebuilder sector. Centex announced orders that were less than expected and MDC Holdings disappointed as well. The analysts coming out against the sector multiplied overnight. Most of the builders lost ground again but not by big losses. The bulls still believe in them and with the single digit PE numbers where else are you going to find values this cheap? The Homebuilder Index (HGX) is well off its highs but still lofty in relative terms. As long as it does not break two month support at 345 the bulls will likely buy the dip. The next material support is in the 300 range. The HGX is optionable but expensive.

Tech worries also grew from the banking sector after several banks reported earnings that expressed concern that commercial loan demand was soft. This suggests that an IT recovery may be muted if loans to purchase and upgrade equipment are not in demand. BBT and STT suggested 2004 could be a challenging year.

The market action was both confusing and frustrating depending on your market view. The Dow dropped -118 intraday day but rebounded to close down only -58. The dip was well under Dow support at 10400 but the rebound put it back above that support to 10427. Bottom line, was this a bearish day or a bullish day? Or was it just a profit-taking day? Since the high near 10600 last Thursday the Dow has trended down and today was no exception. The minor rebound on Monday was just a short term oversold dip buy. Today was a continuation of Friday due to worries over IBM and Intel and earnings in general. So far it is just cautious profit taking. 10400 is strong support and I was surprised to see it break today even on the earnings disappointments. Tomorrow and Thursday are the key. Should 10400 break again the next real support is 10300 then 10100. Volume was skewed 2:1 to the downside and it was moderately heavy with 4.6 billion across all markets. If we break 10400 again I expect that volume to rise and the imbalances to be strongly negative. Bulls have got to be worried but the bears still have no conviction.

The Nasdaq dropped below 2100 but held solid on four day support at 2080. The tech advance has been so strong there is only minimal support below that at 2050 with much stronger support at 2000. If the techs disappoint on Wednesday night it is very conceivable we could test 2050 by Friday. The tech big caps have been slipping as funds cautiously move cash they stored in late December out of these stocks and into other vehicles. MSFT has been trending down sharply for the last three days. Today was the first INTC drop as investors clung to the earnings run hope. Despite the drop today the Nasdaq has been exhibiting serious strength. If it can pass the test this week the tech bulls will be cheering.

Regardless of your market view the rest of this week should be exciting. We are seeing volatility return to the market and buyers are finally seeing some dips. Odds are good there will be some earnings winners this week and probably some more losers. Keep your powder dry because the bargains are on the way.

Enter Passively, Exit Aggressively.

Jim Brown
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