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Market Wrap

Cash Talks in After Hours

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      07-20-2004           High     Low     Volume   Adv/Dcl
DJIA    10149.07 + 55.00 10155.63 10072.68 1.75 bln 1893/1324
NASDAQ   1917.07 + 33.20  1917.07  1885.80 1.63 bln 2103/ 995
S&P 100   539.65 +  3.36   539.81   535.10   Totals 3996/2319
S&P 500  1108.67 +  7.77  1108.88  1099.10 
SOX       423.47 + 10.20   423.48   413.13
RUS 2000  564.19 +  9.46   564.25   554.73
DJ TRANS 3154.75 + 49.60  3155.33  3104.84
VIX        14.17 -  1.00    15.57    13.98
VXO (VIX-O)14.58 -  0.37    15.85    14.45
VXN        20.91 -  1.30    22.30    20.66 
Total Volume 3,670M
Total UpVol  2,782M	
Total DnVol    818M
Total Adv  4450
Total Dcl  2702
52wk Highs  145
52wk Lows   202
TRIN       0.72
NAZTRIN    0.39
PUT/CALL   0.65

The weakness from the last several days finally wore off just prior to the Greenspan testimony and the major indexes recovered some of their losses. That was not the big story of the day. After the close the richest company in the U.S. decided to return $75 billion to shareholders over the next four years.

Dow Chart

Nasdaq Chart

The markets started off in negative territory after New Home Construction dropped to only 1.80 million units and well below consensus of 1.98 million and the May rate of 1.97 million. This is a massive drop considering how strong the sector has been recently. This was also the biggest drop since Feb-2003. Single-family starts were the hardest hit and new permits are also down. With the June decline closing out Q2 we now have two consecutive quarters of declines in housing. The long awaited collapse of the housing bubble may be closer than we previously thought.

The drop in June was led by single family but the multi family units were also down with a decline of -3.7%. The rental sector has been seeing a rise in vacancy rates that depressed new construction but that should end soon. The baby boomers will be selling their family homes and moving into cheaper rentals and condos in an effort to get by on social security. This should boost the multi family market over the next five years.

The housing sector was understandably weak today but not as bad as you would have expected. The downtrend has been predicted for months and this was just real confirmation of that trend. BZH fell below support at $90 but quickly recovered. CTX hit a new nine-month low at $41 and its downward trend accelerated but the drop was still minimal. Dominion Homes had telegraphed this weakness last week when it said they were seeing a significant rise in order cancellations. They are predominantly located in the Midwest and this appears to be where the general economic slowdown in May/June originated.

The general housing slowdown came from the sudden increase in rates back in April when the ten-year yield jumped from its 3.65% March low to the 4.9% high in May. We saw a rush to buy houses in April as buyers tried to lock in prices and rates but it appears many of those sales were cancelled in May/June. Since May the rates have been falling and we saw a new three month low of 4.51% on Monday. This should help builders unload current inventory but the dropping housing starts suggests they are not in a hurry to build into the increasing economic uncertainty.

Further consumer weakness was seen in the Chain Store Sales at +0.2% for the last week. Since May-29th the total weekly increase in sales has amounted to only -0.1%. With sales flat and due in most part to the rising oil prices they are not likely to get better any time soon. Oil rocketed to $41.95 today before pulling back on profit taking and there is nothing to keep it from going higher. This was very near the $42.30 high set on the last bounce in May. OPEC is pumping well over the levels seen in May and the price is still rising.

Even 99 Cents Only stores (NDN) found conditions tough in the last quarter. They missed earnings by a penny on an overall revenue increase of +14% but same store sales were down -2.5% and costs were higher. Growing competition helped to shrink margins.

Schwab (SCH) jumped in early trading after missing estimates by a penny on weak volume. The CEO resigned and Charles Schwab was picked to come back in to run the company and revive sagging revenues. The company said price cuts needed to stay competitive had produced a -30% drop in net income on 20% fewer revenue producing trades. The CFO said job cuts would likely continue despite more than -10,000 jobs already eliminated since the 2000 market bubble. Schwab said "mixed securities market returns, continuing geopolitical uncertainties and concerns about rising interest rates all weighed on client engagement during much of the quarter. Client daily average revenue trades declined by 20% from the first quarter." Welcome to summer trading in 2004.

Russell Chart

The big news for the morning was the impending testimony by Greenspan to the Senate Banking Committee. Stocks recovered off their early morning lows as speculators took positions hoping for some good news and shorts covered just in case that good news appeared. The SOX rose +2.47% to 423 and well off its 408 lows from Monday. This helped pull the Russell back from the brink at 551 on Monday to close at 563 today and back over the 560 resistance level. The Nasdaq was the beneficiary of all this good news and after trading at 1870 on Monday it recovered to close at 1914, back over 1900 and just above 1910 resistance. The Dow recovered to 10150 and with the news after the bell it should be substantially higher tomorrow. This was all in motion before the Greenspan testimony and stocks got a further substantial boost after the close.

The Greenspan ramp on the hope of a cooling interest rate calendar was served a small disappointment with the prepared comments where he continued to suggest the Fed was prepared to act aggressively if the need arose. There was plenty of boiler plate about the measured pace wording just to assure investors they were not going to race ahead but the message was clear, more rate hikes ahead.

Overall Greenspan's testimony was positive with the headline sentence proclaiming economic developments in the U.S. "have been" quite favorable in 2004 and there is support for the view the expansion will be self-sustaining. He said inflation was not a problem and the recent jump in the numbers was a transitory move due to the spike in energy prices. (I assume he meant transitory if oil does not break $32 this week)

Greenspan also said the jump in hiring in the last six months was encouraging although the rate has eased. According to Manpower, who beat earnings by +4 cents, (+2 cents was due to currency translation), the outlook was not as great and they guided lower for Q3 on lower than expected revenues. Kelly Services also warned that the future job expectations may be weaker. Greenspan warned that lower demand and higher unit labor costs could pressure profits for the rest of 2004.

Greenspan said the Fed was prepared to act aggressively to maintain prices but warned that weak production and the weak demand was going to depress prices companies could receive on their goods. This would shrink future profit margins until demand returned. He suggested GDP was running at a 3.5% to 4% rate. Unfortunately the strong drop in housing today could impact that GDP by up to a point by Q4. The building community consumes vast amounts of raw materials, furniture, fixtures and appliances. A continued slowdown like we saw today could have a serious ripple down impact.

He repeated the obituary on deflation and explained the risk was mostly due to the stock market crash and the reduction of capital available to spend on consumer goods. I think that is a pretty good assumption.

Greenspan continued to repeat the mantra that the Fed had maintained abnormally low rates for an extended period of time and that accommodation had benefited the economy significantly. No complaints there. However, he also maintained that the Fed needed to remove that accommodation at a measured pace to bring Fed policy back in line with reality. Nothing he said suggested they were going to pass on the expected rate hike on August 10th but he also said nothing to indicate it could be the +50% analysts previously expected. It seems a sure thing now that another 25 points will be added in August and the markets simply need to accept it. With bonds already pricing in three more hikes there should not be any material impact from an August hike.

He did make a point that there were potential outside risks (as in another terrorist attack) and the Fed would quickly react to assess and manage these events if they occurred. Interesting that he added that statement as we near the conventions and Olympics.

The market gains into the testimony were shredded as the various comments came out but in the end we moved higher again just before the close. With a flurry of tech earnings after the bell investors did not appear in a hurry to exit. Considering the after hours events it was a good choice.

MOT rose after reporting gains in market share from rivals in the cell phone market and upgrading guidance for next quarter. SUNW also moved higher after posting a profit and revenue actually rose for the first time in 13 quarters. SANM jumped after beating the street and said demand for its high end products was increasing. Etrade beat the street by a mile at +31 cents compared with estimates of +13 cents with results helped by the sale of its ATM business. MCHP beat the street and raised its dividend. PXLW beat by a penny as did STX, STK and WEBX.

Not all the news was good. TXN reported inline and guided slightly lower for next quarter. RFMD beat the street and warned for the current quarter. Still all in all the tech news was good and techs should have had a good day on Wednesday.

It was this last piece of news that gave us the biggest bounce. Microsoft jumped in front of its Thursday earnings announcement with the cash spending plan we have been expecting. Considering the amount of cash they have to spend it was the mother of all cash disbursement programs. Microsoft announced they were going to issue a one time $3.00 dividend and raise their quarterly dividend to eight cents per quarter. They also announced a $30 billion stock buyback program. The total benefit package amounts to $75 billion over the next four years.

This gave MSFT a real shot in after hours trading with the last trade at $29.81 for about a +1.60 jump from the close. With futures moving higher overnight on the positive tech/chip earnings and the Microsoft news the odds are very good this Microsoft announcement will produce a strong bounce at the open. For those in the Editors Play on Microsoft be sure to tune into the Market Monitor in the morning for exit directions.

While this may appear a strong move by Microsoft and you would think the stock will rocket higher we may be surprised. The news has been expected for over a month and the stock has already moved from its support at $26 to trade at the mid $28 range on expectations. Because the buyback is going to be spread over four years it may receive a lukewarm welcome from MSFT investors. The $3 one-time dividend would be slightly less than the amount the stock has risen from the $26 support in May to the overnight close at $29.81. We could easily see investors take profits now on the expectation that the dividend is already priced in. Had the buyback been over the next six months then we could have seen some real movement but over four years may produce a yawn from the more impatient types. Funds holding MSFT will receive a windfall and probably will not change positions. I seriously doubt they will run out and buy more at the inflated price regardless of the hype. It will be interesting to see how Mr. Softee trades tomorrow.

For Wednesday we have Greenspan testimony again at 10:00 and he will get to change anything he felt he said wrong today. Since there was nothing of material impact to the market I doubt he will change anything in his prepared remarks. The markets will still hold their breath during the Q&A to see if anything new appears.

The three days beginning today are the three heaviest days for earnings in this cycle. I believe everyone knows now that the Q2 was good for business despite the end of quarter slump. Most companies are guiding inline but we are seeing an increase in those guiding flat to lower. No surprise there. We only have three trading days left before the democratic convention begins and the odds are good we will see some selling once tomorrows bounce runs its course. We should see some serious knee jerk short covering at the open and it remains to be seen if it will have legs. I would definitely not be a buyer this week. I believe discretion is called for this week and I would not be a buyer for other than a day trade until after the convention is over. I suspect there are quite a few others who believe the same way. This does not mean they won't nibble at some longs just in case nothing happens. I would like to believe that the security is so tight that nothing could possibly happen but I am not willing to risk my capital on that premise. There will always be another trade.

Enter Passively, Exit Aggressively.

Jim Brown


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