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Hewlett Packard Disappoints

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      08-12-2004           High     Low     Volume   Adv/Dcl
DJIA     9814.59 -123.70  9936.48  9808.54 1.71 bln  898/2308
NASDAQ   1752.49 - 29.90  1774.68  1751.95 1.63 bln  825/2220
S&P 100   519.56 -  6.98   526.54   519.47   Totals 1723/4528
S&P 500  1063.23 - 12.56  1075.79  1062.82 
W5000   10293.52 -159.20 10416.62 10291.76
SOX       365.27 -  7.40   372.67   363.39
RUS 2000  517.10 -  9.53   526.63   517.07
DJ TRANS 2995.44 - 54.50  3050.03  2993.93
VIX        19.08 +  1.04    19.30    18.36
VXO (VIX-O)19.16 +  1.63    19.53    18.13
VXN        28.28 +  1.32    28.54    27.41 
Total Volume 3,629M
Total UpVol    472M
Total DnVol  3,125M
Total Adv  1986
Total Dcl  5133
52wk Highs   34
52wk Lows   463
TRIN       2.54
NAZTRIN    1.63
PUT/CALL   1.06

Disappoint is probably the wrong word for the HPQ earnings this morning. Not only did the news knock -16% off HPQ stock but knocked tech stocks back to August 2003 levels. New lows are beginning to be the norm and the event risk is only increasing as the month progresses.

Dow Chart - Daily

Nasdaq Chart - Daily

SPX Chart - Daily

The morning started calmly with Jobless Claims neutral at a slightly lower 333,000 for the week and slightly below consensus estimates. No news here but plenty of other events to worry the market.

Import and Export prices rose +0.2% in July and erased the June loss. Unfortunately the main component for the rise was higher oil prices. The gain for the last year stands at +5.5% but only +2.6% when you remove the oil impact. This is good news for the economy because it shows the recent soft patch took nearly all signs of inflation out of prices. Import prices for consumer goods ex-autos were unchanged for the second consecutive month. This was good news for the market but the news was still rising prices due to higher oil.

Retail Sales for July rose +0.7% and erased the -0.5% decline in June. A strong jump in auto sales was the main cause as dealers piled on the incentives to dump excess inventory in front of the change in model years. Remove auto sales and the headline number would have only risen +0.2%. Consumers are still on hold without a powerful incentive to part with their cash as in the $5,000+ rebates on autos. The next report will show any back to school rise but weekly reports have yet to show any material gains.

Business Inventories rose +0.9% and well over consensus estimates of +0.6%. This was the largest gain in more than two years and the gains were accompanied by only a minimal +0.1% jump in sales. The ramp in inventories could help to boost the next GDP revision but overall it is not a good sign when not accompanied by a rise in sales. We have seen Cisco and Intel and various other tech companies complain about rising inventory levels as a result of slow sales and this is confirmation on a much broader scale. It is time for consumers to rush into the gap or recession fears will return to the market. If inventories are rising because dealers are experiencing a pickup in sales then this number would be highly positive. Unfortunately it appears the buildup was unintentional and could put the brakes on manufacturers prematurely.

The FOMC minutes for June contained some bearish news with several members openly concerned about the jump in inflation. Several argued to remove the "measured pace" phrase to allow them to hike rates faster as in 1994. This is very negative to market sentiment as it shows the Fed is ready to aggressively hike and only the June swoon in the economy kept them from moving faster at the last meeting. The Fed, constantly looking down from their ivory tower, continues to see strongly bullish signs in the economy. This report was seen as bearish with the dissention among the ranks as to the pace of hikes.

The major event risk to the market is no longer the Olympics but appears to have shifted to any remaining tech earnings. HPQ surprised the markets this morning with earnings a week before they were expected and with a huge earnings miss. They also warned that the tech weakness would continue through the current quarter. Carly Fiorina said demand had dropped sharply at the end of the quarter as the economy stumbled. Earnings after items were only 24 cents and analysts were expecting 31 cents. HPQ stock was pounded for a -16% haircut and the tech ripples pushed many other high profile tech stocks to new 52-week lows. Many claim the problem was related to HPQ only. They saw declines in enterprise servers and storage which is exactly where IBM and Dell are showing gains. Still the negative sentiment was indelibly etched on the market consciousness at the open and it lasted all day.

Even the news from IBM failed to rally techs. IBM said they were hiring 18,800 new employees in 2004, up +8,800 from their prior forecast. IBM is seeing strength in its global services business and its enterprise server division. This will bring IBM employment back to highs not seen since 1991 when they had 344,000 workers. In IBM's heyday in the mid 1980s they employed over 400,000. The bad news was only one third of the 18,800 new hires would be in the U.S. The rest would be half in Asia and the remainder dotted around the globe.

Dell also reported earnings tonight with results inline with estimates at 31 cents per share. Dell is showing growth in servers, storage and printing and continuing to take market share. After the HPQ news today we know where most of their share came from. The company said demand improved on a global basis with a +19% increase in shipments. Shipments to Europe, Middle East and Africa rose +30%. Dell saw a +44% increase in server shipments and a +60% increase in storage products. What was unsaid was the majority of Dell's growth was outside the U.S. They did report gains in the U.S. but they were far below the gains in the global market.

With those three major companies above you have the good news and bad news about the current tech story. Dell is a winner and met estimates with strong overseas sales and lower component costs. IBM is adding nearly 13,000 workers to handle business outside the U.S. and is seeing its biggest gains in its services business. HPQ, stumbled and both IBM and DELL took advantage of the situation. Did business improve to the point that IBM and Dell profited from the gains or did they just capture the share that HPQ lost? It is not a zero sum game but with all three companies running neck and neck it should diminish the overall impact of Dell's report. The Dell CFO was the first to say that they were continuing to gain market share at a rapid pace.

Also tanking the market was another new high in the price of oil. Oil soared to $45.75 and closed at $45.45 as bad news for the sector continues to mount. The Yukos saga continued with increasing fears that they may have to cease production in as much as half of their 1.7 million barrels per day due to a freeze on their assets. The war heated up again in Iraq with a raid against Al Sadar and fears of retaliation with oil sabotage helped to spike prices. Twin storms Bonnie and Charlie are shutting down production in the gulf for two days this week as they churn across the oil fields. The one piece of good news came from Venezuela which said there would be no impact to oil shipments from the coming election. Analysts had feared a slowdown depending on the victor.

TrimTabs.com said today that $1 billion flowed out of equity funds for the week ended Wednesday. My initial thought was "is that all?" With the strong downtrend in place I would have thought it would have been higher but I forgot about the two day rally in the middle. Money flow is like the wind, it changes on a whim with the ebb and flow of market fortunes.

Those fortunes have been highly volatile recently with Thursday's -123 point Dow drop the fourth triple digit day in the last two weeks. Heck we have not had that kind of volatility in ages. Welcome to August and the start of the three most bearish months of the year. With only two weeks behind us and a lot of potential potholes ahead it could be a rough month.

The Dow closed at 9814 and only a little more than a dozen points from a nine month low. 9800 is the last support level before we risk a sharp drop to 9500 and a 38% retracement of the 2003 rally. That may sound like a lot but considering the strength and length of that rally, from the 7416 March low to the 10753 February high the Dow rebounded +45%. In perspective giving back a thousand points of that +3300 point gain does not seem so drastic.

The Nasdaq has been the focus of the tech wreck and the bloodshed does not appear to be over. The Nasdaq closed at 1752 and a level not seen since last AUGUST. Sound familiar? Even during the strong bull run in 2003 the Nasdaq dropped about -7% in the first two weeks of August before charging higher. Without the same economic dynamics in place today, warnings every day and major event risk in our future the odds of a similar rebound are slim. The Nasdaq has risk to 1600 which is major support. 1700 was my initial target as the 50% retracement but we are already very close to that level with a lot of bumpy road ahead. The equivalent level on the SPX would be 965 and that seems light years away from today's 1063 close. I am not predicting it but just pointing out the worst case scenario.

The SOX continues to be the weakest link with a break below 385 support on Wednesday and a close at 365 on Thursday. I am now targeting SOX 350 for bargain hunters to appear.

SOX Chart - Daily

Our problem for the coming weeks is not specifically the various high risk events but the constant earnings warnings as the current cycle draws to a close and the lack of any meaningful catalyst to push us higher. Everyone knows that earnings are slowing and the warnings serve to punctuate that fact on a daily basis. Despite the slowing they are still strong but that factor is lost on investors facing the "why buy" question. Add in the potential for $50 oil before the month is out and we could see even more warnings from those companies that depend on oil for their products. The economy continues to sputter and traders can't decide if we are growing or recessing and the Fed is determined to continue its rate hike scenario. Now under this shaky set of market building blocks place several firecrackers of event risk with fuses already smoldering. The stage is set and the potential for further, possibly significant, market events to the downside far outweigh the upside potential over the next three weeks.

We also have a market milestone coming next week when Google prices its IPO. They said after the close today that the auction would begin tomorrow and the IPO would be priced next week. With the smoke swirling around the deal this could send a very negative message to the street should the IPO not find enough buyers to meet the posted prices. With two thirds of investors polled saying they would not touch the IPO and the majority of those left saying they would buy only at a much lower prices, GOOG may have a challenge ahead. If the auction does go off successfully it will take $3 billion out of the tech marketplace at a time when techs need all the help they can get. Should be interesting.

As an investor I would not worry about any impending future dips and use them as buying opportunities for bargain stocks. Look for blue chips beaten down from the last several months of selling and tech stocks with rapidly increasing earnings. Look for lower lows over the next three weeks and plan on entering in small increments as your target prices are reached. You do not have to be a trader to profit from a bear market. You only have to be willing to buy good stocks in a down market.

Enter Passively, Exit Aggressively.

Jim Brown
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