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Ok, Now What?
By Jim Brown

http://www.asianinvestoronline.com/marketwrap/081203_1.asp

The long awaited FOMC meeting is history and the outcome was no surprise to anyone. The Dow rocketed to close over 9300 and the Nasdaq is nearing 1700 once again. What is wrong with this picture? Conviction, total lack of conviction and growing disbelief that the economics will hold. Bears and bulls alike are scratching their heads as the indexes move up but the confirming volume is continuing to shrink. Today was the second lowest volume day, behind Monday as first, since May with less than three billion shares for the third consecutive day.

Dow Chart


Nasdaq Compx Chart


S&P Chart


Wilshire-5000 Chart


Two economic reports today were far from positive for the bulls. The Chain Store Sales rose only +0.1% from the prior week despite sales tax holidays in six states and the second wave of tax credit checks. Back to school sales are reportedly off to a strong start but with only a +0.1% gain in sales it would appear anemic.

Even more troublesome was the Richmond Fed manufacturing Survey which came in at -7 for July. This was a substantial weakening of the conditions and every component lost ground. New Orders fell to -13 from zero, Shipments fell to -7 from +1. Order Backlog fell to -17 from -15 and the six-month outlook fell to 28 from 41. There was nothing positive in this release and after two months of improvement it appears the trend has reversed. The survey showed four consecutive months of retraction which ended in June with a barely positive +1 for the headline number. The drop back into negative territory was the worst showing in three months. Expected shipments fell to the lowest level since October-2001. This report was in sharp contrast to the national ISM survey announced last week, which showed an improvement in conditions. If the Richmond Fed Survey is a leading indicator for the August ISM then we could be in trouble.



Note how the Richmond Fed has performed in relation to the ISM over the last seven months. It actually was more positive in the June period but we see significant divergence in July. One problem with the ISM bounce was the 44% increase from defense spending which inflated the ISM. Without those defense numbers the ISM may have been much closer to negative. More analysts are beginning to worry that the bounce in the July numbers across the board were a reaction to the temporary post war economic bounce. If that bounce fails to grow legs soon the fall economic recovery could evaporate once again.

After the close today there were some more discouraging signs that all is not improving as much as traders had hoped. AMAT announced earnings that beat the street after one time items but then guided analysts lower for the coming quarter. New orders fell -41% from the year ago quarter but +9% above the 2Q. The company said the semiconductor sector appeared to have bottomed after a three year spending drought but then guided analysts that revenue would be flat to only slightly up for the next quarter. They estimate earnings of 4-5 cents when analysts consensus was six cents. The CEO said expectations were high that users would upgrade to the new 12 inch wafer products but he said that bookings were less than expectations. AMAT said it appeared capex spending would be flat to only slightly improved over 2002 levels. AMAT fell in after hours trading.