PINS AND NEEDLES

The market sits on pins and needles as well it should considering the surge the market got at the release of the last Fed minutes. My instincts tell me they will try it again. It is a perfect opportunity to squeeze the shorts as we are not far from the highs and a move above would run the stops. This time around I don't think it will be longlived. The fundamental background is quite different. Oil is near its highs. Real estate the locomotive of the economy the past few years is softening. Auto sales due out tomorrow, which bounced back in December but were blamed for the poor showing of GDP, are expected to show weakness. Finally, their is considerable doubt aver the strength of the consumer this year. Earnings, with the exception of Exxon, have also not blown anyone away particularly among the dow stocks. Greenspan the market's security blanket is also gone. Time to sell the rallies I think.

WALMART

In addition to Exxon's record profits, helping the market as well is Walmart saying it's same store sales will come in at the high end of it's 3-5% estimate at 4.7%. No doubt this is due somewhat to the redemption of gift cards, as they said sales were greater than expected last month. However, at 4.7% this is the best month they have had since a 5.9% showing in Mar of 04. Since last month was so dismal at 2.2% perhaps averaging the two months together is a more accurate picture of the underlying trend, and that comes in at 3.45%.
Walmart has been a weak stock since Feb of 04. Last week it got one upgrade and one down, by major firms. We all know that the low end consumer in the current economic climate is being hurt the worst, Walmart's bread and butter. What is not well appreciated is that prior to last month, they had been running positive comparisons in same store sales to last year for the past six months. This year may be the first year in 4, that they beat last years same store sales growth, albeit only marginally.
The question is, in a slowing economy, will they attract more move down consumers from higher end stores to make up for the shortfall in purchasing power of their traditional customer base. So far so good. Stay tuned.

BOUNCE

As I mentioned a couple of days ago, good earnings from CAT and HON in the dow was just what the doctor ordered and we had a triple digit increase in the dow. The market had a great rally to start the year and the bulls don't want to give up on it. Who can blame them. Every bit of good news is seized on with fervor. We will now pretty soon how this earnings season has come in, but of the 20 dow stocks that have reported, the bad still outnumber the good. Only 4 could characterized as unequivocally good. Not to say that is definitive, because some like AA and PFE are higher than when they reported because of favorable news flow, like higher aluminum prices and new drug announcements. The overall tone however is that the dow will be a lagger and revenue growth is hard to come by.

This morning, the lower than expected GDP report at 1.1% vs 2.8% expected is so far not doing much damage. To my mind, however, this is one more factor starting to deteriorate. Ten year yields are creeping up, the Fed is going to raise rates again next week, housing is slowing, the auto industry is in trouble and oil is getting close to $70 dollars again. Nothing is more lethal to the economy and the market than the combination of higher rates and energy. We have just to look back to Mar of 2000 to see what such a combination did.

MCDONALDS

Reading the footnotes of Mcdonalds press release, 2004 earnings had one time charges of .14 cents per share so the 1.79 reported for the year was 1.93 operating earnings adjusted. 2005 had one time benefits of .06 per share, so adjust the 2.04 reported down to 1.98. That's growth of 3%., a lot different than the headlines ballyhooed on the news wires and CNBC of "McDonalds profit jumps 53%, or McDonalds stock soars on 4th qtr earnings. What's more, revenue DECLINED sequentially. The 4th quarter had the slowest total sales growth in YEARS, averaging 2.5% vs 6% for the 3rd qtr and 6.3% 2nd qtr. Currency is starting to hurt them. Where are the analysts and reporters? Does anyone look behind the headlines any more.

DOW LAGGARDS

One reason the market has given up it's gains this year is the action of its generals. My count says we've had 14 Dow stocks report. All but three have been miserable. UTX is up two points on good earnings and AXP is slightly higher than when it reported. PFE loss was less than expected so it is trading higher. AA Alcoa's reported a fall of 16% in net income on higher energy costs. DD warned of a 200 mil revenue shortfall and issued very weak guidance. Big daddy INTC missed earnings badly and got clobbered. IBM earnings were OK but revenue was light and it is now trading lower. JPM had trading revenue disappoint and it has rolled over. GE was not impressive and its stock has traded consistently lower since reporting. C missed earnings by 2 cents and trading lower. MMM issued weak guidance and is down over a point. JNJ was light on sales, trading lower. MCD don't get me started, said their earnings were great but if you deduct one time factors from the comparisons, I think they were weak. MCD is up 1/4.

The good news is that most of the bad news should be out of the way for the remaining 16. Earnings for the rest should not be so lopsided. CAT, BA, HON should be good. As always forward guidance will be key. Good luck trading.