Option Investor
Market Wrap


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      01-20-2004           High     Low     Volume Advance/Decline
DJIA    10528.66 - 71.90 10616.96 10519.49 2.28 bln   2026/1240
NASDAQ   2147.98 +  7.50  2149.85  2130.20 2.62 bln   2158/1144
S&P 100   563.75 -  0.97   565.95   562.55   Totals   4184/2384
S&P 500  1138.77 -  1.06  1142.93  1135.40 
W5000   11131.32 + 15.30 11151.60 11082.78
RUS 2000  597.98 +  7.57   597.98   590.16 
DJ TRANS 3020.00 - 16.30  3036.46  3006.03   
VIX        15.21 +  0.21    16.13    15.09
VXO (VIX-O)14.91 -  0.36    15.83    14.91
VXN        20.49 +  0.25    22.13    20.26 
Total Volume 5,234M
Total UpVol  3,384M
Total DnVol  1,802M
52wk Highs 1341
52wk Lows    12
TRIN       0.98
NAZTRIN    1.21
PUT/CALL   0.60

It was all about guidance as the bluest of blue chips began presenting their earnings. However, good news did not buy much in the way of investor appreciation as strong earners were pounded when good results fell short of overly optimistic expectations.

Dow Chart

Nasdaq Chart

It was a slow day economically with the NAHB Housing Market Index the only regular hours report. The headline number at 68 was less than consensus at 69 and less than the 70 from both December and November. Slower sales continue to depress the market despite the optimistic outlooks by the builders. With the economy recovering, interest rates low and inventory levels still light the conditions are ripe for a spring sales explosion but the winter weather has put sales in the deep freeze. This would suggest a continued neutral rate decision by the Fed next week could be the green light for another run for the builders as investors buy the dip in advance of the spring thaw. The worst thing that could happen for the home builders would not be what you would expect. A surge in the 4Q GDP, due out next week, that would suggest the recovery is really catching fire could actually push real interest rates up despite a Fed on hold. Rising economies can support higher rates but those same rates could slow home sales. Seems contrary to common sense but that is real life. More buyers can afford homes in a roaring economy but they have to pay more for the privilege.

MMM reported earnings with sales that reached an all time high. They beat estimates by a penny and the shares soared to an all time high of $86.20 before taking a significant hit of over -$5.00 for the day. Analysts found no fault with the earnings with margins at 20% and sales up +14% from last year. MMM also raised its guidance for the quarter and the year. Unfortunately that raised guidance was still at the low end of the consensus range. Expectations for an earnings blowout and improved guidance were just too high it appears.

Dow component UTX reported earnings that beat the street by +3 cents on a +19% increase in 4Q sales and guided inline with prior estimates for 2004. UTX lost -2.70 in early trading. Several analysts suggested UTX was over valued at its current PE of 18 based on the lack of an upgrade in guidance. UTX is expected to earn between $5.00 to $5.30 for 2004. Analysts were disappointed UTX only beat by +3 cents given the weakness of the dollar. Guess they were looking for something more in the IBM/GE range of currency translation gains.

Another Dow component, GM, posted very strong earnings of +$2.13 per share and profits of $1.01 billion. A strong performance by GMAC helped the automaker. They also posted a very strong outlook for 2004 and expects to take market share from competitors with new models. GM spent an average of $3,589 in incentives per car in December. GM also said its -$18 billion pension fund problem had been completely erased thanks to the market gains and a debt offering. This takes a very big negative away from the GM stock. GM was trading down on the news at the close.

Citigroup announced profits that nearly doubled last years results and raised their dividend +14%. Citigroup posted earnings of $4.76 billion or 91 cents per share. Analysts had expected 90 cents. Strong growth in credit card revenue came from 145 million card accounts. Citigroup said volume was strong and they were looking to grow the business by acquisitions where possible. Nothing wrong with this report but C finished negative for the day.

INTC closed in on its lows for the month near $32 and suggested investors were not excited about their record earnings last week. We know it sold off on the less than hoped for guidance and so far that selling has not slowed.

Five Dow components, excellent earnings from all on strong sales improvements. Inline or better guidance for them all yet all the stock prices tanked. This suggests what we all feared that the buyers are saying great but not great enough. Investors were quick to take profits when there was not a short covering rush like we saw in Juniper last week.

The only stock not seeing a sell the earnings result was IBM which three days after announcing mediocre results was up another +1.78 on Tuesday. The reason was an announcement they were adding +15,000 workers. While that sounds like a prelude to a wave of new jobs when the Non Farm Payrolls are released in two weeks it was not as positive as it seemed on the surface. Only 4500 of those jobs will be in the U.S. The remainder of those 15,000 jobs will be in India and China. They did reiterate that they were bullish on the IT market for 2004 and these hiring's would put IBM at the highest employment level (330,000) since 1991 high of 340,000. IBM will save $168 million a year by hiring those programmers overseas. IBM said a programmer with 3-5 years of experience will cost them $12.50 an hour in China where that same programmer in the states costs them $56 an hour including benefits. If this outsourcing continues unabated would you care to speculate on what a programmer in the states will be making five years from now? Way less than $56. I know programmers in Denver that were making enormous amounts of money five years ago that are working in Taco Bell now or have been unemployed for nearly a year because the IT job market has collapsed.

IBM is using that cheap labor to mount an assault on MSFT. They announced on Monday they were launching a new program to help millions of customers migrate from Windows to Linux. Linux is the fastest growing operating system for servers in the world and IBM wants to keep it that way. Microsoft is going to stop supporting Windows-NT by the end of 2004 and IBM is charging ahead with a plan to capture those millions of users. Microsoft software has continued to get more expensive and IBM sees this as an opportunity to take market share. IBM will offer multiple upgrade paths and offer classes on how to migrate. They are making these tools available to their 90,000 partners worldwide as they begin their push. MSFT was up +30 cents on the news despite the announcement from the Justice Dept that MSFT had failed to fulfill a key part of the antitrust settlement. MSFT will announce earnings on Thursday and this could be a shift out of those already announced and into a coming announcer. Buy the rumor, sell the news.

The markets surged to new highs at the open once again but the Dow was unable to hold those opening levels. The January rally has been fueled by near record amounts of cash flowing into the markets. According to TrimTabs $8.6 billion in new cash came into equity funds for the fist nine days of January. The small cap techs are by far the biggest recipient of the cash. The Russell led the major indexes all day as traders scrambled to find something worth buying with hopes of big gains in 2004.

Goldman Sachs reported the results of a CIO survey just completed where 32% of managers expected their IT spending to rise in 2004. Of that 32% the expected rise in spending was only estimated to be +1.5%. This is very low and does not suggest the bullish investor sentiment has carried through to the IT sector. Less than 1/3 expect gains and those gains are expected to be very small. Still 58% of those surveyed expected spending to be flat with the 4Q and that is an implied increase since the 1Q is normally weak. Not exactly a strong reason to invest in techs that are up in many cases more than +100% from 2003 lows. Merrill released a study late last week suggesting that 2004 would actually see a decline in IT services and spending in consulting services.

After the close we saw earnings from AMD, MOT, PMCS, SAMN and RFMD among others. Motorola beat estimates by +4 cents with a +17 cent headline number. Cell phone sales fell -3% because of delays in getting camera phones and other new products to market in quantity. The did see a +64% jump in orders during the quarter. Unfortunately the profit margin on their phones is only 4% compared to 20% for competitor Nokia. They raised guidance to 5-7 cents for Q1 and analysts were expecting +5 cents. MOT traded down slightly in after hours despite the good results.

AMD blew the doors off with its first profit in more than two years on strong 4Q demand for memory and computer chips. AMD said the gains were seasonal and the 1Q would be flat to down. They still expect to post a profit for the 1Q but after that it becomes dicey again. They said flash memory had been strong in the 4Q but pricing pressure and demand would make it flat in the 1Q. This was the same guidance Intel gave on flash memory. AMD was up early on the news but traded down as the after hours session ended.

RFMD took a hit in after hours after beating estimates by +3 cents but then guiding down for Q1. The company was still upbeat but a pause in demand will push estimated Q1 earnings down to only +2 to +4 cents. Analysts had been expecting +7 cents.

PMCS beat the street by a penny and said they were still expecting a strong 2004. They did use the "if" word in their guidance saying "if current trends continue" but then that is always the implied scenario. PMCS traded down slightly after the announcement.

SANM turned in a profit and reversed a prior loss but the street was not happy with the results. Guidance was inline with estimates but given the expectations for the sector analysts were hoping for more. The consensus after the guidance was that SANM was benefiting from a restocking cycle and not new orders for an increase in IT spending. David MacGregor, a research analyst for Longbow said he surveys three dozen or so board companies each month and he saw only a little evidence of inventory buildup from companies like SANM.

Techs got a very late gift after the close. The Semi Book-to-Bill came in at 1.20 and a high not seen in many months. This would suggest a sharp increase in orders and more confirmation that the 4Q was strong. This is a December number but one that should negate any negatives from some of the earning questions tonight. The futures did not react to the B-t-B announcement but it does not come out until the after hours stock session closes so reaction is normally muted until the next day.

After the flurry of tech earnings after the close the futures fell slightly. This could have been due to the less than stellar guidance from some or just fear of the president. The State of the Union speech tonight offers numerous chances for a few misplaced comments to tank various sectors depending on the initiatives mentioned. The drug and health care sector are a favorite with comments about lowering the cost of healthcare suggesting profits for those companies will be lower. The energy sector could be volatile should any sweeping suggestions appear. Oil hit $36 a barrel today so I expect that to be on the hit list somewhere. The speech tends to hit every possible campaign target so nothing is sacred. Getting out of the way in advance with your profits is not a bad idea. This is also a very high profile event where all the heads of government are gathered in one place. This would be a terrorists dream target although probably the toughest possible target considering the security. This could have provided even more reasons for taking some profits off the table.

The markets were far stronger today than the closing indexes suggest. The Dow lost -71 based on drops in HON, UTX, MMM, CAT, INTC and several others. Gains in IBM failed to prevent the dip. The -$5 drop in MMM was a major drag on the index. However, that Dow drop was mostly based on those five stocks. It was not a broad based decline. The Nasdaq closed at a new high near 2150 and the Russell gained a whopping +7.57. The S&P was flat. However the internals tell the real story. Volume ended strong at 5.23 billion across all exchanges. Considering the almost complete lack of volume intraday this is amazing and could have been option related. The A/D line was nearly 2:1 in favor of advancers despite the negative indexes. The new 52-week highs hit a three month high at 1341. This was not a negative day.

The only qualifier was the strange volume, which was very heavy at the open and the close and flat intraday. This suggests that volume was squaring of exercised option positions. The key will be the volume and direction on Wednesday. Earnings are appearing faster than popped corn in a hot skillet and there is plenty of reasons to trade. If the volume continues tomorrow and displays the same positive patterns then the outlook is good. Lately volume has been increasing almost daily but we are still stalled under 10600 on the Dow and 1161 on the S&P. The Nasdaq and Russell are in breakout mode and not looking back. Eventually the blue chips have to join the party or the party is going to fade. This is the week for it to happen and Microsoft's earnings on Thursday could be the pivotal point. The speech is about to start and the next 90 minutes will also be critical for the week. Let's hope the market likes it!

Enter Passively, Exit Aggressively.

Jim Brown


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