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Earnings Worries Weigh On Wall Street

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     04-07-2004            High     Low     Volume Advance/Decline
DJIA    10480.15 - 90.66 10569.26 10465.33 1.79 bln   1325/1492
NASDAQ   2050.24 -  9.66  2060.44  2038.74 1.76 bln   1528/1511
S&P 100   557.28 -  4.30   561.58   556.33   Totals   2853/3003
S&P 500  1140.53 -  7.63  1148.16  1138.41 
RUS 2000  601.64 +  2.31   603.76   595.22
DJ TRANS 2954.47 - 20.31  2974.53  2933.60
VIX        15.76 +  0.44    16.36    15.34
VXO        15.46 +  0.97    16.01    15.19
VXN        21.99 -  0.24    22.65    21.81
Total Volume 3,964M
Total UpVol  2,217M
Total DnVol  1,684M
52wk Highs     325
52wk Lows       30
TRIN          1.84
PUT/CALL      0.70

Earnings Worries Weigh On Wall Street
By James Brown

Major stock indices traded lower on Wednesday due to concerns that Q1 earnings may not meet expectations. An earnings miss from Dow component Alcoa (AA) last night and two high-profile earnings warnings from tech stocks (Nokia and Seagate) in the last two days are testing investors' resolve while giving weak- willed traders an excuse to take profits. Rising tensions in Iraq with the heaviest fighting since the end of the war were also weighing on Wall Street.

Global stocks markets were mixed and many trended lower but losses were relatively mild. The Japanese NIKKEI lost 60 points but still managed to close over the 12,000 mark, a level it achieved yesterday. The Chinese Hang Seng added 33 points to close at 12,920. European stocks were generally lower with the German DAX down 21 to 4001, the French CAC down 11 to 3734 and the British FTSE down 4 to 4468. The dollar was also weaker and that helped a $3.80 rally in gold to $423.70 an ounce. Crude oil futures also turned in a big day adding $1.18 (3.4%) to $36.15 a barrel.

U.S. markets opened the day in the red and sank for the first 90 minutes of trading as investors reacted to the Alcoa earnings news and the Seagate earnings warning. Alcoa was a major drag on the Dow with a 5% loss to $34.65 after missing analyst estimates by 2 cents despite beating the revenue estimates. The good news was that rising aluminum prices should boost their second quarter numbers but traders sold the news anyway. Seagate (STX) gapped lower to open down 16% but rebounded almost the entire session to end at $14.98 (only down 3.91%). Their earnings warning last night sparked a round of profit taking across the tech sector but like STX most stocks pared their losses by the close. If you take a moment to look at the intraday charts on the Industrials, S*P 500 and the NASDAQ you'll see that all three traded a good chunk of their day in a very narrow range before spiking higher in the last hour only to fade again. There was speculation that stocks were rebounding higher on news that Secretary of Defense Donald Rumsfeld would hold a 3:30 PM afternoon press conference. When that press conference failed to deliver any good news on the situation in Iraq the markets faded again.

Chart of the Dow Industrials:

Chart of the NASDAQ Composite:

Chart of the S&P 500 Index:

There were a few economic reports out this morning but nothing market moving. Influencing the already weak mortgage lenders was the Mortgage Bankers Association of America survey of weekly loan applications. This weekly survey dropped 7.2% due to a 15% plunge in refinancing applications, which really isn't that surprising since the rates on a 30-year fixed mortgage jumped from 5.49% to 5.75% last week. The two larger reports were the consumer credit numbers and the import/export prices. The Federal Reserve said that consumer credit jumped $4.2 billion in February to $2.02 trillion but this was below economists' expectations for a $7.4 billion gain. March's import prices climbed 0.9% but if you exclude oil imports the jump was only 0.2%. This marked the fifth consecutive gain for import prices. The Labor Department reported that export prices also rose 0.9% in March.

Aside from the early morning weakness it turned out to be a slow day. Volume was light and will get even lighter tomorrow as more traders leave early to take advantage of the three-day weekend. Market internals were mixed. Advancing stocks fell behind decliners 13 to 15 on the NYSE and it was a dead heat at 15 to 15 on the NASDAQ. Down volume was almost twice up volume on the NYSE but bulls managed to push ahead on the NASDAQ with up volume of 880 million versus 791 million in down volume. Selling was heaviest in the airlines, cyclicals and retail stocks. .

Making headlines during the trading session were HPQ, KMG, TASR and WMT. Hewlett-Packard (HPQ) won some negative comments from Prudential who reduced their earnings estimates and lowered their price target a dollar to $25 based on weakness in the computer market. Kerr-McGee (KMG) made headlines when it announced the acquisition of Westport Resources (WRC) for $2.5 billion in stock. TASER Intl (TASR) can't seem to help but make headlines as the stock soared another 6.27% and breached the $100 level after announcing another 2:1 split yesterday. TASR closed at $98.04. Meanwhile Wal-Mart (WMT) slipped just over a dollar to $57.98 after citizens in Inglewood, CA voted down WMT's proposal to build one of their mega-sized supercenters in their town.

After hours was when the real excitement began. A handful of high-profile earnings reports all beat estimates and in the euphoria we had three new 2-for-1 split announcements. Starting the earnings parade this evening was biotech firm Genentech (DNA). Second only to Amgen in the biotech world, DNA reported earnings of 38 cents per share (ex-items) versus estimates of 32 cents. Revenues soared 30% to $975.1 million and profits were boosted by strong sales of its Avastin drug. Its board also declared a 2-for-1 stock split that is subject to shareholder approval at their April 16th annual shareholder meeting.

This news was followed by earnings from Research In Motion (RIMM). The company reported that demand for its BlackBerry wireless handhelds sent sales soaring. Revenues jumped almost 37% to $210.6 million, which was above consensus estimates. Net income, accounting for its litigation provision and tax recovery, hit 56 cents a share surpassing analyst expectations by 6 cents. RIMM's management also raised their estimates on the next quarter. On top of it all they announced another 2-for-1 split payable in June. In spite of all this good news traders chose to hit the sell button and RIMM was trading lower after hours.

The real after-hours headliner was Internet giant Yahoo! Inc. (YHOO). Analysts were expecting YHOO's earnings to hit 11 cents a share, up from 8 cents a year ago. YHOO reported a headline number of 14 cents but looking deeper net income was closer to 13 cents or $101.2 million for the quarter. This is a 116% improvement over last year's profit number. Furthermore YHOO raised its 2004 profit estimates from $420-480 million to $575- 625 million while bumping its yearly sales estimates from $2.12- 2.25 billion to more than $2.41 billion. The icing on the cake was a 2-for-1 stock split announcement payable on May 11th.

This trio of positive earnings announcements should be more than enough to juice the markets into a pre-holiday rally. Yet if that wasn't enough DELL jumped on the bandwagon and raised its revenue numbers after the bell tonight too. The No 2 computer maker upped its quarterly revenue estimates from $11.2 billion to $11.4 billion while leaving estimates at 28 cents per share. The Stock Traders Almanac says that the Thursday before Good Friday has been up five years in a row. With this sort of positive earnings news I think odds are good that we'll see the trend hit six years in a row.

I believe that tonight's positive earnings news should wash away any bitter aftertaste left by the Alcoa miss and the Nokia and Seagate earnings warning. Our only worries now should be a disastrous earnings miss Thursday morning from General Electric but I don't believe that's going to happen with the U.S. economy doing so well. We'll also see earnings from Abbott Labs (ABT), Rite Aid (RAD) and SunTrust Banks (STI) tomorrow morning.

Before I close remember that volume should be very light tomorrow ahead of the market holiday on Friday. Extremely light volume tends to exaggerate moves both directions. While I expect the market to be up tomorrow the rising tensions in Iraq have caught the market's attention. The larger issue is how America perceives the conflict and how it affects President Bush's reelection. However, the specter of a long weekend (and the Easter holiday weekend at that) could curb investors' enthusiasm to hold stocks while we battle Muslim extremists half a world away. This could set us up for a strong opening tomorrow morning only to see it fade later in the session. More importantly let's keep our men and women in uniform in our prayers!


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