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Intel Beats, UPS Warns

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      01-11-2005           High     Low     Volume   Adv/Dcl
DJIA    10556.22 - 64.80 10619.77 10531.54 1.88 bln 1168/2050
NASDAQ   2079.62 - 17.40  2090.62  2072.62 2.25 bln  947/2151
S&P 100   564.68 -  3.59   568.27   563.49   Totals 3115/4201
S&P 500  1182.99 -  7.26  1190.25  1180.43 
SOX       396.19 - 10.10   406.09   393.73
RUS 2000  611.53 -  6.21   617.74   609.91
DJ TRANS 3644.26 - 19.00  3662.90  3639.50
VIX        13.19 -  0.04    13.68    13.05
VXO (VIX-O)13.03 -  0.14    13.92    12.90
VXN        19.67 +  0.06    20.30    19.55  
Total Volume 4,413M
Total UpVol  1,004M
Total DnVol  3,368M
Total Adv  2457
Total Dcl  4787
52wk Highs  126
52wk Lows    64
TRIN       1.72
NAZTRIN    1.34
PUT/CALL   0.82

Tech holders are breathing a little better tonight after Intel beat street estimates slightly. However, the broader market may focus on dropping package volume at UPS as real evidence the economy is slowing. It is still too early to form any opinions about this earnings cycle from the mix of warnings and guidance but that info is coming soon.

Dow Charts

Nasdaq Chart

SOX Chart

The cautiously awaited Intel earnings beat the street by two cents with the highest ever quarterly revenue at $9.6B. Intel projected a slight rise in CapEx spending for Q1 to around $5.1B. Inventory levels had dropped slightly to $2.6B from $3.2B last quarter. They projected slightly lower grow margins around 55% in Q1 as they continue to markdown inventory. Their 2005 margin estimate remains 58% and Intel expects the inventory problem to be reduced over the next several quarters. CEO, Craig Barrett, said they ended the quarter with robust demand across all geographies. Records were set in sales of Microprocessors, Chipsets, Motherboards and WiFi units.

There were mixed feelings about the $600 million drop in inventory. Many analysts were hoping for more. This is inventory that in many cases is already 6-12 months old and is becoming more obsolete as each day passes. If Intel could not dump more of it during the Q4 consumer feeding frenzy then they may have to mark down selling prices even more in 2005 or even take a charge to blow it out and get rid of the problem.

Intel said the new 64bit Xeon processors had surpassed one million units in the first two quarters of shipments. Intel also announced it was hiring the HP Itanium design team and HP announced it was going to spend $3 billion to drive the development and sales of its Itanium based server systems. Itanium processors now power 83 of the top 500 of the worlds fastest supercomputers with Intel branded processors in 64% of the top 500.

The positive Intel earnings came only a day after AMD warned that earnings would be below expectations. The company said that weaker sales of flash memory would cause earnings to be down significantly from the Q3 level of $68.4 million. They claimed that processor sales had continued higher and would be over Q3 levels. AMD did not give a new earnings estimate and analysts had expected a +19 cent profit.

On the downside tonight UPS warned after the bell that slower than expected package volume and higher costs would cause it to miss estimates by a dime for Q4. The prior estimate was 85 cents. They said late December shipments dropped significantly more than they previously expected and were only about half the prior rate for the quarter. UPS said that international shipments grew at a double digit rate compared to a +2.5% growth for domestic shipments. The market did not react strongly to the warning with UPS only losing about -$2 in after hours to $81. They maintained their positive outlook for all of 2005 expecting earnings to increase +13% to +17%. All of 2004 UPS grew earnings by +19%.

One stock that continues to shock investors is TASR which has finally run out of energy. Problems are now appearing almost daily including SEC investigations, suits by their competitors and now an earnings warning from Taser itself. Taser said it is expecting delays in orders from law enforcement agencies as those agencies test and evaluate products from their competitors. It was also announced that the top insiders sold $105.8 million in stock recently and there were some questionable financial arrangements to insiders. It was disclosed that the company paid $205K in 2004 to lease airplanes from the family that runs the company and entered a 15 year lease to use another plane that is owned by Thomas Smith, the president. In one week in November three family members sold $54 million in stock only days after it was announced the federal government had approved Taser for use on airlines. While all of this dirt being spread by detractors is not illegal activities it does pose questions about the long term prospects if insiders are dumping the stock. With positive news breaking out all over in Q4 the insiders sold stock worth more than 10% of the market cap of the company receiving the equivalent of twice the companies annual sales in proceeds. Those recent buyers who believed the spin were rewarded with a drop from $33 to $14 over the last two weeks of trading. Competitors to Taser claiming to have better products are Stinger Systems (STIY) and Law Enforcement Associates (LENF). LENF claims their guns shoot twice as far and use 1/16th the power making them less dangerous. They have also been around much longer than Taser in the law enforcement community.

TASR Chart

Economically today was a non-event with Chain Store Sales falling -0.6% but that should be no surprise given the post holiday letdown. The December Richmond Fed Manufacturing Survey rose to zero from a -3 in November. There was no real change in components with shipments and new orders flat. The backlog of orders also returned to nearly flat at -4. The bottom line was no change and no excitement as the year came to a close. Capacity utilization decreased and the only positive was a continued rise in optimism by manufacturers for the next six months. The Richmond district has been lagging the rest of the company in its recovery.

The next day for material economic reports is Friday when we get PPI, Industrial Production, Consumer Sentiment and Business Inventories.

Oil prices continue to creep higher and closed just shy of $46 today on fears of increasing Iraqi attacks, work stoppages in Nigeria, well problems in the North Sea and the coming OPEC meeting on Jan-30th. $46 has been a new resistance level since Dec-1st but the pressure is building. Traders fear OPEC will ratchet down production again at the coming meeting to offset the potential drop in demand as cold weather ends. During the spring there is less demand for heating oil and the summer gasoline demand has not yet increased. Rumors are that OPEC has decided to support a $45 price now instead of $40. Once addicted to an increasing supply of dollars it is tough to break the habit if you control half the worlds supply of a limited commodity. They have found that the sticker shock has passed and we have become more or less immune to the current $42 bottom.

PeopleSoft employees got the bad news today. Oracle said today they would be announcing the first round of layoffs at PSFT as a result of the Oracle takeover. This should come as no shock as rumor has it employees are already leaving in droves on their own accord. The layoff announcement is scheduled for Friday.

The SOX was the index of the day with a drop below 400 on the AMD news and in fear that Intel could stumble after the close. The index held 396 all afternoon despite selling in several chip stocks. After Intel's earnings report the chip sector saw a muted bounce but nothing earth shaking. The analysts community had been making positive comments about expectations for Intel for the last week so much of the good news may have been priced into the market. That news was shaken yesterday with the AMD announcement but support at 22.40 on Intel continued to hold.

I was going to title this part tonight as "Danger Will Robinson" after the Dow, Nasdaq and S&P all closed at a new low for the year. After hearing the various spins on the Intel earnings as well as Andy Bryant bubbling over with excitement it is possible the market losses are almost over. Those three key indexes are still well above my critical levels I mentioned on Sunday and are still technically bullish despite closing at the lows for the year.

The Dow closed just above its 50-day average at 10556 with the S&P closing drop putting it about -2 points under its 50-day at 1185. The Nasdaq is well under the 50 at 2106 and tested support at 2075 today for the second time this year. For tomorrow that 2075 level would be my key. As long as we stay over that level the market could attract buyers. The SOX should rally back over 400 at the open and it MUST hold that level from now on to avoid a tech meltdown.

S&P-500 Chart

We have already sold off more than I initially expected but as I stated above the charts are still bullish with only a normal correction at this point. Until the Dow moves under 10425 and the Nasdaq 2000 that bullish bias will remain. Obviously that is a lot lower than our current levels and it would require some serious pain to make that trip. With the Intel news tonight and the potential for further retirement cash to flow into the market I would look for SPX 1175 to be the more critical line on the charts. Nasdaq 2075 for techs and S&P 1175 for the broader market. I would not be a dip buyer under 1175. I would wait for the market to come back to us at that level if you are determined to be long.

We are reaching a critical turning point in the markets. There needs to be some attempt to rally very soon or the market sentiment will begin to change rapidly. Bulls are beginning to get nervous and bears are getting bolder. It is time for the 2005 bull market to assert itself and make a stand or it is going to be a long year for investors.

Jim Brown
Editor

"One reason it is so hard to save money is that our neighbors are always buying something we can't afford"

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