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Sweeps Week Part II
SEATTLE - 12 April 2002 - by M.A. Nystrom
As we noted last month in Sweeps Week (Part I), the upcoming earnings season was bound to bring excitement and activity, and we have not been disappointed. We speculated that with stocks trading near their post-attack highs, a selloff was nearly inevitable when companies began reporting. What they reported would be irrelevant, we theorized - the fact that the facts are out, and the facts could never live up to the market's fantasies would necessarily cause a run for the exits. Now with first quarter officially closed and in the books, we find our predictions unfolding true to form. This week has been interesting - it has been more like "weeps week" - but the real drama should occur next week.

The big news Monday was IBM's terse pre-announcement that "the business environment remains very tough." Lacking any further details, the stock promptly dropped 10%, dragging the market down with it at the open. But the market, ex-IBM, managed to claw its way back quite nicely, closing out the day without much significant damage. The bulls took heart. The news was only "company specific!" The Nasdaq even managed to close with a gain.


But IBM's chart looks terrible with that gaping air pocket in the chart. With the benefit of being a blue chip, the stock didn't fall as far as some of the B-players we saw last week, which got 20-25% haircuts for their shortcomings. Significantly however, IBM finds itself below its September lows, and is still falling. This quondam blue chip has faltered badly. And as I've noted elsewhere, the air pocket means that market was taken by surprise - all the recent talk of a recovering economy and improving business conditions and consumer confidence had pushed stocks back to unjustified valuations, especially the blue chips. These are always the last to fall.


Likewise, GE's announcement today was greeted with boo's from the market. Not, mind you, that the numbers were "bad" at least not by previous, pre-Enron, standards. After all, they did "meet the street" in terms of their bottom line earnings number, but in a faux pas, failed to "beat the street." Oh, the distinctions. While profits were in line, revenue was down. In a conference call discussing its results, the CFO said the quarter was "even tougher than we expected" and the economy was "as tough as we've seen in a long time."

There are many cross currents buffeting the market and the economy, and even good news from a company does not guarantee a good stock performance. MBNA, the world's largest credit card lender, was also able to "meet the street." In fact MBNA said that net income jumped 20 percent in the first quarter as low U.S. interest rates fueled loan growth. It's no wonder that profits jumped - they're getting money practically for free from the Fed, and loaning it out to me, and probably you, at 19.99%! But even this sweet deal failed to inspire the stock price - shares fell over 4%.


Finally, Yahoo! topped its revenue forecast as sales rose a stronger-than-expected 7 percent, but the stock was rewarded with a 16% haircut. These are not the good old days anymore.


The only stocks which seem to be responding positively are discount retailers like Sears and Walmart, which benefited from consumer spending (or rather, consumer debt creation) in the first quarter. Investors are (or somebody is) straight-lining this growth out into the rest of the year, and running the stock prices up. The apparent misguided assumption is that consumers will be able to continue spending more than they make, at least for the foreseeable future.

Regardless of what the pundits, government economists, and discount retailers are saying about the economy, the Nasdaq hit a six week low today, is down 10% for the year, and hasn't had a winning year since 1999. The layoffs are continuing. Just this week we had 7,000 more from Andersen, 5,000 from Lucent, and 3,000 from Levi Strauss. We're well past the days when layoffs were viewed as positive, cost cutting measures for a company. Companies today are in desperation mode, doing everything they can to remain profitable, or even just viable. The economy is now at the point where each incremental layoff will have a cumulative negative effect on the economy as a whole.

The market picture is not improving. Last month we looked at Oracle, the company that "missed a layup" on its earnings report. The stock faltered and has continued on its way down.


Next week we'll hear from some big guns: Coke, Intel, Microsoft, and the full word from IBM. Don't expect it to be pretty. The markets are sitting at long term support levels, and should these break, there is not much between here and the September 2001 lows. The world situation looks bleak, and we all know that the market "climbs a wall of worry," but don't forget either that it falls down the slippery slope of hope. And in a market like this one, hope is a four letter word. Next week will be critical in determining the story for the rest of the year

Stay tuned.

M.A. Nystrom
12 April 2002


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