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Bad Omen: Wall Street Journal's Earnings Collapse

Friday, 15 April 2005 12:00 AM

1. The Wall Street Journal's Woes: A Worrisome Sign
2. Andrew Wilkinson Analysis: Dow Theory Says We're Not In a Bear

1. The Wall Street Journal's Woes: A Worrisome Sign
2. Andrew Wilkinson Analysis: Dow Theory Says We're Not In a Bear

1. The Wall Street Journal's Woes: A Worrisome Sign

There was some unsettling news from The Wall Street Journal today. It wasn't about some other company or the state of the world economy – it was news about the paper's parent company, Dow Jones & Co.

The company announced that its earnings had fallen a whopping 54% from last year during the same period.

The only silver lining was that, for the first time, the company made more money from its online division than it did from its old-line newspaper.

But Dow Jones & Co.'s woes are worrisome in a larger sense.

As the business newspaper of the nation, the paper reflects the general trend of the U.S. economy. We are told the nation remains in a strong recovery.

If that's the case, The Wall Street Journal should be booming.

It isn't.

Other media outlets – save the Internet – are indicating weakness in advertising sales.

Other anecdotal information we hear suggests the economy is wilting rather than prospering.

A book publishing honcho tells us that he notices book sales tend to mirror the U.S. economy. When the economy is doing well, books – a discretionary item if ever there was one – sell well. He also notices book sales tend to indicate the country's economic direction.


2. Dow Theory Suggests We're Not in a Bear Market
Analysis by Andrew Wilkinson

If you can keep your head when all about you
Are losing theirs and blaming it on you;
 -- Rudyard Kipling, "If."

Stocks have had a wild week. On Tuesday it looked as though a big reversal of fortune might be in play as the cavalry came to the rescue.

A 75-point decline in the Dow industrials was reversed following a Fed confession that interest rates were unlikely to change their pace. The Dow snapped back some 147 points and put in a gain for the day.
 
But as the week wore on, that optimism turned sour despite a further fall in the price of crude oil. Equity buyers turned into sellers even when oil fell back to below $50 for the first time since February 22.

The broad market weakness raises the question: "Is this a full-on bear market?'

After all, it is broad-based weakness across several key index measures – it's not confined to just one.

At a time like this with stock markets plunging, investors look for confirmation of what is blatantly apparent to them. They often turn to Dow Theory Forecasts to validate a bear market.

As theory goes, when the industrial economy meets brisk trade, the transport sector is bustling too. And this makes sense.

If demand is strong within the economy, not only do manufacturers require delivery of raw materials, but consumers and shippers need goods delivered to them as well. Trains, planes and truckers are in high demand as the economy booms.

Charles Dow, who developed several key stock indices, observed that when a rise in industrial stocks to a new high was confirmed by a rise in transport stocks to fresh highs, a bull market was indeed underway.

Similarly, falling industrials needed falling transports to usher in a new bear market.

And so the debate is fierce after Thursday's lower close on Wall Street, where Dow Theory is apparently playing out to a new bear market. But is it?

Analyst Richard Moroney of Dow Theory Forecasts says that observers are premature in their call to a bear market. He claims Dow Theory states that we are in the early phases of determining whether or not the bull market is set to come undone.

While the early January lows were broken through on Thursday, Dow Theorists should have expected such a decline or test of the trend.

Investors should expect a bounce in the index over the coming months and only then – if the market fails to test the January high for both transport and industrial indices – should we look for a break lower. And that would have to occur precisely below lows set in place at the current sell-off.

Regardless of Dow Theory, we are not seeing huge evidence of a global or even local American slowdown. Perhaps we are heading for a soft patch once again, but it's a far cry from looming recession.

So how does one take advantage of this situation?

It's at times like these that I remember my years in the Boy Scouts. The group was founded by Rudyard Kipling, and I remember a wall poster with information about the well-traveled writer. One of the poems on the poster was "If," written from a father to a son. In it, the father advises his son to stand head-and-shoulders above the crowd by remaining calm.

Last week in MoneyNews, we pointed out that investors could take advantage of a small rise in the price of shares of oil-producing corporations by buying call options.

Just one day after we did so, our advice proved correct, and the underlying Oil Services HOLDRS (Ticker: OIH) traded back above $100 per share. It took the price of the call option we'd mentioned higher than the 25% we thought it might.

Right now we see another opportunity in the market as investors plumb the depths searching for a fresh low point.

At some stage, this fear-driven selling will come to a halt. If Dow Theory holds up, we'll likely see a challenge back to the upside before very long.

Option players do best with short, sharp moves. We could be in for one right here. A call option on the Dow Industrials with a strike of 103.00 (meaning 10,300 Dow points) could be bought for $120. Should the index rally within the next 10 days back to 10,400, that call would be worth $210 – a 75% gain.

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1. The Wall Street Journal's Woes: A Worrisome Sign2. Andrew Wilkinson Analysis: Dow Theory Says We're Not In a Bear1. The Wall Street Journal's Woes: A Worrisome Sign2. Andrew Wilkinson Analysis: Dow Theory Says We're Not In a Bear1. The Wall Street Journal's Woes: A...
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Friday, 15 April 2005 12:00 AM
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