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Market Wrap

The Picture Has Brightened

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     02-11-2004            High     Low     Volume Advance/Decline
DJIA    10737.70 +123.85 10746.88 10572.59 2.12 bln   1923/ 911
NASDAQ   2089.66 + 14.33  2089.66  2064.77 2.00 bln   1853/1238
S&P 100   572.39 +  6.04   573.20   565.01   Totals   3776/2149
S&P 500  1157.76 + 12.22  1158.89  1142.33
RUS 2000  597.07 +  4.24   597.08   590.14
DJ TRANS 2951.93 + 30.07  2951.97  2910.47
VIX        15.39 -  0.55    16.16    15.26
VXO        14.88 -  0.67    16.26    14.80
VXN        23.53 -  0.97    24.77    23.40
Total Volume 4,721M
Total UpVol  3,298M
Total DnVol  1,358M
52wk Highs     858
52wk Lows        5
TRIN          0.57
PUT/CALL      0.68

The Picture Has Brightened
By James Brown

"...the picture has brightened." sums up the day and Greenspan's perspective on the U.S. economy. The excerpt was part of Federal Reserve Chairman Alan Greenspan's official comments before congress in day one of a two-day semiannual meeting. Alan's positive speech sent the markets soaring while broker-dealers and media stocks traded higher on the $66 billion Disney takeover bid by cable-giant Comcast.

The one-two punch of Greenspan's speech and the Disney bid sent the markets to new highs. The Dow Jones Industrials added 123 points to close above resistance at 10,700 and hit levels not seen since June 2001. The S&P 500 also broke out to a new one- year high above January's resistance near 1155. The NASDAQ lagged behind with a 14-point gain but it closed over minor resistance at 2075 and the index looks poised to take another swing at the 2150 level.

Overall the rally was very widespread. Every major sector closed higher except for the HMO index, which fell 2%. Investors were pouring money into broker-dealers, homebuilders, gold and mining, semiconductors and retail stocks. Market internals were naturally bullish with advancers outrunning decliners by more than 2-to-1 on the NYSE and 3-to-2 on the NASDAQ. New highs exploded to 665 between the two exchanges. Up volume was four times down volume on the NYSE and more than twice down volume on the NASDAQ. Traders want to see rallies support by strong volume and we got that today with more than 4 billion shares trading between the two exchanges.

Chart of the DJIA:

Chart of the NASDAQ:

Chart of the S&P 500:

The new closing high for the DJIA is very bullish. This breaks the major resistance near 10,700 from March 2002 and paves the way for the Dow to run towards its next overhead barrier in the 10,900-11,000 range. The NASDAQ also looks good. The move through resistance in the 2050-2075 range has set us up for a run toward overhead resistance at 2150. Today's close puts the NASDAQ above all its major moving averages on both its daily and weekly chart save for the 21-dma. The S&P 500 has followed the Dow's lead and broken through to a new one-year high above January's resistance. Overhead resistance on the SPX is virtually nonexistent between here and the 1175 level dating back to December 2001-March 2002.

This week the markets have been exceptionally Greenspan-centric. Monday and Tuesday the markets traded cautiously ahead of his appearance for fear of what he might say. Today they soared higher on his bullish comments for the economy and a reiteration of the Fed's plan to be patient. When commenting on how the situation has changed from his last visit to congress Alan said, "Since then, the picture has brightened. The gross domestic product expanded vigorously over the second half of 2003 while productivity surged, prices remained stable, and financial conditions improved further. Overall, the economy has made impressive gains in output and real incomes; however, progress in creating jobs has been limited." More importantly Alan followed up with, "Looking forward, the prospects are good for sustained expansion of the U.S. economy." That's exactly what the markets want to hear from him.

Alan also commented on the "growing confidence of business executives in the durability of the expansion" and the "favorable financial conditions" that lead to a turnaround in business spending. Of course Greenspan couldn't dodge the jobs question, mainly where are they? His response was that "stunning increases in productivity" had been a surprise and allowed businesses to meet increasing demand "without stepping up hiring". However, he quickly pointed out that "employment will begin to grow more quickly before long as output continues to expand." Essentially he believes that productivity increases are going to become harder and harder to squeeze out and as the expansion continues managers will become more confident in its "durability" and "firms will surely once again add to their payrolls." Following his appearance there is always a lot of discussion as the markets dissect his comments and I heard some analysts suggesting that the U.S. could produce between 2 million and 3 million jobs by the end of the year.

Speaking of jobs some believe that Disney's CEO Mike Eisner's job may be on the line. The big story today was an unsolicited $66 billion all-stock bid by Comcast cable (CMCSA) to buy Disney (DIS). Evidently Comcast's CEO Brian Roberts had pitched the idea of a merger to Eisner earlier this week but Mike turned him down. In response Comcast decided to take it to the Disney shareholders and Board of directors by making it public. The $54 billion deal, plus $12 billion in assume debt, offers 0.78 shares of Comcast's Class A stock for each share of Disney stock. Should the deal go through it would form the largest media company on the planet, eclipsing media titan Time-Warner's $40 billion in revenues and $79 billion market cap.

What really makes this interesting is not only the timing of the bid but Wall Street's reaction to it. Based on yesterday's prices the Comcast offer values Disney at $26.47 a share, almost a 10% premium from Tuesday's close. Yet shares of DISNEY shot up 14.6% to 27.60, which means Wall Street believes there may be a bidding war between Comcast and other media giants looking to buy up Disney's brand and assets. A few of the companies considered as potential buyers are Viacom, News corp., Time-Warner and even Microsoft since the software company is still sitting on a $50 billion pile of cash and has expressed an interest in the media business. Right now Viacom seems to be the most viable alternative to Comcast who will probably end up raising its bid. A combined Comcast-Disney business has immediately raised some antitrust concerns. Such a media conglomerate would own ABC, Disney Channel, E! entertainment, the Golf channel, ESPN sports network, Disney's film studio, Disney's Touchstone movie studio, Disney's theme parks, cruise ship business, the most enviable portfolio of cartoons and movies on top of a cable business with 21 million homes, and 5 million high-speed Internet customers.

The merger news completely overshadowed earnings reports from both Disney and Comcast. DIS reported earnings of 33 cents a share, which was a dramatic improvement from last year's 2 cents and above current estimates at 23 cents a share. Revenues soared past analysts' estimates to $8.5 billion for the quarter. Meanwhile Comcast reported earnings of 17 cents a share, where were also dramatically better than last year's loss of 7 cents and well above current estimates for a net profit of 3 cents per share. Comcast's revenues jumped more than 58% to $4.74 billion.

Another major earnings report out today was Dow component Coca- Cola Co (KO). KO reported before the opening bell with 38 cents a share, but minus one-time charges their EPS was 46 cents, or 2 cents above the estimates. Revenues surpassed the estimate but investors sold the news as analysts comments turned negative over a drop in operating income and an 8% jump in expenses. Also noteworthy was an earnings pre-announcement from Hewlett-Packard (HPQ). Speculation had been growing over HPQ's earnings but the company wasn't due to report until next week on Feb. 19th. We don't know whether HPQ management got tired of the rumors or whether they wanted to steal some of Dell's thunder but they pre- announced an hour before today's close. For the quarter ending January 31st HPQ will report earnings of 35 cents a share, which is in line with estimates on revenues of $19.5 billion. The news quickly took the wind out of the stock and shares fell steadily into the close.

Tomorrow should be interesting. The new highs on the Dow and the SPX above January's resistance could spark another round of short covering and inspire bulls who had been waiting for another dip to finally jump on board for fear they'll miss the train. We'll also hear the latest weekly jobless claims, the January retail sales figures, business inventories and the Treasury budget numbers. However, eclipsing them all will be Alan Greenspan's second appearance, this time before the senate. As Jim mentioned in the monitor today the Q&A section is likely to be tougher and this is still a wild card event should he stumble and issue the wrong comment. Personally, after today's speech I feel that any Greenspan-risk has sunk considerably. That leaves us with just Dell's earnings report after the close. Let's hope Michael Dell has some positive comments for us!


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