The markets ignored positive economic data and plunged to end very close to major support levels. Bonds fell and yields rose after a lackluster treasury auction and there are two more days of auctions to come. Cisco disappoints after the close and warns that while business is not getting worse it is also not getting any better. Are we having fun yet?
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The morning started out well with Chain Store Sales rebounding from last weeks drop by +0.8%. Tax rebate checks are making it to the stores and six southern states had tax holidays to boost spending. The results were excellent and with school starting early the shoppers were out in force. Considering average selling prices have dropped -4% due to heavy discounting this means sales were actually heavier than reported. Inventory is being pushed out the doors and retailers are starting to breathe easier.
Also beating estimates by a mile was the ISM Services Index which soared to 65.1 when estimates were only 58. This was the highest level since the index began and the biggest jump in six years. This represents a 10-point increase in just two months. New orders jumped to 66.9 from 57.5 but prices fell to 50.6 from 51.4 and employment barely budged to 50.7 from 50.3. The services numbers are not normally market movers due to the manufacturing ISM, which comes out a week earlier. The numbers today were no different. We had a spike on the report but that spike was quickly sold and we ended much lower.
The only negative report of the day came from the Challenger Layoff report, which saw a spike in announced layoffs for July to 85,117 from 59,720 in June. The two-month decline ended with a steep jump. The continued need to cut costs to preserve earnings and higher productivity is taking its toll. However, the current level for all 2003 is 12% less than the same level at this point in 2002. Analysts tried to spin it as positive by pointing to the much higher levels earlier in the year when layoffs averaged over 100,000. I agree it was higher but I think the dip corresponds to the "expected" post war bounce which did not really appear. If employers held off cutting employees in case there was a bounce they could be feeling the pain of higher payrolls now without higher profits.
Hurting the markets at the open was a strong warning by Costco which said lower margins due to falling prices and higher costs would depress earnings for the current quarter. They did say sales were improving but had been below plan for the last two months. The stock was knocked for a -6.90 loss to $30.06 and represented investor feelings about companies unable to squeeze any more earnings out of their turnip.
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