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Market Wrap

Let the Fireworks Begin

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     01-14-2004            High     Low     Volume Advance/Decline
DJIA    10538.37 + 53.19 10548.51 10428.67 1.94 bln   1905/ 942
NASDAQ   2111.13 + 14.69  2111.73  2094.32 2.08 bln   1854/1206
S&P 100   559.77 +  4.02   559.90   555.75   Totals   3759/2148
S&P 500  1130.52 +  9.30  1130.75  1121.22
RUS 2000  586.12 +  4.96   586.12   581.16
DJ TRANS 3031.61 + 12.33  3044.47  3017.99
VIX        16.75 -  1.29    17.30    16.40
VXO        16.70 -  0.17    17.10    16.26
VXN        23.17 +  0.12    23.44    22.77
Total Volume 4,434M
Total UpVol  2,860M
Total DnVol  1,480M
52wk Highs     906
52wk Lows       14
TRIN          0.71
PUT/CALL      0.66

Let the Fireworks Begin
By James Brown

Today was a big day in the U.S. stock markets. Investors translated yesterday's weakness as a buying opportunity and stocks soared at the open. Boosting the indices was plenty of economic news with the trade deficit numbers, the PPI, and the Fed's Beige book report. There was a midday lull as traders began to take some money off the table but by the afternoon buyers were back and stocks closed near their highs for the session. After the bell is when the real fireworks began and the show should continue tomorrow.

Overseas markets were mixed. Asian stocks were generally weak with the NIKKEI up 13 points to 10,863 and the Hang Seng down 75 to 13,320. European bourses did better with the FTSE up 21 to 4461 and the DAX up almost 59 to 4055. Strength across the Atlantic didn't hurt U.S. stocks and the Dow Jones Industrials managed an 111-point gain to close at 10538. The NASDAQ managed a 14-point jump amid weakness in the semiconductors ahead of Intel's post-market earnings. The S&P 500 added 9 points to close at 1130.

Selling was strongest in the XAU gold & silver index, down more than 4% as gold lost $3.50 to close at $420.50 an ounce. Oil service stocks also fell behind with a 1.6% drop in the OSX index as crude oil prices dropped 23 cents to $33.78 a barrel. Meanwhile investors were busy elsewhere buying the dip from yesterday. Homebuilders and healthcare stocks saw the strongest gains with defense, airlines and broker-dealers outpacing the broader indices. Overall market internals were pretty positive. The NYSE saw advancers crush declining stocks 19 to 9 and the NASDAQ reported winners outpacing losers 3 to 2. Up volume was almost three times down volume on the NYSE. It was a much closer race on the NASDAQ with up volume hitting 1158 million shares versus 865 million in down volume.

Chart of the DJIA:

Chart of the NASAQ:

One benefit to the dollar's decline has been a rise in U.S. exports. The month of November showed a 59 percent jump in civilian aircraft sales. These sales combined with a strong increase in consumer goods and food translated into a 2.9 percent jump in monthly exports to $90.6 billion. This marked the highest level of exports in three years and helped narrow the trade gap to just $38.0 billion in November, an 8.6 percent decrease, which completely caught economists by surprise. The U.S. trade gap has been a growing concern among economists and politicians alike. The first 11 months of 2003 have already hit a new record at $446.8 billion, surpassing 2002 levels. However, the unexpected improvement in November combined with Alan Greenspan's comments yesterday that it could be managed set investors in a good mood this morning.

This morning's Producer Price Index (PPI) also underpinned today's stock market action. The Labor Department reported that December's PPI index rose 0.3 percent while the core PPI, excluding food and energy, dropped 0.1 percent. Economists had been expecting a rise in the PPI and the core PPI after November's big decline but were surprised to see the core rate of inflation drop again. Overall 2003 witnessed the fastest rise for inflation in several years but most experts feel the climb has been mild and Wall Street believes the FOMC has it under control.

About midday the Federal Reserved released their Beige Book report, which showed optimistic trends across the nation's twelve districts and "modest improvements" in the labor markets. Retail sales were strong and factory utilization was improving but loan demand appeared flat. This coincides with recent earnings reports from some regional banks who warned that 2004 might be soft until loan demand improves. The Beige book also reported that travel and tourism was up and that housing numbers were strong.

An hour after the Beige book report the afternoon rally began as investors started to repositions themselves in eager anticipation for this evening's earnings bonanza. The biggest announcement came from chip behemoth Intel Corp (INTC). Wall Street was estimating that Intel would turn in profits of 25 cents a share on revenues of $8.64 billion for the quarter. The headline number was 33 cents a share on revenues of $8.74 billion. By first accounts this was a blow out number and some of the financial media is reporting that this is Intel's best quarterly profit since Q3 of 2000. However, drilling down into the details reveals why the stock was trading lower after hours. The real earnings number may be closer to 27 cents. Intel had already told analysts that earnings would reflect a $200 million tax benefit but that benefit turned about to be about $620 million or about 9 cents a share. The $420 million difference is worth about 6 cents a share so that 33 cents becomes 27 cents. Yet if we remove the tax benefit completely Intel's profits were just 24 cents a share and below the 25 cent estimates. Even so the 24- cent number would be an improvement over Q4 last year where Intel reported profits of 16 cents on revenues of $7.16 Billion. Looking ahead Intel is guiding first quarter revenues in the $7.9 billion to 8.5 billion range but analysts were already expecting $8.24 billion. This isn't the glowing report that investors were hoping for and Intel's expectations that gross margins might dip to 60% from its current 63.6% is far from inspiring. Overall Intel tried to put a positive spin on the quarter saying that business is beginning to see early signs of an I.T. turnaround and stronger spending patterns by corporations. Commenting on the fourth quarter Intel's CFO Andy Bryant said growth was worldwide with strength in emerging markets and steady demand from mature markets like N. America and Western Europe.

Investors were also eager to hear from Yahoo! (YHOO). Analysts were expecting YHOO to turn in profits of 11 cents a share on revenues of $495 million. What YHOO reported was a net profit of 11 cents a share on revenues of $663.9 million. However, if you remove the traffic acquisition costs (paid by its Overture division) revenues are reduced to $511.3 million for the fourth quarter. This is still above analyst estimates and well above 2002's Q4 revenues of $285 million. Looking ahead YHOO is forecasting Q1 revenues of $475 to $505 million compared to consensus estimates of $492 million with earnings at 11 cents per share again. While this is positive news it wasn't enough to excite any buyers and shares fell strongly after hours. In other news YHOO announced an agreement with Chinese Internet portal Sina.com (SINA) to join forces for an online auction service for Chinese users.

Earnings news from Apple (AAPL) was also taking a bite out of this evening's headlines. Wall Street was looking for AAPL to beat estimates of 14 cents a share. Apple reported profits of 17 cents a share ($63 million) on revenues of $2.01 billion. However, if you back out a $3 million after-tax investment, that number becomes just 16 cents a share. Overall it was a strong quarter compared with last year's Q4 $8 million loss (-2 cents/share). It also proves the success of Apple's iPod and iTunes products. Apple's CEO Steve Jobs said the company shipped 829,000 Macintosh computers, 733,000 iPod's in the quarter and that their iTunes online music store accounts for 70 percent of the legal music-download market. Apple guided higher for the first quarter predicting 8 to 10 cents a share on revenues of $1.8 billion, which is better than analyst estimates of 7 cents on $1.7 billion but it wasn't enough to stop some after market profit taking.

There were of course dozens of other companies reporting earnings after the bell tonight but overshadowing their announcements was news that J.P.Morgan Chase & Co (JPM) would acquire Bank One (ONE) for nearly $60 billion. Rumors had been circling that the two were in merger talks and the Wall Street Journal broke the story right after the close of trading today. The new entity would become the nation's second largest bank, based on assets, behind Citigroup. Shares of ONE rose 10 percent after hours while JPM slipped 4 percent. As a Dow component, JPM will be a negative impact on the index tomorrow.

There was also merger news circling around the on again off again relationship between AT&T Wireless (AWE) and Cingular Wireless. The two companies had discussed a merger over a year ago and never reached a conclusion. Speculation that they two will be more agreeable among today's more competitive marketplace pushed shares of AWE up 17 percent to $9.99.

In other business news Andrew Fastow, the former CFO for Enron Corp, has pleaded guilty to accounting fraud. Reports have been circling around Andrew and his wife Lea Fastow who have been trying to arrange a plea bargain so that one of them would be free to watch over their two children. It appears they finally came to an agreement with prosecutors. Lea will plead guilty to a single count of filing a false tax return and serve five months in jail and an additional five months under house arrest. In exchange for Andrew's guilty plea the government has agreed to drop 96 of the 98 charges against him on the condition that he cooperate in their other investigations (namely against Ken Lay and Jeff Skilling). Mr. Fastow will also forfeit $23.8 million in assets and spent the next 10 years in jail. It's hard to estimate what kind of affect this type of news will have on the marekts, if any, but the fact that the government is making progress in the case and that some of the key people will spend time behind bars could be a positive for investor sentiment.

Tomorrow is going to be another crazy day. As I have been suggesting for days now investor reaction to these much- anticipated earnings announcements has been to "sell the news". Standouts in tomorrow's earnings parade will be Bank of America (BAC) and Sun Microsystems (SUNW). Yet dwarfing them both will be a surprise announcement from IBM. IBM had been expected to announce earnings on January 20th but the company changed their mind and said they'd be ready tomorrow. Big Blue is now expected to report at 7:30 AM ET on Thursday. Analysts are estimating earnings to be $1.50 a share on revenues of $25.02 billion. Rumors have been circling for several days now that the company might miss based on poor performance from its services division and SAP's recent sales miss and Accenture's earnings miss don't inspire a lot of confidence (unless IBM is just stealing customers from them).

IBM's earnings report is such a market event it will most likely dwarf Thursday's economic events with the weekly jobless claims, the CPI report, the Empire manufacturing survey and the monthly retail sales numbers. A few traders have suggested that IBM's eagerness to report might be hiding a positive earnings surprise but that could just be wishful thinking. Buckle your seat belts. Tomorrow could be volatile.


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