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Market Wrap

Passing Time

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      11-30-2004           High     Low     Volume   Adv/Dcl
DJIA    10428.02 - 47.90 10483.14 10428.02 1.95 bln 1372/1885
NASDAQ   2096.81 - 10.10  2107.45  2096.81 1.91 bln 1395/1754
S&P 100   557.47 -  2.68   560.58   557.46   Totals 2767/3639
S&P 500  1173.82 -  4.75  1178.66  1173.81 
SOX       423.87 -  6.00   431.29   423.86
RUS 2000  633.77 -  0.69   635.81   632.53
DJ TRANS 3658.71 +  8.60  3663.30  3638.47
VIX        13.24 -  0.06    13.38    13.07
VXO (VIX-O)13.54 -  0.08    14.17    13.53
VXN        18.88 +  0.01    18.90    18.52 
Total Volume 4,214M
Total UpVol  1,760M
Total DnVol  2,379M
Total Adv  3162
Total Dcl  4175
52wk Highs  531
52wk Lows    44
TRIN       1.04
NAZTRIN    1.01
PUT/CALL   0.89

The markets could not make up their mind today and spent the entire dsession trading in a range and passing time while waiting for Friday. Funds planning on purchases with the Microsoft dividend money likely spent the day adjusting positions and dropping less desirable stocks. The result was a terribly boring range bound day that ended right on support across the board.

Dow Chart

Nasdaq Chart

SPX Chart

There was a very confusing mix of economic news and stock traders were unsure which reflected reality. The Chain Store Sales fell -1.5% for the week ended 11/27 and that was the biggest drop since March 27th when the index fell -1.9% for the week. Correct me if I am wrong here but shouldn't Thanksgiving week be one of the strongest weeks of the year? We have already heard that Wal-Mart barely posted a gain over last year due to a bad decision about specially discounted items but some other retailers did well. We heard from the retail sector that many stores saw increases in the +4% range but it looks like those chains were not a significant part of the survey. The ICSC-UBS Index is now resting near its late October low for the year and casts doubt on the strength of the season. ICSC lowered its sales forecast for November sales to 2.5% to 3.0% from the 3.5% to 4% it had previously predicted.

Also causing confusion was a drop in Consumer Confidence to 90.5 from 92.9 and fourth consecutive monthly drop. The consensus estimates were calling for a significant increase to 96.3. Obviously somebody forgot to tell the consumers. The present conditions component was slightly higher at 95.2 from 94.0 in October. The expectations component was the culprit as it fell from 92.2 to 87.4. Something weighed on the consumer consciousness and they are becoming worried about the future. We did see oil return to $50 and the market floundered after testing the highs back on Nov-17th. There was also a round of analysts suggesting any end of year rally would find tough sledding once January appeared with much lower growth estimates for 2005. There was a significant drop in buying expectations with those planning on buying a home falling to 2.4% from 3.6%, autos fell to 4.2% from 7.6% and major appliance purchasers fell to 24.2% from 27.8%. The sum of those three components was the lowest since the early 1990s and the auto component was the lowest on record. Expectations of business conditions worsening and fewer jobs also rose. The headline number at 90.5 was the lowest reading since March. The biggest decline in confidence came from households with income under $35K per year.

The Chicago PMI fell to 65.2 from last months two decade high at 68.5. No surprise there given the current state of the economy. Just a normal pullback after a strong spike. This may be seasonal more than a drop in the business climate. Products made for the holidays had to be in stores by Thanksgiving and that sent production to the October highs. In November production fell to 68.4 from 79.7 and new orders dropped to 70.0 from 79.4. Order backlogs fell to 52.7 from 60.9. Unbelievably employment soared to 60.8 from 54.1. Production is catching up with demand either from slowing demand or increasing production. This was still a strong report and could just be indicating that the production spike for the holiday season is over.

The NY-NAPM rose again to 319.3 from last months 313.7 and continued its multi month march higher. The index is up +40.5% from this time last year. Manufacturing components slowed but non manufacturing numbers rose. The coming bonuses in the financial sector should keep the bloom on the big NYC apple until early next year. The yearlong increase in conditions should then moderate given the potential change in the tax structure in 2005.

Another upside surprise came from the GDP with a 3.9% headline number and better than the previously reported +3.7% growth. Conditions were mostly positive with a better trade balance and increases in consumption. The downside was a drop in corporate profits by -2.4% due to hurricane damage and the lag time for insurance payments. Business investments also increased as they tried to capture the accelerated depreciation on new equipment purchased before year end. Inventories were revised down sharply to $31.8B from $47.8B which was previously reported. This should increase GDP in the 4Q as inventory levels are rebuilt.

The end of year replacement cycle for computer equipment is well underway as evidenced by Dell's gains in revenue and earnings. HPQ also showed gains in the PC sector and for both companies the gains are due in a large part by the accelerated depreciation for equipment purchased this year. With less than 30 days remaining in this economic stimulant it was not surprising to see the Gartner Group warn that several computer companies may go away soon. Gartner said the accelerated depreciation was keeping several in business and once that ceased any growth in the PC sector was going to be limited to single digits in 2005. According to Gartner we have seen six quarters of double digit growth and that has kept those third string players in the game. Dell, IBM and HPQ are not expected to drop out of the business and Dell was the preferred vendor for the long run. According to Gartner Dell could sell computers for less than it cost others to make them given their scale and buying power. NEC and Toshiba were farther down the list and questionable as future players. Gartner thought the next replacement cycle would begin in 2008 when the new operating system is due out from Microsoft.

Wal-Mart continued to drop today with share prices back at $52 and support from the summer. The David Faber, CNBC bounce has been erased due to a miscalculation on the Thanksgiving advertising plan. Seems Wal-Mart believed that consumers would remember they always have low prices on everything all the time without massive advertising. Stores like Target, Mervyns, Kohls, Sears, etc, blanketed mailboxes, papers and airwaves with advertised specials and were successful in attracting consumers for the big holiday cycle. WMT saw only a minimal gain in sales for the weekend and a major drop in market cap as a result of their error. WMT has lost -$13 billion in market cap over the last two days but they assured investors they will rectify the situation very quickly. My guess is the sleeping lion is no longer sleeping and will be roaring and advertised specials will be appearing everywhere over the next five weeks. I hope Target and Kmart enjoyed their weekend because the next five weeks could be a lot tougher. WMT can afford to spend more on advertising than most other retailers have in weekend sales. WMT at $50 sounds like a buying opportunity to me.

Tomorrow will be the debut of the QQQ on the Nasdaq as the QQQQ. The AMEX will continue to trade the QQQ but on an unlisted basis and volume is likely to be minimal. The QQQ/QQQQ is the most actively traded ETF in the world with more than 100 million shares traded each day.

The QQQ is not the only major change this week. The SOX will have its first major makeover in two years with the addition of three stocks and the removal of two. The SOX index will drop MOT and LSI. Motorola is being dropped because they spun off their chip division into Freescale Semi (FSL) back in July. LSI is being dropped because it no longer reflects leadership in the sector according to the Philadelphia Exchange. Freescale (FSL), Infineon (IFX) and Marvell Technology (MRVL) are being added to the SOX. The changes will be made before the start of trading on Friday. The SOX options are the eighth most traded index options for 2004.

After the bell today NVLS gave investors their mid quarter update saying that earnings would be in the upper half of their projected range. They projected earnings in the 24-26 cent range and analysts had only projected 21 cents. They also said the business climate remained sluggish but they saw a strong sell through until year end. They are hoping consumer-buying trends will be strong enough to prompt a new wave of component orders in 2005 that result in new equipment from NVLS. Sounds like a strong rendition of "wishing and hoping" by the NVLS chorus.

PHG announced on Tuesday that they were cutting their 2005 estimates for global chip growth to ZERO from +5%. They also said they had shipped more than one billion mobile displays and should complete their second billion within six years. They are the leading supplier of cell phone screens and they expect volume to double in value and volume over the next four years.

Gold prices hit a high of $456 today and just below the $457 high set on Monday. While the weak dollar may be a motivating force the real reason is the $1.5 billion in new demand to back the GLD ETF. Since the fund is backed by the metal they must buy gold for every share that is purchased. This is new demand that did not previously exist and is taking supplies out of the circulation pipeline. Since this gold will not be used for anything but collateral it will not reappear on the market unless the new gold bugs begin dumping those GLD shares. This has driven the price from $425 to over $455 in the last three weeks. Add in the weak dollar and you have 18 year highs.

November is over and despite any concerted month end buying the indexes had a spectacular month. The Russell rose +8.5%, Nasdaq +6.2%, S&P Midcap +5.8%, Transports +4.6% and of course the S&P rounding out the list at +3.9%. The Dow squeaked in with a +4% gain and the Wilshire only slightly better at +4.6%. Considering the weakness since Nov-18th it is surprising the indexes did as well as they did. The SOX tried to make a run for negative territory but found support for a +2.9% gain once the smoke cleared.

Those positive numbers above are the probable reason for the negative numbers we have seen for the last week or so. The Thanksgiving rally was very minimal and funds appeared to be taking the first two days this week as an opportunity to lighten up on those stocks they did not want to take into year end. Profits are not profits until they are sold and booked. This is a hurdle week for economics and with the Intel update on Thursday night there is plenty of suspense. We have a heavy economic schedule ahead with the ISM on Wednesday leading the list. The November Jobs report is due out Friday morning only a few hours after Intel confesses. Add in ten other economic reports between tonight and Friday morning and there is ample reason to lighten the load ahead of the Microsoft dividend payable on Thursday. TrimTabs is now estimating that $22B to $25B will be put back into stocks over the week beginning on Friday. This is a huge amount of liquidity and should float the markets for at least two weeks. I personally believe funds are adjusting positions this week to prepare for the liquidity boom. Given the risk from Intel and Jobs I doubt we will see any major gains until Friday or possibly even Monday of next week. Of course if early buyers begin to appear the race could start sooner than expected.

That adjustment knocked about -50 points off the Dow today and closed it right on support that has held since 11/22 at 10430. While this would appear to be a critical level we could easily see a dip to 10370 and stronger support with no damage to the long term uptrend. In fact another dip lower would be welcomed by those buyers wanting one last entry point before Friday.

The Nasdaq has been much stronger than the Dow and held the 2100 level once again with only a minor -2 point break at the close. The Nasdaq is holding the high ground despite the SOX weakness from the impending Intel update. The positive NVLS news tonight could help support the SOX and in turn hold up the Nasdaq. The Nasdaq has plenty of decent support between 2060-2100 and is not in danger unless we have a real buyer revolt.

The SPX is also holding on support at 1175 with stronger support at 1170 and 1165. A worst-case scenario would be for the SPX to drop back to 1165 to clear the stops and then rebound into the liquidity event. I would still be a dip buyer above 1165.

My plan for the rest of the week is to try to remain long over SPX 1165 and wait for the cash to begin flowing. If fund managers simply pocket the cash for a rainy day there could be a lot of bulls headed for slaughter. I don't expect this because find managers need to use that money to prop up the market and guarantee returns into the year end. Once we get to January earnings it could be a very different scenario but we will worry about that once the gift wrap hits the trash and the Christmas trees hit the curb. Grab some Maalox and continue buying the dips over SPX 1165.

If you have not registered the end of year renewal special this would be a good time to check it out! Bonuses are shipped in the order they are received.

Buy the dips until the trend changes.

Jim Brown

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