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Market Wrap

Markets Turn Choppy

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     04-14-2004            High     Low     Volume Advance/Decline
DJIA    10377.95 -  3.33 10415.28 10322.94 1.82 bln    680/2206
NASDAQ   2024.85 -  5.23  2040.15  2013.98 1.82 bln   1217/1903
S&P 100   551.88 -  0.36   553.69   548.72   Totals   1897/4109
S&P 500  1128.17 -  1.27  1132.52  1122.15 
RUS 2000  582.02 -  3.81   588.01   578.88
DJ TRANS 2909.35 + 18.64  2923.95  2881.50
VIX        15.62 -  1.64    17.71    15.60
VXO        17.30 -  0.20    18.30    16.66
VXN        21.59 -  0.64    22.83    21.59
Total Volume 4,137M
Total UpVol  1,532M
Total DnVol  2,496M
52wk Highs     111
52wk Lows      233
TRIN          0.62
PUT/CALL      0.82

Markets Turn Choppy
By James Brown

U.S. stocks markets turned in a mixed session as investors couldn't decide which to focus on: interest rate fears or stronger corporate profits. The CPI numbers this morning confirmed that inflation is on the rise, which means the Fed will likely act sooner rather than later. Earnings continue to come in strong despite a few high profile misses. Meanwhile the U.S. dollar spiked higher against the euro before fading but jumped strongly against the yen. This sent gold to a $7.20 loss closing at $400.50 an ounce. The inflationary CPI data extended the flight from bonds. Crude oil fell 49 cents to $36.72 a barrel but that didn't stop retail gasoline prices from hitting yet another all-time high.

Global markets were mostly lower. The Japanese NIKKEI fell 29 points to 12,098 but the Chinese Hang Seng plummeted 361 points to 12,669 on currency and interest rate concerns. European stocks didn't fare much better. The English FTSE lost 30 points to 4485. The French CAC dropped 43 points to 3731 while the German DAX fell 58 points to 4012. U.S. indices ended the day close to unchanged with minor losses but that hardly tells the whole story. U.S. stocks fell sharply at the open but within 10 to 15 minutes traders bought the dip and by lunchtime they were at their highs for the session. Unfortunately the afternoon turned into a slow drift lower before a rebound in the last half hour recouped most of the market's losses.

Market internals paint a much more bearish picture with declining stocks whipping advancing issues 3-to-1 on the NYSE and 19 to 12 on the NASDAQ. Down volume outnumbered up volume 2-to-1 on the NYSE and 10 to 7 on the NASDAQ. Overall volume was much improved over Monday's anemic levels. Oddly enough the volatility index, a measure of investor fear, almost completely erased yesterday's gains. The same could not be said for the VXO and the VXN volatility gauges.

Yesterday's decline was pretty discouraging as numerous indices including the Dow Industrials and the S&P 500 broke their simple 50-dma's. Adding to the negative technical picture are the bearish MACD readings on all three major indices. However, there is hope that the recent weakness may just be a bull flag but that could just be the optimist in me striving to come out. Fortunately, the super strong earnings reports after the bell tonight should do a lot to boost investor confidence and we may see a continuation of this afternoon's rebound tomorrow.

Chart of the Dow Industrials:

Chart of the NASDAQ Composite:

Chart of the S&P 500 Index:

One might have expected Intel (INTC) to be the Dow's biggest loser today given its disappointing earnings report last night but shares of INTC were only down 30 cents and managed to hold support at the $27.00 level. Although bears should take heart in noting the strong overhead resistance at its 40-dma and its MACD is weakening and is about to turn into a sell signal. The biggest drag on the Dow happened to be McDonald's (MCD). The stock lost 4.49% and broke support at its 50-dma after announcing strong same-store sales growth and raised their Q1 earnings estimates to 40 cents, 3 cents better than analysts' estimates. Yup, you read that right. MCD traded down on good news. Investors ignored the higher profit forecasts and focused on same-store sales numbers that were hurt by a 2.9% drop in the European comparable store sales even though U.S. same-store sales jumped nearly 10% in March.

Keeping rate hike fears in the spotlight was the inflationary Consumer Price Index (CPI) for March. Economists were expecting a jump of 0.3% but the Labor Department reported a rise of 0.5%. Furthermore the core rate of inflation, minus food and energy prices, soared 0.4%. This was strongly above the expected 0.2% rise and marked the largest jump in the core rate since November 2001. Overall the CPI hit its fourth monthly increase in a row. There has been a lot of discussion over the last few months about the rising rate of inflation even though the government appeared to ignore it. The rising price of commodities including metals like copper and rolled steel have hit multi-year highs. Most businesses have managed to pass along these higher costs to the consumer. Kimberly Clark (KMB) mentioned the need to raise prices a couple of days ago to offset higher raw materials. Of course this really isn't that big of a surprise. An expanding economy increases demand and thus prices rise. It's the Federal Reserve's job to keep growth (and inflation) in check before it gets out of hand. Yesterday's super strong March retail sales and today's CPI figures have nearly guaranteed a rate hike much sooner than previously expected. Gone are the estimates for the Fed to wait until 2005. Instead the market is pricing in a 46% chance that the Fed will raise rates by 25 basis points by June and has already priced in a 100% chance of a 1/4-point hike by August. That's why interest-rate sensitive stocks (and bonds) are getting hit so hard.

Speaking of hikes Delta Airlines (DAL) needs to be able to raise their ticket prices but increasing competition won't allow it. DAL is the third largest airline in the U.S. and the company has slowly been prepping investors for the worst with two earnings warnings over the last quarter. Those turned out to be too generous. The airliner lost $387 million in the first quarter or $3.12 per share. This was 10 cents worse than expected as revenues of $3.29 billion came in under estimates. Rising fuel costs due to the sharp climb in crude oil has been a profit sponge for the entire industry but DAL is also suffering from labor costs. They're asking their pilots to take a 30% pay cut but the pilots union is only offering a 9% cut and they're willing to give up a 4.5% pay raise this coming May. Analysts don't think that's going to be enough. The airline is saddled with billions in debt and is currently burning about $165 million in cash a month. It has enough cash to last it the next year before it may have to consider bankruptcy.

Investors were also unhappy to hear Take-Two Interactive's (TTWO) earnings warning this morning. Estimates had been for a profit of 33 cents a share based on revenues in the $220 million range. The company now expects earnings (due out in May) to be a loss of 15 cents per share with revenues closer to $170 million. The company is blaming poor sales (obviously) and delayed game releases. TTWO's CEO Jeff Lapin said it was game over for him and resigned. The stock gapped down with an early 16% loss but ended the day at $31.92, down 9%.

So enough with all the bad news let's hear the good news! Dow component DuPont (DD), who recently announced a job cut for 3,500 employees, rose 2.99% to $45.00 after pre-announcing stronger earnings this morning. DD raised its March earnings guidance from 65-to-75 cents a share to 95 cents a share. Analysts' estimates had been pegged at 73 cents. The company's press release said that "The improved results reflect a strong quarter for its Agriculture & Nutrition segment and higher than expected volumes across most businesses." Earnings are expected on April 27th.

Another cyclical/commodity related company Georgia-Pacific (GP) pre-announced stronger earnings this morning as well. The housing boom has helped boost lumber prices close to 50% higher from a year ago levels. GP now expects earnings to be 60 cents per share, excluding a 6-cent charge, compared to estimate for 48 cents.

Yet the good news doesn't stop there. The real fireworks began after the closing bell. Intel's rival Advanced Micro Devices (AMD) reported a blow out quarter! A big surge in demand for its flash memory combined with cost cutting and higher average selling prices helped AMD report profits of $45.1 million (12 cents per share) versus a loss of $146.2 million (-42 cents) a year ago. Analysts were expecting AMD to report just 3 cents per share. Revenues came in at $1.24 billion topping estimates. Unfortunately, AMD's Q2 guidance was rather lackluster.

Not so for Apple Computer (AAPL)! AAPL is forecasting its Q3 (June quarter) will come in at 12 to 13 cents per share with revenue surging to $1.93 billion compared to analyst estimates at 9 cents and $1.83 billion. This news followed their stunning earnings report after the bell tonight. AAPL said its March quarter revenues vaulted 29% to $1.91 billion, well above the average estimates at $1.81 billion. Profits were $53 million (14 cents) not counting a $7 million restructuring charge compared to last year's March quarter profit of $14 million. Earnings estimates had been for AAPL to hit 10 cents per share. Driving the quarter was the iPod and the iPod mini.

While we can cheer for AAPL's success its earnings report is rarely a market mover. The same can't be said for Texas Instruments (TXN). The chipmaker reported earnings that were inline at 21 cents per share but revenues surged almost 34% to $2.94 billion compared to average estimates of $2.89 billion. The 21-cent profit ($367 million) is a major improvement over last year's 7-cent performance. The jump in profits were boosted by a rise in gross margins from 43.1% to 45% and lead to TXN's strongest growth in a decade. Furthermore the company guided earnings for the current quarter in the 23 to 26 cent range compared to consensus estimates of 23 cents. TXN expects revenues to fall between $3.08 and $3.325 billion, which is also above estimates.

Hopefully this triple-shot of positive earnings reports can jump- start the bulls tomorrow morning and this afternoon's last hour rebound can get some follow through. The only thing in our path would be a negative earnings report from Citigroup (C) or a bearish reading from New York Empire State index tomorrow morning. I don't think we have to worry about the NY Empire index since the most recent round of economic reports have been so strong. Dow component Citigroup is important because it's one of the biggest financial conglomerates on the planet but once again with the economy recovering earnings should be strong. Estimates for C are 94 cents a share.

Thursday also brings the weekly initial jobless claims and the Philly Fed index but the same argument applies to both. Recent economic readings have been positive and these shouldn't be any different. The real headliner tomorrow will be earnings from International Business Machines (IBM) after the closing bell. IBM is such a monstrous tech company with operations in semiconductors, hardware (servers & laptops), and consulting that it alone can be used as a proxy for the technology sector(s). IBM's guidance for the next quarter can set the tone for tech stocks. Estimates for Big Blue are 93 cents a share.

Overall I agree with Jim's caution yesterday. This is options expiration week and it's liable to remain volatile while Wall Street sorts out its concerns over interest rates. A quarter point rate hike isn't going to kill the bull market or the recovery but right now traders are over reacting. Hopefully the theme of stronger corporate profits can once again retake investors focus but if we don't bounce soon I fear this April may not live up to its historical track record.


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