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Market Wrap

Waiting For Results

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The markets continued their slide into the Q2 earnings cycle with more warnings than earnings only two days into the cycle. The markets were down sharply until 1:45 when a comment from KLAC at Semicon West caused a short covering rally in the semiconductor sector. That temporary short squeeze took the major indexes back to positive territory but enthusiasm was limited. The morning's bearishness was erased but the bulls failed to produce any volume.

Dow Chart - 90 min

Nasdaq Chart - 90 min

SPX Chart - 90 min

The only material economic report for today was the Job Openings Labor Turnover Survey (JOLTS) with a headline number of +18.6%. That means job openings increased +18.6% over the same period in 2005. According to JOLTS 4.96 million jobs were created in May with 4.65 million workers leaving their jobs. This represented a net job gain of +310,000 jobs and much stronger than what the nonfarm payroll report for May indicated. May nonfarm payrolls were revised up to only 92,000 suggesting one of the reports was wrong. However, the household survey for May showed a gain of +288,000 jobs. The combination of the two surveys produced job gains as counted by the BLS of +380,000 jobs. The JOLTS survey, using a different data set, confirmed these numbers eliminating the confusion. This is more data confirming the economy was stronger than analysts expected in May. The Fed will not apply much weight to this number at the August meeting because it will be three months old by then. More important will be the July Nonfarm and household numbers due out on August 4th, three days before the meeting.

The market ignored the economic reports but reacted strongly to the bombings in India. The early morning futures dip, already in progress due to earnings warnings, accelerated when news of the bombings hit the wires. 160 were killed and more than 400 were injured. The light earnings calendar provided no lift for the markets and the indexes fell to their recent support. Dow 11050, Nasdaq 2100 and SPX 1260 provided support for the morning dip and a bottom until the semiconductor comments appeared at 1:45. Speaking at the Semicon West conference in San Francisco, KLAC CEO Rick Wallace said KLAC had a very good quarter and appeared to have beaten its bookings target for the quarter. Positive comments from AMAT also helped improve sentiment for the sector.


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The earnings warnings and bombings had caused traders to load up on shorts early in the day but the dead stop on support for three hours had already taken much of the bearishness out of the market. The semiconductor sector had been severely beaten down with today's SOX low at 411.50 significantly below the May high at 532. The positive comments today prompted a +4% bounce to close at 428.54. The short covering bounce in chips prompted covering in other areas as sellers rethought their bearish stance. The flurry of earnings warnings on Monday slowed with only a couple warnings of note on Tuesday. Some analysts speculated the worst was over and there was suddenly less of an incentive for bears to be short. The short covering spike lifted the indexes off their morning lows with the Dow sprinting +105 points off its 11027, -76 point low to close with a +31 point gain. The Nasdaq ended with a gain of +12 or +33 off its 2095 low. The rebound was significant in that it lifted the indexes from levels not seen in nearly two week but it was only able to push them back into the middle of their recent ranges. It was not a materially directional event.

We are still going to be held hostage by earnings guidance anticipation and there are only a couple material earnings reports remaining this week. GE on Friday will be the biggest but their strength and competitive advantage should ensure a positive report and positive guidance. This is already baked into the market cake. After the warnings we have seen this week from companies like EMC, KBH, SGR, LU, WSM, CNCT, IDCC, DHOM, SCUR and DRI nerves were on edge. Alcoa, reported revenue that was below analyst's estimates and warned that growth could slow in Q3. Downgrades were flying fast and furious as analysts scurried to revalue sectors hit by warnings. Even the energy sector was hit by downgrades with Lehman cutting Murphy Oil (MUR) and Hess (HES) citing valuation concerns. Petro Brasilerio (PBR) was upgraded by Lehman in the same release. These warnings/downgrades were exactly what we were expecting but it appears average investors were caught off guard. However, the majority of the warnings appeared on Monday and Tuesday was relatively free of bad news. With three more lackluster days before the real flood of earnings begins we are more than likely going to remain range bound unless another major warning sours sentiment.

Time Warner (TWX) warned investors late in the day not to believe a report that AOL was going to give away as much as $1 billion in service to broadband subscribers and subscribers switching from other services. TWX warned that the news was from unauthorized sources and "could" be substantially incorrect. TWX said it would release its proposed plan for AOL when it reports earnings on Aug-2nd. The Wall Street Journal reported AOL planned to make up for the free service by adding more advertising to those getting the service for free.

After the bell Genentech (DNA) reported earnings that surged +80% and beat the street by nine cents. The stock was hammered for a -$2.40 loss despite upgrading its outlook for future earnings. DNA raised its full year outlook to 55% - 60% growth from prior estimates of 45% - 55% growth. Weaker than expected sales of cancer drug Avastin was the reason for the sell off. Beat the street and raise guidance substantially and still get hammered. This shows again how nervous traders really are. Monster.com (MNST) dropped -$3 after the close after warning it may have to restate earnings due to stock compensation problems. Traders bought the dip reducing the loss to less than a buck.

The bomb blasts in India sent gold higher for a +17 gain to close at $642. Also fueling the rise in gold, bonds and oil prices was negative news from Iran. The top Iranian negotiator, Ari Larijani, warned of a long road ahead to solve the crisis. "Today's meeting was disappointing," according to a UN spokesman saying four hours of discussions with the Tehran envoy on Tuesday "were not satisfactory." The Iranian president, speaking in Tehran, promised Iran would continue the enrichment program and would not back down under pressure. "The Iranian nation is determined to obtain all of its rights, including full nuclear rights and the complete exploitation of the nuclear fuel cycle." Iran insists it is only concerned with development of fuel for reactors to generate power but it will not allow inspections by UN monitors, turned down free fuel from Russia and has already admitted enriching uranium to levels higher than needed for fuel. This along with other intelligence suggests Iran is trying to produce weapons grade nuclear material. The meeting on Tuesday was supposed to lay the groundwork for talks in France on Wednesday by the five permanent members of the UN Security Council plus Germany. The lack of progress ahead of the joint meeting should escalate the severity of the situation. The news prompted more hard line comments from several members of the committee regarding the need for Iran to halt enrichment immediately. According to the UN spokesman Iran claimed the offer had many ambiguities that needed clarification before Iran could consider the offer. Iran would not tell UN negotiators what those ambiguities were. This only confirms their lack of interest in resolving the issue and their attempts to put up a public smokescreen to appear to be considering the offer. Iran also reiterated their stance that they would not respond until late August and only if the ambiguities were resolved in advance. This smoke and mirrors stance will eventually get them into trouble but until then they are enriching uranium as quickly as possible.

Gold Chart - Daily

August Oil Chart - Daily

The Iran news rescued oil prices from a two-day slide after posting a new record high on Friday of $75.78. The profit taking knocked us back to $72.85 but today's rally put us back over $74. Wednesday's oil inventories are expected to show declines in oil stocks of -1.5 mb and a drop in gasoline levels of -900,000 bbls. There are no signs of tropical storms in the Caribbean but tropical storm Bud is brewing in the Eastern Pacific. It is no danger to the oil fields but did reawaken fears that a Caribbean storm could appear at any time. This was supposed to be a violent storm season but so far the violence has been onshore and not in the gulf. Oil stocks were mixed intraday but rallied into the close with several posting strong gains. SLB +3.32, BHI +3.10, HAL +2.93, MRO +2.77 despite its downgrade, HYDL +2.55 and PBR +2.27 to name just a few. Jim Rogers, a billionaire investor who previously advised George Soros, said oil would hit $100 and stay high for quite a while. He is convinced commodities including oil are going to be in short supply for the next 10-15 years pushing prices significantly higher. Rogers just started a new commodity fund so his motives in pumping commodity prices may not be that pure.

The Department of Energy released its Short Term Energy Outlook today and said higher prices have slowed world oil consumption but only slightly. The DOE said gasoline prices would remain high through 2007. They projected oil demand would grown by 1.6 mbpd in 2006 and 1.8 mbpd in 2007 with the average price for light crude holding at $69 through 2007. At the same time they projected growth in supplies of only 800,000 bpd and warned that supply problems in Nigeria, Iran, Iraq and Venezuela were critical. They estimate gasoline prices will average $2.88 or +12% higher than they estimated last month. That is below the current actual average at $2.99 a gallon and the second highest ever. The DOE is always behind the curve on their estimates in every category.

Hasta la Vista, maybe. Microsoft Chairman Bill Gates told a crowd at a Cape Town technology conference there was a 20% chance Windows Vista could be delayed past January. This would be the latest in a long line of delays since Vista was originally scheduled to be released in 2005. It was rescheduled for 2006 and now appears it could be rescheduled again. This was the first official warning that the Jan-2007 date could be delayed. At the same time in Boston CEO Ballmer said future Window's releases would arrive faster. He said there would never be as long a delay as we have seen since XP. The delay in Vista is due to the complete revamping of the code to provide a much more robust environment while closing all the potential security holes seen in XP and prior versions. Microsoft also announced the company was dropping support for all the Windows 98 versions. That is not a surprise since the operating system is ten years old. Lack of support will also help push people into Vista when it is released. Microsoft also announced five new security updates today to fix critical security flaws in current versions of Windows. Go to WWW.WindowsUpdate.com for details.

Despite the afternoon rebound the markets are still stuck in their range and that is not likely to change until next week. The remaining earnings for this week are sparse with GENZ, MAR and GE as standouts. The GE earnings are Friday before the open and probably too late to rescue the markets for the week. GE typically posts good earnings, lifts guidance and fails to rally because the expectations are already priced into the markets. After the flurry of earnings warnings this week and the semi rebound this afternoon the markets should have a neutral bias heading into Wednesday. As a result of the short squeeze volume was much higher today at 4.8B shares than the wimpy 3.8B we saw on Monday. Internals remained weak because a reduction in bearishness is far from an improvement in bullishness. We are probably on autopilot until next week baring any material warnings.

Market Internals Table

I would continue to maintain a neutral bias over S&P 1260. This level has returned to be a key support point for the broader markets. A drop below 1260 would be shortable with a target of 1240. Likewise a break under 1240 targets 1220 but I would be surprised to see that this week without some material news event. The Indian markets are expected to open substantially lower tonight and that could spread to other Asian markets. However, we have seen in the past the tendency for drops due to major external events to be bought quickly as long as the overall outlook stays the same. The bombings did not damage the outlook for India to continue to grow quickly and as horrific as they were it is still a nation of 1.1 billion people. It is the 4th largest economy in the world and second fastest growing at a rate of +7% annually. I expect the market damage to be short lived and not impact our markets tomorrow unless more attacks appear. Our biggest problem is still the potential for future earnings warnings ahead of the earnings flood next week. Until that flood arrives we are in danger from any warning event taking center stage. Once into next week that danger will disappear under the hundreds of real earnings reports. The new danger then will be earnings guidance. If we see a trend for lowered guidance it could get ugly. Until a post earnings trend develops the markets could remain difficult to trade. Be patient, there is a stampede headed our way. Be ready to join the herd once a direction becomes evident.

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